Page 1 of 26
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
June 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 July 28, 2000:
Class A Common Stock, $.20 par value -- 25,405,501 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
June 30, 2000 and December 31, 1999 3
Consolidated Statement of Income for the
Three and Six Months Ended June 30, 2000
and 1999 4
Consolidated Condensed Statement of Cash
Flows for the Six Months Ended June 30,
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 17-23
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders 25
Item 6. Exhibits and reports on Form 8-K 25
Signatures 26
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
June 30, December 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 22,046 $ 17,655
Accounts receivable, net 219,137 199,207
Inventories 231,614 155,338
Prepaid expenses and other
current assets 14,565 13,923
Total current assets 487,362 386,123
Property, plant and equipment, net 321,529 244,413
Intangible assets, net 635,061 488,958
Other assets and deferred charges 48,211 45,023
Total assets $1,492,163 $1,164,517
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 15,038 $ 9,111
Short-term debt 26,296 4,289
Accounts payable and accrued expenses 148,520 135,281
Accrued and deferred income taxes 11,586 17,175
Total current liabilities 201,440 165,856
Long-term debt:
Senior 335,846 225,110
Convertible subordinated notes,
including $67,850 to related party 370,119 366,674
Deferred income taxes 33,386 35,065
Other non-current liabilities 17,584 17,208
Stockholders' equity:
Class A Common Stock 5,132 4,078
Class B Common Stock 1,900 1,900
Additional paid-in-capital 492,292 297,780
Accumulated other comprehensive
loss (65,769) (34,109)
Retained earnings 107,176 91,139
Treasury stock, at cost (6,943) (6,184)
Total stockholders' equity 533,788 354,604
Total liabilities and
stockholders' equity $1,492,163 $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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Total revenue $219,545 $163,839 $407,825 $320,598
Cost of sales 121,417 90,028 219,453 178,395
Gross profit 98,128 73,811 188,372 142,203
Selling, general and
administrative expenses 68,293 52,743 131,390 102,814
Operating income 29,835 21,068 56,982 39,389
Interest expense (13,053) (8,857) (23,913) (16,323)
Other, net (4,857) (22) (3,909) 921
Income before provision
for income taxes 11,925 12,189 29,160 23,987
Provision for income
taxes 4,093 4,417 10,214 8,779
Net income $ 7,832 $ 7,772 $ 18,946 $ 15,208
Earnings per common share:
Basic $ 0.24 $ 0.28 $ 0.61 $ 0.56
Diluted $ 0.24 $ 0.28 $ 0.59 $ 0.55
Dividends per common share $ 0.045 $ 0.045 $ 0.09 $ 0.09
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)
Six Months Ended
June 30,
2000 1999
Operating Activities:
Net income $ 18,946 $ 15,208
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 31,257 21,893
Interest accretion on convertible debt 3,445 512
Changes in assets and liabilities,
net of effects from business
acquisitions:
(Increase)decrease in accounts receivable (24,046) 8,628
(Increase) in inventory (42,579) (18,314)
Increase (decrease) in accounts payable,
accrued expenses and taxes payable 13,803 (3,560)
Other, net 1,785 747
Net cash provided by
operating activities 2,611 25,114
Investing Activities:
Capital expenditures (26,700) (15,050)
Loans to Ascent Pediatrics (1,500) (4,000)
Purchase of businesses and intangible
assets, net of cash acquired (268,941) (173,626)
Net cash used in investing activities (297,141) (192,676)
Financing Activities:
Dividends paid (2,909) (2,488)
Proceeds from sale of convertible
subordinated debentures - 170,000
Proceeds from senior long-term debt 93,850 277,000
Reduction of senior long-term debt (4,446) (278,858)
Net advances under lines of credit 22,168 4,020
Payments for debt issuance costs (747) (8,445)
Proceeds from issuance of common stock 193,434 14,431
Purchase of treasury stock (759) -
Net cash provided by financing activities 300,591 175,660
Exchange Rate Changes:
Effect of exchange rate changes
on cash (2,352) (1,519)
Income tax effect of exchange rate
changes on intercompany advances 682 1,523
Net cash flows from exchange
rate changes (1,670) 4
Increase in cash 4,391 8,102
Cash and cash equivalents at
beginning of year 17,655 14,414
Cash and cash equivalents at
end of period $ 22,046 $ 22,516
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
and six month periods ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
2. Inventories
Inventories consist of the following:
June 30, December 31,
2000 1999
Finished product $ 137,433 $ 88,494
Work-in-process 32,371 28,938
Raw materials 61,810 37,906
$231,614 $155,338
3. 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 have been 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 (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 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 Agreement,
the Company engaged and incurred fees to investment bankers to
advise on options 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 $.10 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
$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 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 Six Months Ended
June 30, June 30,
2000* 1999 2000* 1999
Revenue $226,500 $238,700 $464,800 $471,700
Net income $9,500 $2,100 $11,900 $2,600
Basic EPS $0.29 $0.08 $0.38 $0.09
Diluted EPS $0.28 $0.07 $0.38 $0.09
* 2000 excludes actual non-recurring charges related to the
Roche MFA acquisition of $4,026 after tax or $0.10 per share.
These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired
intangibles and goodwill and 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.
4. Long-Term Debt and Equity Financing
Long-term debt consists of the following:
June 30, December 31,
2000 1999
Senior debt:
U.S. Dollar Denominated:
1999 Credit Facility
(7.70 - 8.03%) $271,350 $180,000
Note payable - Roche 30,000 -
Industrial Development Revenue Bonds 8,450 9,130
Other, U.S. 112 172
Denominated in Other Currencies (NOK) 40,972 44,919
Total senior debt 350,884 234,221
Subordinated debt:
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 177,269 173,824
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 370,119 366,674
Total long-term debt 721,003 600,895
Less, current maturities 15,038 9,111
$705,965 $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 $186,000. 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 3.)
In June 2000 the Company signed an amendment to its $300,000
Credit Agreement ("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
that facility.
5. Earnings Per Share
Basic earnings per share is based upon the weighted average
number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options 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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Average shares
outstanding - basic 32,475 27,503 31,050 27,379
Stock options 560 353 430 380
Convertible debt - 6,744 6,744 -
Average shares
outstanding - diluted 33,035 34,600 38,224 27,759
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 June 30, 1999 and six months ended June 30,
2000. The calculation of the assumed conversion was antidilutive
for the six months ended June 30, 1999 and three months ended
June 30, 2000.
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 June 30, 2000, but were not
included in the computation of diluted EPS because the result was
antidilutive for all periods presented.
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 June 30, 2000 and the
six months ended June 30, 1999. The numerator for the three
months ended June 30, 1999 and the six months ended June 30, 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 Six Months Ended
Ended
June June June June
30, 30, 30, 30,
2000 1999 2000 1999
Net income - basic $7,832 $7,772 $18,946 $15,208
Adjustments under if -
converted method, net of - 1,811 3,622 -
tax
Adjusted net income - $7,832 $9,583 $22,568 $15,208
diluted
6. Supplemental Data
Three Months Six Months Ended
Ended
June June June June
30, 30, 30, 30,
2000 1999 2000 1999
Other income (expense),
net:
Fees for bridge financing-
MFA acquisition $(4,730) $ - $(4,730) $ -
Interest income 688 258 1,084 444
Foreign exchange gains
(losses), net (631) 29 (442) (268)
Amortization of debt costs (502) (367) (995) (657)
Litigation/Insurance
settlement - - 483 1,000
Income from joint venture
carried at equity 455 348 958 648
Other, net (137) (290) (267) (246)
$(4,857) $ (22) $(3,909) $ 921
Supplemental cash flow
information:
Six Months Ended
June June
30, 30,
2000 1999
Cash paid for interest (net
of $20,006 $13,226
amount capitalized)
Cash paid for income taxes
(net of refunds) $12,375 $ 7,660
Detail of businesses and
intangibles acquired:
Fair value of assets $298,941 $213,087
Seller financed debt -
Roche 30,000 -
Liabilities assumed - 38,558
Cash paid 268,941 174,529
Less cash acquired - 903
Net cash paid for
businesses and
intangibles $268,941 $173,626
7. 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 $5,868 and $1,505
for the three months ended June 30, 2000 and 1999, respectively.
Total comprehensive loss amounted to approximately $12,714 and
$8,371 for the six months ended June 30, 2000 and 1999. The only
components of accumulated other comprehensive loss for the
Company are foreign currency translation adjustments.
8. 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 54 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 since
answering their inquiries. 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.
9. Business Segment Information
The Company's reportable segments are five decentralized
divisions (i.e. International Pharmaceuticals Division ("IPD"),
Fine Chemicals Division ("FCD"), U.S. Pharmaceuticals Division
("USPD"), Animal Health Division ("AHD") and Aquatic Animal
Health Division ("AAHD"). Each division has a president and
operates in distinct business and/or geographic area. Segment
data includes immaterial intersegment revenues which are
eliminated in the consolidated accounts.
The operations of each segment are evaluated based on
earnings before interest and taxes. Corporate expenses and
certain other expenses or income not directly attributable to the
segments are not allocated.
Three Months Ended June 30,
2000 1999 2000 1999
Revenues Operating Income
IPD $76,862 $68,055 $12,581 $7,565
USPD 51,941 42,315 4,351 2,322
FCD 14,954 16,019 6,291 6,192
AHD 72,833 35,103 11,529 * 9,151
AAHD 3,020 2,522 (1,108) (920)
Unallocated and
eliminations (65) (175) (3,809) (3,242)
$219,545 $163,839 $ 29,835 $ 21,068
Six Months Ended June 30,
2000 1999 2000 1999
Revenues Operating Income
IPD $162,013 $128,200 $27,184 $13,022
USPD 95,800 81,751 7,885 4,443
FCD 30,813 31,452 12,159 11,946
AHD 114,410 75,574 20,834 * 18,501
AAHD 6,001 4,634 (2,397) (1,840)
Unallocated and
eliminations (1,212) (1,013) (8,683) (6,683)
$407,825 $320,598 $56,982 $39,389
* 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 the identifiable assets
of AHD at June 30, 2000 are approximately $560,000.
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 June 30, 2000, the Company has advanced
$12,000 to Ascent under the 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 second half 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 June 30,
2000, no losses or reserves were provided.
11. 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
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
the second quarter of 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 $186.0 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.
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 second
quarter 2000 results include one-time charges related to the MFA
acquisition of $6.1 million ($4.0 million after tax or $.10 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
acquisitions and MFA, in particular, 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 objectively. The Company
estimates acquisitions contributed revenues of approximately
$63.0 million and $86.0 million, respectively, in the three and
six months ended June 30, 2000.
The Company further estimates if the cost of financing
necessary to make the acquisitions is considered both the quarter
and six months ended June 30, 2000 were diluted to some extent by
the aggregate acquisitions.
Results of Operations - Six Months Ended June 30, 2000
Total revenue increased $87.2 million (27.2%) in the six
months ended June 30, 2000 compared to 1999. Operating income in
2000 was $57.0 million, an increase of $17.6 million, compared to
1999. Net income was $18.9 million ($.59 per share diluted)
compared to $15.2 million ($.55 per share diluted) in 1999. 2000
earnings per share are diluted by the sale of Class A Common
stock in November 1999 and May 2000. The six months ended June
30, 2000 results are reduced by one-time charges totaling $4.0
million after tax or $.10 per share related to the acquisition
and interim financing of MFA in May 2000. Without the charges net
income would have been $23.0 million ($.69 per share diluted).
Revenues increased in the Human Pharmaceuticals business by
$47.2 million and in the Animal Pharmaceuticals business by $40.2
million. The increase in revenues was reduced by over $9.0
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 six month period ended June 30, 2000 compared to
June 30, 1999 are as follows:
Revenues in IPD increased by $33.8 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 trending down
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 have 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 have resulted in certain lower prices in the second
quarter and further reductions as a result of the adoption of the
above noted legislation will occur in the second half of 2000.
The Company's 2000 business plan anticipated the approximate
effect of lower pricing.
USPD revenues increased $14.0 million due to volume
increases in new and existing products offset in part by lower
net pricing. Revenues in FCD decreased by $.6 million due mainly
to minor price increases being entirely offset by translation of
sales in local currency into the U.S. Dollar.
AHD revenues increased $38.8 million due to acquisitions
primarily MFA. Adverse market and competitive conditions in a
number of AHD's main markets caused volume reductions in certain
ongoing products as the Company's marketing effort was focused on
the newly acquired MFA products. AAHD revenues increased
primarily due to the acquisition of Vetrepharm in November of
1999.
On a consolidated basis, gross profit increased $46.2
million and the gross margin percent increased to 46.2% in 2000
compared to 44.4% in 1999.
A major portion of the increase results from the
acquisitions (primarily MFA and Isis), higher pricing in the
IPD's United Kingdom market and to volume increases of a number
of products in USPD. 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 $28.6 million and represented
32.2% of revenues in 2000 compared to 32.1% in 1999. The dollar
increase is attributable to the acquisitions (primarily MFA and
Isis). Other increases included professional and consulting
expenses for strategic planning 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.
Operating income increased $17.6 million (44.7%). 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. Increased operating income recorded by USPD due to
increased volume and in AHD due to the MFA acquisition were
offset in part by lower volume in certain IPD and AHD markets.
Interest expense increased in 2000 by $7.6 million due
primarily to debt incurred to finance the acquisitions and to a
lesser extent, higher interest rates in 2000.
Other, net was $3.9 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.
Results of Operations - Three Months Ended June 30, 2000
Total revenue increased $55.7 million (34.0%) in the three
months ended June 30, 2000 compared to 1999. Operating income in
2000 was $29.8 million, an increase of $8.8 million, compared to
1999. Net income was $7.8 million ($.24 per share diluted)
compared to $7.8 million ($.28 per share diluted) in 1999. 2000
earnings per share are diluted by the sale of stock in November
1999 and May 2000. The three months ended June 30, 2000 results
are reduced by one-time charges totaling $4.0 million after tax
or $.10 per share related to the acquisition and interim
financing of MFA in May of 2000. Without the charges net income
would have been $11.9 million ($.34 per share diluted).
Revenues increased in the Human Pharmaceuticals business by
$17.4 million and in the Animal Pharmaceuticals business by $38.2
million. The increase in revenues was reduced by over $5.0
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 June 30, 2000 compared
to June 30, 1999 are as follows:
Revenues in IPD increased by $8.8 million due primarily to
the Isis acquisition and higher pricing in the U.K. offset
partially by effects of currency translation and lower volume in
certain markets. The pricing in the U.K. market was higher
relative to the second quarter of 1999, but was lower 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. 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. The government has indicated that it will review the
interim legislation within the next 12 to 15 months. Further
price decreases will occur in the second half of 2000 as a result
of the legislation. The Company's 2000 business plan anticipated
the approximate effect of lower pricing.
USPD revenues increased $9.6 million due to volume increases
in new and existing products offset in part by lower net pricing.
Revenues in FCD decreased by $1.1 million due mainly to lower
volume and currency translation. AHD revenues increased $37.7
million due primarily to the acquisition of MFA in May 2000. MFA
sales were the primary focus of the marketing effort in the
second quarter and volume in other core products and markets
declined due to adverse market and competitive conditions and the
strategy to manage product mix in favor of MFA products. AAHD
sales increased $.5 million due mainly to the acquisition of
Vetrepharm in 1999.
On a company-wide basis, gross profit increased $24.3
million and the gross margin percent declined slightly to 44.7%
in 2000 compared to 45.1% in 1999.
AHD also recorded a $1.0 million charge for an inventory
write-up and subsequent write off upon sale of Roche manufactured
MFA inventory included in the May acquisition (excluding this
charge consolidated gross profit percent was 45.2%).
A major portion of the increase in dollars results from the
acquisitions (primarily MFA and Isis), and to a lesser extent
increased volume in USPD. Partially offsetting increases were
volume declines in certain AHD and IPD markets and the effects of
foreign currency translation. On an overall basis higher pricing
in the U.K. market was offset by lower net pricing in USPD and
AHD.
Operating expenses increased $15.6 million and represented
31.1% of revenues in 2000 compared to 32.2% in 1999. The dollar
increase is attributable to the acquisitions (primarily MFA and
Isis). Also included is a $.4 million expense for severance of
AHD employees primarily in selling and marketing due to the MFA
acquisition.
On an overall basis operating income increased $8.8 million
due to the acquisitions of MFA and Isis and increased volume in
USPD, offset by the $1.4 million of acquisition charges in AHD.
Interest expense increased in 2000 by $4.2 million due
primarily to debt incurred to finance the acquisitions and to a
lesser extent, higher interest rates in 2000.
Other, net was $4.9 million expense in 2000 due to $4.7
million fees incurred as part of the Bridge Financing.
Financial Condition
Working capital at June 30, 2000 was $285.9 million compared
to $220.3 million at December 31, 1999. The current ratio was
2.42 to 1 at June 30, 2000 compared to 2.33 to 1 at year end.
Long-term debt to stockholders' equity was 1.32:1 at June 30,
2000 compared to 1.67:1 at December 31, 1999.
The Company's balance sheet changed substantially as a
result of the acquisition and financing of MFA in May 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.
All balance sheet captions decreased as of June 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 German Mark
depreciated versus the U.S. Dollar in the six months of 2000 by
approximately 7%, 6%, 6% 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 $4.1 million, inventories $4.9 million,
accounts payable and accrued expenses $4.1 million, and total
stockholders' equity $31.7 million. The $31.7 million decrease in
stockholder's equity represents accumulated other comprehensive
loss for the six months ended June 30, 2000 resulting from the
continued strengthening of the U.S. Dollar.
At June 30, 2000, the Company had $22.0 million in cash,
available short term lines of credit of approximately $37.0
million and approximately $107.0 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 June 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.
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 July 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 third quarter of 2000 or later. The delay in drug
introduction has resulted in Ascent continuing to incur
substantial losses thru June 30, 2000. If the commercial
introduction of the second product is delayed past the third
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, both in human
and animal pharmaceuticals. In order to accomplish any
individually significant acquisition or combination of
acquisitions, the Company will need to obtain and is currently
considering additional financing in the form of equity related
securities and/or borrowings. To prepare for this possibility,
the Company presently has an effective $500 million shelf
registration available for either debt or equity financing and
anticipates amending its Certificate of Incorporation to increase
the number of authorized shares of Class A Common Stock from 50
million to 65 million.
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 six months ended June 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Alpharma Inc. annual meeting was held on May 25, 2000.
(b) Proxies were solicited by Alpharma Inc. and there was no
solicitation in opposition to the nominees listed in the proxy
statement. All such nominees were elected to the classes
indicated in the proxy statement pursuant to the vote of the
stockholders as follows:
Votes
Class A Directors For Against
Thomas G. Gibian 17,828,627 131,780
Peter G. Tombros 17,836,333 124,074
Erik Hornnaess 17,837,988 122,419
Class B Directors
I. Roy Cohen 9,500,000 0
Glen E. Hess 9,500,000 0
Ingrid Wiik 9,500,000 0
Einar W. Sissener 9,500,000 0
Erik G. Tandberg 9,500,000 0
0yvin A. Broymer 9,500,000 0
(c) An Amendment to the Company's 1997 Incentive Stock Option
and Appreciation Right Plan, as amended, was approved by a vote
of:
For 22,601,852
Against 3,095,102
Abstain 247,340
No Vote 1,516,113
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (electronic filing only)
4.0 Amendment No. 4 to the 1999 Credit Facility and Amendment
No. 5 to the Parent Guaranty dated June 29, 2000 between the
Company and the Banks that are parties to the amended agreement.
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: August 7, 2000 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer