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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
March 31, 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 April 28, 2000:
Class A Common Stock, $.20 par value -- 20,252,091 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, 2000 and December 31, 1999 3
Consolidated Statement of Income for the
Three Months Ended March 31, 2000 and 1999 4
Consolidated Condensed Statement of Cash
Flows for the Three Months Ended March 31,
2000 and 1999 5
Notes to Consolidated Condensed Financial
Statements 6-16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
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, December 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 12,841 $ 17,655
Accounts receivable, net 182,166 199,207
Inventories 170,809 155,338
Prepaid expenses and other
current assets 13,641 13,923
Total current assets 379,457 386,123
Property, plant and equipment, net 239,114 244,413
Intangible assets, net 472,263 488,958
Other assets and deferred charges 46,814 45,023
Total assets $1,137,648 $1,164,517
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 13,969 $ 9,111
Short-term debt 3,980 4,289
Accounts payable and accrued expenses 123,461 135,281
Accrued and deferred income taxes 14,107 17,175
Total current liabilities 155,517 165,856
Long-term debt:
Senior 214,739 225,110
Convertible subordinated notes,
including $67,850 to related party 368,396 366,674
Deferred income taxes 33,920 35,065
Other non-current liabilities 15,887 17,208
Stockholders' equity:
Class A Common Stock 4,101 4,078
Class B Common Stock 1,900 1,900
Additional paid-in-capital 301,043 297,780
Accumulated other comprehensive
loss (52,069) (34,109)
Retained earnings 100,915 91,139
Treasury stock, at cost (6,701) (6,184)
Total stockholders' equity 349,189 354,604
Total liabilities and
stockholders' equity $1,137,648 $1,164,517
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,
2000 1999
Total revenue $188,280 $156,759
Cost of sales 98,036 88,367
Gross profit 90,244 68,392
Selling, general and
administrative expenses 63,097 50,071
Operating income 27,147 18,321
Interest expense (10,860) (7,466)
Other, net 948 943
Income before provision for income taxes 17,235 11,798
Provision for income taxes 6,121 4,362
Net income $11,114 $ 7,436
Earnings per common share:
Basic $ 0.38 $ 0.27
Diluted $ 0.35 $ 0.27
Dividend per common share $ .045 $ .045
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)
Three Months Ended
March 31,
2000 1999
Operating Activities:
Net income $11,114 $ 7,436
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 14,368 10,582
Interest accretion on convertible
debt 1,722 -
Changes in assets and liabilities:
Decrease in accounts receivable 14,296 17,605
(Increase) in inventory (18,625) (6,968)
(Decrease) in accounts payable,
accrued expenses and taxes payable (11,247) (3,634)
Other, net (902) (877)
Net cash provided by
operating activities 10,726 24,144
Investing Activities:
Capital expenditures (8,031) (6,739)
Loans to Ascent Pediatrics (1,500) (4,000)
Purchase of intangible assets (3,441) -
Net cash used in investing
activities (12,972) (10,739)
Financing Activities:
Dividends paid (1,338) (1,247)
Proceeds from senior long-term debt - 187,000
Reduction of senior long-term debt (3,266) (187,673)
Net repayments under lines of credit (246) (22,777)
Payments for debt issuance costs - (3,104)
Proceeds from issuance of common stock 2,682 11,011
Purchase of treasury stock (517) -
Net cash used in financing activities (2,685) (16,790)
Exchange Rate Changes:
Effect of exchange rate changes
on cash (543) (824)
Income tax effect of exchange rate
changes on intercompany advances 660 1,061
Net cash flows from exchange
rate changes 117 237
Decrease in cash (4,814) (3,148)
Cash and cash equivalents at
beginning of year 17,655 14,414
Cash and cash equivalents at
end of period $ 12,841 $ 11,266
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. The reported results for the three
month period ended March 31, 2000 are not necessarily indicative
of the results to be expected for the full year.
2. Inventories
Inventories consist of the following:
March 31, December 31,
2000 1999
Finished product $94,850 $ 88,494
Work-in-process 28,194 28,938
Raw materials 47,765 37,906
$170,809 $155,338
3. Long-Term Debt
Long-term debt consists of the following:
March 31, December 31,
2000 1999
Senior debt:
U.S. Dollar Denominated:
1999 Revolving Credit Facility
(7.4 - 7.7%) $177,500 $180,000
Industrial Development Revenue Bonds 9,130 9,130
Other, U.S. 142 172
Denominated in Other Currencies:
Mortgage notes payable (NOK) 36,372 38,521
Bank and agency development loans 5,564 6,398
(NOK)
Total senior debt 228,708 234,221
Subordinated debt:
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 175,546 173,824
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 368,396 366,674
Total long-term debt 597,104 600,895
Less, current maturities 13,969 9,111
$583,135 $591,784
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 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,
2000 1999
Average shares outstanding - basic 29,626 27,255
Stock options 325 430
Convertible debt 6,744 -
Average shares outstanding - diluted 36,695 27,685
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 the
three months ended March 31, 2000. The calculation of the assumed
conversion was antidilutive for the same period in 1999.
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 outstanding at March 31, 2000, but were not
included in the computation of diluted EPS because the result was
antidilutive.
The numerator for the calculation of basic EPS is net income
for all periods. The numerator for the calculation of diluted EPS
is net income for the three months ended March 31, 1999. The
numerator for the three months ended March 31, 2000 includes an
add back for interest expense and debt cost amortization, net of
income tax effects, related to the 05 Notes.
A reconciliation of net income used for basic to diluted EPS
is as follows:
Three Months Ended
March 31, 2000 March 31, 1999
Net income - basic $11,114 $7,436
Adjustments under the if-
converted method, net of tax 1,811 -
Adjusted net income - diluted $12,925 $7,436
5. Supplemental Data
Three Months Ended
March 31, March 31,
2000 1999
Other income (expense), net:
Interest income $ 396 $ 186
Foreign exchange gains (losses),
net 189 (297)
Amortization of debt costs (493) (279)
Litigation/Insurance settlements 483 1,000
Income from joint venture
carried at equity 503 300
Other, net (130) 33
$ 948 $ 943
Supplemental cash flow information:
Cash paid for interest (net amount
capitalized) $7,274 $3,521
Cash paid for income taxes (net of
refunds) $7,732 $5,648
6. 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 loss amounted to approximately $6,846 and $6,866
for the three months ended March 31, 2000 and 1999, respectively.
The only components of accumulated other comprehensive loss for
the Company are foreign currency translation adjustments.
7. Contingent Liabilities and Litigation
The Company was originally named as one of multiple
defendants in 62 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 52 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. 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
and the Company has responded to both requests for information.
The Company is unable to predict what impact the OFT
investigation or OXERA study 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.
8. Business Acquisitions
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 preliminarily 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 fair value of the net assets acquired was based on
preliminary estimates and may be revised at a later date. 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
$3,000 may be paid in the next 3 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 of all businesses discussed above
as if the companies had combined at the beginning of 1999:
Pro Forma
Three Months Ended
March 31,
1999
Revenue $179,500
Net income $7,250
Basic EPS $0.27
Diluted EPS $0.26
These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired
intangibles and goodwill and 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.
9. Business Segment Information
The Company's reportable segments are five 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,
2000 1999 2000 1999
Revenues Income
IPD $85,151 $60,145 $14,603 $5,457
USPD 43,859 39,436 3,534 2,121
FCD 15,859 15,433 5,868 5,754
AHD 41,577 40,471 9,305 9,350
AAHD 2,981 2,112 (1,289) (920)
Unallocated and
eliminations (1,147) (838) (3,926) (2,498)
$188,280 $156,759
Interest expense (10,860) (7,466)
Pretax income $17,235 $11,798
10. 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 March 31, 2000, the Company has advanced
$12,000 to Ascent under the agreement.
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 which extended the option from
2002 to 2003 and altered the formula period from 2001 to 2002 is
subject to approval by Ascent's stockholders.
11. Subsequent Event - Business Acquisition/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 million and
issuance of a $30 million 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 will be purchased from Roche during a transition
period of approximately three months.
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 acquisition will be accounted for in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of the acquired business
operations will be included in the Company's consolidated
financial statements beginning on the acquisition date.
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" (estimated at between
$2,000 - $3,000) will be reflected in cost of sales as inventory
is sold during the second and third quarters. In addition,
certain employees of AHD have been severed as a result of the
acquisition. This will result in an approximate $500 non-
recurring charge in the second quarter.
Due to the timing of the closing, balance sheet and income
statement information for the acquired business as of March 31,
2000 is not presently available. The Company estimates the
purchase will result in the following consolidated elements of
financial position compared to March 31, 2000:
Alpharma Inc.
(Dollars in millions) Pre- Post-
Acquisition Acquisition
Total assets $1,137.6 $1,430.2
Long- term debt $583.1 $875.7
Stockholders' equity $349.2 $349.2
Audited financial statements for MFA and the required pro-
forma statements for 1999 were presented as required in a Form 8-
K filed in May of 2000.
12. 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Most comparisons of 2000 results to 1999 are affected by the
Company's 1999 acquisition program and the financing required to
implement the program. The 1999 acquisitions increased revenue by
approximately $22.8 million, gross profit by approximately $14.0
million, operating expenses by approximately $11.6 million and
operating income by approximately $2.4 million. Estimated
interest on the financings more than offset the acquisitions'
operating income.
Results of Operations - Three Months Ended March 31, 2000
Total revenue increased $31.5 million (20.1%) in the three
months ended March 31, 2000 compared to 1999. Operating income in
2000 was $27.1 million, an increase of $8.8 million, compared to
1999. Net income was $11.1 million ($.35 per share diluted)
compared to $7.4 million ($.27 per share diluted) in 1999.
Revenues increased in the Human Pharmaceuticals business by
$29.9 million and in the Animal Pharmaceuticals business by $2.0
million. The increase in revenues was reduced by over $4.0
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 March 31, 2000
compared to March 31, 1999 are as follows:
Revenues in IPD increased by $25.0 million due primarily to
the 1999 acquisitions ($17.6 million) and higher pricing in the
U.K. offset partially by effects of currency translation. The
pricing in the U.K. market was higher relative to the first
quarter of 1999, but was relatively flat compared to the third
and fourth quarters 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 are not expected to continue through
the second half of 2000. In this regard, the UK government has
publicly proposed a reduction in the prices of certain generic
drugs using late 1998 / early 1999 as a reference period. There
is presently an ongoing comment period during which the Company,
working through its trade association, is presenting certain key
factors, including substantial government-imposed cost increases,
that it believes should be taken into consideration in any final
regulation. It is anticipated that formal regulations will be
implemented later this year.(See also Note 7 to the consolidated
condensed financials). USPD revenues increased $4.4 million due
to volume increases in new and existing products offset slightly
by lower net pricing. Revenues in FCD increased by $.4 million
due mainly to volume increases in vancomycin. AHD revenues
increased $1.1 million due to 1999 acquisitions offset partially
by lower volume in certain products. AAHD sales increased by $.9
million primarily due to their 1999 acquisition of Vetrepharm.
On a consolidated basis, gross profit increased $21.9
million and the gross margin percent increased to 47.9% in 2000
compared to 43.6% in 1999.
A major portion of the increase in dollars and percentage
results from the 1999 acquisitions (primarily Isis), higher
pricing in the U.K. IPD market and to a lesser extent sales of
new products in USPD. Partially offsetting increases were volume
decreases in AHD and certain IPD markets, and the effects of
foreign currency translation.
Operating expenses increased $13.0 million and represented
33.5% of revenues in 2000 compared to 31.9% in 1999. Most of the
increase is attributable to the 1999 acquisitions (primarily
Isis). Other increases included professional and consulting
expenses for strategic planning and acquisitions, and annual
increases in compensation including increased incentive programs.
Operating income increased $8.8 million (48.2%). IPD
accounted for the majority of the increase primarily due to
higher pricing in the U.K. market and to a lesser extent the
Isis acquisition. Increases recorded by USPD and to a lesser
extent by FCD due to increased volume were offset by increased
operating expenses.
Interest expense increased in 2000 by $3.4 million due
primarily to debt incurred to finance the 1999 acquisitions and
to a lesser extent, higher interest rates in 2000.
Financial Condition
Working capital at March 31, 2000 was $223.9 million
compared to $220.3 million at December 31, 1999. The current
ratio was 2.44 to 1 at March 31, 2000 compared to 2.33 to 1 at
year end. Long-term debt to stockholders' equity was 1.67:1 at
March 31, 2000 and December 31, 1999.
All balance sheet captions decreased as of March 31, 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 German Mark,
depreciated versus the U.S. Dollar in the three months of 2000 by
approximately 6%, 5%, 2% and 5%, 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 $2.7 million, inventories $3.2 million,
accounts payable and accrued expenses $2.8 million, and total
stockholders' equity $18.0 million. The $18.0 million decrease in
stockholder's equity represents accumulated other comprehensive
loss for the three months ended March 31, 2000 resulting from the
continued strengthening of the U.S. dollar.
At March 31, 2000, the Company had $12.8 million in cash,
available short term lines of credit of $41.0 million and
approximately $120.0 million available under its $300.0 million
credit facility ("1999 Credit Facility"). 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 1.6625% depending on the ratio of
total debt to EBITDA. As of March 31, 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.
On May 2, 2000, Alpharma completed the acquisition of the
Medicated Feed Additive Business of Roche ("MFA") for a cash
payment of approximately $258.0 million and issuance of a $30.0
million promissory note to Roche due December 31, 2000 bearing
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.
The inventories are estimated at approximately $10.0 million.
The acquisition includes inventories, manufacturing and
formulation sites in the United States, global product
registrations, licenses, trademarks and associated intellectual
property.
The Company financed the $258 million cash payment under a
$225.0 million bridge financing agreement ("Bridge Financing")
with the balance of the financing being provided under its
current $300.0 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 have 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 Company expects to refinance the
Bridge within the initial term by a combination of debt and
equity.
The Bridge Financing was agreed to by the syndicate of banks
who are parties to the 1999 Credit Facility. (All banks in the
bridge financing are part of the 1999 Credit Facility Syndicate).
In future quarters the Company will be required to meet the
covenants included in the 1999 Credit Facility, as amended, which
may require additional equity financings and/or the issuance of
long-term debt subordinate to the 1999 Credit Facility.
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.
On December 3, 1999, the staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin 101 (SAB
101), "Revenue Recognition in Financial Statements" which
summarizes some of the staff's interpretations of the application
of generally accepted accounting standards to revenue
recognition. The Company adopted SAB101 in the first quarter of
2000. The adoption did not have a material impact on financial
position or results of operations.
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 three months ended March 31,
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 6. Exhibits And Reports On Form 8-K
(a) Exhibits
4.0 $225 million Credit Agreement ("Bridge Financing") dated as
of May 2, 2000, among Alpharma U.S. Inc. as borrower, Alpharma
Inc. as parent guarantor, the subsidiary guarantors and First
Union National Bank, Summit Bank, Den norske Bank ASA, Union Bank
of Norway and First Union Securities Inc.
4.1 Parent Guaranty made by the Company in favor of the
Banks party to the Bridge Financing Agreement dated
May 2, 2000.
4.2 Amendment No. 2 to the 1999 Credit Facility and Amendment
No. 3 to Parent Guaranty and Consent dated as of April 19, 2000
between the Company and the Banks that are parties to the
original agreement.
4.3 Form of Consent Amendment No. 3 to the 1999 Credit Facility
and Amendment No. 4 to the Parent Guaranty dated as of May 2,
2000 by and among Union Bank of Norway, as Agent, First Union
National Bank, Den norske Bank ASA, Banque Nationale de Paris
Oslo Branch, Landesbank Schleswig-Holstein Girozentrale
Copenhagen Branch, and Summit Bank, as Working Capital Agent and
Documentation Agent, Alpharma U.S. Inc. and Alpharma Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 5, 2000, the Company filed a report on Form 8-K dated
May 2, 2000 reporting Item 2. "Acquisition or Disposition of
Assets." The event reported was the acquisition of the MFA
business. The Form 8-K included the audited financial statements
of the MFA business and required pro forma financials.
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: May 5 , 2000 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer