Page 24 of 32
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, 1999
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 October 25, 1999.
Class A Common Stock, $.20 par value - 18,089,649 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, 1999 and December 31, 1998 3
Consolidated Statement of Income for the
Three and Nine Months Ended September 30,
1999 and 1998 4
Consolidated Condensed Statement of Cash
Flows for the Nine Months Ended September 30,
1999 and 1998 5
Notes to Consolidated Condensed Financial
Statements 6-17
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18-29
Item 3. Quantitative and Qualitative Disclosures 29-30
about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal proceedings 30-31
Item 5. Other Information 31
Item 6. Exhibits and reports on Form 8-K 31
Signatures 32
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 23,305 $ 14,414
Accounts receivable, net 192,921 169,744
Inventories 155,958 138,318
Prepaid expenses and other 12,983 13,008
Total current assets 385,167 335,484
Property, plant and equipment, net 246,244 244,132
Intangible assets, net 502,120 315,709
Other assets and deferred charges 38,210 13,611
Total assets $1,171,741 $908,936
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,211 $ 12,053
Short-term debt 27,700 41,921
Accounts payable and accrued
liabilities 138,985 105,679
Accrued and deferred income taxes 10,719 10,784
Total current liabilities 181,615 170,437
Long-term debt:
Senior 282,622 236,184
Convertible subordinated notes,
including $67,850 to related
party 365,009 192,850
Deferred income taxes 31,880 31,846
Other non-current liabilities 12,206 10,340
Stockholders' equity:
Class A Common Stock 3,673 3,551
Class B Common Stock 1,900 1,900
Additional paid-in-capital 235,079 219,306
Accumulated other comprehensive
loss (15,453) (7,943)
Retained earnings 79,394 56,649
Treasury stock, at cost (6,184) (6,184)
Total stockholders' equity 298,409 267,279
Total liabilities and
stockholders' equity $1,171,741 $908,936
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 1998 1999 1998
Total revenue $203,131 $164,337 $523,729 $430,412
Cost of sales 108,838 97,642 287,233 251,138
Gross profit 94,293 66,695 236,496 179,274
Selling, general and
administrative expenses 64,664 46,801 167,478 134,634
Operating income 29,629 19,894 69,018 44,640
Interest expense (11,257) (7,454) (27,580) (18,433)
Other income (expense), (673) (377) 248 (195)
net
Income before provision for
income taxes 17,699 12,063 41,686 26,012
Provision for income 6,436 4,512 15,215 10,754
taxes
Net income $11,263 $ 7,551 $ 26,471 $ 15,258
Earnings per common share:
Basic $ .41 $ .30 $ .96 $ .60
Diluted $ .38 $ .28 $ .93 $ .59
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 1998
Operating Activities:
Net income $ 26,471 $ 15,258
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 35,952 27,250
Purchased in-process research & development -- 2,081
Interest accretion on long-term debt 2,159 --
Changes in assets and liabilities,
net of effects from business
acquisitions:
(Increase) in accounts receivable (8,029) (3,699)
(Increase)decrease in inventories (13,891) 2,299
Increase in accounts payable, accrued
expenses and taxes payable 1,859 3,094
Other, net 2,769 5,964
Net cash provided by
operating activities 47,290 52,247
Investing Activities:
Capital expenditures (23,332) (20,347)
Loans to Ascent Pediatrics (7,000)
Purchase of businesses, net of cash acquired (203,408) (197,044)
Net cash used in investing activities (233,740) (217,391)
Financing Activities:
Dividends paid (3,726) (3,433)
Proceeds from sale of convertible
subordinated notes 170,000 192,850
Proceeds from senior long-term debt 317,000 187,522
Reduction of senior long-term debt (279,619) (182,494)
Net repayments under lines of credit (15,609) (22,649)
Payments for debt issuance costs (8,757) (4,175)
Proceeds from issuance of common stock 15,895 2,682
Net cash provided by
financing activities 195,184 170,303
Exchange Rate Changes:
Effect of exchange rate changes
on cash (965) 498
Income tax effect of exchange rate
changes on intercompany advances 1,122 (801)
Net cash flows from exchange
rate changes 157 (303)
Increase in cash 8,891 4,856
Cash and cash equivalents at
beginning of year 14,414 10,997
Cash and cash equivalents at
end of period $ 23,305 $ 15,853
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 1998
Annual Report on Form 10-K. The reported results for the three
and nine month periods ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full
year.
2. Inventories
Inventories consist of the following:
September 30, December 31,
1999 1998
Finished product $ 88,104 $ 68,834
Work-in-process 28,446 25,751
Raw materials 39,408 43,733
$155,958 $138,318
3. Long-Term Debt
In January 1999, the Company signed a $300,000 credit
agreement ("1999 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway, Den norske Bank A.S. and
Summit Bank. The agreement replaced the prior revolving credit
facility and a U.S. short-term credit facility and increased
overall credit availability. The prior revolving credit facility
was repaid in February 1999 by drawing on the 1999 Credit
Facility.
The 1999 Credit Facility provides for (i) a $100,000 six
year Term Loan; and (ii) a revolving credit agreement of $200,000
with an initial term of five years with two possible one year
extensions. The 1999 Credit Facility has several financial
covenants, including an interest coverage ratio, total debt to
earnings before interest, taxes, depreciation and amortization
("EBITDA"), and equity to total asset ratio. Interest on the
facility will be at the LIBOR rate with a margin of between .875%
and 1.6625% depending on the ratio of total debt to EBITDA.
Margins can increase based on the ratio of equity to total
assets.
Primarily as a result of the Company's acquisition of the
Isis Group, the equity to total asset ratio at June 30, 1999 was
24.5%. The ratio falling below 25% required an increase in the
margin on debt outstanding under the 1999 Credit Agreement of
.75% (2.25% aggregate margin) beginning August 18, 1999 and
required the Company to achieve a minimum 25% ratio by December
18, 1999. The equity to total asset ratio at September 30, 1999
was 25.5%. The margin increase will be rescinded effective on or
about November 2, 1999.
In June 1999, the Company issued $170,000 principal amount
of 3.0% Convertible Senior Subordinated Notes due 2006 (the "06
Notes"). The 06 Notes will pay cash interest of 3% per annum,
calculated on the initial principal amount of the Notes. The
Notes will mature on June 1, 2006 at a price of 134.104% of the
initial principal amount. The payment of the principal amount of
the Notes at maturity (or earlier, if the Notes are redeemed by
the Company prior to maturity), together with cash interest paid
over the term of the Notes, will yield investors 6.875% per
annum. The interest accrued but which will not be paid prior to
maturity (3.875% per annum) is reflected as long-term debt in the
accounts of the Company. The 06 Notes are redeemable by the
Company after June 16, 2002.
The 06 Notes are convertible at any time prior to maturity,
unless previously redeemed, into 31.1429 shares of the Company's
Class A Common stock per one thousand dollars of initial
principal amount of 06 Notes. This ratio results in an initial
conversion price of $32.11 per share. The number of shares into
which a 06 Note is convertible will not be adjusted for the
accretion of principal or for accrued interest.
The net proceeds from the offering of approximately $164,000
were used to retire outstanding senior long-term debt principally
outstanding under the 1999 Credit Facility. This created the
capacity under the 1999 Credit Facility to finance the
acquisition of Isis Pharma in the second quarter. (See Note 4.)
Long-term debt consists of the following:
September 30, December 31,
1999 1998
Senior debt:
U.S. Dollar Denominated:
1999 Revolving Credit Facility $230,000 -
(7.6 - 8.0%)
Prior Revolving Credit Facility $180,000
(6.6 - 7.0%) -
A/S Eksportfinans - 7,200
Industrial Development Revenue Bonds:
Baltimore County, Maryland
(7.25%) 3,930 4,565
(6.875%) 1,200 1,200
Lincoln County, NC 4,000 4,500
Other, U.S. 202 504
Denominated in Other Currencies:
Mortgage notes payable (NOK) 40,413 42,224
Bank and agency development loans 7,074 7,991
(NOK)
Other, foreign 14 53
Total senior debt 286,833 248,237
Subordinated debt:
5.75% Convertible Subordinated Notes
due 2005 125,000 125,000
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 67,850
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 172,159 -
Total subordinated debt 365,009 192,850
Total long-term debt 651,842 441,087
Less, current maturities 4,211 12,053
$647,631 $429,034
4. Business Acquisitions
All acquisitions discussed below are accounted for in
accordance with the purchase method.
Cox:
On May 7, 1998, the Company's IPD acquired all of the
capital stock of Cox Investments Ltd. and its wholly owned
subsidiary, Arthur H. Cox and Co., Ltd. and all of the capital
stock of certain related marketing subsidiaries ("Cox") from
Hoechst AG for a total purchase price including direct costs of
the acquisition of approximately $198,000. Cox's operations are
included in IPD and are located primarily in the United Kingdom
with distribution operations located in Scandinavia and the
Netherlands. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams.
The fair value of the assets acquired and liabilities
assumed and the results of Cox's operations are included in the
Company's consolidated financial statements beginning on the
acquisition date, May 7, 1998. The Company is amortizing the
acquired goodwill (approximately $160,000) over 35 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 $26,400, which includes the assumption of debt
which was repaid subsequent to closing. The acquisition consisted
of products, trademarks and registrations.
The preliminary fair value of the assets acquired and
liabilities assumed and the results of Jumer's operations are
included in the Company's consolidated financial statements
beginning on the acquisition date, April 16, 1999. The Company is
amortizing the acquired intangibles and goodwill based on
preliminary estimates of lives generally over an average of 15
years using the straight line method.
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 approximately $153,000
in cash, and a further purchase price adjustment equal to any
increase (or decrease) in the net assets of Isis from January 1,
1999 to the date 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 financed the $153,000 purchase price under its
1999 Credit Facility. On June 2, 1999, the Company repaid
borrowings under the 1999 Credit Facility with a substantial
portion of the proceeds from the issuance of the 06 Notes. Such
repayment created the capacity under the 1999 Credit Facility to
incur the borrowings used to finance the acquisition of Isis.
The preliminary fair value of the assets acquired and
liabilities assumed and the results of Isis operations are
included in the Company's consolidated financial statements
beginning on June 15, 1999. The Company is amortizing the
acquired intangibles and goodwill based on preliminary estimates
of lives over an average of approximately 16 years using the
straight line method.
I.D. Russell:
On September 2, 1999, the Company's AHD acquired the
business of I.D. Russell Company Laboratories ("IDR") for
approximately $22,000 in cash. 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 preliminary fair value of the assets acquired is
included in the Company's consolidated financial statements
beginning on the acquisition date. The Company will allocate the
purchase price to the manufacturing facility and identified
intangibles. The balance of the purchase price has been
allocated to intangible assets and goodwill which will generally
be amortized over 15 years.
Southern Cross:
On September 23, 1999, the Company's AHD acquired the
business of Southern Cross Biotech, Pty. Ltd. ("Southern Cross")
and the exclusive worldwide license for REPORCIN for
approximately $14,000 in cash. Southern Cross is an Australian
manufacturer and marketer of REPROCIN. REPROCIN is a product
which is used to aid in the production of leaner swine. The
purchase price included the rights to the countries in which
REPORCIN has already received regulatory approval and the assets
of Southern Cross. Under the terms of the license agreement
additional cash payments will be made as regulatory approvals are
obtained and licenses granted in other countries. Total
additional payments will approximate $65,000 if all 13 possible
country approvals are received over the next 4-6 years.
The preliminary fair value of the assets acquired and
liabilities assumed and the results of Southern Cross' 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 preliminary estimates
of lives generally over an average of 15 years using the straight
line method.
Proforma Information:
The following pro forma information on results of operations
assumes the purchase of all significant businesses discussed
above as if the companies had combined at the beginning of each
period presented:
Proforma Proforma
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998*
Revenue $206,300 $189,700 $571,600 $543,300
Net income $11,600 $7,300 $26,700 $18,100
Basic EPS $0.42 $0.29 $0.97 $0.71
Diluted EPS $0.39 $0.28 $0.93 $0.70
* Excludes actual non-recurring charges related to the
acquisition of Cox of $3,130 after tax or $0.12 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 an 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 each respective period,
or of future results of operations of the consolidated entities.
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, warrants 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. Sept. Sept. Sept.
30, 30, 30, 30,
1999 1998 1999 1998
Average shares
outstanding - basic 27,555 25,437 27,439 25,391
Stock options 392 244 375 194
Warrants -- 552 -- 359
Convertible notes 12,039 6,744 6,744 -
Average shares
outstanding - diluted 39,986 32,977 34,558 25,944
The amount of dilution attributable to the stock options and
warrants 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, 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 September 30, 1999 and 1998 and for the nine months ended
September 30, 1999. The calculation of the assumed conversion was
antidilutive for the nine months ended September 30, 1998.
In addition, the 06 Notes issued in June 1999 and
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 months ended September 30, 1999. The calculation of the
assumed conversion was antidilutive for the nine months ended
September 30, 1999.
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 nine months ended September 30, 1998. The
numerator for all other periods presented includes an add back
for interest expense and debt cost amortization, net of income
tax effects, related to the convertible notes.
A reconciliation of net income used for basic to diluted EPS
is as follows:
Three Months Ended Nine Months Ended
Sept. Sept. Sept. Sept.
30, 30, 30, 30,
1999 1998 1999 1998
Net income - basic $11,263 $7,551 $26,471 $15,258
Adjustments under the if-
converted method, net of 3,839 1,812 5,565 -
tax
Adjusted net income - $15,102 $9,363 $32,036 $15,258
diluted
6. Supplemental Data
Three Months Nine Months
Ended Ended
Sept Sept Sept Sept
30, 30, 30, 30,
1999 1998 1999 1998
Other income (expense),
net:
Interest income $260 $322 $704 $ 590
Foreign exchange losses, (622) (567) (890) (1,055)
net
Amortization of debt costs (498) (798) (1,155) (1,091)
Litigation settlement - 670 1,000 670
Income from joint venture
carried at equity 286 - 934 -
Gain (loss) on sale of
assets, net (38) (62) (94) 619
Other, net (61) 58 (251) 72
$(673) $(377) $ 248 $(195)
Nine Months
Ended
Sept Sept
30, 30,
1999 1998
Supplemental cash flow
information:
Cash paid for interest (net
of $19,986 $14,310
amount capitalized)
Cash paid for income taxes
(net of refunds) $9,018 $3,640
Detail of businesses
acquired:
Fair value of assets $252,810 $230,740
Liabilities 43,482 33,229
Cash paid 209,328 197,511
Less cash acquired 5,920 467
Net cash paid for
acquisitions $203,408 $197,044
7. Reporting Comprehensive Income
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 requires foreign currency
translation adjustments to be included in other comprehensive
income (loss). Total comprehensive income amounted to
approximately $27,332 and $19,548 for the three months ended
September 30, 1999 and 1998, respectively. Total comprehensive
income amounted to approximately $18,961 and $21,340 for the nine
months ended September 30, 1999 and 1998. The only components of
accumulated other comprehensive income (loss) for the Company are
foreign currency translation adjustments.
8. Contingent Liabilities and Litigation
The Company is one of multiple defendants in 28 lawsuits
(after the dismissal in the second and third quarters of 1999 of
47 lawsuits) alleging personal injuries and seven 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. 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. The Company's request for a court
injunction to prevent the imposition of the ban was rejected. The
Company is continuing to actively pursue other initiatives, based
on scientific evidence available for the product, to limit the
effects of this ban although an assurance of success cannot be
given. In addition, certain other countries, not presently
material to the Company's sales of bacitracin zinc have either
followed the EU's ban or are considering such action. The
existing governmental actions negatively impact the Company's
business but are not material to the Company's financial position
or results of operations. However, an expansion of the ban to
further 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. (Also see
Management's Discussion and Analysis - Risk Factors).
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 and return on capital employed
("ROCE"). Corporate expenses and certain other expenses or income
not directly attributable to the segments are not allocated.
Three Months Ended September 30,
1999 1998 1999 1998
Revenues Income
IPD $84,057 $52,254 $11,716 $2,687
USPD 59,421 52,085 7,555 5,449
FCD 15,331 12,005 5,773 3,795
AHD 40,664 41,787 9,542 9,496
AAHD 5,383 7,528 (211) 3,189
Unallocated and
eliminations (1,725) (1,322) (5,419) (5,099)
$203,131 $164,337
Interest expense (11,257) (7,454)
Pretax income $17,699 $12,063
Nine Months Ended September 30,
1999 1998 1999 1998
Revenues Income
IPD $212,257 $134,711 $24,738 $5,087
USPD 141,172 128,248 11,998 7,790
FCD 46,783 37,898 17,719 12,233
AHD 116,238 119,367 28,043 26,429
AAHD 10,017 13,539 (2,051) 2,877
Unallocated and
eliminations (2,738) (3,351) (11,181) (9,971)
$523,729 $430,412
Interest expense (27,580) (18,433)
Pretax income $41,686 $ 26,012
At December 31, 1998 IPD identifiable assets were $379,217.
Due primarily to the acquisitions of Jumer and Isis the
identifiable assets of IPD at September 30, 1999 are
approximately $585,000.
10. Strategic Alliances
Joint Venture:
In January 1999, the AHD contributed the distribution
business of its Wade Jones Company ("WJ") into a partnership with
G&M Animal Health Distributors and T&H Distributors. The WJ
distribution business which was merged had annual sales of
approximately $30,000 and assets (primarily accounts receivable
and inventory) of less than $10,000. The Company owns 50% of the
new entity, WYNCO LLC ("WYNCO"). The Company accounts for its
interest in WYNCO under the equity method.
WYNCO is a regional distributor of animal health products
and services primarily to integrated poultry and swine producers
and independent dealers operating in the Central South West and
Eastern regions of the U.S. WYNCO is the exclusive distributor
for the Company's animal health products. Manufacturing and
premixing operations at WJ remain part of the Company.
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 may 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 the 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, 1999, the Company had
advanced $7,000 to Ascent under the agreement.
In addition, Ascent and the Company have entered into an
amended agreement under which the Company will have the option
during the first half of 2003 to acquire all of the then
outstanding shares of Ascent for cash at a price to be determined
by a formula based on Ascent's operating income during its 2002
fiscal year. The amended agreement which extended the option from
2002 to 2003 and altered the formula period from 2001 to 2002 is
subject to approval by Ascent's stockholders. (Also see Management's
Discussion and Analysis - Financial Condition).
11. Management Actions
In July 1999, the Company made the decision to rationalize
Aquatic Animal Health production capacity by closing or selling
its Bellevue, Washington plant and severing all 21 employees. The
plant is expected to be closed or sold and all employees
terminated by the end of 1999.
In July the Company informed all employees the facility
would be closed or sold and all employees would be severed. The
severance terms were explained and approximately $575 was accrued
in the third quarter. As of September 30, 1999 the Company was
considering various sales options in lieu of closing the
facility. The fourth quarter of 1999 is expected to include a
charge which will vary depending on whether the plant is sold or
closed. If the plant is closed the charge is presently estimated
to be between $1,500 and $2,500 pre-tax.
12. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133, as amended in 1999, 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
Operations in the first nine months of 1999 improved
relative to the comparable period in 1998. During the 1999 period
a number of transactions occurred, including:
- - In January, the Company contributed the distribution business
of its Wade Jones subsidiary into a joint venture with two
similar third-party distribution businesses. The new entity,
WYNCO, which is a regional distributor of animal health
products in the Central South West and Eastern regions of the
U.S., is 50% owned by Alpharma.
- - In January, the Company replaced its revolving credit facility
and existing domestic short term credit lines with a $300.0
million syndicated facility which provides for increased
borrowing capacity.
- -In February, USPD entered into an agreement with Ascent
Pediatrics, Inc., a branded pediatric pharmaceutical company,
under which USPD may provide up to $40.0 million in loans
subject to Ascent meeting agreed terms and conditions. In
addition, the Company will have the option to acquire Ascent in
2003 for a price based on Ascent's operating income. See
"Financial Condition" below for additional information.
- -In April, the Company's IPD purchased a French generic
pharmaceutical business for approximately $26.4 million in
cash.
- - In June, the Company issued $170.0 million initial principal
amount of 3% Convertible Senior Subordinated Notes due 2006.
- - In June, the Company's IPD acquired the Isis Pharma Group, a
German generic pharmaceutical business for approximately $153.0
million in cash.
- - In September the Company's AHD acquired the business of the
I.D. Russell Company, a privately held US-based manufacturer
of animal health products, for approximately $22.0 million in
cash.
- - In September, the Company's AHD acquired the business of
Southern Cross Biotech, an Australian animal health company,
and a technology license for approximately $14.0 million in
cash.
Results of Operations - Nine Months Ended September 30, 1999
Total revenue increased $93.3 million (21.7%) in the nine
months ended September 30, 1999 compared to 1998. Operating
income in 1999 was $69.0 million, an increase of $24.4 million,
compared to 1998. Net income was $26.5 million ($.93 per share
diluted) compared to $15.3 million ($.59 per share diluted) in
1998. Results for 1998 include non-recurring charges resulting
from the Cox acquisition which reduced net income by $3.1 million
($.12 per share).
Revenues increased in the Human Pharmaceuticals business by
$99.4 million and were $6.7 million lower in the Animal Health
business. Currency translation of international sales into U.S.
dollars was not a major factor in the increases or decreases of
any business segment.
Changes in revenue and major components of change for each
division in the nine month period ended September 30, 1999
compared to September 30, 1998 are as follows:
Revenues in IPD increased by $77.5 million due primarily to
the acquisitions in 1998 and 1999 ($62.7 million aggregate
increase due mainly to the Cox and Isis acquisitions). The
introduction of new products and price increases which were
offset partially by lower volume in certain markets account for
the balance of the IPD increase. Cox revenues grew in 1999 from
higher volume and pricing due in large part to favorable market
conditions which may not continue in 2000. USPD revenues
increased $12.9 million due to volume increases in existing and
new products and revenue from licensing activities offset
partially by lower net pricing. Revenues in FCD increased by $8.9
million due mainly to volume increases in vancomycin, bacitracin
and amphotericin. AHD revenues decreased $3.1 million due to
increased volume in the poultry and cattle markets being more
than offset by sales previously recorded by Wade Jones company
now being recorded by WYNCO, the Company's joint venture
distribution company. (i.e. WYNCO joint venture revenues are not
included in the Company's consolidated sales effective in January
1999 when the joint venture commenced.) AAHD sales were $3.5
million lower due to increased competition and an inability to
supply certain products from the Bellevue, Washington facility.
On a consolidated basis, gross profit increased $57.2
million and the gross margin percent increased to 45.2% in 1999
compared to 41.7% in 1998. Gross profit in 1998 was reduced by a
$1.3 million charge related to the acquisition of Cox (or .3%).
A major portion of the dollar increase in the Company's
consolidated gross profits was recorded in IPD and results from
the 1998 and 1999 acquisitions (particularly Cox and Isis). Other
increases are attributable to higher volume, manufacturing cost
reductions and yield efficiencies in AHD and FCD and sales of new
products and licensing activities in IPD and USPD. Partially
offsetting increases were volume decreases in certain IPD
markets, lower vaccine sales by AAHD and lower net pricing
primarily in USPD.
Operating expenses increased $32.8 million and represented
32.0% of revenues in 1999 compared to 31.3% in 1998. A major
portion of the increase is attributable to the 1998 and 1999
acquisitions which include operating expenses and amortization of
intangible assets acquired. Other increases included professional
and consulting fees for litigation and administrative actions to
attempt to reverse the European Union ban on bacitracin zinc,
consulting expenses for information technology and acquisitions,
severance expenses and annual increases in compensation including
incentive programs. Operating expenses in 1998 include a write
off of in-process research and development of $2.1 million and
$.2 million for severance related to the Cox acquisition.
Operating income increased $24.4 million (54.6%). IPD
accounted for $19.7 million of the increase primarily due to 1998
and 1999 acquisitions (especially Cox due to favorable market
developments), the absence of 1998 acquisition charges related to
Cox, price increases and new product sales. Increased operating
income was recorded by AHD due primarily to increased volume, by
USPD due to higher volume and licensing activities net of pricing
reductions, and by FCD due to increased volume mainly in
vancomycin, bacitracin and amphotericin. Increases in certain
operating expenses and lower AAHD income offset increased
operating income to some extent.
Interest expense increased in 1999 by $9.1 million due
primarily to debt incurred to finance the acquisitions of Cox,
Isis and other 1998 and 1999 acquisitions.
Other, net was $.2 million income in 1999 compared to $.2
million expense in 1998. Other, net in 1999 includes patent
litigation settlement income of $1.0 million and equity income
from the WYNCO joint venture of $.9 million. 1998 included gains
on property sales of $.7 million and a litigation settlement of
$.7 million.
Results of Operations - Three Months Ended September 30, 1999
Total revenue increased $38.8 million (23.6%) in the three
months ended September 30, 1999 compared to 1998. Operating
income in 1999 was $29.6 million, an increase of $9.7 million,
compared to 1998. Net income was $11.3 million ($.38 per share
diluted) compared to $7.6 million ($.28 per share diluted) in
1998.
Revenues increased in the Human Pharmaceuticals business by
$42.5 million and declined by $3.3 million in the Animal Health
business. Currency translation of international sales into U.S.
dollars was not a major factor in the increases or decreases of
any business segment.
Changes in revenue and major components of change for each
division in the three month period ended September 30, 1999
compared to September 30, 1998 are as follows:
Revenues in IPD increased by $31.8 million due primarily to
the acquisitions in 1999 ($21.9 million primarily due to Isis),
the introduction of new products and selected price and volume
increases for Cox as a result of favorable market conditions that
may not continue in 2000. USPD revenues increased $7.3 million
due to volume increases in existing and new products and revenue
from licensing activities offset partially by lower net pricing.
Revenues in FCD increased by $3.3 million due mainly to volume
increases in vancomycin, bacitracin and polymyxin. AHD revenues
decreased $1.1 million due to sales previously recorded by Wade
Jones company now being recorded by Wynco, the company's joint
venture distribution company. (i.e. Wynco joint venture revenues
are not included in the Company's consolidated sales effective in
January 1999 when the joint venture commenced.) AHD revenues in
core product lines increased in volume and sales of I.D. Russell
acquired in September 1999 partially offset the reduction due to
the establishment of the joint venture. AAHD sales were $2.1
million lower due to increased competition and an inabililty to
supply certain products from the Bellevue, Washington facility.
On a consolidated basis, gross profit increased $27.6
million and the gross margin percent increased to 46.4% in 1999
compared to 40.6% in 1998.
A major portion of the increase in dollars was recorded by
IPD and is mainly attributable to the 1999 acquisitions
(primarily Isis) and selected price increases. Other increases
are attributable to higher volume, manufacturing cost reductions
and yield efficiencies in USPD, AHD and FCD and sales of new
products and licensing activities in USPD. Partially offsetting
increases were volume decreases in certain IPD markets and lower
net pricing primarily in USPD.
Operating expenses increased $17.9 million and represented
31.8% of revenues in 1999 compared to 28.5% in 1998. The increase
results mainly from operating expenses related to 1999
acquisitions including amortization of intangible assets,
increased selling and marketing expenses related to higher sales,
severance expenses and increased consulting expenses.
Operating income increased $9.7 million (48.9%). IPD
operating income increased $9.0 million due to increased pricing
mainly at Cox, new product sales and 1999 acquisitions. Increases
were recorded by AHD due primarily to increased volume, by USPD
due to volume increases exceeding lower net pricing and by FCD
due to increased volume. AAHD operating income declined due to
decreased revenues and charges recorded for severance at the
Bellevue, Washington facility which will be closed or sold.
Interest expense increased in 1999 by $3.8 million due
primarily to debt incurred to finance the acquisition of Isis and
other 1999 acquisitions and to a lesser extent higher interest
rates in 1999.
Taxes
The effective tax rate for the three and nine months ended
September 30, 1999 was 36.4% and 36.5% compared to 37.4% and
41.3% in the comparable periods in 1998. The primary reason for
the higher rate in 1998 was the charges related to the
acquisition of Cox included a $2.1 million expense for in-process
research and development which is not tax benefited.
Management Actions
The dynamic nature of our business gives rise, from time to
time, to additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Management is continuously reviewing these
opportunities and may take actions in the future which could be
material to the results of operations in the quarter they are
announced.
In this regard, the AAHD in July 1999 concluded a study of
production capacity and recommended that the AAHD's Bellevue
Washington facility be closed or sold by the end of 1999. The
proposal was approved by executive management and 21 affected
employees were informed in July 1999. The action required charges
in the third quarter of 1999 for severance of $.6 million.
As of September 30, 1999 the Company was considering various
sale options in lieu of closing the facility. The fourth quarter
of 1999 is expected to include a charge which will vary depending
on whether the plant is sold or closed. If the plant is closed
the charge is presently estimated to be between $1.5 million and
$2.5 million pre-tax.
It is expected that most of the products produced at the
Bellevue facility will be produced in future years at the AAHD's
Overhalla facility.
Year 2000
General
The Company began its program to address its potential Y2K
issues in late 1996 and has organized its activities to prepare
for Y2K at the division level. The divisions have focused their
efforts on three areas: (1) information systems software and
hardware; (2) manufacturing facilities and related equipment;
(i.e. embedded technology) and (3) third-party relationships
(i.e. customers, suppliers, and other). Information system and
hardware Y2K efforts are being coordinated by an IT steering
committee composed of divisional personnel.
The Company and the divisions have organized their activities
and are monitoring their progress in each area by the following
four phases:
Phase 1: Awareness/Assessment - identify, quantify and
prioritize business and financial risks by area.
Phase 2: Budget/Plan/Timetable - prepare a plan including costs
and target dates to address phase 1 exposures.
Phase 3: Implementation - execute the plan prepared in phase 2.
Phase 4: Testing/Validation - test and validate the implemented
plans to insure the Y2K exposure has been eliminated or
mitigated.
State of Readiness
The Company summarizes its divisions' state of readiness at
September 30, 1999 as follows:
Information Systems and Hardware
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 100% Completed
3 95 - 100% 4th Quarter 1999
4 95 - 100% 4th Quarter 1999
Embedded Factory Systems
Approximate range Quarter forecasted
Phase of completion for substantial
completion
1 100% Completed
2 100% Completed
3 95 -100% 4th Quarter 1999
4 95 -100% 4th Quarter 1999
Third Party Relationships
Approximate range Quarter forecasted
Phase of completion for substantial
completion
1 100% (a) Completed (a)
2 100% (a) Completed (a)
3 95 - 100% (a)(b) 4th Quarter 1999(a,b)
4 90 - 100% (a)(b) 4th Quarter 1999(a,b)
(a) Refers to significant identified risks - (e.g. customers,
suppliers of raw materials and providers of services) does
not include exposures that relate to interruption of utility
or government provided services.
(b) Awaiting completion of vendor response and follow-up due
diligence to Y2K readiness surveys.
Cost
The Company expects the costs directly associated with its
Y2K efforts to be between $2.25 million and $2.5 million of which
approximately $2.0 million has been spent to date. The cost
estimates do not include additional costs that may be incurred as
a result of the failure of third parties to become Y2K compliant
or costs to implement any contingency plans.
Risks
The Company had previously identified the following
significant reasonably possible Y2K problems:
- Possible problem: the inability of significant sole source
suppliers of raw materials or active ingredients to provide
an uninterrupted supply of material necessary for the
manufacture of Company products.
- Possible problem: the failure to properly interface caused by
noncompliance of significant customer operated electronic
ordering systems.
- Possible problem: the shutdown or malfunctioning of Company
manufacturing equipment.
Since these possible problems were initially identified, risk
remediation progress has, in the opinion of the Company, reduced
the likelihood of these Y2K risks:
- Sole source suppliers: substantially all major sole source
suppliers were certified by Company inspection or have self
certified as Y2K compliant as of September 30, 1999.
- E-Commerce risk: the Company has been advised by a third
party engaged to review this area that it is Y2K compliant
with respect to E-Commerce as of September 30, 1999.
- Shutdown of manufacturing equipment: plants were tested
during vacation shutdowns and no significant Y2K problems
were identified as a result of the testing.
Based on the assessment and remediation efforts to date,
which are substantially complete, the Company does not believe
that the Y2K issue will have a material adverse effect on its
financial condition or results of operation. The Company believes
that any effect of the Year 2000 issue will be mitigated because
of the Company's divisional operating structure, which is diverse
both geographically and with respect to customer and supplier
relationships. Therefore, the adverse effect of most individual
failures should be isolated to an individual product, customer or
Company facility. However, there can be no assurance that the
systems of third parties on which the Company relies will be
converted in a timely manner, or that a failure to properly
convert by another company would not have a material adverse
effect on the Company.
The Company's Y2K program is an ongoing process that may
uncover additional exposures and all estimates of costs and
completion are subject to change as the process continues.
Risk Factors
The Company is updating the Governmental regulation risk
factor included in the 1998 Form 10-K as follows:
The European Union and five non-EU countries have banned the
use of bacitracin zinc, a feed antibiotic growth promoter, in
livestock feeds effective July 1, 1999. The EU ban is based upon
the "precautionary Principle" which states that a product may be
withdrawn from the market based upon a finding of a potential
threat of serious or irreversible damage even if such finding is
not supported by scientific certainty. 1998 sales of the
Company's bacitracin based products were approximately $10.9
million in the EU and $1.8 million in the non-EU countries which
have also banned the product. The initial effort to reverse this
action by means of a court injunction from the Court of First
Instance of the European Court was denied. The Company is
continuing its attempts to reverse or limit this action, with
particular emphasis on political means. The Company believes that
strong scientific evidence exists to refute the EU position. In
addition, other countries are considering a similar ban. If the
loss of bacitracin zinc sales is limited to the European Union
and those countries that have already taken similar action, the
Company does not anticipate a material adverse effect. If either
(a) other countries more important to our sales of bacitracin-
based products ban these products or (b) the European Union (or
countries or customers within the EU) acts to prevent the
importation of meat products from countries that allow the use of
bacitracin-based products, the Company could be materially
affected. A ban in the United States would be materially adverse
to the Company. The Company cannot predict whether the present
bacitracin zinc ban will be expanded.
Financial Condition
Working capital at September 30, 1999 was $203.6 million
compared to $165.0 million at December 31, 1998. The current
ratio was 2.12 to 1 at September 30, 1999 compared to 1.97 to 1
at year end. Long-term debt to stockholders' equity was 2.17:1 at
September 30, 1999 compared to 1.61:1 at December 31, 1998.
The increases in accounts receivable and inventories as of
September 30, 1999, were due primarily to higher sales during the
third quarter of 1999 as well as working capital increases
related to acquisitions in 1999. The change in the Company's
long-term debt to equity ratio was primarily the result of the
issuance of $170.0 million initial principal amount of 3%
Convertible Senior Subordinated Notes in the second quarter of
1999 to reduce revolving credit debt and thereby create
sufficient financing capacity to purchase the Isis Pharma Group,
a German generic pharmaceutical business, for approximately
$153.0 million. In addition long term debt was incurred in the
third quarter 1999 to acquire two animal health businesses.
All balance sheet captions decreased as of September 30, 1999
compared to December 1998 in U.S. Dollars as the functional
currencies of the Company's principal foreign subsidiaries, the
Norwegian Krone, Danish Krone and British Pound, depreciated
versus the U.S. Dollar in the nine months of 1999 by
approximately 2%, 9% and 1%, respectively. In addition, the
Company's operations in Brazil were negatively affected due to
the decline of its currency versus the U.S. Dollar. These
decreases in balance sheet captions impact to some degree the
above mentioned ratios. The approximate decrease due to currency
translation of selected captions was: accounts receivable $3.1
million, inventories $2.5 million, accounts payable and accrued
expenses $2.0 million, and total stockholders' equity $7.5
million. The $7.5 million decrease in stockholder's equity
represents other comprehensive loss for the nine months ended
September 30, 1999 resulting from the strengthening of the U.S.
dollar.
In February 1999, the Company's USPD entered into an
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
USPD may provide up to $40 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 October 25, 1999, $8.5
million has been advanced and additional amounts are expected to
be requested.
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
October 1999 of one product and the other product is subject to
FDA action which Ascent believes will delay its commercial
introduction into 2000. This anticipated delay in drug
introduction resulted in Ascent forecasting that its accumulated
losses would exceed the combined sum of its stockholders' equity
and indebtedness subordinate to the Company's loans during the
first half of 2000. In response to this forecast, the Company and
Ascent have negotiated amendments to the original agreements
providing for (a) a change in the option period (from 2002 to
2003), (b) a change in the formula period for determining the
price of the Company's purchase option from 2001 to 2002, (c) the
granting of a security interest to the Company in products or
business purchased by Ascent with funds loaned by Alpharma and
(d) the commitment of a major shareholder of Ascent to provide up
to $10.0 million of additional financing to Ascent (in addition
to the $4 million previously committed)subordinate to the
Company's loan. 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 collectability of its loans to
Ascent and make any appropriate reserves. The additional
financing results in Ascent continuing to have positive
stockholders' equity and subordinated indebtedness assuming
current operating forecasts are met.
In September 1999, the Company acquired a technology license
and option agreement for the Southern Cross animal health
product. The agreement requires additional payments as additional
regulatory approvals for the product are obtained in other
markets. Total additional payments of approximately $65.0 million
are required over the next 4-6 years (approximately $30 million
of which is expected over the next 2 years) if all 13 possible
country approvals are received.
At September 30, 1999, the Company had $23.3 million in cash
and approximately $72.0 million available under existing lines of
credit. In January 1999, the Company replaced its prior $180.0
million revolving credit facility and domestic short term lines
of credit with a $300.0 million credit facility. In addition,
European short term credit lines were set at $30.0 million. The
credit facility provides for a $100.0 million six-year term loan
and a $200.0 million revolving credit facility with an initial
five-year term with two possible one-year extensions. The credit
facility has several financial covenants, including an interest
coverage ratio, total debt to EBITDA ratio, and equity to total
asset ratio. Interest on borrowings under the facility is at
LIBOR plus a margin of between .875% and 1.6625% depending on the
ratio of total debt to EBITDA. 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 and firm commitments in 1999.
While no commitments exist, the Company is presently
considering and expects to continue its pursuit of complementary
acquisitions or alliances, both in human pharmaceuticals and
animal health, that can provide new products and market
opportunities as well as leverage existing assets. In order to
accomplish any individually significant acquisition or
combination of acquisitions, the Company will need to obtain
additional financing in the form of equity related securities
and/or borrowings. Depending on the financing vehicle chosen by
the Company, it may require a restructuring or expansion of the
1999 Credit Facility.
The Company is required to meet the debt covenants included
in the 1999 Credit Facility. At September 30, 1999, the Company
had a equity to total asset ratio of 25.5% which is in excess of
the required 25%. The slight margin by which the Company met the
ratio and the possibility of not meeting the ratio due to an
increase in assets or due to factors beyond the Company's control
such as currency movements has resulted in the Company
considering certain measures which could include an equity
offering.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
The Company's earnings and cash flow are subject to
fluctuations due to changes in foreign currency exchange rates
and interest rates. The Company's risk management practice
includes the selective use, on a limited basis, of forward
foreign currency exchange contracts and interest rate agreements.
Such instruments are used for purposes other than trading.
Foreign currency exchange rate movements create fluctuations
in the U.S. dollar reported amounts of foreign subsidiaries whose
local currencies are their respective functional currencies. The
Company has not used foreign currency derivative instruments to
manage translation fluctuations. The Company and its respective
subsidiaries primarily use forward foreign exchange contracts to
hedge certain cash flows denominated in currencies other than the
subsidiary's functional currency. Such cash flows are normally
represented by actual receivables and payables and anticipated
receivables and payables for which there is a firm commitment.
At September 30, 1999 the Company had forward foreign
exchange contracts with a notional amount of $10.7 million. The
fair market value of such contracts is essentially the same as
the notional amount. All contracts expire by the third quarter of
2000. The cash flows expected from the contracts will generally
offset the cash flows of related non-functional currency
transactions. The change in value of the foreign currency forward
contracts resulting from a 10% movement in foreign currency
exchange rates would be approximately $.6 million and generally
would be offset by the change in value of the hedged receivable
or payable.
At September 30, 1999 the Company has no interest rate
agreements outstanding. The Company is considering entering into
interest rate agreements in 1999 and 2000 to fix the interest
rate on a portion of its long term debt.
____________
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 10-K for the year ended December 31, 1998.
Part II. OTHER INFORMATION
Item 1. Legal proceedings
The following is an update of Environmental Matters and
Legal Proceedings included in Item 1 and 3 in the Company's 1998
Form 10-K:
(a) The court has granted the Company's Motion for Summary
Judgement with respect to the Drinking Water Act proceeding
brought by the State of California. This ruling is final and
binding as the State has not filed an appeal in the time
permitted under applicable law. No monetary or other penalties
were awarded against the Company in this matter.
(b) The United States Environmental Protection Agency has
offered, and the Company has accepted, a tentative settlement
with respect to the Superfund matter. Pursuant to this settlement
(which must be approved by the court and is subject to a
"reopener" relating to unanticipated site conditions as is
normally contained in settlements under Superfund) the Company's
liability would be nominal.
Item 5. Other Information
The Board of Directors accepted the resignation of Mr. Gert
W. Munthe, President and Chief Executive Officer in September
1999. Mr. Munthe's resignation will be effective on December 31,
1999 or earlier.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Resignation Agreement dated September 24, 1999 between the
Company and Gert Munthe.
10.2 Second Supplemental Agreement dated October 15, 1999 by and
among Ascent Pediatrics Inc., Alpharma USPD Inc. and the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On August 30, 1999, the Company filed a report on Form 8-K/A
dated June 18, 1999 reporting Item 2. "Acquisition or Disposition
of Assets."
The event reported was the acquisition of Isis. The Form 8-
K/A included the audited financial statements of Isis 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: November 2, 1999 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer