1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number
ICN PHARMACEUTICALS, INC.
------------------------------------------------------
(Successor Company to SPI Pharmaceuticals, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
(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
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock,
$.01 par value, as of November 11, 1994, was 26,961,634.
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ICN PHARMACEUTICALS, INC.
(Successor Company to SPI Pharmaceuticals, Inc.)
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets -
September 30, 1994 (Unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Income (Unaudited) -
Three and nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Statement Regarding Unaudited Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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ICN PHARMACEUTICALS, INC.
(Successor Company to SPI Pharmaceuticals, Inc.)
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
(000's omitted)
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(unaudited)
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 16,610 $ 14,777
Marketable securities (used to collateralize $10,000 note payable) -- 32,587
Receivables, net 67,374 43,277
Inventories, net 88,121 107,196
Prepaid expenses and other current assets 17,593 10,925
-------- --------
Total current assets 189,698 208,762
Marketable securities (used to collateralize $10,000 note payable) 30,193 --
Property, plant and equipment, net 84,502 78,718
Goodwill, net 3,199 1,664
Other assets 16,297 12,873
-------- --------
$323,889 $302,017
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Trade payables $ 22,525 $ 13,951
Payable to parent company 1,850 18,313
Accrued liabilities 22,762 17,700
Notes payable 11,548 14,360
Current portion of long-term debt 5,380 3,866
Income taxes payable 16,865 13,313
-------- --------
Total current liabilities 80,930 81,503
Long-term debt, less current portion 17,060 16,980
Other liabilities and deferred income taxes 7,263 6,226
Minority interest 42,649 41,429
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 38,000 shares
authorized; 20,495 shares and 20,101
outstanding at September 30, 1994 and
December 31, 1993, respectively 205 202
Additional capital 97,503 91,449
Retained earnings 87,436 70,973
Unrealized loss on marketable securities, net (2,394) --
Foreign currency translation adjustments (6,763) (6,745)
-------- --------
Total stockholders' equity 175,987 155,879
-------- --------
$323,889 $302,017
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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ICN PHARMACEUTICALS, INC.
(Successor Company to SPI Pharmaceuticals, Inc.)
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(Unaudited - 000's omitted except for per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1994 1993 1994 1993
-------- ------- -------- --------
Net sales $92,796 $70,214 $243,890 $256,272
Cost of sales 47,649 28,892 125,432 124,845
------- ------- -------- --------
Gross profit 45,147 41,322 118,458 131,427
Selling, general and administrative expenses 25,571 22,356 69,568 88,061
Royalties to affiliates, net 2,566 2,048 6,315 4,032
Research and development costs 1,372 1,778 3,848 7,040
Translation and exchange (gains) losses, net (736) (1) 1,518 (598)
Interest income (1,167) (337) (3,373) (2,761)
Interest expense 1,348 3,888 4,394 13,986
Other expense, net 2,071 2,737 3,170 4,565
------- ------- -------- --------
Income before provision for income taxes
and minority interest 14,122 8,853 33,018 17,102
Provision for income taxes 3,278 1,923 8,132 3,501
Minority interest 787 12 1,220 (144)
------- ------- -------- --------
Net income $10,057 $ 6,918 $ 23,666 $ 13,745
======= ======= ======== ========
PER SHARE INFORMATION:
Net income per share $.47 $.34 $1.13 $.68
==== ==== ===== ====
Shares used in per share computation 21,261 20,113 20,951 20,211
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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ICN PHARMACEUTICALS, INC.
(Successor Company to SPI Pharmaceuticals, Inc.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(Unaudited - 000's omitted)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1994 1993
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $23,666 $13,745
Adjustments to reconcile net income to net
cash provided by operating activities:
Allowances for losses on accounts receivable 1,222 8,818
Depreciation and amortization 6,149 6,351
Translation and exchange (gains) losses, net 1,518 (598)
Change in operating assets and liabilities 5,925 (14,948)
------- -------
Net cash provided by operating activities 38,480 13,368
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,603) (10,450)
Decrease in restricted cash -- 5,200
------- -------
Net cash used in investing activities (11,603) (5,250)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit arrangements (1,865) (3,804)
Net payments of long-term debt (1,135) (669)
Net payments to parent company (22,138) (3,899)
Proceeds from exercise of stock options 1,466 949
Dividends paid to minority shareholders (1,435) (1,259)
------- -------
Net cash used in financing activities (25,107) (8,682)
------- -------
Effect of exchange rate changes on cash 63 (20)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,833 (584)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,777 38,054
------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $16,610 $37,470
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by ICN Pharmaceuticals, Inc., a company incorporated on July 27,
1994 as ICN Merger Corp. formed to merge ICN Pharmaceuticals, Inc., SPI
Pharmaceuticals, Inc., Viratek, Inc. and ICN Biomedicals, Inc. into one
company (See Note 1), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results to be expected
for a full year. Although the Company believes that all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the interim period presented are included and that the
disclosures are adequate to make the information presented not misleading,
these consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in SPI Pharmaceuticals, Inc. (the predecessor to ICN Merger Corp.)
Annual Report on Form 10-K and Form 10-K/A Amendment No. 1 for the year ended
December 31, 1993.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(Unaudited)
1. RELATIONSHIP OF PREDECESSOR COMPANIES AND MERGER INTO NEW COMPANY -
On August 1, 1994, ICN Pharmaceuticals, Inc. ("ICN"), SPI
Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor
Companies") entered into a merger agreement (the "Merger Agreement") to
combine the Predecessor Companies into ICN Merger Corp. ("the "Company")
(and in the case of Biomedicals into a wholly owned subsidiary of ICN
Merger Corp.) a newly formed wholly owned subsidiary of SPI (the
"Merger").
On November 1, 1994, the shareholders of the Predecessor Companies
approved the Merger of the Predecessor Companies into ICN Merger Corp.
pursuant to the Merger Agreement. On November 10, 1994, SPI, ICN and
Viratek merged into ICN Merger Corp., and Biomedicals merged into ICN
Subsidiary Corp. a wholly-owned subsidiary of ICN Merger Corp. For
accounting purposes, SPI is treated as the acquiring company and as a
result, the newly merged company will report the financial history of SPI
in its financial results. In conjunction with the Merger, ICN Merger
Corp. was renamed ICN Pharmaceuticals, Inc. The results contained in
this 10-Q reflect the historic results of the predecessor company, SPI,
and do not include the results of the other predecessor companies; ICN,
Viratek and Biomedicals. Subsequent to November 1, 1994, the results of
the newly merged company will include the combined operations of all the
Predecessor Companies. (See Note 10)
SPI was incorporated on November 30, 1981, as a wholly-owned subsidiary
of ICN and was 38% owned by ICN at September 30, 1994. Viratek and
Biomedicals were 63% and 69% owned by ICN at September 30, 1994,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of SPI and all of its subsidiaries. All significant
intercompany account balances and transactions have been eliminated.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents. Common
equivalent shares represent shares issuable for outstanding options
computed using the treasury stock method. This method assumes that the
proceeds from stock options are used to repurchase shares on the open
market.
On January 13, 1994, SPI's Board of Directors declared a first quarter
cash dividend of $.065 per share and a stock dividend of 1.4%, payable on
February 28, 1994, to shareholders of record on February 1, 1994. On May
20, 1994, SPI's Board of Directors declared a second quarter cash
dividend of $.065 per share and a stock dividend of 1.3%, payable on June
15, 1994, to shareholders of record on June 1, 1994. All relevant share
and per share data have been restated to reflect these stock dividends.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the
current year presentation.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1994
(UNAUDITED)
INVENTORIES
INVENTORIES
Inventories, net, consists of the following components: (000's omitted)
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
Raw materials and supplies $32,743 $ 57,148
Work-in-process 14,596 12,541
Finished goods, net 40,782 37,507
------- --------
$88,121 $107,196
======= ========
3. RELATED PARTY TRANSACTIONS -
ROYALTY AGREEMENTS
During the three and nine months ended September 30, 1994, SPI sold
$12,420,000 and $30,270,000 of Virazole(R), respectively, generating
royalties to Viratek of $2,471,000 and $6,041,000, respectively. For the
same periods in 1993, SPI sold $10,240,000 and $20,160,000 of
Virazole(R), respectively, generating royalties to Viratek of $2,048,000
and $4,032,000, respectively. These royalties were based on a royalty
agreement between SPI and Viratek whereby 20% of net sales of Virazole(R)
were payable to Viratek.
COST ALLOCATIONS
ICN, SPI, Viratek and Biomedicals occupied ICN's facility in Costa Mesa,
California. ICN charged facility costs to SPI of $69,000 per quarter in
1994 and 1993. The costs of common services such as maintenance,
purchasing and personnel were incurred by SPI, a portion of which were
allocated to ICN, Viratek and Biomedicals based on services utilized.
These common services costs were $1,989,000 for the nine months ended
September 30, 1994, of which $1,413,000 was allocated to ICN, Viratek and
Biomedicals. During the same period in 1993, common services costs were
$1,917,000, of which $1,235,000 was allocated to the same group.
4. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes was $4,948,000 for the nine months ended
September 30, 1994, and $1,707,000 for the same period in 1993.
Cash paid for interest was $2,562,000 for the nine months ended September
30, 1994, and $8,956,000 for the same period in 1993.
8
9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1994
(UNAUDITED)
5. RESULTS EXCLUDING ICN GALENIKA -
The results of ICN Galenika and the results of SPI, excluding ICN
Galenika, for the three months ended September 30, 1994 and 1993 are
presented below: (000's omitted)
SPI WITHOUT
ICN GALENIKA ICN GALENIKA
------------------------ -----------------------
1994 1993 1994 1993
------- ------- ------- -------
Sales $47,309 $41,496 $45,487 $28,718
Gross Profit 32,752 29,431 12,395 11,891
Net income $ 7,697 $ 6,880 $ 2,360 $ 38
The results of ICN Galenika and the results of SPI, excluding ICN
Galenika, for the nine months ended September 30, 1994 and 1993 are
presented below: (000's omitted)
SPI WITHOUT
ICN GALENIKA ICN GALENIKA
----------------------- ----------------------
1994 1993 1994 1993
------- ------- ------- -------
Sales $134,577 $118,590 $109,313 $137,682
Gross Profit 91,704 78,366 26,754 53,061
Net income (loss) $ 20,008 $ 14,174 $ 3,658 $ (429)
6. ICN GALENIKA -
ICN Galenika operates in a highly inflationary economy and uses the
dollar as the functional currency rather than the Yugoslavian dinar.
At December 31, 1993, the rate used to remeasure ICN Galenika's
results was over one trillion dinars per $1 U.S. On January 1, 1994,
the Yugoslavian government changed the denomination of its currency by
dropping nine zeros. The effect of this redenomination on the
Yugoslavian dinar resulted in an exchange rate of 1,053 dinars to $1
U.S. Subsequent to the redenomination and prior to the enactment of
the stabilization program described below, the dinar had devalued to
12,563,000 dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a
"Stabilization Program" designed to strengthen its currency. Under
this program the official exchange rate of the dinar is fixed at a
ratio of one dinar to one Duetsche mark. The Yugoslavian government
guarantees the conversion of dinars to Duetsche marks by exercising
restraint in the amount of dinars that it prints, thereby restricting
cash in circulation to correspond to hard currency reserves in
Yugoslavia. Since the inception of this program the exchange rate of
dinars to Duetsche marks has remained stable. The trading of dinars
at other than official rates has been virtually eliminated and
inflation and interest rates have declined from over 1 billion percent
a year to a current annual rate of approximately 14% since January 24,
1994, based on information currently available to the Company. The
Company believes that the period of time that the stabilization
program has been operating successfully is significant given that past
attempts at monetary control by the Yugoslavian government have
generally been temporary. In the near term, the positive effects of
the stabilization program could reverse and a return to prior levels
of hyperinflation could occur. The success of this stabilization
program is dependent upon improvement in the Yugoslavian economy,
which is in part dependent upon the lifting of United Nations
sanctions.
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10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1994
(Unaudited)
7. JOINT VENTURE IN RUSSIA -
The Company has recently entered into an agreement with the City of
St. Petersburg to acquire 15% of the outstanding shares of the
Company's recently privatized joint venture partner, Oktyabr, for
approximately $600,000. Under the terms of the agreement, the Company
has the option to pay for the shares by using privatization vouchers
or cash. As a result of this investment, and as part of the
privatization of Oktyabr, the Company submitted an "investment plan"
which, if approved, will allow the Company to purchase additional
outstanding shares of Oktyabr. These shares along with the shares
purchased from the City of St. Petersburg would increase the Company's
ownership to 43%. The "investment plan" does not contemplate any
significant additional cash investment by the Company but gives effect
to the Company's past assistance provided to Oktyabr. The Company has
also recently completed a transaction whereby the Company purchased
26% of the outstanding shares from the employees of Oktyabr in
exchange for rights to acquire SPI common stock. Should the Company
complete the transaction to acquire 43% of the outstanding shares of
Oktyabr together with the 26% acquired from the employees, the Company
would own 61% of the outstanding shares of Oktyabr, in which case the
Company may be required to consolidate the financial statements of
Oktyabr with those of the Company.
8. MARKETABLE SECURITIES -
In January 1994, SPI adopted SFAS No. 115 ("Accounting for Certain
Investments in Debt and Equity Securities"). This statement addresses
the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. Those investments are to be classified as either
held-to-maturity, trading securities, or available-for-sale. SPI has
classified its investment in corporate bond securities, with
maturities ranging from 1999 to 2003, as available-for-sale.
Unrealized holding gains and losses are calculated on the specific
identification method. Changes in market values of equity securities
are reflected as unrealized gains or losses directly in Shareholders'
Equity, as required, and accordingly have no effect on net income.
The adoption of SFAS No. 115 did not result in a cumulative effect
adjustment in the consolidated statements of income.
9. COMMITMENTS AND CONTINGENCIES -
The Company is a defendant in certain consolidated class actions
pending in the United States District Court for the Southern District
of New York entitled In re Paine Webber Securities Litigation (Case
No. 86 Civ. 6776 (VLB); In re ICN/Viratek Securities Litigation (Case
No. 87 Civ. 4296 (VLB) ). In the Third Amended Consolidated Class
Action Complaint plaintiffs allege that ICN, SPI and Viratek
("Defendants") made, or aided and abetted Paine Webber in making,
misrepresentations of material fact and omitted to state material
facts concerning the business, financial condition and future
prospects of ICN, Viratek and SPI in certain public announcements,
Paine Webber, Inc. research reports and filings with the Commission.
The alleged misstatements and omissions primarily concern developments
regarding Virazole(R), including the efficacy, and safety of the drug
and the market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder and constitute
common law fraud and misrepresentation. The Defendants filed their
Answer, containing affirmative defenses, on February 15, 1993. Fact
discovery is complete and expert discovery is virtually complete.
Plaintiffs seek the certification of classes of persons who purchased
ICN, Viratek, or SPI common stock during the period January 7, 1986
through April 15, 1987. In their memorandum of law, dated February 4,
1994, the Defendants argue that class certification may only be
granted for purchasers of ICN common stock for the period August 12,
1986 through February 20, 1987, and for purchasers of Viratek common
stock for the period December 9, 1986 through February 20, 1987. The
Defendants assert that no class should be certified for purchasers of
the
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1994
(Unaudited)
common stock of SPI for any period. Oral argument on plaintiffs'
motion for class certification was held on June 2, 1994. To date, no
decision has been rendered.
On October 20, 1993, plaintiffs informed the Court that they had
reached an agreement to settle with co-defendant Paine Webber for $6.5
million. On May 6, 1994, plaintiffs submitted a Stipulation of
Settlement to the Court and in August 1994 the settlement was
approved. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the Defendants' damages experts find to be
inappropriate under the circumstances, has testified that assuming
that classes were certified for purchasers of ICN, Viratek, and SPI
common stock for the entire class periods alleged by plaintiffs,
January 7, 1986 through April 15, 1987, and further assuming that all
of the plaintiffs' allegations were proven, potential damages against
ICN, Viratek, and SPI would, in the aggregate, amount to $315,000,000.
The ICN Defendants' four damages' experts have testified that damages
are zero. On May 4, 1994, plaintiffs' counsel agreed to stipulate to
the dismissal of the aiding and abetting claim asserted against the
ICN Defendants and a formal stipulation will be submitted to the Court
in the near future. Management believes that, having extensively
reviewed the issues in the above referenced matters, there are strong
defenses and the Company intends to defend the litigation vigorously.
While the ultimate outcome of these lawsuits cannot be predicted with
certainty, and an unfavorable outcome could have an adverse effect on
the Company, at this time management does not expect that these
matters will have a material adverse effect on the financial position,
result of operations or liquidity of the Company. The attorney's fees
and other costs of the litigation were allocated equally between ICN
and Viratek prior to the Merger.
Four lawsuits have been filed with respect to the Merger in the Court
of Chancery in the State of Delaware. Three of these lawsuits,
entitled Helmut Kling v. Milan Panic, et al., Jallath v. Milan Panic,
et al., and Amy Hoffman v. Milan Panic, et al., were filed by
stockholders of SPI and, in the Jallath lawsuits stockholders of
Viratek, against ICN, SPI, Viratek (in the Jallath lawsuit) and
certain directors and officers of ICN, SPI and/or Viratek (including
Milan Panic) and purport to be class actions on behalf of all persons
who hold shares of SPI common stock and Viratek common stock (in the
Jallath lawsuit). The fourth lawsuit, entitled Joice Perry v. Nils
Johannesson, et al., was filed by a stockholder of Viratek against
ICN, Viratek and certain directors and officers of ICN, SPI and
Viratek (including Milan Panic) and purports to be a class action on
behalf of all persons who hold shares of Viratek common stock. These
suits allege that the consideration provided to the public
stockholders of SPI and/or Viratek (as applicable) in the Merger was
unfair and inadequate, and that the Defendants breached their
fiduciary duties in approving the proposed Merger and otherwise. The
Company believes that these suits are without merit and intends to
defend them vigorously.
10. SUBSEQUENT EVENT -
On November 1, 1994, the shareholders of the Predecessor Companies
approved the Merger pursuant to the Merger Agreement, dated August 1,
1994. Under the terms of the Merger Agreement, all of the outstanding
shares of common stock of the Predecessor Companies (other than shares
previously held by ICN of SPI, Viratek and Biomedicals) were exchanged
for shares of common stock of New ICN pursuant to the following
exchange ratios: ICN: 1 to .512; SPI: 1 to 1; Viratek: 1 to .499; and
Biomedicals: 1 to .197.
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12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1994
(Unaudited)
The Merger will be accounted for under the purchase method of
accounting with SPI, as survivor of ICN Merger Corp., representing the
acquiror. Therefore, the aggregate consideration paid by ICN Merger
Corp. in the Merger (determined based upon the number of ICN Merger
Corp. shares issued in the Merger in excess of the outstanding shares
of SPI common stock) will be allocated to the net assets of ICN,
Viratek and Biomedicals based on their fair values; and the results of
operations of ICN, Viratek and Biomedicals will be included in the
results of operations of ICN Merger Corp. only for periods subsequent
to November 1, 1994. In addition, for accounting purposes, SPI will
be treated as the predecessor company to ICN Merger Corp..
Following is a table of unaudited pro forma information for the nine
months ended September 30, 1994 and 1993, which combines the
consolidated results of the Predecessor Companies had ICN Merger Corp.
been in existence as of the beginning of the periods presented after
including the impact of certain adjustments, such as: decrease of
interest expense resulting from a proposed offering of $100,000,000,
8.5% Convertible Notes the proceeds of which will be used to repay
certain long term debt of the Predecessor Companies, amortization of
goodwill, elimination of subsidiary stock transactions and the related
income tax effects. The unaudited pro forma combined financial
information does not reflect any nonrecurring charges incurred in
connection with the Merger (in the aggregate, estimated to be
approximately $189,000,000 of which $185,000,000 will be charged to
operations immediately following the Merger for purchased research and
development).
Nine Months Ended September 30
------------------------------
1994 1993
----------- ------------
(in thousands - unaudited)
Net sales $288,348 $302,103
Income before provision for income
taxes and minority interest 12,271 3,677
Net income 8,517 2,974
Net income per share .31 .11
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating
results that would have occurred had ICN Merger Corp. been consummated
as of the above dates. In addition, the pro forma results are not
intended to be a projection of future results and do not reflect any
synergies that might be achieved from the combined operations.
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
FINANCIAL RESULTS
Net Sales. Net sales for the three months ended September 30, 1994, were
$92,796,000 compared to $70,214,000 for the same period in 1993. This
increase in net sales of $22,582,000, or 32% is a result of increased sales
at substantially all of SPI's operating units. ICN Galenika's sales for the
three months ended September 30, 1994 increased $16,769,000 or 58% compared
to the same period in 1993 primarily due to increased unit sales. The
business environment in which ICN Galenika operates, has improved compared to
the third quarter of 1993 as a result of government action to stabilize the
dinar (see discussion of "stabilization program" below). Net sales of SPI's
operating units excluding ICN Galenika increased $5,813,000 or 14% for the
three months ended September 30, 1994, compared to the same period last year.
This increase in net sales is primarily due to increased Virazole(R) sales
worldwide resulting from a combination of price increases and increased unit
sales. Virazole(R) sales increased $1,710,000 or 20% for the three months
ended September 30, 1994, compared to the same period last year.
Net sales for the nine months ended September 30, 1994 were $243,890,000
compared to $256,272,000 for the same period in 1993. This decrease in net
sales of $12,382,000 or 5% is primarily a result of lower sales at ICN
Galenika during the first quarter of 1994 compared to the same period in
1993. Net sales at ICN Galenika were $109,313,000 for the nine months ended
September 30, 1994, compared to $137,682,000 for the same period in 1993.
The decline in ICN Galenika sales of $28,369,000 or 21% is primarily due to
differences in exchange rates in existence during the first nine months of
1994 compared to the same period last year. Additionally, the sales of ICN
Galenika have been adversely affected by magnitude and timing of devaluations
in the first quarter of 1994 compared to the first quarter of 1993, which has
been partially offset by an improvement of second and third quarter ICN
Galenika sales compared to last year's second and third quarter. The decrease
in overall net sales is partially offset by sales increases of $15,987,000 in
SPI's operating units excluding ICN Galenika. This increase is primarily due
to increased sales of Virazole(R), and a general improvement in SPI's major
product lines.
Gross Profit. Gross profit as a percentage of sales was 49% for both the
three and nine months ended September 30, 1994, compared to 59% and 51%,
respectively, for the same periods in 1993. The lower gross margins in 1994
reflect a decrease in gross margin at ICN Galenika which recorded gross profit
margins of 27% and 24% for the three and nine months ended September 30, 1994,
compared to 41% and 39% for the same periods in 1993, respectively. The
decrease in gross profit margin at ICN Galenika is primarily due to higher
inventory costs resulting from the current economic conditions in Yugoslavia.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales was 28% and 29% for the
three and nine months ended September 30, 1994, compared to 32% and 34% for
the same periods in 1993. This decrease in selling, general and
administrative expenses as a percentage of sales was due primarily to expense
reductions at ICN Galenika resulting from a lower provision for bad debts,
lower wages and the impact of differences in the exchange rates in 1994
compared to 1993.
Royalties to Affiliates, Net. For the three and nine months ended September
30, 1994, Virazole(R) royalties to Viratek were $2,471,000 and $6,041,000,
respectively, compared to royalties of $2,048,000 and $4,032,000 for the
same periods in 1993. The increase in royalties is primarily due to
increased sales of Virazole(R) in the United States.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
Translation and Exchange Losses, Net. Translation and exchange (gains)
losses, net, for the three and nine months ended September 30, 1994, were
($736,000) and $1,518,000, respectively, compared to ($1,000) and ($598,000)
for the same periods in 1993. For the three months ended September 30, 1994,
foreign exchange gains increased $735,000 compared to the same period in
1993, primarily due to favorable exchange rates at ICN Galenika. The
increase in foreign exchange losses of $2,116,000 for the nine months ended
September 30, 1994, is primarily due to translation and exchange losses at
ICN Galenika resulting from the devaluations of the dinar prior to the
implementation of the Yugoslavian monetary stabilization program, discussed
below, and a reduction of translation gains at SPI's Spanish subsidiary.
Interest Expense. Interest expense for the three and nine months ended
September 30, 1994, was $1,348,000 and $4,394,000, respectively, compared to
$3,888,000 and $13,986,000 for the same periods in 1993. The decrease in
interest expense is due to lower interest rates in Yugoslavia resulting from
the efforts of the Yugoslavian government to control inflation and the lower
levels of debt in the United States.
Research and Development. Research and development costs for the nine
months ended September 30, 1994, decreased $3,192,000 or 45%, compared to the
same period in 1993, due to reductions in expenses at ICN Galenika resulting
from lower wages and differences in exchange rates in 1994 compared to 1993.
Research and development costs at ICN Galenika were $1,938,000 for the nine
months ended September 30, 1994, compared to $4,769,000 for the same period
in 1993.
EXCHANGE RATES AND STABILIZATION PROGRAM
ICN Galenika operates in a highly inflationary economy and uses the dollar as
the functional currency rather than the Yugoslavian dinar. At December 31,
1993, the rate used to remeasure ICN Galenika's results was over one
trillion dinars per $1 U.S. On January 1, 1994, the Yugoslavian government
changed the denomination of its currency by dropping nine zeros. The effect
of this redenomination on the Yugoslavian dinar resulted in an exchange rate
of 1,053 dinars to $1 U.S. Subsequent to the redenomination and prior to the
enactment of the stabilization program described below, the dinar had
devalued to 12,563,000 dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the
official exchange rate of the dinar is fixed at a ratio of one dinar to one
Duetsche mark. The Yugoslavian government guarantees the conversion of dinars
to Duetsche marks by exercising restraint in the amount of dinars that it
prints, thereby restricting cash in circulation to correspond to hard
currency reserves in Yugoslavia. Since the inception of this program the
exchange rate of dinars to Duetsche marks has remained stable. The trading
of dinars at other than official rates has been virtually eliminated and
inflation and interest rates have declined from over 1 billion percent a year
to a current annual rate of approximately 14% since January 24, 1994, based
on information currently available to the Company. The Company believes that
the period of time that the stabilization program has been operating
successfully is significant given that past attempts at monetary control by
the Yugoslavian government have generally been temporary. In the near term,
the positive effects of the stabilization program could reverse and a return
to prior levels of hyperinflation could occur. The success of this
stabilization program is dependent upon improvement in the Yugoslavian
economy, which is in part dependent upon the lifting of United Nations
sanctions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
As a result of the stabilization program and the absence of large and
frequent devaluations, the net monetary position of ICN Galenika has
increased to $14,746,000 as of September 30, 1994, representing the balance
sheet increases in accounts receivable and cash from the beginning of the
year. This net monetary position would be subject to foreign exchange loss
if a devaluation of the dinar were to occur.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
The Company generally relies on positive cash flow generated from operations
for funds needed to maintain its liquidity.
During the nine months of 1994 working capital decreased by $18,491,000 to
$108,768,000. This decrease is primarily due to SPI reclassifying its bond
investments as long-term assets compared to its short-term classification at
December 31, 1993. On January 1, 1994, SPI adopted SFAS No. 115 ("Accounting
for Certain Investments in Debt and Equity Securities"). Based on the
guidelines in this new pronouncement and the expected working capital
requirements of SPI in 1994, SPI's bond investments have been categorized as
investments that are "available for sale", and correspondingly, are
classified as long-term assets. Additionally, inventory decreased primarily
at ICN Galenika resulting from the sale of older inventory with high unit
costs which are being replaced with new inventory at lower unit costs.
The decrease in working capital is partially offset by increases in cash and
accounts receivable at ICN Galenika due to the positive effects of the
stabilization program and the absence of large and frequent devaluations.
Prepaid expenses also increased primarily at ICN Galenika due to commitments
for purchases of raw materials from suppliers. SPI's trade payables increased
due primarily to increases at ICN Galenika resulting from a greater
willingness of local suppliers in Yugoslavia to extend trade credit. Lastly,
SPI reduced its liability to ICN by $16,463,000, net of dividends declared,
resulting in a payable to ICN of $1,850,000 as of September 30, 1994.
The Company has recently entered into an agreement with the City of St.
Petersburg to acquire 15% of the outstanding shares of the Company's recently
privatized joint venture partner, Oktyabr, for approximately $600,000. Under
the terms of the agreement, the Company has the option to pay for the shares
by using privatization vouchers or cash. As a result of this investment, and
as part of the privatization of Oktyabr, the Company submitted an "investment
plan" which, if approved, will allow the Company to purchase additional
outstanding shares of Oktyabr. These shares along with the shares purchased
from the City of St. Petersburg would increase the Company's ownership to
43%. The "investment plan" does not contemplate any significant additional
cash investment by the Company but gives effect to the Company's past
assistance provided to Oktyabr. The Company has also recently completed a
transaction whereby the Company purchased 26% of the outstanding shares from
the employees of Oktyabr in exchange for rights to acquire SPI common stock.
Should the Company complete the transaction to acquire 43% of the outstanding
shares of Oktyabr together with the 26% acquired from the employees, the
Company would own 61% of the outstanding shares of Oktyabr, in which case the
Company may be required to consolidate the financial statements of Oktyabr
with those of the Company.
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
As a result of the Merger on November 10, 1994, the Company assumed
approximately $150,000,000 of long-term debt, a substantial portion of which
is anticipated to be refinanced. The Company anticipates the issuance of
$100,000,000, 8.5% Convertible Subordinated Notes ("Notes") due in 1999. The
Notes will have a significantly lower effective interest rate compared to the
current indebtedness of the Predecessor Companies and certain of their
foreign subsidiaries. Therefore, the Company intends to use a substantial
portion of the net proceeds of this offering to repay or redeem existing
indebtedness of the Predecessor Companies and certain of their foreign
subsidiaries.
On January 13, 1994, SPI's Board of Directors declared a first quarter cash
dividend of $.065 per share and a stock dividend of 1.4%, payable on February
28, 1994, to shareholders of record on February 1, 1994. On May 20, 1994,
SPI's Board of Directors declared a second quarter cash dividend of $.065 per
share and a stock dividend of 1.3%, payable on June 15, 1994, to shareholders
of record on June 1, 1994. All relevant share and per share data have been
restated to reflect these stock dividends.
The Company and certain of its subsidiaries do not maintain product liability
insurance. While the Company and the Predecessor Companies have never
experienced a material adverse claim for personal injury resulting from
allegedly defective products, a successful claim could have a material
adverse effect on the Company's liquidity and financial performance.
PART II - OTHER INFORMATION
ITEM 1. LITIGATION
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York
entitled In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776
(VLB); In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296
(VLB) ). In the Third Amended Consolidated Class Action Complaint plaintiffs
allege that ICN, SPI and Viratek ("Defendants") made, or aided and abetted
Paine Webber in making, misrepresentations of material fact and omitted to
state material facts concerning the business, financial condition and future
prospects of ICN, Viratek and SPI in certain public announcements, Paine
Webber, Inc. research reports and filings with the Commission. The alleged
misstatements and omissions primarily concern developments regarding
Virazole(R), including the efficacy, and safety of the drug and the market
for the drug. The plaintiffs allege that such misrepresentations and
omissions violate Section 10(b) of the Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and constitute common law fraud and misrepresentation.
The Defendants filed their Answer, containing affirmative defenses, on
February 15, 1993. Fact discovery is complete and expert discovery is
virtually complete. Plaintiffs seek the certification of classes of persons
who purchased ICN, Viratek, or SPI common stock during the period January 7,
1986 through April 15, 1987. In their memorandum of law, dated February 4,
1994, the Defendants argue that class certification may only be granted for
purchasers of ICN common stock for the period August 12, 1986 through
February 20, 1987, and for purchasers of Viratek common stock for the period
December 9, 1986 through February 20, 1987. The Defendants assert that no
class should be certified for purchasers of the common stock of SPI for any
period. Oral argument on plaintiffs' motion for class certification was held
on June 2, 1994. To date, no decision has been rendered.
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ITEM 1. LITIGATION - CONTINUED
On October 20, 1993, plaintiffs informed the Court that they had reached an
agreement to settle with co-defendant Paine Webber for $6.5 million. On
May 6, 1994, plaintiffs submitted a Stipulation of Settlement to the Court
and in August 1994 the settlement was approved. Plaintiffs' damages
expert, utilizing assumptions and methodologies that the Defendants'
damages experts find to be inappropriate under the circumstances, has
testified that assuming that classes were certified for purchasers of ICN,
Viratek, and SPI common stock for the entire class periods alleged by
plaintiffs, January 7, 1986 through April 15, 1987, and further assuming
that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek, and SPI would, in the aggregate, amount to
$315,000,000. The Defendants' four damages' experts have testified that
damages are zero. On May 4, 1994, plaintiffs' counsel agreed to stipulate
to the dismissal of the aiding and abetting claim asserted against the
Defendants and a formal stipulation will be submitted to the Court in the
near future. Management believes that, having extensively reviewed the
issues in the above referenced matters, there are strong defenses and the
Company intends to defend the litigation vigorously. While the ultimate
outcome of these lawsuits cannot be predicted with certainty, and an
unfavorable outcome could have an adverse effect on the Company, at this
time management does not expect that these matters will have a material
adverse effect on the financial position, result of operations or liquidity
of the Company. The attorney's fees and other costs of the litigation were
allocated equally between ICN and Viratek prior to the Merger.
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN
Canada Limited ("ICN Canada"), its parent, SPI, and ICN alleging breach of
contract and related claims arising out of a manufacturing contract between
Gencon and ICN Canada. ICN and SPI were dismissed from the action in March
1993 based on SPI's agreement to guarantee any judgment against ICN Canada.
Following trial in October and November 1993, the judge signed a decision
granting judgment in favor of Gencon for breach of contract in the amount
of approximately $2,100,000 plus interest, costs and attorney's fees (which
sums total approximately $650,000). Trial counsel has advised SPI that the
decision contains serious errors of law and fact. ICN Canada's appeal from
this judgment is now pending. SPI's 1993 financial statements include an
accrual in an amount equal to what the Company believes is the maximum
exposure with regard to this contingency.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware. Three of these lawsuits, entitled
Helmut Kling v. Milan Panic, et al., Jallath v. Milan Panic, et al., and
Amy Hoffman v. Milan Panic, et al., were filed by stockholders of SPI and,
in the Jallath lawsuit, stockholders of Viratek, against ICN, SPI, Viratek
(in the Jallath lawsuit) and certain directors and officer of ICN, SPI
and/or Viratek (including Milan Panic) and purport to be class actions on
behalf of all persons who hold shares of SPI common stock and Viratek
common stock (in the Jallath lawsuit). The fourth lawsuit, entitled Joice
Perry v. Nils O. Johannesson, et. al., was filed by a stockholder of
Viratek against ICN, Viratek and certain directors and officers of ICN, SPI
and Viratek (including Milan Panic) and purports to be a class action on
behalf of all persons who hold shares of Viratek common stock. These suits
allege that the consideration provided to the public stockholders of SPI
and/or Viratek (as applicable) in the Merger was unfair and inadequate, and
that the defendants have their fiduciary duties in approving the proposed
Merger and otherwise. The Company believes that these suits are without
merit and intends to defend them vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11: Computation of Per Share Earnings
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1994.
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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.
ICN PHARMACEUTICALS, INC.
Registrant
Date: November 13, 1994 /s/ Milan Panic
-------------------------------
Milan Panic
President
Date: November 13, 1994 /s/ John E. Giordani
-------------------------------
John E. Giordani
Executive Vice President, Chief
Financial Officer and
Corporate Controller
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