Page 1 of 29 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarter ended Commission file number 1-8593 September 30, 2000 Alpharma Inc. (Exact name of registrant as specified in its charter) Delaware 22-2095212 (State of Incorporation) (I.R.S. Employer Identification No.) One Executive Drive, Fort Lee, New Jersey 07024 (Address of principal executive offices) Zip Code (201) 947-7774 (Registrant's Telephone Number Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of November 3, 2000. Class A Common Stock, $.20 par value - 30,685,333 shares; Class B Common Stock, $.20 par value - 9,500,000 shares ALPHARMA INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheet as of September 30, 2000 and December 31, 1999 (restated) 3 Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2000 and 1999 (restated) 4 Consolidated Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (restated) 5 Notes to Consolidated Condensed Financial Statements 6-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-27 Item 3. Quantitative and Qualitative Disclosures 28 about Market Risk PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders 29 Item 6. Exhibits and reports on Form 8-K 29 Signatures 29 ALPHARMA INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (In thousands of dollars) (Unaudited) December 31, September 30, 1999 2000 (Restated) ASSETS Current assets: Cash and cash equivalents $ 95,583 $ 17,655 Accounts receivable, net 270,250 189,261 Inventories 239,336 161,033 Prepaid expenses and other 12,872 13,923 Total current assets 618,041 381,872 Property, plant and equipment, net 324,119 244,413 Intangible assets, net 607,072 488,958 Other assets and deferred charges 62,619 45,023 Total assets $1,611,851 $1,160,266 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $50,614 $ 9,111 Short-term debt 2,717 4,289 Accounts payable and accrued expenses163,514 135,281 Accrued and deferred income taxes 16,698 15,595 Total current liabilities 233,543 164,276 Long-term debt: Senior 129,997 225,110 Convertible subordinated notes, including $67,850 to related party 371,826 366,674 Deferred income taxes 32,023 35,065 Other non-current liabilities 21,646 17,208 Stockholders' equity: Class A Common Stock 6,193 4,078 Class B Common Stock 1,900 1,900 Additional paid-in-capital 791,105 297,780 Accumulated other comprehensive loss (92,988) (34,201) Retained earnings 123,549 88,560 Treasury stock, at cost (6,943) (6,184) Total stockholders' equity 822,816 351,933 Total liabilities and stockholders' equity $1,611,851 $1,160,266 The accompanying notes are an integral part of the consolidated condensed financial statements. ALPHARMA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1999 1999 2000 Restated 2000 Restated Total revenue $252,634 $199,829 $662,751 $517,995 Cost of sales 139,461 106,972 360,460 283,970 Gross profit 113,173 92,857 302,291 234,025 Selling, general and administrative expenses 71,757 64,664 203,147 167,478 Operating income 41,416 28,193 99,144 66,547 Interest expense (11,324) (11,257) (35,237) (27,580) Other income (expense), (511) (673) (4,420) 248 net Income before provision for income taxes 29,581 16,263 59,487 39,215 Provision for income 9,286 5,890 19,783 14,276 taxes Net income $20,295 $10,373 $39,704 $ 24,939 Earnings per common share: Basic $ .54 $ .38 $ 1.19 $ .91 Diluted $ .48 $ .35 $ 1.11 $ .88 Dividends per common share $ .045 $ .045 $ .135 $ .135 The accompanying notes are an integral part of the consolidated condensed financial statements. ALPHARMA INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (In thousands of dollars) (Unaudited) Nine Months Ended September 30, 1999 2000 (Restated) Operating Activities: Net income $ 39,704 $ 24,939 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,758 35,952 Stock option income tax benefits 6,189 1,631 Interest accretion on long-term debt 5,207 2,159 Changes in assets and liabilities, net of effects from business acquisitions: (Increase) in accounts receivable (89,125) (2,671) (Increase)decrease in inventories (49,164) (16,938) Increase in accounts payable, accrued expenses and taxes payable 39,131 920 Other, net 1,493 2,929 Net cash provided by operating activities 3,193 48,921 Investing Activities: Capital expenditures (57,516) (23,332) Loans to Ascent Pediatrics (1,500) (7,000) Purchase of businesses and intangible assets, net of cash acquired (268,711) (203,408) Net cash used in investing activities(327,727) (233,740) Financing Activities: Dividends paid (4,715) (3,726) Proceeds from sale of convertible subordinated notes - 170,000 Proceeds from senior long-term debt 128,000 317,000 Reduction of senior long-term debt (206,241) (279,619) Net repayments under lines of credit (1,072) (15,609) Payments for debt issuance costs (747) (8,757) Proceeds from issuance of common stock 489,196 14,264 Purchase of treasury stock (759) - Net cash provided by financing activities 403,662 193,553 Exchange Rate Changes: Effect of exchange rate changes on cash (2,913) (965) Income tax effect of exchange rate changes on intercompany advances 1,713 1,122 Net cash flows from exchange rate changes (1,200) 157 Increase in cash 77,928 8,891 Cash and cash equivalents at beginning of year 17,655 14,414 Cash and cash equivalents at end of period $ 95,583 $23,305 The accompanying notes are an integral part of the consolidated condensed financial statements. 1. General The accompanying consolidated condensed financial statements include all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the results for the periods presented. These financial statements should be read in conjunction with the consolidated financial statements of Alpharma Inc. and Subsidiaries included in the Company's 1999 Annual Report on Form 10-K/A. The reported results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. 2. Restatement of Financial Statements In the third quarter of 2000 the Company discovered that with respect to its Brazilian AHD operations, which reported revenues of approximately $1,800, $6,000 and $13,700 for the years 1997, 1998, and 1999, respectively, a small number of employees collaborated to circumvent established company policies and controls to create invoices that were either not supported by underlying transactions or for which the recorded sales were inconsistent with the underlying transactions. A full investigation of the matter with the assistance of counsel and the company's independent auditors was initiated and completed. As a result, the individuals responsible have been removed, new management has been appointed to supervise AHD Brazilian operations and the Company has restated all affected periods, comprising all four quarters of 1999 and the first two quarters of 2000. A summary of the effects of the restatement adjustments on the accompanying balance sheet as of December 31, 1999 and statements of income for the three and nine month periods ended September 30, 1999 follows: December 31, 1999 Reported Restated ASSETS: Accounts receivable, net $199,207 $189,261 Inventories 155,338 161,033 Other current assets 31,578 31,578 Current assets 386,123 381,872 Non current assets 778,394 778,394 Total assets $1,164,517 $1,160,266 LIABILITIES AND EQUITY: Current liabilities $165,856 $164,276 Long-term debt 591,784 591,784 Deferred taxes and other 52,273 52,273 Cumulative translation adj. (34,109) (34,201) Stockholders' equity 388,713 386,134 Total liabilities & equity $1,164,517 $1,160,266 Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 Reported Restated Reported Restated Total revenue $203,131 $199,829 $523,729 $517,995 Cost of sales 108,838 106,972 287,233 283,970 Gross profit 94,293 92,857 236,496 234,025 Selling, general & administrative expenses 64,664 64,664 167,478 167,478 Operating income 29,629 28,193 69,018 66,547 Interest expense (11,257) (11,257) (27,580) (27,580) Other, net (673) (673) 248 248 Income before provision for income taxes 17,699 16,263 41,686 39,215 Provision for income taxes 6,436 5,890 15,215 14,276 Net income $ 11,263 $ 10,373 $ 26,471 $ 24,939 Earnings per common share: Basic $0.41 $0.38 $0.96 $0.91 Diluted $0.38 $0.35 $0.93 $0.88 3. Inventories Inventories consist of the following: December 31, September 30, 1999 2000 (Restated) Finished product $146,890 $ 94,189 Work-in-process 32,173 28,938 Raw materials 60,273 37,906 $239,336 $161,033 4. Business Acquisitions 2000 Roche MFA and Bridge Financing: On May 2, 2000, Alpharma announced the completion of the acquisition of the Medicated Feed Additive Business of Roche Ltd.("MFA") for a cash payment of approximately $258,000 and issuance of a $30,000 promissory note to Roche. The Note is due December 31, 2000 and bears interest at the Prime rate. The purchase price will be adjusted based on actual product inventories as of May 2, 2000. In addition certain international inventories were purchased from Roche during a transition period of approximately three months. The MFA business had 1999 sales of $213,000 and consists of products used in the livestock and poultry industries for preventing and treating diseases in animals. MFA sales by region are approximately 56% in North America, 20% in Europe and 12% in both Latin America and Southeast Asia. The acquisition included inventories, five manufacturing and formulation sites in the United States, global product registrations, licenses, trademarks and associated intellectual property. Approximately 200 employees primarily in manufacturing and sales and marketing are included in the acquisition. The acquisition has been accounted for in accordance with the purchase method. The fair value of the assets acquired and liabilities assumed based on a preliminary allocation and the results of the acquired business operations are included in the Company's consolidated financial statements beginning on the acquisition date. The Company is amortizing the acquired intangibles and goodwill based on lives of 5 to 20 years (average approximately 18 years) using the straight line method. The Company financed the $258,000 cash payment under a $225,000 Bridge Financing agreement ("Bridge Financing") with the balance of the financing being provided under its then current $300,000 credit facility ("1999 Credit Facility"). The Bridge Financing was arranged by Union Bank of Norway, First Union National Bank, and a group of other banks and was fully repaid on June 29, 2000. Under the Bridge Financing the Company paid a 1% fee for the banks commitment and in connection with drawing the funds. Interest was payable at Libor plus 2.75%. In addition, because of the size of the acquisition, other possible acquisitions, and the existing restrictive covenants under the 1999 Credit Facility, the Company engaged and incurred fees to investment bankers to advise on alternatives and strategies to finance the Roche acquisition. All fees relating to the bridge financing were expensed in the second quarter. The impact on cost of sales of the write up of inventory to net realizable value pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations" was reflected in cost of sales as manufactured inventory acquired was sold during the second quarter. In addition, certain employees of AHD have been severed as a result of the acquisition and resulted in $400 severance expense in the second quarter. The non-recurring charges related to the acquisition and financing of MFA included in the second quarter of 2000 are summarized as follows: Inventory write-up $1,000 (Included in cost of sales) Severance of existing AHD employees 400 (Included in selling, general and administrative expenses) Bridge financing and advisory costs 4,730 (Included in other, net) 6,130 Tax benefit (2,104) $4,026 $.09 per share-diluted 1999 I.D. Russell: On September 2, 1999, the Company's AHD acquired the business of I.D. Russell Company Laboratories ("IDR") for approximately $23,500 in cash (including a purchase price adjustment and other direct costs of acquisition). IDR is a US manufacturer of animal health products primarily soluble antibiotics and vitamins. The acquisition consisted of working capital, an FDA approved manufacturing facility in Colorado, product registrations, trademarks and 35 employees. The Company has allocated the purchase price to the manufacturing facility and identified intangibles and goodwill (approximately $13,000) which will be generally amortized over 15 years. The purchase agreement provides for up to $4,000 of additional purchase price if two product approvals currently pending are received in the next four years. Isis: Effective June 15, 1999, the Company's IPD acquired all of the capital stock of Isis Pharma GmbH and its subsidiary, Isis Puren ("Isis") from Schwarz Pharma AG for a total cash purchase price of approximately $153,000, including purchase price adjustments and direct costs of acquisition. Isis operates a generic and branded pharmaceutical business in Germany. The acquisition consisted of personnel (approximately 200 employees; 140 of whom are in the sales force) and product registrations and trademarks. No plant, property or manufacturing equipment were part of the acquisition. The Company is amortizing the acquired intangibles and goodwill based on lives which vary from 7 to 20 years (average approximately 16 years) using the straight-line method. Jumer: On April 16, 1999, the Company's IPD acquired the generic pharmaceutical business Jumer Laboratories SARL and related companies of the Cherqui group ("Jumer") in Paris, France for approximately $26,000, which includes the assumption of debt which was repaid subsequent to closing. Based on product approvals received, additional purchase price of approximately $2,100 may be paid in the next 2 years. The acquisition consisted of products, trademarks and registrations. The Company is amortizing the acquired intangibles and goodwill based on lives which vary from 16 to 25 years (average approximately 22 years) using the straight line method. Pro forma Information: The following unaudited pro forma information on results of operations assumes the purchase at the beginning of 1999 of all businesses discussed above as if the companies had been combined at such date: Proforma Proforma Three Months Ended Nine Months Ended September 30, September 30, 1999 2000* 1999 Revenue $256,400 $719,800 $726,100 Net income $4,000 $32,400 $4,800 Basic EPS $0.15 $0.97 $0.18 Diluted EPS $0.14 $0.94 $0.17 * 2000 excludes actual non-recurring charges related to the Roche MFA acquisition of $4,026 after tax or $0.09 per share. These unaudited pro forma results have been prepared for comparative purposes only and include restated amounts, where appropriate and certain adjustments, such as additional amortization expense as a result of acquired intangibles and goodwill and increased interest expense on acquisition debt. They do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred at the beginning of the period, or of future results of operations of the consolidated entities. 5. Long-Term Debt and Equity Financing Long-term debt consists of the following: September 30, December 31, 2000 1999 Senior debt: U.S. Dollar Denominated: 1999 Credit Facility (7.70 - 8.25%) $105,000 $180,000 Note payable - Roche (9.5%) 30,000 - Industrial Development Revenue Bonds 7,950 9,130 Other, U.S. 81 172 Denominated in Other Currencies (NOK) 37,580 44,919 Total senior debt 180,611 234,221 Subordinated debt: 3% Convertible Senior Subordinated Notes due 2006 (6.875% yield), including interest accretion 179,031 173,824 5.75% Convertible Subordinated Notes due 2005 124,945 125,000 5.75% Convertible Subordinated Note due 2005 - Industrier Note 67,850 67,850 Total subordinated debt 371,826 366,674 Total long-term debt 552,437 600,895 Less, current maturities 50,614 9,111 $501,823 $591,784 In May 2000, the Company sold 4,950,000 shares of Class A Common Stock to an investment banker and received proceeds of approximately $185,600. The proceeds were used to repay a portion of the Bridge Financing which was arranged for the purpose of purchasing the Roche MFA business. (See note 4.) In June 2000 the Company signed an amendment to its $300,000 1999 Credit Facility with the original consortium of banks plus the Bank of America whereby the six year term loan agreement was increased by $10,000 and the revolving credit facility was increased by $90,000. Concurrently with the completion of the Amendment the Company borrowed the necessary funds, repaid the balance of the Bridge Financing and terminated the Bridge Financing Agreement. In August 2000, the Company sold 5,000,000 shares of Class A Common Stock to an investment banker and received proceeds of approximately $287,300. The proceeds were used to repay all outstanding revolving debt under the 1999 Credit Facility with the remainder invested in short-term money market instruments. 6. Elyzol Dental Gel ("EDG") Product Sale and Related Agreements In July 2000, the Company's Danish subsidiary sold the patents, trademarks, marketing authorizations, and inventory related to the Elyzol Dental Gel ("EDG") product for cash proceeds of approximately $8,250. Concurrently with this sale, and due to the specialized nature of the manufacturing process for EDG, the company entered into a Toll Manufacturing agreement with the purchaser under which the Company will manufacture EDG for the purchaser for a four year period, for which it will be reimbursed direct manufacturing costs plus an agreed upon amount for overhead and a variable manufacturing profit which declines as production volumes increase. The Company also entered into a Transition Services agreement under which the Company provides regulatory and/or sales and marketing assistance to the purchaser for which it is reimbursed at agreed upon hourly rates. As the relative fair value of the assets sold and the Company's toll manufacturing obligation cannot be reliably estimated, the Company has deferred the entire excess of the cash proceeds over the carrying amount of the assets sold and expenses associated with the sale. The deferral amounts to approximately $7,700 and will be amortized over the four year term of the Toll Manufacturing agreement on a straight line basis, which management believes will approximate amortization using the units of production method. Income from the Transition Service agreement and the contractual profit under the Toll Manufacturing agreement will be recognized as services are provided or goods are sold to the purchaser. Approximately $480 of the deferral was recognized for the three months ended September 30, 2000. The remaining deferral of $7,220 has been deferred and $1,920 is included in accrued expenses and $5,300 is classified as other non-current liabilities. 7. Earnings Per Share Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of stock options and convertible debt when appropriate. A reconciliation of weighted average shares outstanding for basic to diluted weighted average shares outstanding is as follows: (Shares in thousands) Three Months Ended Nine Months Ended Sept 30, Sept 30, Sept 1999 Sept 30, 1999 30, (restated) 2000 (restated) 2000 Average shares outstanding - basic 37,615 27,555 33,255 27,439 Stock options 689 393 486 375 Convertible debt 12,039 6,744 12,039 6,744 Average shares outstanding - diluted 50,343 34,692 45,780 34,558 The amount of dilution attributable to the stock options, determined by the treasury stock method, depends on the average market price of the Company's common stock for each period. Subordinated notes issued in March 1998 ("05 Notes"), convertible into 6,744,481 shares of common stock at $28.59 per share, were included in the computation of diluted EPS for all periods presented. In addition, subordinated senior notes issued in June 1999 ("06 Notes") convertible into 5,294,301 shares of common stock at $32.11 per share were included in the computation of diluted EPS for the three and nine months periods in 2000. The calculation of the assumed conversion was not included for the three and nine months periods in 1999 because the result was antidilutive. The numerator for the calculation of basic EPS is net income for all periods. The numerator for diluted EPS includes an add back for interest expense and debt cost amortization, net of income tax effects, related to the 05 and the 06 Notes. A reconciliation of net income used for basic to diluted EPS is as follows: Three Months Nine Months Ended Ended Sept 30, Sept 30, Sept 1999 Sept 1999 30, (Restated 30, (Restated 2000 ) 2000 ) Net income - basic $20,295 $10,373 $39,704 $24,939 Adjustments under if - converted method, net of 3,750 1,855 11,249 5,565 tax Adjusted net income - $24,045 $12,228 $50,953 $30,504 diluted 8. Supplemental Data Three Months Nine Months Ended Ended Sept Sept Sept Sept 30, 30, 30, 30, 2000 1999 2000 1999 Other income (expense), net: Fees for bridge financing MFA acquisition $ - $ - $(4,730) $ - Interest income 1,259 260 2,343 704 Foreign exchange gains (losses), net (1,526) (622) (1,968) (890) Amortization of debt costs (540) (498) (1,535) (1,155) Litigation/Insurance settlement - - 483 1,000 Income from joint venture carried at equity 348 286 1,306 934 Other, net (52) (99) (319) (345) $( 511) $ (673) $(4,420) $ 248 Supplemental cash flow information: Nine Months Ended Sept Sept 30, 30, 2000 1999 Cash paid for interest (net of $28,124 $19,986 amount capitalized) Cash paid for income taxes (net of refunds) $15,533 $ 9,018 Detail of businesses and intangibles acquired: Fair value of assets $298,711 $252,810 Seller financed debt - 30,000 - Roche Liabilities assumed - 43,482 Cash paid 268,711 209,328 Less cash acquired - 5,920 Net cash paid for businesses and intangibles $268,711 $203,408 9. Reporting Comprehensive Income SFAS 130, "Reporting Comprehensive Income" requires foreign currency translation adjustments and certain other items to be included in other comprehensive income (loss). Total comprehensive income (loss) amounted to approximately $(6,815) and $26,581 for the three months ended September 30, 2000 and 1999, respectively. Total comprehensive income (loss) amounted to approximately $(19,083) and $17,589 for the nine months ended September 30, 2000 and 1999. The only components of accumulated other comprehensive loss for the Company are foreign currency translation adjustments. 10. Contingent Liabilities and Litigation The Company was originally named as one of multiple defendants in 68 lawsuits alleging personal injuries and six class actions for medical monitoring resulting from the use of phentermine distributed by the Company and subsequently prescribed for use in combination with fenflurameine or dexfenfluramine manufactured and sold by other defendants (Fen- Phen Lawsuits). None of the plaintiffs have specified an amount of monetary damage. Because the Company has not manufactured, but only distributed phentermine, it has demanded defense and indemnification from the manufacturers and the insurance carriers of manufacturers from whom it has purchased the phentermine. The Company has received a partial reimbursement of litigation costs from one of the manufacturer's carriers. The Company has been dismissed in all the class actions and the plaintiffs in 59 of the lawsuits have agreed to dismiss the Company without prejudice. Based on an evaluation of the circumstances as now known, including but not solely limited to, 1) the fact that the Company did not manufacture phentermine, 2) it had a diminimus share of the phentermine market and 3) the presumption of some insurance coverage, the Company does not expect that the ultimate resolution of the current Fen-Phen lawsuits will have a material impact on the financial position or results of operations of the Company. Bacitracin zinc, one of the Company's feed additive products has been banned from sale in the European Union (the "EU") effective July 1, 1999. While initial efforts to reverse the ban in court were unsuccessful, the Company is continuing to pursue initiatives based on scientific evidence available for the product, to limit the effects of this ban. In addition, certain other countries, not presently material to the Company's sales of bacitracin zinc have either followed the EU's ban or are considering such action and certain individual customers outside the EU may be refraining from the use of bacitracin because of the negative inferences of the ban. The existing governmental actions negatively impact the Company's business but are not material to the Company's financial position or results of operations. However, an expansion of the ban to additional countries where the Company has material sales of bacitracin based products could be material to the financial condition and results of operations of the Company. The United Kingdom Office of Fair Trading ("OFT") is conducting an investigation into the pricing and supply of medicine by the generic industry in the United Kingdom. As part of this investigation, Cox received in February 2000 a request for information from the OFT. The request states that the OFT is particularly concerned about the sustained rise in the list price of a range of generic pharmaceuticals over the course of 1999 and is considering this matter under competition legislation. In December 1999 Cox received a request for information from the Oxford Economic Research Association ("OXERA"), an economic research company which has been commissioned by the United Kingdom Department of Health to carry out a study of the generic drug industry. The requests related to certain specified drugs. The Company has responded to both requests for information. The Company has not had any communications from either agency regarding the initial responses. Effective August 3, 2000 the government has adopted interim maximum pricing legislation. The government has indicated that it will review the interim legislation within the next 12 to 15 months based in part on the results of the OXERA activities. The Company is unable to predict what final impact the OFT investigation or OXERA activities will have on the operations of Cox and the pricing of generic pharmaceuticals in the United Kingdom. The Company and its subsidiaries are, from time to time, involved in other litigation arising out of the ordinary course of business. It is the view of management, after consultation with counsel, that the ultimate resolution of all other pending suits should not have a material adverse effect on the consolidated financial position or results of operations of the Company. 11. Business Segment Information The Company's reportable segments are five decentralized divisions (i.e. International Pharmaceuticals Division ("IPD"), Fine Chemicals Division ("FCD"), U.S. Pharmaceuticals Division ("USPD"), Animal Health Division ("AHD") and Aquatic Animal Health Division ("AAHD"). Each division has a president and operates in distinct business and/or geographic area. Segment data includes immaterial intersegment revenues which are eliminated in the consolidated accounts. The operations of each segment are evaluated based on earnings before interest and taxes. Corporate expenses and certain other expenses or income not directly attributable to the segments are not allocated. Three Months Ended September 30, 2000 1999 2000 1999 Revenues Operating Income IPD $73,500 $84,057 $ 8,236 $11,716 USPD 68,076 59,421 11,166 7,555 FCD 16,509 15,331 6,432 5,773 AHD 89,051 37,362 (1) 17,647 8,106 (1) AAHD 6,622 5,383 1,951 (211) Unallocated and eliminations (1,124) (1,725) (4,016) (4,746) $252,634 $199,829(1) $ 41,416 $28,193 (1) Nine Months Ended September 30, 2000 1999 2000* 1999 Revenues Operating Income IPD $235,513 $212,257 $ 35,420 $24,738 USPD 163,876 19,051 141,172 11,998 FCD 47,322 46,783 18,591 17,719 AHD 205,753 110,504 (1) 39,227 25,572 (1) AAHD 12,623 10,017 (446) (2,051) Unallocated and eliminations (2,336) (2,738) (12,699) (11,429) $662,751 $517,995(1) $99,144 $66,547(1) (1) Restated * AHD 2000 operating income includes one-time charges of $1,400 related to the acquisition of Roche MFA. At December 31, 1999 AHD identifiable assets were $204,188. Due primarily to the acquisition of Roche MFA the identifiable assets of AHD at September 30, 2000 are approximately $600,000. 12. Strategic Alliance Ascent Loan Agreement and Option: On February 4, 1999, the Company entered into a loan agreement with Ascent Pediatrics, Inc. ("Ascent") under which the Company will provide up to $40,000 in loans to Ascent to be evidenced by 7 1/2% convertible subordinated notes due 2005. Pursuant to the loan agreement, up to $12,000 of the proceeds of the loans can be used for general corporate purposes, with $28,000 of proceeds reserved for projects and acquisitions intended to enhance growth of Ascent. All potential loans are subject to Ascent meeting a number of terms and conditions at the time of each loan. As of September 30, 2000, the Company has advanced $12,000 to Ascent under the general corporate purpose section of agreement and the loans are included as other assets. In addition, Ascent and the Company have entered into an amended agreement under which the Company will have the option during the first half of 2003 to acquire all of the then outstanding shares of Ascent for cash at a price to be determined by a formula based on Ascent's operating income during its 2002 fiscal year. The amended agreement extended the option from 2002 to 2003 and altered the formula period from 2001 to 2002. Ascent has incurred operating losses since its inception and has publicly disclosed that if a significant product is not approved by the FDA in the fourth quarter of 2000 it may need to raise additional financing or curtail operations. The Company's accounting policy with regard to its Ascent loans is to recognize losses, up to the amount of its loans, to the extent Ascent has accumulated losses in excess of its stockholders' equity and the indebtedness subordinate to the Company's loans. Additionally, the Company is required to assess the general collectibility of its loans to Ascent and make any appropriate reserves. The Company evaluates its Ascent loans quarterly. As of September 30, 2000, no losses or reserves were provided. 13. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. 14. Subsequent Event In November, 2000 two lawsuits were filed against the Company and certain of its executive officers alleging violations of securities laws and seeking to recover damages on behalf of a class consisting of those persons and entities who purchased the Company's common stock between April 1999, and October 2000. Publicly available sources indicate that one or more additional lawsuits containing similar allegations may have been filed, but the Company has not received or reviewed court documents in that regard. The Company believes it has defenses to these allegations and intends to engage in a vigorous defense. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview In 1999, the Company made a number of acquisitions intended to enhance future growth. The International Pharmaceuticals Division ("IPD") acquired Human Pharmaceuticals businesses in Germany ("Isis") and France. The Animal Health Division ("AHD") acquired an Animal Pharmaceutical business in the United States ("ID Russell") and a technology license for Reporcin. The Aquatic Animal Health Division ("AAHD") purchased an aquatic health distribution company in the United Kingdom, ("Vetrepharm"). In 2000 the Company continued its strategy of growth and completed its largest acquisition and related financings. - On May 3, 2000, the Company's AHD purchased the Medicated Feed Additive Business of Roche Ltd. ("MFA") for a cash payment of $258.0 million and the issuance of a $30.0 million promissory note to Roche. The acquisition was initially financed under a $225.0 million bridge financing agreement ("Bridge Financing") and existing credit agreements. - On May 12, 2000, the Company sold 4,950,000 shares of Class A common stock and received proceeds of approximately $185.6 million which were used to repay a portion of the Bridge Financing. - In June 2000, the Company signed an amendment to its 1999 Credit Facility and increased the facility by $100.0 million. Upon the completion of the amendment the Company borrowed the necessary funds and repaid and terminated the Bridge Financing. - In August 2000, the Company sold 5,000,000 shares of Class A Common stock and received net proceeds of approximately $287.3 million. The proceeds were used to pay down existing line of credit and other short-term debt with the balance being invested in money market instruments. The acquisition of the MFA, the 1999 acquisitions by IPD and AHD, and the financing required to complete the acquisitions affect most comparisons of 2000 results to 1999. The year to date results for 2000 include one-time charges incurred in the second quarter related to the MFA acquisition of $6.1 million ($4.0 million after tax or $.09 per share diluted). The Company has integrated the operations of the 1999 acquisitions and MFA within the respective divisional operations in varying degrees. The MFA acquisition has been integrated to a greater extent because its assets, operations and personnel were immediately absorbed in existing AHD legal entities. The MFA, in particular, and to a lesser extent the other acquisitions share with their respective divisions customers, R&D efforts, supply chain activities, and administrative support and have complementary product lines and sales forces. As a result the full incremental impact of the acquisitions is impractical to segregate. The Company estimates acquisitions contributed revenues of approximately $56.0 million and $142.0 million, respectively, in the three and nine months ended September 30, 2000. Results of Operations - Nine Months Ended September 30, 2000 (All amounts for prior years have been restated as appropriate. See Note 2 to the Condensed Financial Statements.) Total revenue increased $144.8 million (27.9%) in the nine months ended September 30, 2000 compared to 1999. Operating income in 2000 was $99.1 million, an increase of $32.6 million, compared to 1999. Net income was $39.7 million ($1.11 per share diluted) compared to $24.9 million ($.88 per share diluted) in 1999. 2000 earnings per share are diluted by the sale of Class A Common stock in November 1999, May 2000, and August 2000. The nine month period ended September 30, 2000 results are reduced by one-time charges totaling $4.0 million after tax or $.09 per share related to the acquisition and interim financing of MFA in May 2000. Without the charges net income would have been $43.7 million ($1.20 per share diluted). Revenues increased in the Human Pharmaceuticals business by $46.5 million and in the Animal Pharmaceuticals business by $97.9 million. The aggregate increase in revenues was reduced by over $21.0 million due to changes in exchange rates used in translating sales in foreign currencies into the U.S. Dollar, primarily in the IPD. Changes in revenue and major components of change for each division in the nine month period ended September 30, 2000 compared to September 30, 1999 are as follows: Revenues in IPD increased by $23.3 million due primarily to the 1999 acquisitions. Higher pricing in the U.K. was offset substantially by effects of currency translation and lower volume in certain markets. The pricing in the U.K. market was higher relative to the first half of 1999, but was lower in the third quarter 2000 compared to the third quarter of 1999. U.K. revenues grew in 1999 primarily as a result of higher pricing due in large part to conditions affecting the market which abated somewhat during the second quarter of 2000. Effective August 3, 2000 the U.K. government has adopted interim maximum pricing legislation. The government has indicated that it will review the interim legislation within the next 12 to 15 months. Market conditions resulted in certain lower prices in the second quarter of 2000 and further reductions as a result of the adoption of the above noted legislation have occurred in the third quarter of 2000. The Company's 2000 business plan anticipated the approximate effect of lower pricing. USPD revenues increased $22.7 million due to volume increases in new and existing products offset in part by lower net pricing. Revenues in FCD increased by $.5 million due mainly to minor price increases being partially offset by translation of sales in local currency into the U.S. Dollar. AHD revenues increased $95.2 million due to acquisitions primarily MFA. Adverse market and competitive conditions in a number of AHD's main markets caused volume and to a lesser extent price reductions in certain ongoing products. AAHD revenues increased due to new product introductions and the acquisition of Vetrepharm in November of 1999. On a consolidated basis, gross profit increased $68.3 million and the gross margin percent increased marginally to 45.6% in 2000 compared to 45.2% in 1999. A major portion of the dollar increase results from the acquisitions (primarily MFA and Isis). Higher pricing in the IPD's United Kingdom market and volume increases of a number of products in USPD also contributed to the increase. Partially offsetting increases were volume decreases in AHD ongoing products and certain IPD markets, lower net pricing in USPD and the effects of foreign currency translation. In addition, AHD gross profits were reduced by a $1.0 million write-up and subsequent write-off upon sale of MFA manufactured inventory. The write-up is required by Generally Accepted Accounting Principles. Operating expenses increased $35.7 million and represented 30.7% of revenues in 2000 compared to 32.3% in 1999. The dollar increase is attributable to the acquisitions (primarily MFA and Isis). Other increases included professional and consulting expenses for strategic planning, information technology and acquisitions, and a $.4 million charge for severance of existing AHD employees resulting from the combining of the sales forces of MFA and AHD. The percentage reduction is primarily the result of leveraging of incremental MFA sales on the existing AHD business infrastructure. Operating income increased $32.6 million (49.0%). AHD accounted for $13.7 million of the increase due primarily to the MFA acquisition offset by weakness in base product sales in a number of markets. IPD increased $10.7 million due to higher pricing in the UK market during the first 6 months and to a lesser extent the Isis acquisition offset partially by lower volume in certain IPD markets. USPD increased $7.1 million due to increased volume offset in part by lower net pricing. Interest expense increased in 2000 by $7.7 million due primarily to debt incurred to finance the acquisitions and to a lesser extent, higher interest rates in 2000. Other, net was $4.4 million expense in 2000, due primarily to $4.7 million fees incurred as part of the $225.0 million MFA bridge financing and other financing fees. The bridge financing was committed, drawn, repaid and terminated in the second quarter. All fees associated with the interim financing were expensed in the second quarter. The year-to-date estimated effective tax rate was 33.3% in 2000 compared to 36.4% in 1999. The primary reason for the lower rate is the acquisition of foreign businesses in recent years and the restructuring of ownership of legal entities in 2000 to allow for movement of funds between the international entities and maximize foreign tax efficiency. Results of Operations - Three Months Ended September 30, 2000 Total revenue increased $52.8 million (26.4%) in the three months ended September 30, 2000 compared to 1999. Operating income in 2000 was $41.4 million, an increase of $13.2 million, compared to 1999. Net income was $20.3 million ($.48 per share diluted) compared to $10.4 million ($.35 per share diluted) in 1999. 2000 earnings per share are diluted by the sale of stock in November 1999, May 2000 and August 2000. Revenues decreased in the Human Pharmaceuticals business by $.7 million and increased the Animal Pharmaceuticals business by $52.9 million. The aggregate increase in revenues was reduced by over $11.0 million due to changes in exchange rates used in translating sales in foreign currencies into the U.S. Dollar, primarily in the IPD. Changes in revenue and major components of change for each division in the three month period ended September 30, 2000 compared to September 30, 1999 are as follows: Revenues in IPD decreased by $10.6 million due primarily to the effects of currency translation and lower pricing. The pricing in the U.K. market was lower relative to the third quarter of 1999. U.K. revenues grew in 1999 primarily as a result of higher pricing due in large part to conditions temporarily affecting the market. The market has stabilized and prices have lowered due to market conditions. Effective August 3, 2000 the U.K. government has adopted interim maximum pricing legislation which caused IPD to lower prices. The government has indicated that it will review the interim legislation within the next 12 to 15 months. Further price decreases may occur in the fourth quarter of 2000 as a result of the legislation. The Company's 2000 business plan anticipated the approximate effect of lower pricing. USPD revenues increased $8.7 million due to volume increases in new and existing products offset in part by lower net pricing. Revenues in FCD increased by $1.2 million due mainly to price and volume and offset partially by currency translation. AHD revenues increased $51.7 million due primarily to the acquisition of MFA in May 2000. Volume in other core products and markets declined marginally due to adverse market and competitive conditions. AAHD sales increased $1.2 million due to the introduction of new vaccines and to a lesser extent to the acquisition of Vetrepharm in 1999. On a company-wide basis, gross profit increased $20.3 million and the gross margin percent declined to 44.8% in 2000 compared to 46.5% in 1999. A major portion of the increase in dollars results from the acquisitions (primarily MFA), and to a lesser extent increased volume in USPD. Partially offsetting increases were volume declines in certain AHD and IPD markets, the effects of foreign currency translation and by lower net pricing in USPD and AHD. Operating expenses increased $7.1 million and represented 28.4% of revenues in 2000 compared to 32.4% in 1999. The dollar increase is mainly attributable to the acquisition of MFA. However, the lower percent to sales is also attributable to MFA due to leveraging of MFA sales on the existing AHD business infrastructure. Partially offsetting the operating expense increase was the reversal of the AHD 2000 bonus of $1.0 million accrued thru the second quarter as compared to an approximate $.7 million accrual for AHD bonuses in the third quarter of 1999. Divisional bonuses are dependent on achieving budgeted goals for operating income and return on capital. Recent developments in AHD make it highly unlikely a bonus will be payable to AHD employees. In addition, the effects of foreign currency translation lowered expenses as reported in U.S. dollars. On an overall basis operating income increased $13.2 million primarily due to the acquisition of MFA, increased volume in USPD, lower percentage of operating expenses in AHD and income as opposed to a loss by AAHD. Increases were reduced by lower income in IPD due mainly to the expected decrease in Cox operating income when compared to the 1999 which was impacted favorably by market conditions. Interest expense was approximately equal to 1999 as debt incurred to finance acquisitions was substantially refinanced by equity sales in November 1999, May 2000 and August 2000. Financial Condition Working capital at September 30, 2000 was $384.5 million compared to $217.6 million at December 31, 1999. The current ratio was 2.65 to 1 at September 30, 2000 compared to 2.32 to 1 at year end. Long-term debt to stockholders' equity was 0.61:1 at September 30, 2000 compared to 1.68:1 at December 31, 1999. The Company's balance sheet changed substantially as a result of the acquisition and financing of MFA in second quarter of 2000. Accounts receivable and inventory each increased at June 30, 2000 by approximately $40.0 million in the AHD. Intangible assets and property, plant and equipment increased by over $250.0 million. The acquisition was ultimately financed principally by a sale of Class A Common stock of approximately $186.0 million with the balance of the MFA acquisition financed by long-term debt. Increased accounts payable and short-term debt financed the additional working capital required by MFA. The balance sheet improved in the third quarter as a result of the sale of Class A Common stock of approximately $288.0 million. The proceeds were used to pay off all revolving debt under the 1999 credit facility and substantially all short term debt with the balance invested in money market instruments. At September 30, 2000, the Company had $95.6 million in cash, available short term lines of credit of approximately $42.0 million and $290.0 million available under its 1999 Credit Facility. The credit facility was amended in June of 2000 with the effect of increasing the overall amount available by $100.0 million. The credit facility has several financial covenants, including an interest coverage ratio, total debt to EBITDA ratio, and equity to total asset ratio. Interest on borrowings under the facility is at LIBOR plus a margin of between .875% and 2.0% depending on the ratio of total debt to EBITDA. As of September 30, 2000 the margin was 1.375%. The Company believes that the combination of cash from operations and funds available under existing lines of credit will be sufficient to cover its currently planned operating needs. All balance sheet captions decreased as of September 30, 2000 compared to December 1999 in U.S. Dollars as the functional currencies of the Company's principal foreign subsidiaries, the Norwegian Krone, Danish Krone, British Pound and the Euro depreciated versus the U.S. Dollar in the nine months of 2000 by approximately 14%, 15%, 9% and 12%, respectively. The decreases do impact to some degree the above mentioned ratios. The approximate decrease due to currency translation of selected captions was: accounts receivable $8.1 million, inventories $9.5 million, accounts payable and accrued expenses $8.1 million, and total stockholders' equity $58.8 million. The $58.8 million decrease in stockholder's equity represents accumulated other comprehensive loss for the nine months ended September 30, 2000 resulting from the continued strengthening of the U.S. Dollar. The Company has approved a number of capital projects in 2000 including the purchase and construction of a AHD plant for Reporcin, (a product and technology acquired in 1999) and a company-wide information technology project which is expected to require expenditures of over $30.0 million. In February 1999, the Company's USPD entered into an agreement with Ascent Pediatrics, Inc. ("Ascent") under which USPD may provide up to $40.0 million in loans to Ascent to be evidenced by 7 1/2% convertible subordinated notes due 2005. Up to $12.0 million of the proceeds of the loans can be used only for general corporate purposes, with $28.0 million of proceeds reserved for approved projects and acquisitions intended to enhance the growth of Ascent. All potential loans are subject to Ascent meeting a number of terms and conditions at the time of each loan. The exact timing and/or ultimate amount of loans to be provided cannot be predicted. As of September 2000, $12.0 million has been advanced for general corporate purposes. Ascent has incurred operating losses since its inception. An important element of Ascent's business plan contemplated commercial introduction of two pediatric pharmaceutical products which require FDA approval. Ascent has received FDA approval in January 2000 for one product and the other product is subject to FDA action which has delayed its commercial introduction until the fourth quarter of 2000 or later. The delay in drug introduction has resulted in Ascent continuing to incur substantial losses thru September 30, 2000. If the commercial introduction of the second product is delayed past the fourth quarter 2000, Ascent may need to raise additional funds. There is no assurance that Ascent can raise any additional funds in which case it may be required to curtail its operations. The Company is required to recognize losses, up to the amount of its loans, to the extent Ascent has accumulated losses in excess of its stockholders' equity and the indebtedness subordinate to the Company's loans. The Company is further required to assess the general collectibility of its loans to Ascent and make any appropriate reserves. The Company will continue to monitor the operations and forecasts of Ascent to consider what actions, if any, are required with respect to the Company's loans to Ascent. An important element of the Company's long term strategy is to pursue acquisitions that in general will broaden global reach and/or augment product portfolios. While no commitments exist, the Company is presently considering and expects to continue its pursuit of complementary acquisitions or alliances. In order to accomplish any individually significant acquisition or combination of acquisitions, the Company may use its available cash and credit lines and, if more significant, obtain additional financing in the form of equity related securities and/or borrowings. To prepare for this possibility, the Company presently has an effective shelf registration with approximately $200 million available for either debt or equity financing. In anticipation of further offerings the Company amended its Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock from 50 million to 65 million in July 2000. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. Item 3. Quantitative and Qualitative Disclosures about Market Risk Quantitative Disclosure - There has been no material changes in the Company's market risk during the nine months ended September 30, 2000. Qualitative Disclosure - This information is set forth under the caption "Derivative Financial Instruments" included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. ___________ Statements made in this Form 10Q, are forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Information on other significant potential risks and uncertainties not discussed herein may be found in the Company's filings with the Securities and Exchange Commission including its Form 10K for the year ended December 31, 1999. PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders An Amendment to the Company's Amended and Restated Certificate of Incorporation was approved by written consent of: For 53,643,595 Against 244,652 Abstain 352,433 The approval increased the authorized number of shares of Class A Common Stock from 50,000,000 to 65,000,000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (electronic filing only) 3 Amendment to the Amended and Restated Certificate of Incorporation of Alpharma Inc. is filed as an exhibit to this report. 27 Financial Data Schedule (b) Reports on Form 8-K On October 31, 2000, the Company filed a report on Form 8-K reporting in Item 5 - the restatement of its financial statements for 1999 and the two quarters of 2000 and in Item 9 - the press release reporting third quarter earnings. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Alpharma Inc. (Registrant) Date: November 14, 2000 /s/ Jeffrey E. Smith Jeffrey E. Smith Vice President, Finance and Chief Financial Officer