Page 5 of 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of report (Date of earliest event reported): May 2, 2000
ALPHARMA INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-8593 22-2095212
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification Number)
Incorporation)
One Executive Drive Fort Lee, New Jersey 07024
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code:(201)947-7774
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets
On May 2, 2000, Alpharma completed the acquisition of the
Medicated Feed Additive Business of Roche ("MFA") for a cash
payment of approximately $258 million and issuance of a $30
million promissory note to Roche. The promissory note is due
December 31, 2000 and will bear 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 will be purchased from Roche during a transition
period of approximately three months. These inventories are
estimated at approximately $10 million.
The MFA business had 1999 sales of over $200 million 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 includes inventories, five manufacturing and
formulation sites in the United States (two of which will be
operated by Roche until third party consents are received),
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 Company financed the $258 million cash payment under a $225
million bridge financing agreement ("Bridge Financing") with the
balance of the financing being provided under its current $300
million credit facility ("1999 Credit Facility").
The Bridge Financing was arranged by First Union National Bank,
Union Bank of Norway, and a group of other banks. It has an
initial term of 90 days; extendable up to two additional 30 day
periods at the option of the bank group if the Company is in the
active process of refinancing. The Bridge Financing is guaranteed
by substantially all of the Company's U.S. subsidiaries and the
stock in substantially all of the Company's U.S. subsidiaries has
been pledged to the banks.
Under the Bridge Financing the Company has paid a 1% fee for the
banks' commitment and in connection with drawing the funds.
Interest is payable at Libor plus 2.75% to 3.00%.
If the Bridge Financing is not repaid at the end of its term, the
facility will convert to a senior secured facility that will
amortize over the remaining term of the 1999 Facility and be
secured by substantially all of the assets of the Company and its
U.S. subsidiaries. All collateral under the senior secured
facility will be held equally as security for the payment of the
1999 Credit Facility.
The bridge financing agreement and two amendments to the 1999
Credit Facility will be filed with the Form 10-Q for the quarter
ended March 31, 2000. The complete 1999 Credit Facility has
previously been filed with the Securities and Exchange
Commission. Both documents include the names of banks
participating therein.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(a) Financial Statements of Acquired Assets and Business
(i) Independent Auditors' Report (F-2)
(ii) Roche Holding Ltd. Combined Statement of Assets to be
Sold and of Revenues and Direct Operating Expenses of
the MFA Business as of December 31, 1999 and for the
year then ended. (F-1 to F-11).
(b) Pro Forma Financial Information.
i) Alpharma Inc. Unaudited Pro Forma Condensed Combined Balance
Sheet as of December 31, 1999 (F-13).
ii) Alpharma Inc. Unaudited Pro Forma Condensed Combined
Statement of Income for the year ended December 31, 1999 (F-14).
iii) Notes to Unaudited Pro Forma Condensed Combined Financial
Statements (F-15 to F-19).
(c) Exhibits.
2.1 Asset Purchase Agreement, dated as of April 19, 2000
among Roche Vitamins Inc. (RVI) and F.Hoffman-La Roche Ltd.
(Roche Basle) (collectively, Sellers) and Alpharma Inc. and
Alpharma (Luxembourg) SARL (collectively, Buyers).
23.1 Consent of PricewaterhouseCoopers AG
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 hereunto duly authorized.
ALPHARMA INC.
By: \s\ Jeffrey E. Smith
Jeffrey E. Smith
Executive Vice President
and Chief Financial
Officer
Date: May 5, 2000
Roche Holding LTD. and its subsidiaries
Combined Statement of Assets to be Sold
and of Revenues and Direct Operating Expenses
of the MFA Business
as of December 31, 1999
and for the year then ended
Board of Directors
Roche Holding Ltd. and its subsidiaries
4070 Basel
March 31, 2000
Report of Independent Accountants
We have audited the accompanying combined statement of
assets to be sold and combined statement of revenues
and direct operating expenses of the Roche MFA
business (the "Statements") as of December 31, 1999
and for the year then ended. These Statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
Statements based upon our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States.
Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
Statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
Statements. An audit also includes assessing the
accounting principles used and significant estimates
made by management, as well as evaluating the overall
Statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statements were prepared to present
the assets to be sold and the revenues and direct
operating expenses of the MFA business subject to a
potential sale transaction as described in Note 1, and
are not intended to be a complete presentation of the
Roche MFA business' financial position and results of
operations.
In our opinion, the Statements referred to above
present fairly, in all material respects, the combined
assets to be sold and the revenues and direct
operating expenses as of December 31, 1999 and the
year then ended, in conformity with accounting
principles generally accepted in the United States.
PricewaterhouseCoopers AG
Basel, Switzerland
Ralph R Reinertsen Dana Bultman
December 31,
1999
ASSETS TO BE SOLD
Inventories $ 39,950
Property, plant and equipment, net 94,631
Goodwill and other intangibles, net 97,674
Total assets to be sold $ 232,255
See accompanying notes to combined statements.
Year ended
December 31, 1999
Net revenues $ 213,614
Cost of revenues, including
distribution cost of $6,775 152,708
Gross profit 60,906
Direct and related expenses:
Marketing 47,297
Research and development 11,160
Administration 7,228
Amortization 18,610
Other operating expense 344
Operating loss (23,733)
Foreign currency exchange
gains and losses 33
Other non-operating (income)
expense, net 7
Loss before interest and taxes $ (23,773)
See accompanying notes to combined statements.
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The combined statements of assets to be sold and of revenues
and direct operating expenses as of December 31, 1999 and for
the year then ended have been prepared for the purpose of
selling the Medicated Feed Additives (MFA) business. The MFA
business is a fully integrated business unit of the Roche
Group ("Roche"), consisting of Roche Holding AG and its
subsidiaries. The business produces Medicated Feed Additives
(MFAs) used by food producers (livestock, poultry and
aquaculture) for the purpose of treating or preventing
disease in animals, or for promoting more efficient growth.
As an integrated business unit of Roche, the business relies
on Roche and other Roche affiliates to provide administration
management and other services including, but not limited to,
management information systems, accounting and financial
reporting, treasury, cash management, human resources,
employee benefit administration, payroll, legal and certain
other support. Costs for such services are charged by Roche
directly to the operating units utilizing such services.
However, these costs may not be indicative of costs that
would have been incurred had the MFA business operated
autonomously or as an entity independent of Roche.
MFA Assets to be Sold
The MFA assets to be sold do not include trade receivables
and payables and certain other assets and liabilities related
to the operation of the MFA Business prior to closing. Also,
the MFA assets to be sold exclude certain assets related to
the Lasolocid product line. In addition, the MFA business
may enter into certain supply contracts with Roche related to
Lasalocid.
Principles of Combination
The MFA business, as an integrated business unit of the Roche
Group Vitamins and Fine Chemicals division, does not prepare
separate financial statements in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP") in the
normal course of operations. Accordingly, the accompanying
combined statements of assets to be sold and of revenues and
direct operating expenses have been derived by extracting the
assets, revenues and expenses of the MFA business from the
consolidated assets, revenues and expenses and the accounting
records of Roche.
The accompanying combined statements reflect the assets to be
sold and revenues and expenses directly attributable to the
MFA business as well as allocations deemed reasonable by
Roche management to present the financial position and
results of operations of the MFA business on a stand alone
basis (the "Combined Statements"). Although Roche management
is unable to estimate the actual costs that would have been
incurred if the services performed by Roche had been
purchased from independent third parties, the allocation
methodologies have been described within the respective
footnotes, where appropriate, and Roche management considers
the allocations to be reasonable. However, the financial
position and the revenues and direct operating expenses of
the MFA business may differ from those that may have been
achieved had the MFA business operated autonomously or as an
entity independent of Roche.
All significant intercompany accounts and transactions
between MFA business entities have been eliminated.
Basis of Presentation
The Combined Statements of the MFA business have been
prepared in accordance with accounting principles generally
accepted in the United States.
Revenue Recognition
Sales revenue is recognized upon shipment of products to
customers after deducting volume discounts and sales taxes.
Net revenues have been adjusted for sales returns and
allowances.
Operating Expenses
Operating expenses of the MFA business include payroll and
other expenses relating to cost of sales, marketing,
distribution, research and development, amortization of
intangibles, and operations as well as charges from Roche for
certain common support costs such as accounting, financial
management, legal, information systems, human resources,
employee benefits and support services. Charges for common
costs from Roche have been determined on bases that Roche
consider to be reasonable. Such methods included sales,
headcount and others.
Cost of Goods Sold
Cost of goods sold includes the corresponding direct
production costs and related production overhead of goods
manufactured and services rendered. Manufacturing site costs
specifically related to MFA products are included in cost of
goods sold. Certain Roche costs for international logistics
have been charged to the MFA business based on relative
production costs and the relative degree to which management
efforts are expended.
Research and Development
Research and development costs are charged against income as
incurred, with the exception of buildings and major items of
equipment, which are capitalized and depreciated. The
expenses for research and development included in these
financial statements relate to projects specific to the MFA
business.
Inventories
Inventories are stated at the lower of cost or net realizable
value. Provision is made for slow-moving goods and obsolete
materials are written off. Cost is determined primarily by
the last-in, first-out (LIFO) method for all inventories in
the United States. Other inventories are stated at the lower
of cost or market determined by the first-in, first-out
(FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost,
net of accumulated depreciation. These assets are initially
recorded at cost, which includes interest costs attributable
to and incurred during an asset's construction period.
Depreciation is computed using the straight-line method over
the estimated useful lives or lease terms, if shorter.
Estimated useful lives of major classes of depreciable assets
are as follows:
Land improvements and buildings 40 years
Machinery and equipment 5 to 15 years
Office equipment 3 years
Motor vehicles 5 years
The costs of major renewals and betterments, which extend the
useful lives of assets, are capitalized. The costs of
maintenance, repairs and minor equipment items are charged to
operations as incurred. Upon sale or other dispositions of
property, plant and equipment, the cost and related
accumulated depreciation are removed from the accounts and
any gain or loss is recorded in the income statement.
Intangible Assets
The excess of the cost over the fair value of net assets
acquired including identifiable intangible assets of
purchased businesses has been allocated to goodwill. Other
intangible assets include acquired intellectual property
(including patents, technology and know-how), trademarks,
licenses, and other similarly identifiable rights and are
recorded at their acquisition cost. Intangible assets and
goodwill are amortized using the straight-line method over
their estimated economic lives for a period not exceeding 20
years from the date of acquisition.
Long-lived Assets
The MFA business periodically evaluates the recoverability of
the carrying amount of long-lived assets (including property,
plant and equipment, goodwill and other intangible assets)
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable.
Impairment is assessed when the undiscounted expected future
cash flows derived from an asset are less than its carrying
amount. Impairment losses are recognized in operating income
to the extent that an impaired asset's carrying amount
exceeds its fair value.
Management Estimates and Assumptions
The preparation of the combined statements requires
management to make estimates and assumptions that affect the
reported amounts of assets to be sold, disclosure of
contingent assets at the date of the statements and reported
amounts of revenues and direct operating expenses during the
reporting period. If in the future such estimates and
assumptions, which were based on Roche management's best
judgment at the date of the financial statements, deviate
from the actual circumstances, the original estimates and
assumptions will be modified as appropriate in the year that
the circumstances change.
2. INVENTORIES
Inventories to be sold consisted of the following at
December 31, 1999:
Raw materials and supplies $ 4,217
Work in process 275
Finished goods 42,110
Other inventories 1,617
Total inventories to be sold, at cost 48,219
Less allowance for obsolete
inventories (768)
Less excess of cost over LIFO cost (7,501)
Total inventories to be sold, net $ 39,950
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for
approximately 63% of the MFA business's inventories and by the
first-in, first-out (FIFO) method for all other inventories. The
FIFO method approximates current cost. During 1999, LIFO
inventory quantities were reduced resulting in a partial
liquidation of the LIFO bases, the effect of which increased net
earnings by approximately $1,394.
The MFA assets to be sold exclude Lasalocid raw materials and
work-in-process. Therefore, these amounts have been excluded
from the above inventories to be sold.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment to be sold consisted of the
following at December 31, 1999:
Land $ 495
Buildings 16,040
Machinery, equipment and fixtures 82,050
Uncompleted capital projects 20,202
Property, plant and equipment
to be sold, at cost 118,787
Less accumulated depreciation (24,156)
Property, plant and equipment
to be sold, net $ 94,631
Total depreciation expense was $10,197, of which $5,225
represents depreciation on assets to be sold. Interest expense
of $433 incurred in 1999 has been capitalized as part of the cost
of property, plant and equipment and is depreciated over the
useful lives of the related assets.
The MFA assets to be sold exclude the Lasalocid manufacturing
facilities in Belvidere, New Jersey, blending facilities located
in Fresno, California; Sisseln, Switzerland; and Sao Paulo,
Brazil, and packaging facilities located at Istituto delle
Vitamine in Milan, Italy. Therefore, these amounts are excluded
from the above property plant and equipment to be sold.
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles to be sold consisted of the
following at December 31, 1999:
Goodwill $ 94,353
Patents, licenses and trademarks 110,354
Goodwill and other intangibles
to be sold, at cost 204,707
Less accumulated amortization (107,033)
Goodwill and other intangibles
to be sold, net $ 97,674
5. RELATED PARTY TRANSACTIONS
The MFA business purchased various materials and other
products from related Roche entities approximating $317 in
1999. The MFA business sold certain products to other Roche
entities for blending with other Roche vitamins products for
sale to customers. Net revenues include only revenues
related to the MFA products and not any other Roche products
blended for sales to third parties.
6. COMMITMENTS
The MFA business leases various office facilities, vehicles,
telephone and data processing equipment.
Minimum future rental commitments under non-cancelable
operating leases having an initial or remaining term in
excess of one year as of December 31, 1999 are as follows:
2000 $ 10,078
2001 10,039
2002 10,019
2003 10,013
2004 and thereafter 10,013
Total minimum rental
payments $ 50,162
See "MFA Assets to be Sold" in note 1 above.
7. CONTINGENCIES AND LEGAL PROCEEDINGS
The operations and earnings of the MFA business continue,
from time to time and in varying degrees, to be affected by
political, legislative, fiscal and regulatory developments,
including those relating to environmental protection. The
industries in which the MFA business is engaged are also
subject to physical risks of various kinds. The nature and
frequency of these developments and events, not all of which
are covered by insurance, as well as their effect on future
operations and earnings are not predictable.
ALPHARMA INC.
Index to Unaudited Pro Forma
Condensed Combined Financial Statements
Unaudited Pro Forma Condensed Combined
Balance Sheet at December 31, 1999 F - 13
Unaudited Pro Forma Condensed Combined
Statement of Income for the Year Ended
December 31, 1999 F - 14
Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements F-15 to F-19
Alpharma Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 1999
(Dollars in thousands)
Pro Forma Unaudited
Alpharma MFA Adjust- Pro Forma
Historical Historical ments Combined
ASSETS
Current assets:
Cash and cash $ 17,655 $17,655
equivalents
Accounts receivable, 199,207 199,207
net (a)
Inventories 155,338 39,950 9,500 204,788
Prepaid expenses and
other current assets 13,923 13,923
Total current 386,123 39,950 9,500 435,573
assets
Property, plant and
equipment, net 244,413 94,631 (a) 339,044
Intangible assets, net 488,958 97,674 50,865 637,497
Other assets and
deferred 45,023 45,023
charges
Total assets $1,164,517 $232,255 $60,365 $1,457,137
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term deby $ 9,111 $ 9,111
Short-term debt 4,289 4,289
Accounts payable 51,621 51,621
Accrued expenses 83,660 83,660
Accrued and deferred
income taxes 17,175 17,175
Total current
liabilities 165,856 165,856
Long-term debt: (a)
Senior 225,110 292,620 517,730
Convertible
subordinated
notes, including
$67,850 to related 366,674 366,674
party
Deferred income taxes 35,065 35,065
Other non-current
liabilities 17,208 17,208
(a)
Stockholders' equity 354,604 232,255 (232,255) 354,604
Total liabilities
and $1,164,517 $232,255 $ 60,365 $1,457,137
stockholders'
equity
See accompanying notes to the unaudited pro forma condensed
combined financial
statements.
Alpharma Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
For the year ended December 31, 1999
(In thousands, except per share data)
Pro Forma Unaudited
Alpharma MFA Adjust- Pro Forma
Historical Historical ments Combined
(d)
Total revenue $742,176 $213,614 $(2,600) $953,190
(d)
Cost of sales 397,890 152,708 (2,500) 548,098
Gross profit 344,286 60,906 (100) 405,092
Selling, general
and administrative (a)(c)
expenses 244,775 84,639 (11,310) 318,104
Operating income 99,511 (23,733) 11,210 86,988
(b)
Interest expense (39,174) (29,260) (68,434)
Other income
(expense), net 1,450 (40) - 1,410
Income before
provision 61,787 (23,773) (18,050) 19,964
for income taxes
Provision for income (e)
taxes 22,236 (15,040) 7,196
Net income $39,551 $( 3,010) $ 12,768
Average common shares
outstanding:
Basic 27,745 27,745
Diluted 34,848 28,104
Earnings per share:
Basic $1.43 $0.46
Diluted $1.34 * $0.45
* Includes addback to net income for adjustments required under
the if-converted method applicable to dilution of convertible
notes.
See accompanying notes to the unaudited pro forma condensed
combined financial statements.
1. Basis of Presentation
The unaudited pro forma condensed combined financial
statements (pro forma financials) are presented for illustrative
purposes only, giving effect to the acquisition, as described and
therefore are not indicative of the operating results that might
have been achieved had the combination occurred as of an earlier
date, nor are they indicative of operating results which may
occur in the future.
On May 2, 2000 Alpharma's Animal Health Division ("AHD")
purchased the Medicated Feed Additives (MFA) business of Roche
Holdings AG and Subsidiaries ("Roche"). The MFA business was a
fully integrated business unit of Roche. The business produces
Medicated Feed Additives (MFAs) used by food producers
(livestock, poultry and aquaculture) for the purpose of treating
or preventing disease in animals, or for promoting more efficient
growth. MFAs are currently marketed in more than 100 countries.
As an integrated business unit of Roche, the business relied
on Roche to provide significant administrative management and
other services including, but not limited to, management
information systems, accounting and financial reporting,
treasury, cash management, human resources, employee benefit
administration, payroll, legal and other support. Costs for such
services were charged or allocated by Roche directly to the
operating units utilizing such services. However, these costs are
not indicative of costs that would have been incurred had the MFA
business operated autonomously or as a business within AHD.
The acquisition will be accounted for in accordance with the
purchase method. The purchase price is expected to be allocated
to the intangible assets, goodwill, inventory and plant, property
and equipment. (Plant, property and equipment includes two
facilities which will be operated by Roche until third party
consents are received.) The final allocation and actual lives to
be assigned will be determined by a professional valuation to be
completed within one year of purchase. The accompanying unaudited
pro forma condensed combined income statement reflects the
acquisition as if it occurred as of the beginning of the period
presented. A balance sheet is required since the accounts of MFA
are not included in the Company Form 10-K filed as of December
31, 1999. The financial statements of MFA, consisting of
statements of assets acquired and revenues and direct expenses,
were prepared in accordance with the accounting principles
generally accepted in the United States for inclusion in this
Form 8-K and for pro forma purposes.
The actual results of MFA will be consolidated with the
Company from the date of acquisition, May 2, 2000.
2. Pro Forma adjustments - Balance Sheet at December 31, 1999
The unaudited pro forma balance sheet gives effect to the
acquisition as if it had been consummated at December 31, 1999.
(a) To record purchase of MFA business based on a preliminary
estimate of the purchase price allocation. The purchase price
paid in cash and an issuance of a $30,000 promissory note to
Roche is calculated as follows:
Recorded as
Purchase price per
agreement $287,620
Additional estimated
direct costs of
acquisition 5,000
Purchase price assumed
borrowed $292,620 Long-term debt
Net book value of
MFA assets acquired 232,255
Amount to be allocated $ 60,365
Allocated as follows:
Record inventory at
estimated fair value 9,500 Inventory
Intangible assets/excess
of cost over net book
value* 50,865 Intangible assets
$ 60,365
* Net amount resulting from elimination of Roche historical
intangibles and establishment of Alpharma intangibles and goodwill.
3. Pro Forma adjustments - Statement of Income
The unaudited pro forma income statement assumes the
purchase as of the beginning of the period presented. The
adjustments which follow are those which are required by Article
11 of Regulation S-X. The Company believes the business will be
run as part of the AHD in a much different manner than in 1999 as
part of Roche. The resulting pro forma income statement is
therefore not indicative of the results had the business been
purchased as of the beginning of the respective period. The
required adjustments are as follows:
Year Ended
December 31,
1999
(a) Amortization of intangibles $13,000
To record amortization of
estimated intangibles based on
5 to 15 year lives and residual
goodwill based on a 20 year life.
Amortization of intangibles (18,610)
To reverse historical amortization
included in MFA financial
statements
(Net amounts are included
in selling, general and
administrative expenses.)
(b) Interest expense $29,260
To record interest expense at
10.00% on assumed average
borrowings of $292,600.
(c) Selling general and administrative (5,700)
expense
To reduce expenses for MFA
employees not assumed by AHD under
the terms of the purchase
agreement. These employees
primarily consist of sales,
regulatory, and manufacturing
personnel, whose positions were
deemed redundant due to significant
overlap of Alpharma's and MFA's
customer base. (See Note 5a)
(d) Sales (2,600)
Cost of goods sold (2,500)
To reduce sales and cost of sales
for sales made by Alpharma to MFA
in 1999.
(e) Tax benefit 15,040
To record estimated income tax
effect of pro forma adjustments
and non-tax effected financial
results of MFA. (Loss of $41,823 at
an approximate combined federal,
state and foreign rate of 36%.)
The interest rate of 10.00% used for the pro forma condensed
combined statement of income is based on the Company's financing
from Roche and the bridge financing agreement both of which bear
interest at approximately 9.00% plus debt amortization expenses
not expected to exceed 1.00%. For each 1/8% change in interest
rates interest expense would increase/decrease by approximately
$365 for a full year. No effect of refinancing the Bridge with a
combination of debt and equity has been included in the pro forma
income statement.
4. Items excluded from pro forma combined statement of income
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" is not reflected in the
pro forma statement of income. This non-recurring charge is
estimated at between $2,000 - $3,000 and will be reflected in
cost of sales as inventory is sold during the second and third
quarters of 2000.
In addition, certain employees of AHD will be severed as a
result of the acquisition. This will result in a non-recurring
charge of approximately $500 in the second quarter.
Under the Bridge Financing the Company has paid a 1% fee for
the banks commitment and in connection with drawing the funds.
These non-recurring fees and other related expenses will be
amortized over the term of the bridge loan.
5. Cost savings and future synergies
The Company in its evaluation of the MFA acquisition
identified significant cost savings resulting from the operation
of the business as a important part of the AHD as opposed to MFA
being a small part of the Roche organization. Cost savings and
synergies include the following:
a) Included in the pro forma statement of income.
Under the terms of the asset purchase agreement, AHD was not
obligated to offer employment to all of MFA's employees. Prior to
the closing, the Company has determined that due to the
significant overlap in sales, regulatory and production
activities of the AHD and MFA, 65 MFA employees were redundant
and are not required for the on-going conduct of the business.
These employees remained with Roche. Should Roche terminate any
of these employees, AHD will reimburse Roche for the portion of
the severance specified in the agreement. The Company estimates
$5,700 in direct salary and benefit expenses have been eliminated
as a result of this determination.
b) Not included in the pro forma statement of income.
As part of the worldwide Roche organization and the vitamins
division the MFA was allocated expenses for manufacturing,
marketing, distribution and administration in 1999 of
approximately $36,000. The Company, based on its due diligence
review of MFA, believes it can replace the allocated services by
utilizing resources already existing in its organization or by
adding incremental expenses at a significantly reduced amount.
MFA as part of Roche in 1999 engaged in discovery research
costing over $11,000 and a significant clinical study costing
approximately $6,000. The Company does not intend to actively
continue the discovery research and no employees relating to the
research will be employed by AHD. Certain development projects
will be continued by outside parties at a significantly reduced
level. The clinical study has been evaluated and will not be
continued.
The amount and timing of savings and synergies cannot be
assured. The Company estimates that the acquisition before one-
time charges for severance, inventory write up and bridge
financing fees will be neutral to slightly accretive in 2000.
_______________
Statements made in this Form 8-K, 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 included
under the caption "Risk Factors" in its Form 10-K for the years
ended December 31, 1999.