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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11397
ICN 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 545-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
(TITLE OF CLASS)
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 20, 1995, was approximately $421,285,605.
The number of outstanding shares of common stock as of March 20, 1995
was 28,085,707.
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Exhibit index on 99
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION
PART I
PAGE NO.
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 16
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . 17
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 20
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 28
9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure . . . 61
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 62
11. Executive Compensation and Related Matters . . . . . . . . . . . . . . . . . . . . . . . 71
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 79
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 82
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . 91
(ii)
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PART I
ITEM 1. BUSINESS
INTRODUCTION
On November 1, 1994, the shareholders of ICN Pharmaceuticals, Inc.
("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies")
approved the Merger of the Predecessor Companies, ("the Merger"). 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.
In conjunction with the Merger, ICN Merger Corp. was renamed ICN
Pharmaceuticals, Inc. ("New ICN" or "the Company"). For accounting
purposes, SPI is the acquiring company and as a result, the newly merged
company will report the historical financial data of SPI in its financial
results. Subsequent to the Merger, the results of the newly merged company
will include the combined operations of all Predecessor Companies.
New ICN is an international pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical and nutritional products,
research chemicals and diagnostic products. The Company pursues a strategy of
international expansion which includes (i) the research and development of
proprietary products with the potential to be significant contributors to the
Company's global operations; (ii) the penetration of major pharmaceutical
markets by means of targeted acquisitions; and (iii) the expansion in these
major markets through the development or acquisition of pharmaceutical products
that meet the particular needs of each market.
The Company distributes and sells a broad range of prescription and
over the counter ("OTC") pharmaceutical products in over 60 countries
worldwide, primarily in North America, Latin America, Western Europe and
Eastern Europe. These pharmaceutical products treat viral and bacterial
infections, diseases of the skin, myasthenia gravis, cardiovascular disease,
diabetes and psychiatric disorders. The Company's leading product is the broad
spectrum antiviral agent ribavirin, which is marketed in the United States,
Canada and most of Europe under the name Virazole(R). Virazole(R) is currently
approved for commercial sale in over 40 countries for one or more of a variety
of viral infections, including respiratory syncytial virus ("RSV"), herpes
simplex, influenza, chicken pox, hepatitis and HIV. In the United States,
Virazole(R) is approved only for use in hospitalized infants and young children
with severe lower respiratory infections due to RSV.
The Company believes it has substantial opportunities to realize
growth from its internally developed compounds. These compounds are the result
of significant investments in its research and development activities related
to nucleic acids conducted over three decades. During the second quarter 1994,
Viratek completed a review of data from Phase III multicenter trials and on
June 1, 1994, Viratek submitted a New Drug Application ("NDA") to the FDA for
Virazole(R) capsules in the treatment of chronic hepatitis C in the United
States. In November 1994, the FDA responded to the Company's filing and stated
that the data submitted was considered to be inadequate for approval of the
NDA. The Company is currently reviewing its options. The Company believes
that combination therapy of Virazole(R) with interferon has potential and
intends to take all necessary steps to obtain approval of such combination
therapy. ICN plans to make a second NDA filing for a combination therapy of
Virazole(R) and Interferon in the treatment of chronic hepatitis C. The
Company is in discussions with manufacturers of interferon in order to pursue
approval of combination therapy. However, there can be no assurance that any
such arrangements can be reached.
Applications for approval to market Virazole(R) as a monotherapy for
treatment of chronic hepatitis C were filed in July of 1994 in the European
Union and in August of 1994 with the Health Protection Branch (HPB) in Canada.
Additional applications have been filed to date in Sweden, Norway, Finland,
Australia and New Zealand. There can be no assurance that any of these
applications will be approved.
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ITEM 1. BUSINESS - CONTINUED
The Company believes it is positioned to expand its presence in the
pharmaceutical markets in Eastern Europe. In 1991, a 75% interest was acquired
in Galenika Pharmaceuticals, a large drug manufacturer and distributor in
Yugoslavia. Galenika Pharmaceuticals was subsequently renamed ICN Galenika.
This acquisition added new products and significantly expanded the sales volume
of the Company. With the investment in Galenika Pharmaceuticals, the Company
became one of the first Western pharmaceutical companies to establish a direct
investment in Eastern Europe. ICN Galenika continues to be a significant part
of the Company's operations although its sales and profitability have been
substantially diminished owing principally to the imposition of sanctions on
Yugoslavia by the United Nations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation." In pursuing its expansion
strategy, the Company acquired a 41% interest in Oktyabr, one of the largest
pharmaceutical companies in the Russian Republic, see "Item 7. Liquidity and
Capital Resources, Investment in Russia."
In addition to its pharmaceutical operations, the Company also
develops, manufactures and sells a broad range of research chemical products,
biomedical instrumentation, diagnostic reagents and radiation monitoring
services. The Company markets these products internationally to major
scientific, academic, health care and governmental institutions through catalog
and direct mail marketing programs.
INDUSTRY SEGMENTS
The Company operates in two industry segments: pharmaceutical and
biomedical. For financial information about industry segments, see Note 10 of
Notes to Consolidated Financial Statements.
PRODUCTS
ANTI-INFECTIVES.
Anti-infectives: Antibacterial and antiviral drugs treat bacterial and
viral infections. The Company sells approximately 65 antibacterial products
and sells its antiviral drug, ribavirin, sold under the tradename, Virazole(R),
in North America and certain European countries. At the present time, the
Company believes that there are fewer than ten antiviral product lines marketed
in the world, one of which is Virazole(R), the only antiviral product line
currently sold by the Company. Antivirals are rare and difficult to produce
relative to antibacterials because of the nature of bacteria compared to
viruses. Whereas bacteria live outside of cells, viruses live inside cells.
Thus, while antibacterials can focus simply on killing bacteria, antivirals,
ideally, must eliminate viruses without killing the host cell or adversely
affecting the host organism. An important feature of Virazole(R) is that it
inhibits the reproduction of viruses rather than killing viruses.
Antiviral: Virazole(R) accounted for approximately 13%, 7% and 6% of
the Company's consolidated net sales for the years ended December 31, 1994,
1993 and 1992, respectively. The majority of the Virazole(R) sales are in the
North American market. Virazole(R) is currently approved for sale in various
pharmaceutical formulations in over 40 countries for the treatment of several
different human viral diseases. In the United States and Canada, Virazole(R)
has been approved for hospital use in aerosolized form to treat infants and
young children who have severe lower respiratory infections caused by RSV.
In the United States, the resulting infection is sufficiently severe to require
hospitalization of an estimated 100,000 children annually.
In treating RSV, the drug is administered by a small particle
aerosolized generator ("SPAG"), a system that permits direct delivery of
Virazole(R) to the site of the infection. In 1993, the American Academy of
Pediatrics issued new treatment guidelines for RSV recommending Virazole(R)
for use in all high risk critically ill infants with RSV lung infection,
thereby making Virazole(R) the standard of care for this infection. Similar
approvals for Virazole(R) for use in the treatment of RSV have been granted by
governmental authorities in 22 other countries.
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ITEM 1. BUSINESS - CONTINUED
During the second quarter 1994, Viratek completed a review of data
from Phase III multicenter trials and on June 1, 1994, Viratek submitted a New
Drug Application ("NDA") to the FDA for Virazole(R) capsules in the treatment
of chronic hepatitis C in the United States. In November 1994, the FDA
responded to the Company's filing and stated that the data submitted was
considered to be inadequate for approval of the NDA. The Company is currently
reviewing its options. The Company believes that combination therapy of
Virazole(R) with interferon has potential and intends to take all necessary
steps to obtain approval of such combination therapy. ICN plans to make a
second NDA filing for a combination therapy of Virazole(R) and interferon in
the treatment of chronic hepatitis C. The Company is in discussions with
manufacturers of interferon in order to pursue approval of combination therapy,
however, there can be no assurance that any such arrangements can be reached.
Applications for approval to market Virazole(R) as a monotherapy for
treatment of chronic hepatitis C were filed in July of 1994 in the European
Union and in August of 1994 with the Health Protection Branch (HPB) in Canada.
Additional applications have been filed to date in Sweden, Norway, Finland,
Australia and New Zealand. There can be no assurance that any of these
applications will be approved.
The Virazole(R) trademark is used in North America and certain
European countries. Ribavirin is sold as Vilona(R) and Virazid(R) in Latin
America, and Virazid(R) in Spain, where it is commercially available and is
approved for the treatment of hepatitis, herpes infections, influenza and
exhanthemous viral diseases such as measles and chicken pox, as well as RSV.
References to the sale of Virazole(R) in this Form 10-K include sales made
under the trademarks Vilona(R) and Virazid(R).
Antibacterials: Antibacterials accounted for approximately 22%, 24%
and 31% of the Company's consolidated net sales for the years ended December
31, 1994, 1993 and 1992, respectively. Most of the antibacterials sold by the
Company (excluding ICN Galenika) are proprietary, whereas most of the
antibacterial products manufactured and sold by ICN Galenika are licensed from
other manufacturers including Roche Holding AG, Bristol-Myers Squibb and Eli
Lilly, principally under exclusive licenses for specific geographical areas,
primarily Yugoslavia.
OTHER ETHICALS
Other ethicals accounted for approximately 41%, 40% and 40% of
consolidated net sales for the years ended December 31, 1994, 1993 and 1992,
respectively. The Company manufactures and/or markets a wide variety of other
ethical pharmaceuticals, including analgesics, anticholinesterases,
antirheumatics, cardiovasculars, dermatologicals, endocrine agents,
gastrointestinals, hormonals and psychotropics. The Company manufactures and
markets approximately 75 other dermatological products, primarily in North
America and Eastern Europe. The Company markets three anticholinesterase
product lines in North America under the trade names Mestinon(R), Prostigmin(R)
and Tensilon(R). These products, manufactured by and licensed from Roche
Holding AG, are used in treating myasthenia gravis, a progressive neuromuscular
disorder, and in reversing the effects of certain muscle relaxants.
Bensiden(R) is a tranquilizer manufactured by ICN Galenika and is used in the
treatment of psychological and emotional disorders. The Company also sells
insulin for the treatment of diabetes. Albumina(R) is sold in Spain and Mexico
for use in emergency treatment of shock due to burns, trauma, operations and
infections, and conditions where the restoration of blood volume is urgent.
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ITEM 1. BUSINESS - CONTINUED
MEDICATED NUTRITIONALS AND VITAMINS.
Medicated nutritionals and vitamins accounted for 8%, 9% and 8% of
consolidated net sales for the years ended December 31, 1994, 1993 and 1992,
respectively. The Company manufactures, subcontracts and markets approximately
870 nutritional and vitamin products in Latin America, Western Europe and
Eastern Europe. In Mexico, the Company manufactures and markets injectable and
oral multi-vitamins and supplements under the Bedoyecta-Tri(R), Dextrevit(R),
M.V.I. (R) and Vi-Syneral(R) trade names. Bedoyecta-Tri(R) is the Company's
largest selling vitamin and medicated nutritional. ICN Galenika manufactures
and markets Oligovit(R), Beviplex(R) and Bedoxin(R).
OTHER OVER THE COUNTER PRODUCTS.
Other OTC products accounted for approximately 10%, 12% and 8% of the
Company's consolidated net sales for the years ended December 31, 1994, 1993
and 1992, respectively. Other OTC products encompass a broad range of
ancillary products sold through the Company's existing distribution channels.
Approximately 90% of these product lines, which include such items as bandages,
adhesive tape, candy and instant beverages, are manufactured by ICN Galenika.
RESEARCH CHEMICALS AND DIAGNOSTIC PRODUCTS.
Due to the Merger, net sales of research chemicals and diagnostic
products are included in the Company's consolidated net sales for the periods
subsequent to the effective date of the Merger. On this basis, research
chemicals accounted for approximately 3% of the Company's consolidated net
sales for the year ended December 31, 1994.
Research Chemicals: The Company services biotechnology researchers
throughout the world through a catalog sales operation. The Company's catalog
lists approximately 55,000 products which are used by medical and scientific
researchers involved in molecular biology, cell biology, immunology and
biochemistry. A majority of these products are purchased from third party
manufacturers and distributed by the Company. Over 3,000 new products were
added to the catalog in 1993. Products include biochemicals,
immunobiologicals, radiochemicals, tissue culture products and organic and rare
and fine chemicals.
Diagnostic Products: The diagnostic products marketed by the Company
are instruments and reagents that are routinely used by physicians and medical
laboratories to diagnose accurately and quickly hundreds of patient samples for
a variety of disease conditions. The Company manufactures both enzyme and
radio-immunoassay kits, which it markets under the ImmuChem(TM) product line.
The Company is also a supplier of immunodiagnostic tests for the screening of
newborn infants for inherited and other disorders.
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ITEM 1. BUSINESS - CONTINUED
ACQUISITIONS
For more than ten years, the Company has pursued a strategy of
targeted expansion into regional markets which it considers to have significant
potential for the sale of pharmaceutical products. This strategy has been
implemented in large part through the acquisition of compatible businesses and
product lines and the formation of strategic alliances and joint ventures in
markets such as Mexico, Spain, Yugoslavia and Germany. The Company intends to
continue this strategy and to expand its manufacturing and marketing potential
for Virazole(R) through joint ventures.
Galenika Acquisition: The Company believes it is positioned to
expand its presence in the pharmaceutical markets in Eastern Europe. In 1991,
a 75% interest was acquired in Galenika Pharmaceuticals, a large drug
manufacturer and distributor in Yugoslavia. Galenika Pharmaceuticals was
subsequently renamed ICN Galenika. This acquisition added new products and
significantly expanded the sales volume of the Company. With the investment in
Galenika Pharmaceuticals, the Company became one of the first Western
pharmaceutical companies to establish a direct investment in Eastern Europe.
ICN Galenika continues to be a significant part of the Company's operations
although its sales and profitability have been substantially diminished owing
principally to the imposition of sanctions on Yugoslavia by the United Nations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Until the imposition of United Nations sanctions in May 1992, ICN
Galenika made a significant contribution to the sales and net income of SPI.
Approximately 15% of such sales were exports from Yugoslavia, primarily to
republics of the former Soviet Union, the Middle East and certain Balkan
nations. The imposition of sanctions, including the prohibition of exports,
has had a material adverse effect on the operations and profitability of ICN
Galenika. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - ICN Galenika". The Company believes that
if economic stability returns in Yugoslavia, ICN Galenika has the potential to
contribute substantially to the Company's results of operations.
In September 1994, the United Nations Security Council voted to ease
sanctions against Yugoslavia by allowing civilian air traffic to Belgrade and
by lifting of the ban on cultural and sports exchanges.
Investment in Russia: During 1993 and 1994, the Company acquired a
41% interest in Oktyabr, a Russian pharmaceutical company. The Company intends
to increase its ownership interest in Oktyabr to approximately 62% through a
government-sponsored investment program. Participation in this program does
not require significant expenditure of future funds. Once the Company achieves
its ownership goals it will begin a program to construct a new pharmaceutical
manufacturing facility in Russia built pursuant to "good manufacturing
practices." Although Russia may, in time, evolve into a large, free market
oriented economy, because of the present unpredictable political, social and
economic factors in Russia, the Company intends to penetrate this market in a
gradual manner. There can be no assurance as to when or if the new facility
will be constructed or as to its future success.
FOREIGN OPERATIONS
The Company operates in North America, Latin America (principally
Mexico), Western Europe and Eastern Europe. For financial information about
domestic and foreign operations and export sales, see Note 10 of Notes to
Consolidated Financial Statements.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including possible nationalization or expropriation, price and
exchange controls, limitations on foreign participation in local enterprises,
health-care regulation and other restrictive governmental actions. Changes in
the relative values of currencies take place from time to time and may
materially affect the Company's results of operations. Their effects on the
Company's future operations are not predictable. The current political and
economic circumstances in Yugoslavia create certain risks particular to that
country. Yugoslavia has been operating under sanctions imposed by the United
Nations since May 1992 which have severely limited the ability to import raw
materials for manufacturing and have prohibited all exports. In addition,
certain risks such as hyperinflation, currency
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ITEM 1. BUSINESS - CONTINUED
devaluations, wage and price controls, potential government action and a
rapidly deteriorating economy could have a material effect on the Company's
results of operations. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Inflation and Changing Prices."
MARKETING AND CUSTOMERS
The Company markets its pharmaceutical products in some of the most
developed pharmaceutical markets, including the United States, Canada and
Western Europe, as well as developing markets, including Latin America and
Eastern Europe. The Company believes its marketing strategy is characterized
by flexibility, allowing the Company to successfully market a wide array of
pharmaceutical products within diverse regional markets as well as certain
drugs, notably Virazole(R), on a worldwide basis.
The Company has a marketing and sales staff of approximately 1,510
persons for its pharmaceutical products, including sales representatives in
North America, Latin America, Western Europe and Eastern Europe, who call on
physicians, pharmacists, distributors and other health care professionals. As
part of its marketing program for pharmaceuticals, the Company makes direct
mailings, advertises in trade and medical periodicals, exhibits products at
medical conventions, sponsors medical education symposia and sells through
distributors in countries where it does not have its own marketing staff.
In the United States, the Company currently sells its pharmaceutical
products through drug wholesalers who, in turn, distribute them to drug stores
and hospitals. The nutritional product line is sold directly and through
distributors to various retail outlets and to certain healthcare professionals.
In Mexico, the Company serves pharmacies through a network of distributors and
sells directly to pharmacists and hospitals. In Western Europe, the Company
markets vision care products in The Netherlands through hospitals and
pharmacies and to retail customers through optical shops. The Company's
Spanish subsidiary sells pharmaceutical products through its own sales force to
hospitals, retail outlets, pharmacies and wholesalers. In Canada, the Company
sells directly to hospitals, wholesalers and large drug store chains.
ICN Galenika sells a broad range of pharmaceutical and other products
in Yugoslavia through approximately 30 wholesalers, six representative offices
and 85 sales representatives. In the event that United Nations sanctions are
lifted, it is anticipated that ICN Galenika will resume exporting certain of
its product lines to Russia and other Eastern European markets, Africa, the
Middle East and the Far East.
During 1994, approximately 88% of ICN Galenika's sales were to
entities subsidized by the Yugoslavian government. Future sales by ICN
Galenika could be dependent on the ability of the Yugoslavian government to
continue to subsidize purchases of pharmaceutical products.
The Biomedical group principally sells its products world-wide primarily
through its mail order catalog.
RESEARCH AND DEVELOPMENT
The Company's research and development activities utilize the
expertise accumulated by the Company and its predecessors in over 30 years of
nucleic acids research. In addition, the Company develops innovative products
targeted to address the specific needs of the Company's local markets. The
Company's predecessors include one of the first firms to engage in broad based
nucleic acid research, and the Company's research activities have allowed it to
compile a library of over 5,000 nucleoside-based compounds. The Company's
long-term research efforts are focused on development of therapeutics and
diagnostics for diseases related to DNA and RNA structure such as viral
infections, cancer and skin diseases.
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ITEM 1. BUSINESS - CONTINUED
LONG-TERM RESEARCH AND DEVELOPMENT.
The Company's long-term research and development activities are
targeted on the development of therapeutic and diagnostic agents for use
against chronic viral diseases, cancer and diseases of the skin, and, as such,
compliment the Company's current product lines and development efforts.
One important area of current research has been the use of "antisense"
technologies. This approach seeks to block genetic material causing diseases
such as cancer, viral infections and psoriasis by constructing longer sequences
of nucleotides (oligonucleotides) that selectively bond to the disease-causing
nucleic acid sequences. In this research, the Company makes use of its
extensive library of nucleotide compounds. The Company is using similar
technologies to develop diagnostic techniques used to screen for genetic
diseases, viral infections and various forms of cancer.
MEDIUM-TERM RESEARCH AND DEVELOPMENT.
The Company's medium-term research and development efforts involve the
preclinical and clinical testing of certain nucleotide compounds with broader
market applications that have shown the most promise of successful
commercialization. These compounds include:
Virazole(R) (Ribavirin): During the second quarter 1994, Viratek
completed a review of data from Phase III multicenter trials and on June 1,
1994, Viratek submitted a New Drug Application ("NDA") to the FDA for
Virazole(R) capsules in the treatment of chronic hepatitis C in the United
States. In November 1994, the FDA responded to the Company's filing and stated
that the data submitted was considered to be inadequate for approval of the
NDA. The Company is currently reviewing its options. The Company believes
that combination therapy of Virazole(R) with interferon has potential and
intends to take all necessary steps to obtain approval of such combination
therapy. ICN plans to make a second NDA filing for a combination therapy of
Virazole(R) and interferon(R) in the treatment of chronic hepatitis C. The
Company is in discussions with manufacturers of interferon in order to pursue
approval of combination therapy, however, there can be no assurance that any
such arrangements can be reached.
Applications for approval to market Virazole(R) as a monotherapy for
treatment of chronic hepatitis C were filed in July of 1994 in the European
Union and in August of 1994 with the Health Protection Branch (HPB) in Canada.
Additional applications have been filed to date in Sweden, Norway, Finland,
Australia and New Zealand. There can be no assurance that any of these
applications will be approved.
Clinical studies have also been conducted with Virazole(R) in other
pharmaceutical formulations for treatment of several other viral diseases.
Among those diseases with respect to which clinical studies have been conducted
and for which at least one governmental health regulatory agency in various
countries other than the United States has approved commercialization of
Virazole(R) are herpes zoster, genital herpes, hemorrhagic fever with renal
syndrome, lassa fever, measles, chicken pox, influenza and HIV. The Company
has no plans to initiate new clinical studies for any of these indications.
The Company intends, where appropriate, to utilize the clinical data from these
studies as a basis for future submissions to additional governmental health
authorities to expand the use of Virazole(R).
Tiazole(TM) (Tiazofurin(TM)): The Company has maintained an active
research program centered on Tiazofurin(R), which the Company is developing
under the tradename Tiazole(TM), is a nucleotide that is chemically similar to
Virazole(R). Tiazole(TM) has been demonstrated to be an inhibitor of
IMP-dehydrogenase, an enzyme whose presence in elevated concentrations is
associated with a number of cancers. The Company is in the process of
completing Phase II/III clinical documentation of Tiazole(TM) as a treatment
for chronic myelogenous leukemia. The Company is also conducting research into
the effectiveness of Tiazole(TM) as an anti-cancer agent when used in
conjunction with other basic anti-cancer compounds, such as taxol, in end-stage
ovarian carcinoma.
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ITEM 1. BUSINESS - CONTINUED
Adenazole(TM) (8-Cl-c-AMP): This nucleotide, which is in preclinical
research, has been shown to control cell proliferation and differentiation in
certain cancers. Human trials have been conducted by third parties in Scotland
and Italy. The Company is also planning to begin preclinical investigations of
the use of the drug against leukemia and is exploring the drug's potential use
as a topical treatment for psoriasis based on its ability to inhibit rapid cell
proliferation.
Oncozole(TM) (3-Deazaguanine): Research on animals has shown this
compound to be active against a range of solid tumors, including breast and
colon tumors. The Company is engaged in preclinical research of Oncozole(TM)
as a treatment for solid tumors.
Selenazole(TM) (Selenazofurin): Selenazofurin, an anti-tumor
nucleoside licensed from Brigham Young University, is related to tiazofurin.
Preclinical studies suggest that selenazofurin combines in treatment protocols
with other well known agents against both leukemia and solid tumors.
Growth Hormone Releasing Factor (GRF): In November 1994, the Company
entered into a license agreement for the rights to develop and commercialize a
group of compounds related to and including human GRF for the United States and
other major pharmaceutical markets. In connection with this agreement, the
Company is obligated to pay, upon reaching certain milestones, an aggregate
amount of $2,600,000. In addition, after such milestones are met, the Company
is obligated to pay a royalty of 9%, subject to certain adjustments, based upon
net sales of the human GRF in certain territories. The testing of these GRF
compounds in relieving growth retardation is in Phase III clinical trials.
SHORT-TERM PRODUCT DEVELOPMENT.
At the current time, a majority of the Company's staff of research
professionals are located at the Company's facilities in the U.S., Mexico,
Spain and Yugoslavia. The Company's research activities are oriented toward
the development of products which have been identified by the Company as having
particular promise in specific local markets. In general, these products which
involve the use of known compounds for new indications, are customized to meet
the specific needs or preferences of the targeted local market and can be
brought to market in less than 12 months. For example, the Company recently
received authorization in Spain to produce and market nasal calcitonin in
monodose form. The Company believes that this product, which is administered
nasally and used in the treatment of post-menopausal osteoporosis, may prove
more popular than alternative treatments now available in the market, certain
of which require periodic injections. In Mexico, the Company has been
successful in introducing metronidazole(R), a topical antibiotic for the
treatment of acne rosacea, a skin infection that affects the nose and face.
The Company believes metronidazole(R) is more effective than alternative
treatments such as oral tetracyclines. ICN Galenika has developed a wide range
of pharmaceuticals, diagnostics, veterinary and over-the-counter drugs and has
developed value-added versions of well known therapeutic compounds.
There can be no assurance with regard to the results of the Company's
research and development efforts or the commercial success of any of its
products under development.
COMPETITION
The Company operates in a highly competitive environment. The
Company's competitors, many of whom have substantially greater capital
resources and marketing capabilities and larger research and development staffs
and facilities than the Company, are actively engaged in marketing products
similar to those of the Company and in developing new products similar to those
proposed to be developed and sold by the Company. Competitive factors vary by
product line and customer and include service, product availability and
performance, price and technical capabilities. The Company does business in an
industry characterized by extensive and ongoing research efforts. Others may
succeed in developing products that are more effective than those presently
marketed or proposed for development by the Company. Progress by other
researchers in areas similar to those explored by the Company may result in
further competitive challenges.
8
11
ITEM 1. BUSINESS - CONTINUED
The Company is aware of several ongoing research programs which are
attempting to develop new prophylactic and therapeutic products for treatment
of RSV. Although the Company will follow publicly disclosed developments in
this field, on the basis of currently available data it is unable to evaluate
whether the technology being developed in these programs poses a threat to its
current market position in the treatment of RSV or its revenue streams.
In the market segment relating to the treatment of chronic hepatitis
C, the Company expects, if Virazole(R) is approved as a combination therapy for
that indication, that it will experience intense competition from several
pharmaceutical manufacturers who have previously received approval for products
containing interferon. Such manufacturers include Schering-Plough Corporation,
Roche Holding AG, Wellcome plc and Takeda Chemical Industries Ltd., all of
which have substantially greater resources at their disposal than does the
Company and all of which have already begun to market their respective brands
of interferon products for the treatment of chronic hepatitis C. In addition,
the Company believes that research programs are ongoing at a number of
laboratories, including government, industry and private, to develop new
prophylactic and therapeutic products for chronic hepatitis C.
Competitors of the Company's research products group include companies
such as Sigma-Aldrich Corporation, Abbott Laboratories, Diagnostic Products
Corporation and Amersham in the diagnostic reagents market, Life Technologies,
Inc. and Bio Whittaker, Inc.
ORDER BACKLOG
As is customary in the pharmaceutical industry, all the Company's
products are sold on an "open order" basis. Consequently, order backlog is not
considered a significant factor.
RAW MATERIALS
The Company manufactures pharmaceuticals at seven facilities. Those
facilities are located in Bryan, Ohio; Mexico City, Mexico (at two locations);
Montreal, Canada; Zoetermeer, The Netherlands; Barcelona, Spain; and Belgrade,
Yugoslavia. The Company believes it has sufficient manufacturing capacity to
meet its needs for the foreseeable future. All of these manufacturing
facilities, which require GMP approval from the FDA or foreign agencies, have
obtained such approval.
In Bryan, Ohio, the Company manufactures topical and oral dosages of
several pharmaceutical products for the United States market. All of the
Company's dermatology products are formulated, packaged and distributed from
the Bryan, Ohio, facility. The Bryan, Ohio, facility also packages and
distributes Virazole(R) on a worldwide basis.
At the two facilities in Mexico City, the Company manufactures a
variety of pharmaceuticals in topical, oral and injectable dosage forms to
serve the Latin American market. In Montreal, Canada, the Company
manufactures Virazole(R) and SPAG units for the administration of Virazole(R)
in the treatment of RSV, and other related medical devices. At that facility,
the Company manufactures a variety of topical and oral pharmaceuticals
including a line of generics to serve the Canadian and United States markets.
The Canadian facility also manufactures a full-line of products using the
controlled drug substance morphine for the management of pain in cancer and
post-surgical states.
In The Netherlands, the Company manufactures contact lenses and vision
care products. In Spain, the Company manufactures and markets ethical
pharmaceuticals principally for distribution in Spain.
In Yugoslavia, Galenika manufactures over 450 pharmaceutical,
veterinary, dental and other products in topical, oral and injectable forms.
9
12
ITEM 1. BUSINESS - CONTINUED
The Company subcontracts all of the manufacture of bulk ribavirin to
third party suppliers. Most of the finishing and packaging of Virazole(R) is
done by the Company and the balance by third party subcontractors. The
capacities of these manufacturers are sufficient to meet the current demand for
Virazole(R).
Manufacturing of the Company's research chemical products is chiefly
carried out in three domestic facilities and one foreign facility: Costa Mesa,
California (radioimmunoassay kits and immunobiologic products); Huntsville,
Alabama (diagnostic and microplate instrumentation); Irvine, California
(radiochemicals) and Eschwege, Germany (chromatography products). Some
manufacturing and repackaging is also carried out at the facility in Aurora,
Ohio.
In general, raw materials used by the Company in the manufacture of
all of its products are obtainable from multiple sources in the quantities
desired. During 1992 and 1993, the United Nations and the United States
government adopted certain resolutions and executive orders that imposed
economic sanctions on Yugoslavia. The sanctions require that specific
authorization in the form of a license must be granted on a
transaction-by-transaction basis from the country of origin and the United
Nations before the shipment of raw materials and finished goods can be made
into Yugoslavia. Few licenses have been granted for the import of raw
materials. Although licenses for finished goods are relatively easy to obtain,
licenses for the importation of raw materials are granted only in exceptional
cases. The denial of licenses for raw materials is intended to inhibit the
productive capacity of Yugoslavian industry. See Note 12 of Notes to
Consolidated Financial Statements. Currently, raw materials in Mexico are
available in the quantities required. However, the cost of imported raw
materials will increase substantially due to the fall in the relative value of
the Mexican Peso.
LICENSES, PATENTS AND TRADEMARKS
The Company may be dependent on the protection afforded by its patents
relating to Virazole(R) and no assurance can be given as to the breadth or
degree of protection which these patents will afford the Company. The Company
has patent rights in the United States expiring in 1999 relating to the use of
Virazole(R) to treat specified human viral diseases. While the Company has
patents in certain foreign countries covering use of Virazole(R) in the
treatment of certain diseases, which coverage and expiration varies and which
patents expire at various times between 1995 and 2006. The Company has no, or
limited, patent rights with respect to Virazole(R) and/or its use in certain
foreign countries where Virazole(R) is currently, or in the future may be,
approved for commercial sale, including France, Germany and Great Britain. The
Company has been granted a review classification (Concertation Procedure) for
Virazole(R) as a treatment for chronic hepatitis C in all European Union
countries (including France, Germany and Great Britain). As a result, approval
of the application of Virazole(R) for treatment of chronic hepatitis C (if such
approval is granted) would, in the European Union, provide the Company up to
ten years of protection from the date of such approval of the application
against competitors relying upon the Company's submitted documentation,
including the results of clinical trials, to support such competitors'
application to manufacture, market or sell generic substitutes of Virazole(R)
for treatment of chronic hepatitis C. There can be no assurance that the loss
of the Company's patent rights with respect to Virazole(R) upon expiration of
the Company's patent rights in the United States, Europe and elsewhere will not
result in competition from other drug manufacturers or will not otherwise have
a significant adverse effect upon the business and operations of the Company.
Marketing approvals in certain foreign countries provide an additional level of
protection for products approved for sale in such countries. As a general
policy, the Company expects to seek patents, where available, on inventions
concerning
10
13
ITEM 1. BUSINESS - CONTINUED
novel drugs, techniques, processes or other products which it may develop or
acquire in the future. However, there can be no assurance that any patents
applied for will be granted, or that, if granted, they will have commercial
value or as to the breadth or the degree of protection which these patents, if
issued, will afford the Company. The Company intends to rely substantially on
its unpatented proprietary know-how, but there can be no assurance that others
will not develop substantially equivalent proprietary information or otherwise
obtain access to the Company's know-how. Patents for pharmaceutical compounds
are not available in certain countries in which the Company markets its
products.
ICN Galenika manufactures and sells three of its top-selling
antibacterial products, Pentrexyl(R), Longaceph(R) and Palitrex(R), under
licenses from Bristol-Myers Squibb, Roche Holding AG and Eli Lilly,
respectively. See "Products."
Many of the names of the Company's products are registered trademarks
in the United States, Yugoslavia, Mexico, Canada, Spain, The Netherlands and
other countries. The Company anticipates that the names of future products
will be registered as trademarks in the major markets in which it will operate.
Other organizations may in the future apply for and be issued patents or own
proprietary rights covering technology which may become useful to the Company's
business. The extent to which the Company, at some future date, may need to
obtain licenses from others is not known.
GOVERNMENT REGULATION
The Company is subject to licensing and other regulatory control by
the FDA, the Nuclear Regulatory Commission, other Federal and state agencies
and comparable foreign governmental agencies.
FDA approval must be obtained in the United States and approval must
be obtained from comparable agencies in other countries prior to marketing or
manufacturing new pharmaceutical products for use by humans. Obtaining FDA
approval for new products and manufacturing processes can take a number of
years and involve the expenditure of substantial resources. To obtain FDA
approval for the commercial sale of a therapeutic agent, the potential product
must undergo testing programs on animals, the data from which is used to file
an Investigational New Drug Application with the FDA. In addition, there are
three phases of human testing. Phase I: safety tests for human clinical
experiments, generally in normal, healthy people; Phase II: expanded safety
tests conducted in people who are sick with the particular disease condition
that the drug is designed to treat; and Phase III: greatly expanded clinical
trials to determine the effectiveness of the drug at a particular dosage level
in the affected patient population. The data from these tests is combined with
data regarding chemistry, manufacturing and animal toxicology and is then
submitted in the form of a NDA to the FDA. The preparation of a NDA requires
the expenditure of substantial funds and the commitment of substantial
resources. The review by the FDA could take up to several years. If the FDA
determines that the drug is safe and effective, the NDA is approved. No
assurance can be given that authorization for the commercial sale by the
Company of any new drugs or compounds for any application will be secured in
the United States or any other country, or that, if such authorization is
secured, those drugs or compounds will be commercially successful. The FDA in
the United States and other regulatory agencies in other countries also
periodically inspect manufacturing facilities.
LITIGATION, GOVERNMENT INVESTIGATIONS AND OTHER MATTERS
Litigation: The Predecessor Companies were parties to a number of
lawsuits. As a result of the Merger, the Company has assumed all of the
Predecessor Companies' liabilities with respect to such lawsuits. See Item 3.
"Legal Proceedings."
11
14
ITEM 1. BUSINESS - CONTINUED
Product Liability: The Company could be exposed to possible claims for
personal injury resulting from allegedly defective products. The Company
generally self-insures against potential product liability exposure with
respect to its marketed products, including Virazole(R). While to date no
material claim for personal injury resulting from allegedly defective products,
including Virazole(R), has been successfully maintained against any of the
Predecessor Companies, a substantial claim, if successful, could have a
material adverse effect on the Company.
Environmental Matters: The Company has not experienced any material
impact on its capital expenditures, earnings or competitive position as a
result of compliance with any laws or regulations regarding the protection of
the environment. The Company believes it is in compliance in all material
respects with applicable laws relating to the protection of the environment.
EMPLOYEES
As of December 31, 1994, the Company employed approximately 5,840
persons, of which approximately 890 were engaged in general and administrative
matters, 1,510 in marketing and sales, 330 in research and development and
3,110 in production. Of these employees, approximately 3,880 are employed by
ICN Galenika, including 600 engaged in general and administrative matters, 720
in marketing and sales, 250 in research and development and 2,310 in
production. All of the employees employed by ICN Galenika, 330 employees of
the Company's Mexican subsidiaries and 250 employees of the Company's Spanish
subsidiary are covered by collective bargaining agreements. National labor
laws in some foreign countries in which the Company has substantial operations,
including Yugoslavia and Spain, govern the amount of wages paid to employees
and establish restrictions, severance provisions and related requirements that
must be satisfied prior to the termination of employees. In Mexico, the terms
of the collective bargaining agreements expire in February 1996. The Company
has not experienced any work stoppage, slowdown or other serious labor problems
which have materially impeded their business operations. In early 1994, there
was a minor work stoppage at one of the Company's Mexican subsidiaries, which
was satisfactorily resolved. The Company is uncertain as to how the current
economic situation, the devaluation of the Peso and wage controls in Mexico may
affect future labor relations with the employees in Mexico. The Company
currently considers its relations with its employees to be satisfactory.
12
15
ITEM 2. PROPERTIES
The following are the principal facilities of the Company and its
subsidiaries:
OWNED OR SQUARE
LOCATION PURPOSE LEASED FOOTAGE
-------- ------- ------ -------
Costa Mesa, California Corporate headquarters and manufacturing facility Owned 197,000
Covina, California Offices and warehouse Owned 185,000
Mexico City, Mexico Offices and manufacturing facility Owned 146,000
Mexico City, Mexico Offices and manufacturing facility Owned 144,000
Montreal, Canada Offices and manufacturing facility Owned 97,000
Barcelona, Spain Offices and manufacturing facility Owned 100,000
Bryan, Ohio Warehouse and manufacturing facility Owned 37,000
Zoetermeer, The Netherlands Offices and manufacturing facility Owned 25,000
Belgrade, Yugoslavia Offices and manufacturing facility Owned 781,000
Aurora, Ohio Manufacturing and repackaging facility Leased 68,000
Huntsville, Alabama Manufacturing facility Owned 60,000
Irvine, California Manufacturing facility Leased 27,000
Eschwege, Germany Manufacturing facility Owned 21,000
High Wycombe, United Kingdom Administrative offices Leased 32,000
Opera, Italy Sales offices Owned 77,000
Thames, United Kingdom Offices and warehouse Leased 17,000
During the third quarter of 1994, ICN Galenika commenced a
construction and modernization program at its pharmaceutical complex outside
Belgrade, Yugoslavia. This program includes the construction of two new
pharmaceutical manufacturing plants (one to produce cephalosporins, which are
broad spectrum penicillin resistant antibiotics, and the other to produce
steroids and hormones), the modernization of the existing facility and the
construction of a quality control building and a research institute. It is
estimated that this program will have an aggregate cost of $136,000,000. ICN
Galenika intends to fund their construction and modernization through funds
from local operations and locally funded debt.
In the opinion of the Company's management, all facilities occupied by
the Company are adequate for present requirements, and the Company's current
equipment is considered to be in good condition and suitable for the operations
involved.
13
16
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
Litigation: The Predecessor Companies were parties to a number of
lawsuits. As a result of the Merger, the Company has assumed all of the
Predecessor Companies' liabilities with respect to such lawsuits.
In February and March 1995, eighteen actions were filed ("the 1995
Actions") which named the Company, its Board of Directors, Milan Panic and
several other officers of the Company, in various combinations, as defendants
(the "Defendants"). Eleven of the actions purport to be securities class
actions, one is an individual securities action and six purport to be
derivative suits. All of the purported securities class actions were filed in
the United States District Court for the Central District of California and the
individual securities action was filed in the United States District Court for
the Eastern District of Tennessee. The derivative suits were filed in the
Court of Chancery of the State of Delaware, the United States District Court
for the Central District of California and the Superior Court of the State of
California.
In general, all of the securities class actions allege that the
Company made various deceptive and untrue statements of material fact and
omitted to state material facts in connection with information it received from
the FDA regarding the Company's NDA for the use of Virazole(R) for the
treatment of chronic hepatitis C. Plaintiffs also allege that various officers
of the Company traded on inside information. The purported securities class
actions and the individual securities action assert claims for alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
Rule 10b-5 promulgated thereunder, common law fraud, misrepresentation and
negligent misrepresentation. They seek unspecified compensatory and punitive
damages, attorneys' fees and costs, injunctive and equitable relief, and
disgorgement. With respect to the purported securities class actions,
plaintiffs seek certification of classes of persons who purchased ICN common
stock, ICN debentures, and ICN call options or sold ICN put options. The
securities class actions seek certification for differing time periods, the
longest alleged time period being June 2, 1994 through February 17, 1995.
With respect to the purported derivative suits, plaintiffs assert
claims for breach of fiduciary duty, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, breach of the fiduciary duty of candor,
waste of corporate assets, constructive fraud, disgorgement, gross
mismanagement, abuse of control and unjust enrichment. In these actions
plaintiffs seek unspecified compensatory and punitive damages, attorneys' fee
and costs and injunctive and equitable relief.
The Company has had preliminary discussions with the attorneys for
plaintiffs who have suggested that an Amended Consolidated Complaint,
encompassing the above actions, be filed in the United States District Court
for the Central District of California. If this consolidation occurs, as
Defendants currently expect, Defendants will have at least 30 days from the
filing of the Amended Consolidated Complaint to answer or move. The Defendants
intend to vigorously defend these actions.
Four lawsuits have been filed with respect to the Merger ("the 1994
Actions") 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, 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 held shares of SPI common stock and, in the Jallath lawsuit,
Viratek common stock. 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
held 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 Merger and otherwise. The Company believes
that these suits are without merit and intends to defend them vigorously.
14
17
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
ICN, SPI and Viratek and certain of their officers and directors
(collectively, the "ICN Defendants") were named defendants in certain
consolidated class actions pending ("the 1987 Actions") 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 the ICN Defendants
made, or aided and abetted Paine Webber, Inc. ("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 research reports
and filings with the Securities and Exchange Commission (the "Commission").
The alleged misstatements and omissions primarily concern developments
regarding Virazole(R), including the efficacy, safety and market for the drug.
The plaintiffs allege that such misrepresentations and omissions violate
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and
constitute common law fraud and misrepresentation. The ICN 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 ICN 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 ICN 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. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN 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 October 20, 1993, plaintiffs informed the Court that they
had reached an agreement to settle with co-defendant Paine Webber and on July
27, 1994, the settlement was approved by the Court. 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 the 1987 Actions cannot be predicted
with certainty, and an unfavorable outcome could have a material adverse effect
on the Company, at this time management does not expect these matters will have
a material adverse effect on the financial position and results of operations
of the Company.
In late January 1995 an action was commenced by Deborah Levy against
ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., Viratek, Inc. and Milan
Panic. The complaint asserts causes of action for sex discrimination and
harassment, and for violations of the California Department of Fair Employment
and Housing statute and a provision of the California Government Code. The
complaint seeks injunctive relief and unspecified compensatory and punitive
damages. Defendants filed their answer, demand for production of documents and
request for interrogatories in March 1995. In addition, defendants have taken
plaintiff's deposition for two days and intend to continue that deposition.
The defendants intend to vigorously defend the suit.
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"), 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
1993, the judge granted judgment in favor of Gencon for breach of contract in
the amount of approximately $2,100,000 plus interest, costs and attorneys' fees
(which totals approximately $650,000). ICN Canada timely filed its Notice of
Appeal and Gencon filed a Notice of Cross-Appeal, seeking approximately
$145,000 in additional claimed costs. Both the appeal and the cross-appeal
have been fully briefed. No date has been set for oral argument. The
defendants intend to vigorously defend the suit
15
18
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
On January 25, 1995, GRC International, Inc. ("GRC") filed a motion in
the Superior Court of the State of California, County of Orange, to confirm a
pre-existing $2,260,807 arbitration award issued against Biomedicals. The
dispute centered on the last payment due from Biomedicals to GRC as a result of
Biomedical's acquisition of Flow General Inc. in 1989. Biomedicals filed its
papers in opposition to the motion to confirm or to vacate the arbitration
award on February 28, 1995. On March 23, 1995, GRC's motion to confirm the
arbitration award was granted, and a judgment against Biomedicals was entered
in the approximate amount of $2,300,000. The Company has accounted for the
resolution of this matter upon the effective date of the Merger.
In October 1994, an action entitled Engelhardt v. ICN Pharmaceuticals,
Inc. (Case No. 94-2-2322) was filed in the United States District Court for
the District of Colorado. The action was commenced by Lauri and Kenneth
Engelhardt on behalf of themselves and their infant daughter Hannah. It is
alleged that Lauri Engelhardt was exposed to Virazole(R) early in her
pregnancy, and that as a result of such exposure, Hannah was born with birth
defects. Plaintiffs assert causes of action for products liability and
negligence and seek unspecified damages. The Company filed a motion on
February 28, 1995 to dismiss, asserting that Plaintiffs' claims are barred by
the statute of limitations. No decision has been rendered with respect to that
motion. The Company believes that the allegations are without merit and
intends to vigorously defend this action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan
("Khan") in the United States District Court for the Southern District of New
York. The complaint alleged, among other things, that Khan violated numerous
provisions of the securities laws and breached his fiduciary duty to ICN and
Viratek by attempting to effectuate a change in control of ICN while acting as
an agent and fiduciary of ICN and Viratek. ICN and Viratek are seeking
compensatory and punitive damages in the amount of $25,000,000. Khan has filed
counterclaims, asserting causes of action for slander, interference with
economic relations, a shareholders' derivative action for breach of fiduciary
duties, violations of the federal securities laws and tortious interference
with economic relations, and is seeking compensatory damages, interest and
exemplary damages of $29,000,000. On November 4, 1994, ICN and Viratek moved
to have a default judgment entered against Khan and to dismiss his
counterclaims. Khan submitted his opposition papers on March 15, 1995, and
oral argument is currently scheduled for April 21, 1995.
Arbitration: On June 30, 1993, ICN filed a claim in arbitration, ICN
v. Labsystems, O.Y., alleging breach of of a certain supplier agreement and
requesting repudiation of such agreement. On February 6, 1995, the tribunal
awarded Labsystems approximately $5,000,000 including interest and affirming
existence of the supplier agreement between the parties requiring ICN to accept
$4,500,000 of inventory from Labsystems. The Company has paid and accounted
for the resolution of the arbitration as a liability assumed upon the effective
date of the Merger.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
New ICN began trading its common stock on the New York Stock Exchange
beginning November 14, 1994, the first trading day after the Merger was
completed and New ICN common stock was approved for listing on the New York
Stock Exchange (Symbol: ICN). Prior to the Merger, SPI common stock was first
listed on NASDAQ (National Association of Securities Dealers Automated
Quotation System) on October 7, 1983, and was subsequently listed on the
American Stock Exchange on July 22, 1988.
The following table sets forth, from November 14, 1994, the high and
low sales prices of the Company's common stock on the New York Stock Exchange.
Prior to November 14, 1994 the table sets forth the high and low sales prices
for SPI on the American Stock Exchange. In January 1993, SPI issued a fourth
quarter 1992 stock dividend of 2%. During 1993, SPI issued quarterly stock
dividends which totaled 6%. During 1994, SPI and the Company issued quarterly
stock dividends and distributions which totaled 4.8%. In March 1995, the
Company declared a first quarter 1995 stock distribution of 1.7%. The market
prices set forth below have been retroactively adjusted for these stock splits,
dividends and distributions.
1993 HIGH LOW
---- ---- ---
First Quarter 19-3/4 9-1/8
Second Quarter 15 11-1/4
Third Quarter 16-1/2 10-3/4
Fourth Quarter 14-1/8 11-7/8
199
---
First Quarter 18-7/8 13-1/2
Second Quarter 17-1/8 13-6/8
Third Quarter 25-7/8 14-7/8
Fourth Quarter 23-7/8 14-7/8
As of March 20, 1995, there were 11,647 holders of record of the
Company's common stock.
The Board of Directors will continue to review the Company's dividend
policy. The amount and timing of any future dividends will depend upon the
profitability of the Company, the need to retain earnings for use in the
development of the Company's business and other factors.
The Indentures pursuant to which the 12-7/8% Sinking Fund Debentures
due July 15, 1998 (the "12-7/8% Debentures") were issued, restrict the ability
of the Company to declare cash dividends on, and to repurchase any shares or
rights to stock of the Company. Under the most restrictive provisions of the
Indentures, the Company may not pay dividends or make distributions on stock
(other than dividends or distributions payable solely in shares of its stock),
or purchase, redeem or otherwise acquire or retire any of its stock or permit
any of its publicly owned subsidiaries to purchase, redeem or otherwise acquire
any of the companies stock (a) if an event of default (as defined in the
Indenture) exists under the indenture, or (b) if, after giving effect thereto,
the aggregate of all such dividends, distributions, purchases or payments
declared or made after July 24, 1986, would exceed the sum of (i) 20% of the
Company's consolidated net income (as defined in the indenture) subsequent to
May 31, 1986, (ii) the net proceeds to the Company of the issuance or sale
after July 24, 1986, of any shares of its common stock and capital stock of its
subsidiaries or any convertible securities which have been converted into its
common stock and (iii) $10,000,000.
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20
ITEM 6. SELECTED FINANCIAL DATA
On November 1, 1994, the shareholders of ICN, SPI, Viratek and
Biomedicals approved the Merger of the Predecessor Companies ("the Merger").
On November 10, 1994 (effective November 1, 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. In conjunction with the Merger,
ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the
Company") . The Merger was accounted for using the purchase method of
accounting. Additionally, for accounting purposes, SPI was treated as the
acquiring company and as a result, the Company has reported the historic
financial data of SPI in its financial results and included the results of ICN,
Viratek and Biomedicals from the effective date of the Merger, November 1,
1994.
The following table sets forth certain consolidated financial data for
the years ended December 31, 1994, 1993, 1992, and 1991, and for the year ended
November 30, 1990. The Company's separate results of operations for the month
of December 1990 are not reflected in the Statement of Income, but have been
charged directly to retained earnings. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements included elsewhere in
this Form 10-K (amounts in thousands, except per share information).
DECEMBER 31 NOVEMBER 30,
----------- ------------
1994 1993 1992 1991(1) 1990
---- ---- ---- ------- ----
Statement of
Operations Data:
----------------
Net sales(2) $ 366,851 $403,957 $476,118 $364,358 $140,716
Cost of sales 182,946 211,923 208,745 173,554 56,101
------- ------- ------- ------- --------
Gross profit 183,905 192,034 267,373 190,804 84,615
Selling, general and
administrative
expenses 111,388 131,069 170,313 99,942 55,437
Royalties to
affiliates, net 7,468 6,121 5,511 4,377 3,781
Purchased Research
and Development(3) 221,000 -- -- -- --
Other, net(4) 14,001 27,777 38,343 33,642 2,535
------ ------ ------ ------ --------
Income (loss) before
provision for income
taxes and minority
interest (169,952) 27,067 53,206 52,843 22,862
Provision for
income taxes 10,360 5,368 9,095 10,852 7,942
Minority interest 3,269 189 9,608 11,865 --
----- --- ----- ------ ----------
Net income (loss) $(183,581) $ 21,510 $ 34,503 $ 30,126 $ 14,920
========= ======== ======== ======== ========
Per Share Information: (5)
Net income (loss) $(8.24) $1.03 $1.67 $1.50 $.82
====== ===== ===== ===== ====
Cash dividends paid $ .26 $ .24 $ .74 $ .85 $.07
===== ===== ===== ===== ====
Historical dividends
declared(6) $1.19 $1.12 $1.06 $1.00 $.09
===== ===== ===== ===== ====
Weighted Average Common
Shares Outstanding (5) 22,266 20,926 20,606 20,118 18,094
====== ====== ====== ====== ======
Balance Sheet Data:
Working capital $ 137,802 $127,259 $120,942 $123,367 $ 40,630
Total assets 441,473 302,017 333,218 336,905 152,326
Long-term debt 195,181 16,980 21,016 16,519 11,257
Stockholders' equity 88,908 155,879 135,427 88,134 95,935
18
21
See accompanying notes to Selected Financial Data.
19
22
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
NOTES TO SELECTED FINANCIAL DATA:
(1) Financial data for 1991 includes the results of ICN Galenika from the
effective date of acquisition, May 1, 1991. For financial statement
purposes, the Company's separate results of operations for the month
of December 1990 are not reflected in the Statement of Income
but have been charged directly to retained earnings.
(2) ICN Galenika's sales have been adversely affected since the imposition
in May, 1992 of United Nations sanctions on Yugoslavia.
(3) The Merger resulted in $221,000,000 or $9.93 per share being ascribed
to purchased research and development and was written-off immediately.
This write-off is a one-time, non-cash charge and is not related to
the Company's ongoing research and development activities for
Virazole(R). The 1994 net loss of $183,581,000 or $8.24 per share,
includes a one-time, non-cash write-off of $221,000,000 or $9.93 per
share related to purchased research and development due to the Merger.
Income, excluding this one-time, non- cash write-off, was $37,419,000
or $1.68 per share in 1994 compared to net income of $21,510,000 or
$1.03 per share in 1993, an increase of $15,909,000 or 74%.
(4) Other, net for 1994, 1993 and 1992 includes research and development
costs; translation and exchange losses, net; interest (income)
expense, net; other (income) expense, net; and amortization of
goodwill.
(5) In March and July 1991, SPI issued 10% and 15% stock distributions,
respectively, which resulted in a 26% stock split. In January 1993,
SPI issued a fourth quarter 1992 stock dividend of 2%. During 1993,
SPI issued additional stock dividends which totaled 6%. During 1994,
SPI and the Company issued additional stock dividends and
distributions which totaled 4.8%. In March 1995, the Company declared
a first quarter 1995 stock distribution of 1.7%. All share and per
share amounts have been restated to reflect these stock splits,
dividends and distributions, except for historical dividends issued
which are unadjusted for stock splits, dividends and distributions.
(6) Dividends for 1994 include cash dividends of $.26 on a historical
basis and stock dividends and distributions of $.93. Dividends for
1993 include cash dividends of $.25 on a historical basis and stock
dividends equivalent to $.87. The dividends in 1992 include cash
dividends of $.86 on a historical basis and stock dividend equivalent
to $.20 per share. The stock dividends are based upon the market
value of SPI's and the Company's common stock at the declaration date.
For 1991 and prior years, the dividends were paid in cash.
20
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Since 1981 the ICN group of companies included a pharmaceuticals
products company, SPI Pharmaceuticals, Inc. ("SPI"), a research products
company, ICN Biomedicals, Inc. ("Biomedicals"), a research and development
company, Viratek, Inc. ("Viratek"), and the parent company, ICN
Pharmaceuticals, Inc. ("ICN") (collectively, the "Predecessor Companies").
Until November 1, 1994, the effective date of the Merger, ICN maintained a
controlling interest in the subsidiary companies.
On November 10, 1994, SPI, ICN and Viratek merged into New ICN, and
Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of New
ICN. The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring company
and as a result, the Company has reported the historical financial data of SPI
in its financial results and the results of ICN, Viratek and Biomedicals have
been included with the results of the Company since the effective date of the
Merger.
As part of the Merger, the Company issued approximately 6,476,770
common shares valued on November 10, 1994 at $20.75 per share, which was the
publicly trade price for SPI's common shares at that date. Accordingly, the
purchase price, including direct acquisition costs of $3,654,000 has been
allocated to the estimated fair value of the net assets, including amounts
ascribed to purchased research and development costs of $221,000,000 or $9.93
per share, which was written-off to operations immediately following the
consummation of the Merger. The $2,313,000 excess of the fair value of the net
assets acquired and amounts allocated to acquired research and development over
the purchase price has been proportionately allocated to reduce non-current
assets acquired.
The purchase price allocation related to the Merger is preliminary,
pending resolution of a pre-acquisition contingency associated with certain
consolidated class actions entitled In re Paine Weber Securities Litigation; In
re ICN/Viratek Securities Litigation against ICN and Viratek. (See Note 7 of
Notes to Consolidated Financial Statements)
The Merger resulted in the acquisition of a biomedicals business with
annual sales of approximately $58,000,000, direct access to Viratek's research
and development resources including its scientific expertise, substantial tax
net operating loss carryforwards and the elimination of royalty payments to
Viratek on the sales of Virazole(R).
The 1994 net loss of $183,581,000 or $8.24 per share, includes a
one-time, non-cash write-off of $221,000,000 or $9.93 per share related to
purchased research and development due to the Merger. Income, excluding this
one-time, non-cash write-off, was $37,419,000 or $1.68 per share in 1994
compared to net income of $21,510,000 or $1.03 per share in 1993, an increase
of $15,909,000 or 74%. This improvement is primarily due to improved sales of
Virazole(R) in North America and an improved business environment in
Yugoslavia. The Company's Yugoslavian subsidiary, ICN Galenika benefited from
an overall reduction in operating expenses along with a $15,660,000 decrease in
interest expense resulting from reduced levels of inflation in Yugoslavia.
RESULTS OF OPERATION
For financial reporting purposes the Company's operations are divided
into two industry segments, the Pharmaceutical segment and the Biomedical
segment. Certain financial information for the two industry segments is set
forth below.
21
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
This discussion should be read in conjunction with the consolidated financial
statements of the Company included elsewhere in this document. For additional
financial information by industry segment, see Note 10 of Notes to Consolidated
Financial Statements.
1994 1993 1992
---- ---- ----
Net Sales (in thousands)
------------------------
Pharmaceutical . . . . . . . . . $357,821 $403,957 $476,118
Biomedical . . . . . . . . . . . 9,030 -- --
-------- -------- --------
Total Company . . . . . . . . . $366,851 $403,957 $476,118
======== ======== ========
NET SALES. Pharmaceutical segment net sales for 1994 were
$357,821,000 compared to $403,957,000 in 1993. This decrease in net sales of
$46,136,000, or 11%, is primarily a result of lower sales at ICN Galenika.
Net sales at ICN Galenika were $172,124,000 for the year ended December 31,
1994 compared to $239,832,000 for the same period last year. The decline in
ICN Galenika dollar sales of $67,708,000, or 28%, is primarily due to
differences in exchange rates during 1994 compared to 1993 and the reluctance
of the Yugoslavian government to allow sales price increases during 1994.
Despite a dollar decline in sales, the number of units sold in ICN Galenika
increased 20% over the prior year. In January 1994, the Yugoslavian government
initiated an economic stabilization program to control inflation. This program
created a more stable business environment that allowed ICN Galenika to
increase unit sales, increase production and improve product mix.
The decrease in sales at ICN Galenika is partially offset by sales
increases of $21,572,000, or 13%, in the Company's operating units excluding
ICN Galenika. The sales in these operations increased to $185,697,000 in 1994
compared to $164,125,000 in 1993. This increase is primarily due to increased
Virazole(R) sales of $16,782,000, or 57% compared to 1993. Sales and operating
results for 1994 were not adversely affected by the devaluation of the Mexican
Peso during December 1994. As a result of the Merger, the Company acquired a
biomedicals research products business that contributed $9,030,000 of sales to
the 1994 operating results since November 1, 1994, and an otherwise
insignificant effect on operations.
Net sales for 1993 declined to $403,957,000 from $476,118,000 for 1992
due to lower sales at the Company's Yugoslavian subsidiary, ICN Galenika.
Sales at ICN Galenika were $239,832,000 for 1993 compared to sales of
$325,903,000 for 1992. The United Nations sanctions on Yugoslavia and price
controls imposed by the Yugoslavian government impacted the sales at ICN
Galenika, both in terms of a decrease in unit sales and a change in product
mix. Additionally, sales were adversely impacted by inflation and by larger
and more frequent devaluations in 1993 as compared to 1992.
Sales in the Company's operating units, excluding ICN Galenika,
increased $13,910,000 or 9% in 1993 to $164,125,000 compared to the prior year
sales of $150,215,000. The Company's United States operations reported
increased sales of $8,906,000, or 17%, for 1993 compared to 1992, primarily due
to increased sales of dermatological products. The Company's Mexican
subsidiaries recorded an increase in sales of $9,129,000 or 19%, for 1993
compared to 1992, primarily due to increased unit sales and price increases for
its injectable vitamin, Bedoyecta, along with increased sales of Virazole(R).
The Company's Spanish subsidiary recorded a decrease in sales of $3,153,000, or
12%, primarily due to a 23% devaluation of the Spanish peseta against the U.S.
dollar, which was partially offset by increased unit sales.
22
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
GROSS PROFIT. Gross profit as a percentage of sales was 50% for 1994
compared to 48% for 1993. The increase in gross profit is primarily due to
increased sales of Virazole(R) in the United States. Gross profit margin at
ICN Galenika decreased to 29% in 1994 from 35% in 1993 primarily due to the
higher cost of inventory and government imposed price controls. During the
later part of 1992 and into 1993 the unit cost of inventory had risen due to
higher prices resulting from the economic conditions in Yugoslavia existing
during this time. This higher priced inventory is reflected in cost of sales
for 1994 and has been replaced with inventory having a lower unit cost
resulting from an improved economic environment in Yugoslavia and higher
production levels. The gross profit margin in the Company's operating units
other than ICN Galenika increased to 69% compared to 66% in 1993 due primarily
to increased Virazole(R) sales in the United States.
Gross profit as a percentage of sales was 48% for 1993 compared to 56%
in 1992. The decrease in the gross profit margin reflects the impact of price
controls in Yugoslavia and higher labor costs per unit at ICN Galenika. The
decrease in gross margins at ICN Galenika was partially offset by improvements
in the aggregate gross profit margins of the Company's subsidiaries outside of
Yugoslavia. The combined gross margins of these subsidiaries was 66% for 1993
compared to 62% for 1992.
At ICN Galenika, gross profit as a percentage of sales was 35% in 1993
compared to 53% for 1992. The overall rate of inflation in Yugoslavia exceeded
the rate at which ICN Galenika could increase selling prices. This was
compounded by more frequent currency devaluations, which together resulted in
lower revenues and gross profits when stated in U.S. dollars. Additionally,
the cost of manufactured inventory increased as a result of declining unit
production while maintaining the same work force that existed before sanctions
began. United Nations sanctions contributed to shortages of raw materials and
a deteriorating business environment, resulting in unit production in 1993 that
was significantly less than what was produced in 1992.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of sales were 30% in 1994 compared to
32% in 1993. This decrease was primarily due 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.
Selling, general and administrative expenses as a percentage of sales
were 32% for 1993 compared to 36% for 1992. The 1992 results include
provisions at ICN Galenika for training employees, redundancy and early
retirement costs of $21,065,000. Excluding these provisions, selling, general
and administrative costs for the year ended December 31, 1992, were 31% of net
sales. The increase in 1993 expenses as a percentage of sales is primarily a
result of lower sales at ICN Galenika combined with overall increases in
operating expenses due to inflationary pressures in Yugoslavia offset by lower
provisions for doubtful accounts.
In countries experiencing high inflation, such as Yugoslavia, a
devaluation will result in a reduction of accounts receivable and a
proportionate reduction in the accounts receivable allowance. The reduction of
accounts receivable is recorded as a foreign currency translation loss and the
reduction of the allowance is recorded as a translation gain. Shortly after a
devaluation the level of accounts receivable will rise as a result of
subsequent price increases. In conjunction with the rise in receivables,
additions to the allowance for receivables will be made for existing doubtful
accounts. This process will repeat itself for each devaluation that occurs
during the year. The effect of this process results in a high level of bad
debt expense that does not necessarily reflect credit risk or difficulties in
collecting receivables. In 1993, ICN Galenika recorded provisions for doubtful
accounts of $10,968,000 compared to $48,279,000 for 1992. The timing of
devaluations has a material impact on the size of the provision for doubtful
accounts. The decrease in the 1993 provision is primarily a result of more
frequent devaluations and smaller price increases in 1993 compared to 1992, and
lower levels of accounts receivable compared to the prior year. The reduction
of the accounts receivable allowance from devaluation resulted in a translation
gain of $9,118,000 and $40,191,000 resulting in a net expense from bad debts
and bad debt translation gain of $1,850,000 and $8,088,000 for 1993 and 1992,
respectively.
23
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
ROYALTIES TO AFFILIATES, NET. Royalties to Viratek were $7,171,000,
$5,903,000 and $5,448,000 for 1994, 1993 and 1992, respectively. These
royalties were based on an agreement whereby SPI paid a royalty of 20% on all
Virazole(R) sales for all indications. As a result of the Merger, the Company
is no longer required to pay future royalties on Virazole(R). The royalties
to Viratek in 1994 are based on Virazole(R) sales up to the date of the Merger.
In 1994, sales of Virazole(R), for purposes of determining royalties to Viratek
in 1994, were $35,855,000. Sales of Virazole(R) were $46,297,000, $29,515,000
and $27,240,000 for 1994, 1993 and 1992, respectively.
OTHER, NET. A summary of certain other items, including other
(income) expense is as follows (in thousands):
1994 1993 1992
---- ---- ----
Research and development costs . . . . . . . . . . . $ 7,690 $ 11,516 $ 7,836
Translation and exchange losses (gains), net . . . . 191 (3,282) 25,039
Interest income . . . . . . . . . . . . . . . . . . . (4,728) (8,033) (9,679)
Interest expense . . . . . . . . . . . . . . . . . . 9,317 23,750 13,065
Other . . . . . . . . . . . . . . . . . . . . . . 1,531 3,826 2,082
----- ----- -----
Other, net . . . . . . . . . . . . . . . . . . . . . $14,001 $ 27,777 $ 38,343
======= = ====== = ======
Research and Development Costs. In 1994, research and development
costs decreased $3,826,000 due to lower costs at ICN Galenika of $5,210,000
resulting from wage reductions for research and development personnel and
differences in exchange rates. The decrease in research and development
expense was partially offset by research and development costs of $1,874,000
resulting from the Merger. In 1993, Viratek reported research and development
costs of approximately $5,193,000. The Company intends to continue the
research and development efforts that were performed at Viratek. Research and
development costs rose in 1993 and 1992 due primarily to higher research and
development costs at ICN Galenika.
Translation and Exchange Losses (Gains), Net. Foreign exchange
losses, net, in 1994 were $191,000 compared to foreign exchange gains, net, of
$(3,282,000) in 1993. Foreign exchange losses, net, at ICN Galenika were
$1,417,000 in 1994 related to exchange rate fluctuations occurring before the
Yugoslavian stabilization program. The losses at ICN Galenika were offset by
foreign exchange gains related to certain of the Company's foreign denominated
long-term debt. In 1993, the foreign exchange losses, net, decreased compared
to 1992, due to foreign exchange gains of $3,143,000 at the Company's Spanish
subsidiary and reduced losses at ICN Galenika of $27,790,000 as a result of
planned reductions in its net monetary exposure.
Interest Expense. The decrease in interest expense in 1994 compared
to 1993 of $14,433,000 is primarily due to a decrease in interest expense of
$15,660,000 at ICN Galenika. The economic stabilization program enacted by the
Yugoslavian Government early in the year has resulted in lower interest rates
in 1994 compared to 1993. The decrease in interest expense at ICN Galenika is
partially offset by increased interest expense in the United States resulting
from the assumption of debt in connection with the Merger.
The increase in interest expense in 1993 compared to 1992 of
$10,685,000 is a result of ICN Galenika's strategy to manage its monetary
position by maintaining higher levels of short-term debt compared to the prior
year. Approximately $2,000,000 of this dinar denominated short-term debt was
outstanding at December 31, 1993. In 1993, ICN Galenika was charged interest
at highly inflationary rates. The high level of interest expense in 1993 does
not necessarily reflect a high level of debt burden on the Company or a high
level of cash paid for interest. From the time that ICN Galenika accrued its
liability for its highly inflationary interest expense to the time that it
actually paid the interest, significant devaluation in the translation rate
occurred. The devaluation resulted in a payment of interest stated in U.S.
dollars that was significantly below what was originally accrued. In 1993, ICN
Galenika had $16,774,000 of interest expense and interest payments of
$7,149,000 resulting in estimated translation gains on accrued interest
devaluations of $9,625,000.
24
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Other. In 1993, the Company recorded $988,000 for estimated damages
relating to a breach of contract suit and $1,000,000 for costs associated with
the layoff of employees in the Company's Spanish subsidiary. These costs did
not recur in 1994.
Income taxes. The Company's effective income tax rate was 6%, 20% and
17% for 1994, 1993 and 1992 respectively. The Company's effective tax rate of
6% in 1994 was significantly different than the expected U.S. statutory rate of
(35%) due to the write-off of purchased research and development related to the
Merger for which there is no related tax benefit. The Company's effective rate
of 20% in 1993 was significantly less than the U.S. statutory rate primarily
due to the utilization of foreign and alternative minimum tax credits and other
deferred tax benefits for which a valuation allowance existed at January 1,
1993. The Company's effective tax rate for 1992 was significantly less than
the U.S. statutory rate due to an increase in the Company's accumulated foreign
earnings which were taxed at relatively low effective foreign rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash provided by operating activities continues to be the Company's
primary source of funds to finance operating needs, capital expenditures and
dividend payments. In 1994, cash provided by operating activities totaled
$42,557,000 which includes increased earnings of the Company before a one-time,
non-cash charge to income of $221,000,000 or $9.93 per share, related to
purchased research and development due to the Merger. Other net cash flows
used in operating activities were primarily attributed to increases in
receivables and prepaid expenses and other current assets. The accounts
receivable level at ICN Galenika increased $34,670,000 due to the positive
effects of the stabilization program and the absence of large and frequent
devaluations. Prepaid expenses increased primarily due ICN Galenika prepaying
its foreign suppliers of inventory, a trend expected to continue, in order to
help mitigate the effects of devaluations. Other net cash flows used in
operating activities were partially offset by increases in trade payables and
decreases in inventory. The decrease in inventory primarily relates to the
higher priced inventory in ICN Galenika which has been charged to cost of sales
during 1994 and replaced with inventory having a lower unit cost resulting from
an improved economic environment in Yugoslavia and lower unit costs resulting
from higher production levels.
Capital expenditures of $20,205,000 in 1994 primarily relate to the
facility expansion and modernization project at ICN Galenika. This project
will include two new factories, one of which will manufacture cephalosporins
and the other will manufacture steroids and hormones. Additionally, ICN
Galenika's existing drug plant will be modernized and upgraded. The total cost
of this facility expansion and modernization is expected to be approximately
$136,000,000 through 1998. ICN Galenika intends to fund this program through
funds generated from local operations and locally funded debt.
In November 1994, the Company completed an underwritten public
offering in the principal amount of $115,000,000 of 8.5% Subordinated
Convertible Notes (the "Convertible Notes"), due in November 1999. These notes
are convertible at the option of the holder either in whole or in part, at any
time prior to maturity, into the Company's common stock at a current conversion
price of $22.98 per share, subject to adjustment in certain events. The
Convertible Notes are also redeemable, in whole or in part, at the option of
the Company at any time on or after November 15, 1997 at specified redemption
prices, plus accrued interest. The fair value of the Convertible Notes was
approximately $110,975,000 at December 31, 1994.
The net proceeds from the Convertible Notes were primarily used by the
Company to retire certain high yield debt which included the retirement of
$37,000,000 of the Company's 12-7/8% Sinking Fund Debentures plus accrued
interest, $20,238,000 of 12-1/2% Debentures plus accrued interest, $3,382,000
of Mexican debt and $15,198,000 of Spanish debt. The Company intends to use
the remaining proceeds of approximately $32,000,000 for general working capital
purposes. The effect on net income from the above debt extinguishments was not
material for 1994 but will benefit future years through a reduction of interest
expense.
25
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
In an effort to reduce future interest expense, the Company has
elected to call $10,000,000 of the 12-7/8% Sinking Fund Debentures, at par,
with payment to be made on April 28, 1995.
Product liability: In December 1985, Management discontinued product
liability insurance in the United States. While to date no material adverse
claim for personal injury resulting from allegedly defective products has been
successfully maintained against the Company, a substantial claim, if
successful, could have a material adverse effect on the Company's liquidity and
financial performance. See Note 7 of Notes to Consolidated Financial
Statements.
Investment in Russia: During 1993 and 1994, the Company acquired a
41% interest in Oktyabr, a Russian pharmaceutical company. The Company intends
to increase its ownership interest in Oktyabr to approximately 62% through a
government-sponsored investment program. Participation in this program does
not require significant expenditure of future funds. Once the Company achieves
its ownership goals it will begin a program to construct a new pharmaceutical
manufacturing facility in Russia built pursuant to "good manufacturing
practices." Although Russia may, in time, evolve into a large, free market
oriented economy, because of the present unpredictable political, social and
economic factors in Russia, the Company intends to penetrate this market in a
gradual manner. There can be no assurance as to when or if the new facility
will be constructed or as to its future success.
Demands on Working Capital: Management believes that funds generated
from operations will be sufficient to meet its normal operating
requirementsduring the coming year. If these funds prove to be insufficient,
or if new opportunities require the Company to raise capital, the Company may
seek additional financing or issue additional common stock.
ICN GALENIKA
SANCTIONS:
A substantial majority of ICN Galenika's business is conducted in the
Federal Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the
United Nations Security Council ("UNSC") adopted a resolution that imposed
economic sanctions on the Federal Republic of Yugoslavia and on April 17, 1993,
the UNSC adopted a resolution that imposed additional economic sanctions on the
Federal Republic of Yugoslavia. The sanctions specifically exempt certain
medical supplies for humanitarian purposes, a portion of which are distributed
by ICN Galenika. ICN Galenika continues to apply for, and has received,
licenses under the sanctions, however, the efforts to enforce sanctions create
administrative burdens that slow the shipments of licensed raw materials to
Yugoslavia. Shipments of imported raw materials in 1994 and 1993 were 60% and
38% of pre-sanction levels, respectively. Additionally, the sanctions have
contributed to an overall deteriorating business environment in which ICN
Galenika must operate.
The sanctions provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of sanctions may create
a restriction on ICN Galenika's corporate bond security holdings of
approximately $29,155,000 that are maintained in a bank outside of Yugoslavia.
Of this amount $8,103,000 serves as collateral for a note payable to the
financial institution. Management believes, however, that these funds will be
available for drawdowns on lines of credit for shipments specifically licensed
under the sanctions. As a result of continuing political and economic
instability within Yugoslavia, including the long-term impact of the sanctions,
wage and price controls, and devaluations, there may be further limits on the
availability of hard and local currency and, consequently, an adverse impact on
the future operating results of the Company.
In September, 1994, the United Nations Security Council voted to ease
sanctions against Yugoslavia by allowing air traffic to Belgrade and by lifting
the ban on cultural and sports exchanges.
26
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
HYPERINFLATION AND PRICE CONTROLS:
Under existing Yugoslavian price controls imposed in July of 1992, ICN
Galenika can no longer continue the unrestricted practice of increasing selling
prices in anticipation of inflation. Rather, price increases must be approved
by the government prior to implementation. During 1994, ICN Galenika received
fewer price increases than in the past, a trend that may continue, applying
increased pressure on gross profit margins. The imposition of price controls
along with the effect of sanctions and recurring currency devaluations resulted
in reduced sales levels in the last half of 1992 and for 1993. U.S. dollar
sales in 1994 were below 1993 levels due to exchange rate differences despite
an increase in units sold of 20%. This trend of reduced U.S. dollar sales
levels could continue as long as sanctions are in place.
ICN Galenika operates in a highly inflationary environment that has,
prior to January 1994, experienced high levels of inflation along with large
and frequent devaluations. 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 Deutsche mark. The Yugoslavian government guarantees the
conversion of dinars to Deutsche 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 Deutsche 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 5% since early 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 high inflation 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.
At ICN Galenika the net monetary asset position, consisting primarily
of accounts receivable net of trade payables, increased due to a more favorable
business environment in Yugoslavia. The stabilization program resulted in
lower interest rates, increased availability of hard currency, and a lower risk
of devaluation. The reduced risk of holding losses from carrying accounts
receivables has resulted in a greater willingness of companies operating in
Yugoslavia to extend trade credit. This net monetary asset position is
subject to foreign exchange loss if a devaluation of the dinar were to occur,
which management is unable to predict with any certainty. The net monetary
asset position at ICN Galenika as of December 31, 1994 and February 28, 1995
was approximately $25,442,000 and $34,372,000, respectively, which is subject
to fluctuations in the exchange rate of the dinar against the dollar.
For additional information and expanded discussion regarding the
impact of ICN Galenika, see Note 12 of Notes to Consolidated Financial
Statements.
INFLATION AND CHANGING PRICES
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuations
in the relative values of currencies, political instability and restrictive
governmental actions. Changes in the relative values of currencies occur from
time to time and may, in certain instances, materially affect the Company's
results of operations. The effect of these risks remains difficult to predict.
27
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The Company's subsidiary in Mexico recorded 1994 sales of
$56,737,000, cost of sales of $27,997,000 and income before provision for
income taxes of $5,115,000. In December 1994, the Mexican peso experienced a
30% devaluation that will result in lower U.S. dollar sales and gross margins
in the future. This devaluation resulted in an increase in the foreign
currency translation charge included as a component of stockholders' equity of
$9,451,000. Also, approximately 30% of the Mexican cost of inventory include
materials obtained from outside of Mexico. The devaluation of the peso will
make the cost of these foreign materials higher creating added pressure on the
gross margins for these products. In addition, inflation continues to increase
along with a weakening of the Mexican peso against the U.S. dollar. The
Company will endeavor to mitigate these effects by seeking price increases,
adjusting its product mix and seeking local sources for materials that had
previously been foreign sourced. However, the implementation of these actions
may be affected by recently enacted economic restraint plans by the Mexican
government, which include stricter price controls.
The Company is subject to foreign currency risk on its foreign
denominated debt of approximately $31,136,000 at December 31, 1994, which is
exposed to currency fluctuations.
The effects of inflation are experienced by the Company through
increases in the costs of labor, services and raw materials. While the Company
attempts to raise selling prices in anticipation of inflation, adverse effects
have been experienced in Yugoslavia and are anticipated in Mexico as a result
of price controls.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended
December 31, 1994 and 1993 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER (2)(3)
---- ------- ------- ------- --------------
Net sales $ 72,167 $ 78,927 $92,796 $ 122,961
Gross profit 39,552 33,759 45,147 65,447
Net income 8,364 5,245 10,057 (207,247)
Net income (loss) per share(1) $ .39 $ .24 $ .46 $ (8.25)
1993
----
Net sales $ 119,636 $ 66,422 $70,214 $ 147,685
Gross profit 58,946 31,159 41,322 60,607
Net income 5,736 1,091 6,918 7,765
Net income per share(1) $ .27 $ .05 $ .33 $ .38
(1) Net income per share has been restated to reflect quarterly stock
dividends totaling 6% during 1993, and quarterly stock dividends and
distributions totaling 4.8% during 1994 and a 1.7% first quarter 1995
stock distribution declared in March 1995.
(2) Includes a write-off in 1994 of purchased research and development for
which no alternative use exists of $221,000,000 or $9.93 per share as
a result of the Merger.
(3) Includes the results of ICN, Viratek and Biomedicals since the
effective date of the Merger, November 1, 1994.
28
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 1994
Report of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements:
Consolidated balance sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 30
For the years ended December 31, 1994, 1993 and 1992:
Consolidated statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated statements of stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . 34
Schedule supporting the consolidated financial statements for the years ended
December 31, 1994, 1993 and 1992:
II.-- Valuation and qualifying accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 60
The other schedule has not been submitted because it is not applicable.
29
32
REPORT OF INDEPENDENT AUDITORS
To ICN Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the
consolidated financial statement schedule of ICN Pharmaceuticals, Inc. (a
Delaware corporation, formerly SPI Pharmaceuticals, Inc.) and subsidiaries
listed in the index on page 29 of this Form 10-K. These consolidated financial
statements and the consolidated financial statement schedule are the
responsibility of the Company's Management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The Company had certain transactions, through, November 1, 1994, with
previously Affiliated Corporations as more fully described in Note 4. Whether
the terms of these transactions would have been the same had they been
between wholly unrelated parties cannot be determined.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of ICN Pharmaceuticals, Inc. and subsidiaries as of December 31, 1994
and 1993, the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles. In addition, in our opinion,
the consolidated financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
The Company is a defendant in various class action lawsuits (the 1995,
1994 and 1987 Actions), as defined and discussed in Note 7. The ultimate
outcome of these lawsuits cannot presently be determined. Accordingly, no
provision for any liability that may result has been made in the accompanying
consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 27, 1995
30
33
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
------
1994 1993
---- ----
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 42,376 $ 14,777
Restricted cash . . . . . . . . . . . . . . . . . . . . . 1,425 --
Marketable securities (used to collateralize $10,000
note payable) . . . . . . . . . . . . . . . . . . . . . -- 32,587
Receivables, net . . . . . . . . . . . . . . . . . . . . 81,951 43,277
Inventories, net . . . . . . . . . . . . . . . . . . . . 89,448 107,196
Prepaid expenses and other current assets . . . . . . . . 25,146 10,925
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . 240,346 208,762
Marketable securities (used to collateralize $8,103
note payable) . . . . . . . . . . . . . . . . . . . . . 33,179 --
Property, plant and equipment (at cost), net . . . . . . 128,623 78,718
Other assets . . . . . . . . . . . . . . . . . . . . . . 21,282 10,527
Goodwill and intangibles, net . . . . . . . . . . . . . . 18,043 4,010
------------ -----------
$ 441,473 $ 302,017
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . $ 13,757 $ 14,360
Current portion of long-term debt . . . . . . . . . . . . 6,067 3,866
Trade payables . . . . . . . . . . . . . . . . . . . . . 25,079 13,951
Accrued liabilities . . . . . . . . . . . . . . . . . . . 43,111 17,700
Current portion of payable to ICN . . . . . . . . . . . . -- 18,313
Income taxes payable . . . . . . . . . . . . . . . . . . 14,530 13,313
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . 102,544 81,503
Long-term debt, less current portion . . . . . . . . . . 195,181 16,980
Other liabilities . . . . . . . . . . . . . . . . . . . . 9,960 6,226
Minority interest . . . . . . . . . . . . . . . . . . . . 44,880 41,429
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 100,000 shares authorized;
28,028 and 20,101 shares issued and outstanding at
December 31, 1994 and 1993, respectively . . . . . . . 282 202
Additional capital . . . . . . . . . . . . . . . . . . . 251,713 91,449
Retained earnings (deficit) . . . . . . . . . . . . . . . (142,946) 70,973
Foreign currency translation adjustment . . . . . . . . . (16,709) (6,745)
Unrealized loss on marketable securities . . . . . . . . (3,432) --
------------ -----------
Total stockholders' equity . . . . . . . . . . . . . . 88,908 155,879
------------ -----------
$ 441,473 $ 302,017
============ ===========
The accompanying notes are an integral part of these consolidated statements.
31
34
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993 1992
---- ---- ----
Net sales . . . . . . . . . . . . . . . . . $ 366,851 $ 403,957 $ 476,118
Cost of sales . . . . . . . . . . . . . . . 182,946 211,923 208,745
----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . 183,905 192,034 267,373
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 111,388 131,069 170,313
Royalties to affiliates, net . . . . . . . 7,468 6,121 5,511
Research and development costs . . . . . . 7,690 11,516 7,836
Translation and exchange losses (gains),
net . . . . . . . . . . . . . . . . . . . 191 (3,282) 25,039
Interest income . . . . . . . . . . . . . . (4,728) (8,033) (9,679)
Interest expense . . . . . . . . . . . . . 9,317 23,750 13,065
Other expense, net . . . . . . . . . . . . 1,531 3,826 2,082
Write-off of purchased research and
development . . . . . . . . . . . . . . . . 221,000 -- --
----------- ----------- -----------
Income (loss) before provision for income
taxes and minority interest . . . . . (169,952) 27,067 53,206
Provision for income taxes . . . . . . . . 10,360 5,368 9,095
Minority interest . . . . . . . . . . . . . 3,269 189 9,608
----------- ----------- -----------
Net income (loss) . . . . . . . . . . $ (183,581) $ 21,510 $ 34,503
=========== =========== ===========
Net income (loss) per share . . . . . $ (8.24) $ 1.03 $ 1.67
=========== =========== ===========
Weighted average common shares . . . . 22,266 20,926 20,606
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
32
35
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOREIGN UNREALIZED
COMMON STOCK RETAINED CURRENCY LOSS ON
------------------- ADDITIONAL EARNINGS TRANSLATION MARKETABLE
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS SECURITIES TOTAL
------ ------ ---------- --------- ----------- ---------- -----
BALANCE AT DECEMBER 31, 1991 16,331 $163 $27,217 $58,767 $1,987 $ -- $88,134
Exercise of stock options 327 3 2,175 -- -- -- 2,178
Translation adjustments -- -- -- -- (3,929) -- (3,929)
Sale of temporary treasury stock
holdings in connection with
the acquisition of ICN Galenika 900 9 28,619 -- -- -- 28,628
Tax benefit of stock options
exercised -- -- 956 -- -- -- 956
Cash dividends ($.75 per share) -- -- -- (15,043) -- -- ( 15,043)
Effect of stock dividend issued in
January 1993 332 4 3,436 (3,440) -- -- --
Net income -- -- -- 34,503 -- -- 34,503
------ ---- -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1992 17,890 179 62,403 74,787 (1,942) -- 135,427
Exercise of stock options 461 5 2,410 -- -- -- 2,415
Translation adjustments -- -- -- -- (4,803) -- (4,803)
Tax benefit of stock options
exercised -- -- 727 -- -- -- 727
Cash dividends ($.24 per share) -- -- -- (4,690) -- -- (4,690)
Effect of 1993 quarterly stock
dividends 1,121 11 16,106 (16,117) -- -- --
Effect of stock dividend issued in
January 1994 276 3 4,514 (4,517) -- -- --
Common stock issued for payment of
ICN debt 200 2 3,073 -- -- -- 3,075
Common stock issued for acquisition 153 2 2,216 -- -- -- 2,218
Net income -- -- 21,510 -- -- 21,510
------ ---- -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1993 20,101 202 91,449 70,973 (6,745) -- 155,879
Exercise of stock options 80 1 587 -- -- -- 588
Translation adjustments -- -- -- -- (9,964) -- (9,964)
Tax benefit from stock options exercised -- -- 134 -- -- -- 134
Stock issued in Merger 6,477 65 134,328 -- -- -- 134,393
Net unrealized loss on
marketable securities -- -- -- -- -- (3,432) (3,432)
Shares issued as employee compensation 70 1 1,090 -- -- -- 1,091
Cash dividend ($.26 per share) -- -- -- (6,181) -- -- (6,181)
Effect of 1994 quarterly
stock dividends and distributions 832 8 17,410 (17,437) -- -- (19)
Effect of stock distribution declared in
March 1995 468 5 6,715 (6,720) -- -- --
Net loss -- -- -- (183,581) -- -- (183,581)
------ ---- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31, 1994 28,028 $282 $251,713 $(142,946) $(16,709) $(3,432) $ 88,908
====== ==== ======== ========= ======== ======= ========
The accompanying notes are an integral part of these consolidated statements.
33
36
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . $(183,581) $ 21,510 $ 34,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 9,248 8,513 6,770
Allowance for losses on accounts receivable . . . . 1,410 11,261 48,312
Write-off of purchased research and development . . 221,000 -- --
Foreign exchange losses (gains), net . . . . . . . . 191 (3,282) 14,739
(Gain) loss on sale of fixed assets . . . . . . . . (294) (194) 151
Increase in inventory allowances . . . . . . . . . . 3,835 4,252 2,456
Other non-cash losses . . . . . . . . . . . . . . . -- 1,312 --
Minority interest . . . . . . . . . . . . . . . . . 3,451 189 9,608
Change in assets and liabilities, net of effects
of acquired companies:
Receivables . . . . . . . . . . . . . . . . . . . . (30,270) 19,968 19,151
Inventories . . . . . . . . . . . . . . . . . . . . 25,823 (15,388) (37,491)
Prepaid expenses and other assets . . . . . . . . . (20,137) 3,164 (4,640)
Other liabilities and deferred income taxes . . . . 699 (5,562) (44,104)
Trade payables and accrued liabilities . . . . . . . 6,795 (29,331) (25,448)
Income taxes payable . . . . . . . . . . . . . . . . 4,387 1,795 5,711
-------- -------- --------
Net cash provided by operating activities . . . 42,557 18,207 29,718
-------- -------- --------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . (20,205) (8,431) (11,610)
Proceeds from sale of fixed assets . . . . . . . . . 164 1,131 1,252
Purchase of marketable securities . . . . . . . . . -- (33,899) --
(Increase) decrease in restricted cash . . . . . . . -- 15,200 (15,200)
Cash acquired in connection with the acquisition
of the predecessor companies (including
$1,425 of restricted cash) . . . . . . . . . . . 9,921 -- --
Other, net . . . . . . . . . . . . . . . . . . . . . (1,270) 205 222
-------- -------- --------
Net cash used in investing activities . . . . . (11,390) (25,794) (25,336)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in borrowings under line of
credit arrangements . . . . . . . . . . . . . . (9,174) (1,487) 4,270
Proceeds from issuance of long-term debt . . . . . . 117,008 4,207 9,588
Payments on long-term debt . . . . . . . . . . . . . (82,409) (4,644) (7,285)
Payments to former affiliates . . . . . . . . . . . (23,718) (13,662) (14,987)
Proceeds from stock issuances . . . . . . . . . . . 588 2,415 32,994
Dividends paid to minority stockholders . . . . . . (5,214) (2,531) (7,525)
-------- -------- --------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . (2,919) (15,702) 17,055
-------- -------- --------
Effect of exchange rate changes on cash . . . . . . . . . (649) 12 (54)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . 27,599 (23,277) 21,383
Cash and cash equivalents at beginning of year . . . . . 14,777 38,054 16,671
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . $ 42,376 $ 14,777 $ 38,054
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
34
37
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. ORGANIZATION AND BACKGROUND:
On November 1, 1994, the shareholders of ICN Pharmaceuticals, Inc.
("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies")
approved the Merger of the Predecessor Companies, ("the Merger"). On November
10, 1994 (effective November 1, 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. In conjunction with the Merger, ICN Merger
Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company").
The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring company
and as a result, the Company has reported the historic financial data of SPI in
its financial results and includes the results of ICN, Viratek and Biomedicals
since November 1, 1994.
SPI was incorporated on November 30, 1981, as a wholly-owned
subsidiary of ICN and was 39%-owned by ICN prior to the Merger. Viratek and
Biomedicals were 63%-owned and 69%-owned by ICN, respectively, prior to the
Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements for 1994 include
the full year financial results of SPI and majority owned subsidiaries, which
includes 75% ownership in ICN Galenika (See Note 12), and the financial results
of ICN, Viratek, and Biomedicals, from the effective date of the Merger. The
consolidated financial statements for 1993 and 1992 reflect the financial
results of SPI. Investments in 20% through 50% owned affiliated companies are
included under the equity method where the Company exercises significant
influence over operating and financial affairs. The accompanying consolidated
financial statements reflect the elimination of all significant intercompany
account balances and transactions.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1994 and 1993, includes
$36,124,000 and $1,247,000, respectively, of certificate of deposits which have
maturities of three months or less. For purposes of the Statements of Cash
Flows, the Company considers highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
of those assets approximates fair value due to the short-term maturity of these
instruments.
Marketable Securities
In January 1994, the Company 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. The Company has classified its investment
in corporate bond securities, with maturities ranging from 1999 to 2003, and
its investment in equity
35
38
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
securities as available-for-sale. The contractual maturity value of these
corporate bond securities is approximately $33,700,000. The fair value of the
Company's investment in corporate bond securities is approximately $29,155,000.
The fair value of these corporate bond securities is determined based on quoted
market prices. Gross unrealized holding losses have been calculated on the
specific identification method. Changes in market values of equity securities
are reflected as unrealized gains or losses directly in stockholders' equity,
as required, and accordingly have no effect on the consolidated statements of
income. The adoption of SFAS No. 115 did not result in a cumulative effect
adjustment in the consolidated statements of income.
Marketable securities had an aggregate cost at December 31, 1993, of
$33,899,000. A valuation allowance in the amount of $1,312,000 has been
recorded to reduce the carrying amount of the portfolio to fair value, which
represents the net unrealized loss included in the determination of net income
for 1993. These investments are used to collateralize a note payable of
$10,000,000.
Inventories
Inventories, which include material, direct labor and factory
overhead, are stated at the lower of cost or market. Cost is determined on a
first-in, first-out ("FIFO") basis.
Property, Plant and Equipment
The Company primarily uses the straight-line method for depreciating
property, plant and equipment over their estimated useful lives. Buildings and
related improvements are depreciated from 7-50 years, machinery and equipment
from 5-15 years, furniture and fixtures from 4-10 years, and leasehold
improvements are amortized over their useful lives, limited to the life of the
lease.
The Company follows the policy of capitalizing expenditures that
materially increase the lives of the related assets and charges maintenance and
repairs to expense. Upon sale or retirement, the costs and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is included in income.
Goodwill and Intangibles
The difference between the purchase price and the fair value of net
assets acquired at the date of acquisition is included in the accompanying
Consolidated Balance Sheets as Goodwill. Goodwill amortization periods are
five years for single product line businesses acquired through November 30,
1986, and 10 to 23 years for certain businesses acquired in 1987, which have
other intangibles (patents and trademarks), and whose values and lives can be
reasonably estimated. The Company periodically evaluates the carrying value of
goodwill including the related amortization periods. The Company determines
whether there has been impairment by comparing the anticipated undiscounted
future operating income of the acquired entity with the carrying value of the
goodwill.
As a result of the Merger, the Company acquired certain intangible
assets (primarily related to patents and customer lists) of $14,000,000 after
certain purchase accounting adjustments, which are being amortized
over 5 to 10 years, using the straight-line method.
Notes Payable
The Company classifies various borrowings with initial terms of one
year or less as notes payable. At December 31, 1994, these notes, which are
primarily variable rate notes, had average interest rates of 9% in Spain, 7% in
Yugoslavia, 12% in Italy and 16% in the United States on a foreign denominated
obligation. The carrying amount of notes payable approximates fair value due
to the short-term maturity of these instruments. The weighted average interest
rate on short-term borrowings outstanding at December 31, 1994 and 1993 was 9%.
36
39
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations, except
those in highly inflationary economies, are translated at the end of period
exchange rates. Revenues and expenses are translated at the average exchange
rates prevailing during the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated in stockholders' equity. The monetary assets and
liabilities of foreign subsidiaries in highly inflationary economies are
remeasured into U.S. dollars at the year end exchange rates and non-monetary
assets and liabilities at historical rates. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
the Company has included in operating income all foreign exchange gains and
losses arising from foreign currency transactions and the effects of foreign
exchange rate fluctuations on subsidiaries operating in highly inflationary
economies. The (gains) losses included in operations from foreign exchange
translation and transactions for 1994, 1993 and 1992, were $191,000,
($3,282,000), and $25,039,000, respectively.
Income Taxes
In January 1993, the Company adopted SFAS 109, Accounting for Income
Taxes. SFAS 109 requires that an asset and liability approach be used in the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns. The adoption of SFAS 109 in 1993 did not result in
a cumulative effect adjustment in the consolidated statements of income.
Per Share Information
Per share information is based on the weighted average number of
common shares outstanding and the dilutive effect of common share equivalents.
Common share equivalents represent shares issuable for outstanding options, on
the assumption that the proceeds would be used to repurchase shares in the open
market.
In January 1993, SPI issued a fourth quarter 1992 stock dividend of
2%. During 1993, SPI issued quarterly stock dividends which totaled 6%. In
1994, SPI and the Company issued quarterly stock dividends and distributions
which totaled 4.8%. In March 1995, the Company declared a first quarter 1995
stock distribution of 1.7%. All share and per share amounts used in computing
earnings per share have been restated to reflect these stock dividends and
distributions.
Reclassifications
Certain prior year items have been reclassified to conform with the
current year presentation.
37
40
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
3. ACQUISITION OF THE PREDECESSOR COMPANIES
On November 10, 1994, SPI, ICN and Viratek merged into New ICN, and
Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of New
ICN. The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring company
and as a result, the Company has reported the historical financial data of SPI
in its financial results and the results of ICN, Viratek and Biomedicals have
been included with the results of the Company since the effective date of the
Merger.
As part of the Merger, the Company issued approximately 6,476,770
common shares valued on November 10, 1994 at $20.75 per share, which was the
publicly traded price for SPI's common shares at that date. Accordingly, the
purchase price, including direct acquisition costs of $3,654,000, has been
allocated to the estimated fair value of the net assets, including amounts
ascribed to purchased research and development costs which was charged to
operations immediately following the consummation of the Merger. The
$2,313,000 excess of the fair value of the net assets acquired and amounts
allocated to acquired research and development over the purchase price has been
proportionately allocated as a reduction of non-current assets acquired.
The purchase price allocation related to the Merger is preliminary,
pending resolution of a pre-acquisition contingency associated with certain
consolidated class actions, the 1987 Actions, entitled In re Paine Weber
Securities Litigation; In re ICN/Viratek Securities Litigation against ICN and
Viratek. (See Note 7)
The preliminary purchase price allocation, as of the effective date of
the Merger, is summarized as follows (in thousands):
Current assets (including cash of $9,921 of which $1,425 is restricted) . . $ 41,211
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 44,335
Acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 8,724
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,931)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (138,292)
Purchased research and development . . . . . . . . . . . . . . . . . . . . . 221,000
---------
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,047
=========
The Company has obtained independent third party appraisals for the
acquired in-process research and development costs and certain other intangible
costs, primarily patents and trademarks. The $221,000,000 which represents the
valuation of acquired in-process research and development for which no
alternative use exists, has been charged to operations immediately upon
consummation of the Merger in accordance with generally accepted accounting
principles.
38
41
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
The following table presents unaudited pro forma combined financial
information for the twelve months ended December 31, 1994 and 1993, as though
the Merger had been consummated at the beginning of those periods, after
including the impact of certain adjustments, such as: decrease of interest
expense resulting from the offering of $115,000,000, 8.5% Convertible Notes
(See Note 6), the proceeds of which have been used to repay certain long term
debt, amortization of intangibles, elimination of related party stock
transactions and the related income tax effects. The unaudited pro forma
combined financial information does not reflect any non-recurring costs
incurred in connection with the Merger (in the aggregate of approximately
$223,000,000 of which $221,000,000 was charged to operations immediately
following the Merger) (in thousands, except per share data):
(unaudited)
Year Ended December 31,
-----------------------
1994 1993
---- ----
Net sales $416,573 $463,033
Income (loss) before provision for income
taxes and minority interest $ 17,516 $ (2,275)
Net income (loss) $ 9,910 $ (3,058)
Net income (loss) per share $ .35 $ (0.11)
The pro forma combined financial information is presented for
informational purposes only and is not necessarily indicative of the operating
results that would have occurred had the Merger 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.
4. RELATED PARTY TRANSACTIONS:
General
Prior to the Merger, ICN controlled Biomedicals and Viratek through
stock ownership and board representation and was affiliated with SPI. Certain
officers of ICN occupied similar positions with SPI, Biomedicals, and Viratek
and were affiliated with SPI. Prior to the Merger, ICN, SPI, Biomedicals, and
Viratek engaged in certain transactions with each other.
Prior to the Merger, an Oversight Committee of the Board of Directors
of ICN, SPI, Biomedicals and Viratek reviewed transactions between or among
the affiliated corporations to determine whether a conflict of interest existed
with respect to a particular transaction and the manner in which such a
conflict could be resolved. The Oversight Committee had advisory authority
only and made recommendations to the Board of Directors of each of the
Affiliated Corporations. The Oversight Committee consisted of one
non-management director of each Affiliated Corporation and a non-voting
chairman. The significant related party transactions were reviewed and
recommended for approval by the Oversight Committee and approved by the
respective Board of Directors. As a result of the Merger, the Oversight
Committee has been eliminated.
Royalty Agreements
Effective December 1, 1990, SPI entered into a royalty agreement with
Viratek whereby a royalty of 20% of all sales of Virazole(R) was paid to
Viratek. Sales of Virazole(R), for purposes of determining royalties to
Viratek, for 1994, 1993 and 1992 were $35,855,000, $29,515,000 and $27,240,000,
respectively, which generated royalties to Viratek for 1994, 1993 and 1992 of
$7,171,000, $5,903,000 and $5,448,000, respectively. As a result of the
Merger, the Company is no longer required to pay future royalties on
Virazole(R).
39
42
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Beginning in 1993, under an amended agreement between SPI and the
employer of a director of Viratek, SPI was required to pay $20.00 for each new
aerosol drug delivery device manufactured. In connection with the Merger, the
Company assumed the agreement under the same terms as SPI. Such royalties for
1994 were $16,000. Also, pursuant to this agreement, the Company is required
to pay a 2% royalty on all sales of Virazole(R) in aerosolized form. Such
royalties for 1994, 1993 and 1992 were $725,000, $422,000 and $430,000,
respectively.
SPI marketed products under license from ICN for the treatment of
myasthenia gravis, a disease characterized by muscle weakness and atrophy. ICN
charged SPI royalties at the rate of 9% of net sales. Effective September 1,
1990, SPI prepaid royalties to ICN in the amount of $9,590,000, which was
recorded in Other Assets and is being amortized using the straight-line method
over fifteen years.
Beginning in December 1986 and prior to the Merger, SPI began selling
Brown Pharmaceuticals, Inc. products under license from ICN. ICN charged SPI
royalties at the rate of 8-1/2% of net sales. During 1994, 1993 and 1992, SPI
paid ICN $298,000, $218,000 and $65,000, respectively, in royalties under this
agreement. As a result of the Merger, the Company is no longer required to pay
a royalty to ICN for sales of Brown Pharmaceuticals, Inc. products.
Cost Allocations
Prior to the Merger, the affiliated corporations occupied ICN's
facility in Costa Mesa, California. The accompanying consolidated statements
of income include charges for rent from ICN of $230,000 for 1994 and $279,000
for each of years 1993 and 1992. In addition, the costs of common services
such as maintenance, purchasing and personnel were incurred by SPI and
allocated to ICN, Viratek and Biomedicals based on services utilized. The
total of such costs were $2,207,000 for 1994, $2,584,000 in 1993 and $2,556,000
in 1992 of which $1,579,000, $1,733,000 and $1,679,000 were allocated to the
affiliated corporations, respectively. It is management's belief that the
methods used and amounts allocated for facility costs and common services were
reasonable based upon the usage by the respective companies.
Investment Policy
Prior to the Merger, ICN and SPI had a policy covering intercompany
advances and interest rates, and the types of investments (marketable equity
securities, high yield bonds, etc.) to be made by ICN and its subsidiaries.
Under this policy, excess cash held by ICN's subsidiaries was transferred to
ICN and, in turn, cash advances were made to ICN's subsidiaries to fund certain
transactions. ICN charged or credited interest based on the amounts invested
or advanced, current interest rates and the cost of capital. During 1994, 1993
and 1992, SPI was charged interest of $359,000, $800,000 and $1,195,000,
respectively.
Debt and Equity Transactions
During 1993, ICN sold 1,618,200 shares of SPI's common stock for an
aggregate sales price of $19,995,000 in open market transactions and privately
negotiated sales. During 1992, ICN sold 690,000 shares of SPI's common stock
for an aggregate sales price of $13,786,000 in open market transactions and
privately negotiated sales.
On November 15, 1993, SPI issued 200,000 shares of common stock to ICN
in exchange for reducing its debt outstanding to ICN by $3,075,000. The value
of the shares issued was based on the quoted share price on the transaction
date.
During 1992, ICN Galenika sold 1,200,000 shares of SPI stock for
proceeds of $30,822,000. Net of amounts attributable to minority interest, the
sale of the stock increased paid-in-capital and decreased treasury stock by
$28,628,000.
40
43
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Other
Following is a summary of transactions incurred prior to the Merger,
as described above, between SPI and the former affiliated corporations for
1994, 1993 and 1992 (in thousands) :
1994 1993 1992
---- ---- ----
Cash payments to former affiliates, net . . . . . . . . . . . $ 23,718 $ 13,662 $ 15,806
Royalties to affiliates, net . . . . . . . . . . . . . . . . (7,469) (6,121) (5,511)
Allocation of common service costs to ICN and its subsidiaries 1,579 1,733 1,679
Rent charged by ICN . . . . . . . . . . . . . . . . . . . . . (230) (279) (279)
Interest expense with affiliates, net . . . . . . . . . . . . (359) (800) (1,195)
Dividends payable to ICN . . . . . . . . . . . . . . . . . . (967) (1,857) (7,518)
Return of inventory from Biomedicals . . . . . . . . . . . . -- -- 500
Common stock issued for payment of ICN debt . . . . . . . . . -- 3,075 --
Allocation of payroll costs . . . . . . . . . . . . . . . . . -- -- 507
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,041 2,707 465
----------- ----------- ---------
$ 18,313 $ 12,120 $ 4,454
=========== =========== =========
The average balances due to ICN were $6,326,000, $26,439,000 and $29,289,000
for 1994, 1993 and 1992, respectively.
5. INCOME TAXES:
In January 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactment of changes
in the tax law or rates. Previously, the Company used the SFAS 96 asset and
liability approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
The adoption of SFAS 109 did not result in a cumulative effect adjustment in
the consolidated statements of income.
Pretax income (loss) from continuing operations before minority
interest for the years ended December 31, consists of the following (in
thousands):
1994 1993 1992
---- ---- ----
Domestic . . . . . . . . . . . . . . . . . . . $ (194,756) $ 17,322 $ 6,371
Foreign . . . . . . . . . . . . . . . . . . . 24,804 9,745 46,835
----------- -------- --------
$ (169,952) $ 27,067 $ 53,206
=========== ======== ========
41
44
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
The income tax provisions for the years ended December 31, consist of
the following (in thousands):
1994 1993 1992
---- ---- ----
Current
-------
Foreign . . . . . . . . . $ 4,931 $ 1,929 $ 1,493
Federal . . . . . . . . . 5,829 4,197 5,876
State . . . . . . . . . . 100 100 100
---------- -------- --------
10,860 6,226 7,469
---------- -------- --------
Deferred
--------
Foreign . . . . . . . . . (500) (858) 1,185
Federal . . . . . . . . . -- -- 441
---------- -------- --------
(500) (858) 1,626
---------- -------- --------
Total $ 10,360 $ 5,368 $ 9,095
========== ======== ========
The current federal tax provision has not been reduced for the tax
benefit associated with the exercise of employee stock options. The tax
benefit from the exercise of employee stock options was credited to paid-in
capital in 1994, 1993, and 1992, in the amounts of $134,000, $727,000, and
$956,000, respectively.
In connection with the Merger, the Company acquired approximately
$226,000,000 of net operating loss carryforwards ("NOLs"). Included in the
total acquired net operating loss carryforward is approximately $191,000,000 of
domestic NOLs and approximately $35,000,000 of foreign NOLs. The utilization
of acquired NOLs is subject to a variety of limitations including an annual
limitation under Internal Revenue Code Section 382 on the use of such NOLs to
reduce the taxable income of the Company. The Company's NOLs expire beginning
1995 to 2009.
Generally, Section 382 imposes an annual limitation on the
availability of NOLs that can be used to reduce taxable income after certain
substantial ownership changes of a corporation. The Merger resulted in an
ownership change with respect to the acquired companies. Consequently, the
Company's annual limitation on utilization of the acquired domestic NOLs is
approximately $33,000,000 per year.
Included in the total acquired NOL is approximately $9,800,000 of
domestic NOLs acquired by Biomedicals from Flow Laboratories ("Flow"). Under
the terms of the Flow acquisition, 50 percent of the tax benefit from the
utilization of these acquired NOLs in excess of $500,000 is payable to the
former shareholders of Flow. Under the terms of the Flow acquisition
agreement, utilization is determined on a with and without basis.
In accordance with SFAS 109, any realization of acquired tax benefits must
be used to 1) reduce goodwill, 2) reduce acquired noncurrent intangible assets
and 3) reduce income tax expense. Consequently, the Company's post-1994 income
tax expense will not reflect the recognition of acquired tax benefits until all
acquired intangible assets have been reduced to zero. At December 31, 1994,
the balance of acquired noncurrent intangibles was approximately $13,500,000.
42
45
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
In addition to the acquired NOLs discussed above, the Company has an
NOL carryforward of approximately $3,700,000 which relates to a prior year
acquisition. The utilization of this loss carryforward is subject to an annual
limitation of $540,000.
The primary components of the Company's net deferred tax liability at
December 31, 1994 and 1993, are as follows (in thousands):
1994 1993
---- ----
Deferred tax assets:
NOL carryforward $ 80,524 $ --
Inventory and other reserves 7,459 1,789
Foreign tax credit carryover -- 700
Other -- 1,936
Long-term debt 3,186 --
Valuation reserve (82,573) (2,307)
--------- -------
Total deferred tax asset 8,596 2,118
Deferred tax liabilities:
Property, plant and equipment 3,885 --
Intangibles 3,919 --
Inventory 1,218 1,500
Unrealized currency gains -- 1,100
Other 544 988
--------- -------
Total deferred tax liability 9,566 3,588
--------- -------
Net deferred tax liability $ 970 $ 1,470
========= =======
The Company's effective tax rate differs from the applicable U.S.
statutory federal income tax rate due to the following:
1994 1993 1992
---- ---- ----
Statutory rate (benefit) (35%) 35% 34%
Write-off of purchased research and development 46 -- --
Foreign source income taxed at
lower effective rates (3) (5) (23)
Foreign dividend distributions -- -- 10
Utilization of foreign NOL -- (1) (2)
Recognition of fully reserved deferred tax debits (1) (2) --
Utilization of foreign tax/AMT credits (1) (4) (1)
Favorable audit settlement (1) (3) --
Other, net 1 -- (1)
--- --- ---
Effective rate 6% 20% 17%
=== === ===
43
46
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
During 1994, no U.S. income or foreign withholding taxes were provided
on the undistributed earnings of the Company's foreign subsidiaries with the
exception of the Company's Panamanian subsidiary, Alpha Pharmaceuticals, since
management intends to reinvest those undistributed earnings in the foreign
operations. Included in consolidated retained earnings at December 31, 1994,
is approximately $61,000,000 of accumulated earnings of foreign operations that
would be subject to U.S. income or foreign withholding taxes, if and when
repatriated.
The Company is under examination by the Internal Revenue Service for
the tax years ended November 30, 1991, 1990, 1989, and 1988. Currently, the
proposed adjustments, if upheld, would not result in a significant additional
tax liability and would not result in a significant reduction in NOLs available
to the Company.
6. DEBT
Long-term debt consists of the following (in thousands):
1994 1993
---- ----
8.5% Convertible Subordinated Notes due 1999 $ 115,000 $ --
12 7/8% Sinking Fund Debentures due July 15, 1998 (net of unamortized
premium of $463) 34,160 --
Swiss Franc Subordinated Bonds due 1988-2001 with effective
interest rate of 8.5% (net of unamortized discount of $1,288) 14,590 --
Zero Coupon Guaranteed Swiss Franc Bonds with an effective
interest rate of 8.5%, maturing in 2002 (net of unamortized
discount of $611) 9,453 --
3 1/4% Subordinated Double Convertible Swiss Franc Bonds due 1997
(net of unamortized discount of $146) 4,545 --
Zero Coupon ECU Subordinated Bonds due 1987-1996 with
effective interest rate of 8.5% 2,548 --
Bank credit lines and long-term loans with interest rates at 14%-16%
adjusted annually, payable in Spanish pesetas 822 12,221
U.S. mortgage with a variable interest rate currently at 6.2%, interest and
principal payable monthly through 1998 12,435 --
Other long-term debt, due in U.S. dollars and various foreign currencies
with interest rates ranging from 2% to 14% 7,695 8,625
---------- ---------
201,248 20,846
Less current portion 6,067 3,866
---------- ---------
Total long-term debt $ 195,181 $ 16,980
========== =========
44
47
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
On November 17, 1994, the Company completed an underwritten public
offering in the principal amount of $115,000,000 of 8.5% Subordinated
Convertible Notes (the "Convertible Notes"), due in November 1999. These notes
are convertible at the option of the holder either in whole or in part, at any
time prior to maturity, into the Company's stock at a current conversion price
of $22.98 per share, subject to adjustment in certain events. The Convertible
Notes are also redeemable, in whole or in part, at the option of the Company at
any time on or after November 15, 1997 at the specified redemption prices, plus
accrued interest. The fair value of the Convertible Notes was approximately
$110,975,000 at December 31, 1994.
The net proceeds from the Convertible Notes were primarily used to
retire certain high yield debt which included the retirement of $37,000,000 of
12-7/8% Sinking Fund Debentures (the "12-7/8% Debentures") plus accrued
interest, $20,238,000 of 12-1/2% Debentures plus accrued interest, $3,382,000
of Mexican variable rate debt and $15,198,000 of Spanish debt. The effects on
income from the above debt extinguishments was not material.
In July 1986, ICN issued $115,000,000 principal amount 12-7/8%
Debentures, due July 15, 1998 in an underwritten public offering of which
$33,697,000 remains outstanding at December 31, 1994. The 12-7/8% Debentures
are senior, uncollateralized indebtedness of the Company. The 12-7/8%
Debentures are redeemable, in whole or in part, at the option of the Company at
par plus accrued interest. Mandatory annual sinking fund payments, commencing
on July 15, 1994, are calculated to retire 80% of the issue prior to maturity.
The indenture imposes limitations on, among other things, (i) the issuance or
assumption by the Company or its subsidiaries of additional debt which is
senior to the 12-7/8% Debentures and (ii) dividends and distributions on, or
repurchases and redemptions of common stock of the Company. As mentioned
above, the Company utilized the proceeds from the offering of the Convertible
Notes to retire $37,000,000 in principal of the 12-7/8% Debentures plus accrued
interest. The fair value of the 12-7/8% Debentures outstanding at December 31,
1994 was approximately $35,185,000.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust
established by ICN, completed an underwritten public offering in Switzerland of
Swiss francs 100,000,000 principal amount of 5-5/8% Swiss Franc Exchangeable
Certificates (the "Xr Certificates") of which SFr. 66,510,000 remain
outstanding at December 31, 1994. At the time of the issuance, the Xr
Certificates were exchangeable through 2001 for 1,250,000 shares of common
stock of ICN and 860,000 shares of common stock of SPI owned by ICN at initial
exchange prices of $24.10 and $35.02 per share, respectively, at a fixed
exchange rate of SFr. 1.66 per $1.00. Currently, the face value of the
outstanding Xr Capital are convertible into 1,444,277 shares of the Company's
common stock at the exchange price of $27.74 per share and at a fixed exchange
rate of SFr. $1.66 per $1.00. The net proceeds of the offering were used by
Xr Capital to purchase from ICN 14 series of Swiss Franc Subordinated Bonds due
1988-2001 (the "ICN-Swiss Franc Xr Bonds") for approximately $27,944,000 and
SFr. 45,700,000 principal amount of cumulative coupon 5.4% Italian Electrical
Agency Bonds due 2001 for approximately $27,202,000. The Company has no
obligation with respect to the payment of the face amount of the Xr
Certificates since these are to be paid upon maturity by the Italian Bonds
(except for payment of certain additional amounts in the event of the
imposition of U.S. withholding taxes on either the Xr Certificates or ICN Swiss
Franc Xr Bonds are funds required for redemption of the Xr Certificates in the
event the Company exercises its optional right to redeem). The fair value of
the ICN-Swiss Franc Xr. Bonds was approximately $13,277,000 at December 31,
1994.
45
48
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by
ICN and Biomedicals, completed a public offering in Switzerland of SFr.
70,000,000 principal amount of 5-1/2% Swiss Franc Exchangeable Certificates
("Old Certificates"). The Bio Capital debt is senior, uncollateralized
indebtedness of the Company. At the option of the certificate holder, the Old
Certificates are exchangeable into shares of the Company's common stock. Net
proceeds were used by Bio Capital to purchase SFr. 70,000,000 face amount of
zero coupon Swiss Franc Debt Notes due 2002 of the Kingdom of Denmark (the
"Danish Bonds") for SFr. 33,772,000 and 15 series of zero coupon Swiss Franc
Guaranteed Bonds of the Company (the "Zero Coupon Guaranteed Bonds") for SFr.
32,440,000 which are guaranteed by the Company. Each series of the Zero Coupon
Guaranteed Bonds are in an aggregate principal amount of SFr. 3,850,000
maturing February of each year through 2002. The Company has no obligation
with respect to the payment of the principal amount of the Old Certificates
since they will be paid upon maturity by the Danish bonds. During 1990,
Biomedicals offered to exchange, to all certificate holders, the Old
Certificates for newly issued certificates ("New Certificates"), the terms of
which remain the same except that 334 shares per SFr. 5,000 principal
certificate can be exchanged at $10.02 using a fixed exchange rate of SFr. 1.49
to U.S. $1.00. Substantially all of the outstanding Old Certificates were
exchanged for New Certificates (together referred to as "Certificates").
Currently, the face value of the outstanding Bio Capital (SFr. 39,615,000) are
convertible into 533,427 shares of the Company's common stock at the exchange
prices of $48.99 and $84.44 at fixed exchange rates of Sfr. 1.49 and Sfr. 1.54
for New and Old Certificates, respectively. No repurchases were made in
1994. The fair value of the Zero Coupon Guaranteed Bonds was approximately
$8,508,000 at December 31, 1994.
On March 25, 1987, ICN completed an underwritten public offering in
Switzerland of SFr. 60,000,000 principal amount (approximately $38,961,000) of
3-1/4% Subordinated Double Convertible Bonds due 1997 "Double Convertible
Bonds". These bonds are convertible at the option of the holder into one of
the following: (i) entirely into 1,500,000 of common stock of ICN at a
conversion price of $26.14 per share (at a fixed exchange rate of SFr. 1.53 per
$1.00); (ii) entirely into 15,000 shares of common stock of Ciba Geigy Ltd. at
a conversion price of SFr. 4,000 per share; or (iii) a combination of 750,000
shares of common stock of ICN and 7,500 shares of common stock of Ciba Geigy
Ltd. at conversion prices of $26.14 and SFr. 4,000 per share, respectively,
subject to adjustment for dilutive issues. Currently, the outstanding Double
Convertible Bonds totaling SFr. 6,136,000 are convertible into 81,538 shares
of the Company's common stock at the exchange price of $49.19 per share and
at a fixed exchange rate of SFr. 1.53 per $1.00. During 1992, a one to five
stock split was declared on Ciba Geigy stock, thereafter, the conversion
price for Ciba Geigy shares was adjusted to SFr. 800 per Ciba Geigy share.
Meanwhile, the bondholders can convert the Bonds equally into both Ciba Geigy
stock and common stock of the Company based on the above exchange price and
rate. In connection with this offering, the Company placed in escrow 15,000
shares of Ciba Geigy Ltd. common stock. As of December 31, 1994, 7,670
shares of Ciba Geigy stock were outstanding and are reflected in the
Consolidated Balance Sheet as marketable securities. The fair value of these
bonds was approximately $4,454,000 at December 31, 1994.
In October 1986, Pharma Capital Holdings ("Pharma Capital"), a trust
established by ICN, completed an underwritten public offering in Europe of ECU
40,000,000 principal amount of 7-1/4% Exchangeable Certificates Due 1996 (the
"Pharma Certificates") of which ECU 16,195,000 remain outstanding at December
31, 1994. At the time of issuance, the Pharma Certificates were exchangeable
into 1,936,000 shares of common stock of ICN at an initial exchange price of
$21.14 per share, at a fixed exchange rate of ECU .9775 per $1.00. Currently,
the face value of the outstanding Pharma Certificates are convertible into
416,637 shares of the Company's common stock at the exchange price of $39.76
per share and at a fixed exchange rate of ECU .9775 per $1.00. The net
proceeds of approximately ECU 19,400,000 were used by Pharma Capital to
purchase nine series of Zero Coupon ECU Subordinated Bonds of ICN (consisting
of one series, payable in two installments, the first on May 30, 1987 in the
amount of ECU 1,756,111 and the second on May 30, 1988 in the amount of ECU
2,900,000, and eight series each in the aggregate principal amount of ECU
2,900,000 maturing on May 30 in each of the years 1989 to 1996) (the "ICN-ECU
Bonds") and ECU 40,000,000 aggregate principal amount of ECU 200,000,000 Zero
Coupon Guaranteed Bonds Due May 30, 1996, Series 119, of The Mortgage Bank and
Financial Agency of the Kingdom ofDenmark (unconditionally guaranteed by the
Kingdom of Denmark). The Company has no obligation with respect to the payment
of the face amount of the Pharma Certificates since these are to be paid upon
maturity by the
46
49
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Kingdom of Denmark Zero Coupon Guaranteed Bonds (except for payment of certain
additional amounts in the event of U.S. withholding taxes on either the Pharma
Certificates or ICN-ECU Bonds and funds required for redemption of the Pharma
Certificates in the event the Company exercises its optional right to redeem).
Fair value of the ICN-ECU bonds was approximately $2,293,000 at December 31,
1994.
The Company has the optional right to redeem the ICN-ECU Bonds,
ICN-Swiss Franc Xr Bonds, Bio Certificates and Double Convertible Bonds in the
event that the market price of the Company's common stock meets certain
conditions. As mentioned above, due to the Merger, all convertible bonds are
now convertible into the Company's common stock at various specified conversion
prices, subject to adjustment for subsequent dilutive issues.
The Spanish bank credit lines totaling $822,000, which approximates
fair value, are collateralized by accounts receivable totaling $3,053,000 and
land and a building with a net book value of $10,185,000.
The Company has mortgage notes payables totaling $16,963,000, payable
in U.S. dollars, Deutsche marks and Dutch guilders, collateralized by certain
real property of the Company.
Annual aggregate maturities of long-term debt subsequent to December
31, 1994 are as follows (in thousands):
1995 . . . . . . . . . . . . . . . . . . . . . . $ 6,067
1996 . . . . . . . . . . . . . . . . . . . . . . 6,767
1997 . . . . . . . . . . . . . . . . . . . . . . 20,488
1998 . . . . . . . . . . . . . . . . . . . . . . 36,936
1999 . . . . . . . . . . . . . . . . . . . . . . 119,281
Thereafter . . . . . . . . . . . . . . . . . . . 11,709
---------
Total . . . . . . . . . . . . . . . . . $ 201,248
=========
The fair value of the Company's debt is estimated based on quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The carrying amount of
all short-term and variable interest rate borrowings approximates fair value.
Subsidiaries of the Company have short and long-term lines of credit
aggregating $10,466,000 of which $1,173,000 was outstanding at December 31,
1994.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
At December 31, 1994, the Company was committed under noncancellable
operating leases for minimum aggregate lease payments as follows (in
thousands):
1995 . . . . . . . . . . . . . . . . . . . . . . $ 1,312
1996 . . . . . . . . . . . . . . . . . . . . . . 1,127
1997 . . . . . . . . . . . . . . . . . . . . . . 925
1998 . . . . . . . . . . . . . . . . . . . . . . 839
1999 . . . . . . . . . . . . . . . . . . . . . . 668
Thereafter . . . . . . . . . . . . . . . . . . . 5,061
---------
Total . . . . . . . . . . . . . . . . . $ 9,932
=========
Rental expense on operating leases was $213,000 in 1994 representing rental
expenses on leases assumed in connection with the Merger since November 1,
1994.
47
50
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Litigation
The Predecessor Companies were parties to a number of lawsuits. As a
result of the Merger, the Company has assumed all of the Predecessor Companies'
liabilities with respect to such lawsuits.
In February and March 1995, eighteen actions were filed which named
the Company, its Board of Directors, Milan Panic and several other officers of
the Company, in various combinations, as defendants (the "Defendants") ("the
1995 Actions"). Eleven of the actions purport to be securities class actions,
one is an individual securities action and six purport to be derivative suits.
In general, all of the securities class actions allege that the
Company made various deceptive and untrue statements of material fact and
omitted to state material facts in connection with information it received from
the FDA regarding the Company's NDA for the use of Virazole(R) for the
treatment of chronic hepatitis C. Plaintiffs also allege that various officers
of the Company traded on inside information. The purported securities class
actions and the individual securities action assert claims for alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
Rule 10b-5 promulgated thereunder, common law fraud, misrepresentation and
negligent misrepresentation. They seek unspecified compensatory and punitive
damages, attorneys' fees and costs, injunctive and equitable relief, and
disgorgement. With respect to the purported securities class actions,
plaintiffs seek certification of classes of persons who purchased ICN common
stock, ICN debentures and ICN call options or sold ICN put options. The
securities class actions seek certification for differing time periods, the
longest alleged time period being from June 2, 1994 through February 17, 1995.
With respect to the purported derivative suits, plaintiffs assert
claims for breach of fiduciary duty, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, breach of the fiduciary duty of candor,
waste of corporate assets, constructive fraud, disgorgement, gross
mismanagement, abuse of control and unjust enrichment. In these actions
plaintiffs seek unspecified compensatory and punitive damages, attorneys' fee
and costs and injunctive and equitable relief.
The Company has had preliminary discussions with the attorneys for
plaintiffs who have suggested that an Amended Consolidated Complaint,
encompassing the 1995 Actions, be filed in the United States District Court for
the Central District of California. If this consolidation occurs, as
Defendants currently expect, Defendants will have at least 30 days from the
filing of the Amended Consolidated Complaint to answer or move. It is not
possible at present for the Company to predict the outcome or the range of
potential loss, if any, that might result from the 1995 Actions. The
Defendants intend to vigorously defend the 1995 Actions.
In response to the allegations contained in the 1995 Actions, the
Board of Directors established a Special Committee of the Board of Directors in
February, 1995 to review the trading of common stock of the Company by
executives and issues surrounding the timely disclosure of information received
from the FDA regarding the Company's NDA for the use of Virazole in the
treatment of chronic hepatitis C. The Committee's investigation is still in
progress. It is anticipated that the Committee will finalize its report and
present its findings to the Board of Directors in mid-April 1995.
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. ("the 1994 Actions"), were filed by stockholders of SPI
and, in the Jallath lawsuit, 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 held shares of SPI common stock and, in the Jallath lawsuit,
Viratek common stock. The fourth lawsuit, entitled ~Joice Perry v.
48
51
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
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 held shares of Viratek common stock. These suits allege that the
consideration provided to the publicstockholders 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 Merger and otherwise. The
Company believes that the 1994 Actions are without merit and intends to defend
them vigorously. It is not possible at present for the Company to predict the
outcome or the range of potential loss, if any, that might result from the 1994
Actions.
ICN, SPI and Viratek and certain of their officers and directors
(collectively, the "ICN Defendants") were named defendants 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)) (collectively "the 1987 Actions"). In the Third Amended
Consolidated Class Action Complaint, plaintiffs allege that the ICN Defendants
made, or aided and abetted Paine Webber, Inc. ("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 research reports
and filings with the Securities and Exchange Commission. The alleged
misstatements and omissions primarily concern developments regarding
Virazole(R), including the efficacy, safety and market for the drug. The
plaintiffs allege that such misrepresentations and omissions violate Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and constitute
common law fraud and misrepresentation. 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. Oral argument on plaintiffs' motion
for class certification was held on June 2, 1994. To date, no decision has
been rendered. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN 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, 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. On October 20, 1993,
plaintiffs informed the Court that they had reached an agreement to settle with
co-defendant Paine Webber and on July 27, 1994, the settlement was approved by
the court. Management believes that, having extensively reviewed the issues
in the above referenced matters, there are strong defenses and the Company
intends to defend the 1987 Actions vigorously. While the ultimate outcome of
the 1987 Actions cannot be predicted with certainty, and an unfavorable outcome
could have a material adverse effect on the Company, at this time management
does not expect these matters will have a material adverse effect on the
financial position and results of operations of the Company.
In late January 1995, an action was commenced by Deborah Levy against
ICN, SPI, Viratek and Milan Panic. The complaint asserts causes of action for
sex discrimination and harassment, and for violations of the California
Department of Fair Employment and Housing statute and a provision of the
California Government Code. The complaint seeks injunctive relief and
unspecified compensatory and punitive damages. Defendants filed their answer,
demand for production of documents and request for interrogatories in March
1995. The defendants intend to vigorously defend the suit.
49
52
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
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"), 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
1993, the judge granted judgment in favor of Gencon for breach of contract in
the amount of approximately $2,100,000 plus interest, costs and attorneys' fees
(which sums total approximately $650,000). ICN Canada timely filed its Notice
of Appeal and Gencon filed a Notice of Cross-Appeal, seeking the award of
approximately $145,000 in additional claimed costs. Both the appeal and the
cross-appeal have been fully briefed. No date has been set for oral argument.
The defendants intend to vigorously defend this action.
On January 25, 1995, GRC International, Inc. ("GRC") filed a motion in
the Superior Court of the State of California, County of Orange, to confirm a
$2,260,807 arbitration award issued against Biomedicals. The dispute centered
on the last payment due from Biomedicals to GRC as a result of Biomedical's
acquisition of Flow General Inc. in 1989. On March 23, 1995, GRC's motion to
confirm the arbitration award was granted. The Company has accounted for the
resolution of this matter as a liability assumed upon the effective date of the
Merger.
In October 1994, an action entitled Engelhardt v. ICN Pharmaceuticals,
Inc. (Case No. 94-2-2322) was filed in the United States District Court for the
District of Colorado. The action was commenced by Lauri and Kenneth Engelhardt
on behalf of themselves and their infant daughter Hannah. It is alleged that
Lauri Engelhardt was exposed to Virazole(R) early in her pregnancy, and that as
a result of such exposure, Hannah was born with birth defects. Plaintiffs
assert causes of action for products liability and negligence and seek
unspecified damages. The Company filed a motion on February 28, 1995 to
dismiss asserting that Plaintiffs' claims are barred by the statute of
limitations. No decision has been rendered with respect to that motion. The
Company believes that the allegations are without merit and intends to
vigorously defend this action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan
("Khan") in the United States District Court for the Southern District of New
York. The complaint alleged, among other things, that Khan violated numerous
provisions of the securities laws and breached his fiduciary duty to ICN and
Viratek by attempting to effectuate a change in control of ICN while acting as
an agent and fiduciary of ICN and Viratek, and are seeking compensatory and
punitive damages in the amount of $25,000,000. Khan has filed counterclaims on
April 12, 1993, asserting causes of action for slander, interference with
economic relations, a shareholders' derivative action for breach of fiduciary
duties, violations of the federal securities laws and tortious interference
with economic relations, and is seeking compensatory damages, interest and
exemplary damages of $29,000,000. On November 4, 1994, ICN and Viratek moved
to have a default judgment entered against Khan and to dismiss his
counterclaims. Khan submitted his opposition papers on March 15, 1995, and an
oral argument is currently scheduled for April 21, 1995.
The Company is a party to a number of other pending or threatened
lawsuits arising out of, or incident to, its ordinary course of business. In
the opinion of management, these various other pending lawsuits will not have a
material adverse effect on the consolidated financial position or operations of
the Company.
Arbitration: On June 30, 1993, ICN filed a claim in arbitration, ICN
v. Labsystems, O.Y., alleging breach of a certain supplier agreement and
requesting repudiation of such agreement. On February 6, 1995, the tribunal
awarded Labsystems approximately $5,040,000 including interest and affirming
existence of the supplier agreement between the parties requiring ICN to accept
$4,500,000 of inventory from Labsystems. The Company has accounted for the
resolution of the arbitration as a liability assumed upon the effective date of
the Merger.
50
53
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Product Liability Insurance
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products. While to date no material adverse
claim for personal injury resulting from allegedly defective products has been
successfully maintained against the Company, a substantial claim, if
successful, could have a material adverse effect on the Company.
License Commitment
In November 1994, the Company entered into a license agreement for the
rights to develop and commercialize a group of compounds related to and
including human growth hormone releasing factor ("GRF"), for the United States
and other major pharmaceutical markets. In connection with this agreement, the
Company is obligated to pay, upon meeting certain milestones, an aggregate
amount of $2,600,000. In addition, after such milestones are met, the Company
is obligated to pay a royalty of 9%, subject to certain adjustments, based upon
net sales of GRF in certain territories. The testing of these GRF
compounds in relieving growth retardation is in Phase III clinical trials.
Benefits Plans
The Company has a defined contribution plan that provides all U.S.
employees the opportunity to defer a portion of their compensation for payout
at a subsequent date. The Company can voluntarily make matching contributions
on behalf of participating and eligible employees. The Company's expense
related to such defined contribution plan was not material in 1994, 1993 and
1992.
In connection with the Merger, the Company assumed deferred
compensation agreements with certain officers and certain key employees of the
Predecessor Companies, with benefits commencing at death or retirement. As of
December 31,1994, the present value of the deferred compensation benefits to be
paid has been accrued in the amount of $2,270,000. Interest accrues on the
outstanding balance at rates ranging from 10.9% to 11.3%. No new
contributions are being made, however, interest continues to accrue on the
present value of the benefits expected to be paid.
Other
Prior to the Merger, the Predecessor Companies had employment
agreements with certain executive officers. The Company assumed all such
employment agreements upon the effective date of the Merger.
Milan Panic, the Company's Chairman of the Board, President and Chief
Executive Officer, is employed under a contract expiring September 1995 that
provides for, among other things, certain retirement benefits. Mr. Panic, at
his option, may provide consulting services upon his retirement for $120,000
per year for life, subject to annual cost-of-living adjustments from the base
year of 1967. Including such cost-of-living adjustments, the annual cost of
such consulting services is currently estimated to be in excess of $535,000. The
consulting fee shall not at any time exceed the annual compensation as
adjusted, paid to Mr. Panic. Upon Mr. Panic's retirement, the consulting fee
shall not be subject to further cost of living adjustments.
The Company has Employment Agreements with six key executives which
contain "change in control" benefits. Upon a "change in control" of the
Company as defined in the contract, the employee shall receive severance
benefits equal to three times salary and other benefits. The executives
include Mr. Jerney, Mr. Giordani, Mr. MacDonald, Mr. Watt, Mr. Phillips and
Mr. Sholl.
51
54
8. COMMON STOCK:
Prior to Merger, each of the Predecessor Companies had their own stock
option plans. Upon consummation of the Merger, New ICN assumed all options
outstanding under the existing stock option plans. The existing stock option
plans were exchanged for shares of New ICN. Each option of ICN common stock,
SPI common stock, Viratek common stock and Biomedicals common stock was
exchanged for 0.512, 1.0, 0.499 and 0.197 options of New ICN common stock,
respectively.
New ICN assumed three, two and three Nonqualified Stock Option Plans
from Biomedicals, ICN and Viratek, respectively, and two employee Incentive
Stock Option Plans from each of Biomedicals, ICN and Viratek, respectively.
Prior to the Merger, SPI had three Non Qualified Stock Option Plans, one of
these Plans was reserved for certain officers of SPI, and two employee
Incentive Stock Option Plans. Under the terms of all Stock Option Plans, the
option price may not be less than the fair market value at the date of the
grant and may not have a term exceeding 10 years. The options granted are
reserved for issuance to officer, directors, key employees, scientific advisors
and consultants.
52
55
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
The following table sets forth information relating to stock option plans during
the years ended December 31, 1994, 1993 and 1992 (in thousands, except per
share data):
AVERAGE
OPTION
TOTAL PRICE
----- -------
Shares under option, December 31, 1991 1,882
Granted 1,408 $ 6.66
Exercised (327)
Canceled (102)
-----
Shares under option, December 31, 1992 2,861 $16.19
Granted 760
Exercised (461) $ 5.24
Canceled (121)
-----
Shares under option, December 31, 1993 3,039 $16.56
Granted 1,025
Exercised (80) $ 7.35
Canceled (150)
Effect of Merger 1,879
-----
Shares under option, December 31, 1994 5,713 $18.66
=====
Exercisable at December 31, 1994 2,814
=====
In January 1993, SPI issued a fourth quarter 1992 stock dividend of
2%. During 1993, SPI issued quarterly stock dividends which totaled 6%. In
1994, SPI and the Company issued quarterly stock dividends and distributions
which totaled 4.8%. Accordingly, all relevant stock option data and per share
data has been restated to reflect these dividends and distributions.
In 1994, SPI issued common stock for certain bonuses accrued in 1993.
The number of shares issued was based upon the fair value of the shares at the
date of issuance and a fixed amount related to the bonuses paid.
At December 31, 1994, a total of 5,713,000 shares under options have
been granted from the Company's Incentive and Non Qualified Stock Option Plans,
with shares available for grant under the Incentive Stock Option Plan of
952,199. Under the Non Qualified Stock Option Plans, a total of 4,253,087
shares were reserved and outstanding and 341,937 shares were not reserved and
outstanding at the time of grant, but were granted to key employees pursuant
to authorization by the Board of Directors, subject to the approval of the
stockholders at the next stockholders' meeting.
53
56
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
9. DETAIL OF CERTAIN ACCOUNTS (IN THOUSANDS):
1994 1993
---- ----
RECEIVABLES, NET:
Trade accounts receivable . . . . . . . . . . . . $ 84,789 $ 47,956
Other receivables . . . . . . . . . . . . . . . . 7,198 2,954
----------- ---------
91,987 50,910
Allowance for doubtful accounts (10,036) (7,633)
----------- ---------
$ 81,951 $ 43,277
=========== =========
INVENTORIES, NET:
Raw materials and supplies . . . . . . . . . . . $ 37,198 $ 57,148
Work-in-process . . . . . . . . . . . . . . . . . 13,167 12,541
Finished goods . . . . . . . . . . . . . . . . . 42,994 38,824
----------- ---------
93,359 108,513
Allowance for inventory obsolescence (3,911) (1,317)
----------- ---------
$ 89,448 $ 107,196
=========== =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Advances to inventory suppliers . . . . . . . . . $ 19,175 $ 5,617
Prepaid expenses and other current assets . . . . 5,971 5,308
----------- ---------
$ 25,146 $ 10,925
=========== =========
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . $ 13,493 $ 4,891
Buildings . . . . . . . . . . . . . . . . . . . . 53,807 46,477
Machinery and equipment . . . . . . . . . . . . . 68,292 44,385
Furniture and fixtures . . . . . . . . . . . . . 11,685 7,403
Leasehold improvements . . . . . . . . . . . . . 4,087 1,269
Construction in progress . . . . . . . . . . . . 11,224 4,490
----------- ---------
162,588 108,915
Accumulated depreciation and amortization . . . . (33,965) (30,197)
----------- ---------
$ 128,623 $ 78,718
=========== =========
During the third quarter of 1994, ICN Galenika commenced a
construction and modernization program at its pharmaceutical complex
outside Belgrade, Yugoslavia. At December 31, 1994, construction in
progress primarily relates to costs incurred to date for these
facilities.
OTHER ASSETS:
Prepaid royalties . . . . . . . . . . . . . . . . $ 5,901 $ 6,395
Deferred loan costs . . . . . . . . . . . . . . . 4,590 --
Catalog costs . . . . . . . . . . . . . . . . . . 2,440 965
Other . . . . . . . . . . . . . . . . . . . . . . 8,351 3,167
----------- ---------
$ 21,282 $ 10,527
=========== =========
Deferred loan costs incurred in connection with the issuance of the
Convertible Notes are amortized using the effective interest method over the
life of the related debt.
54
57
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
1994 1993
---- ----
ACCRUED LIABILITIES:
Payroll and related items . . . . . . . . . . . . $ 12,396 $ 8,278
Royalties . . . . . . . . . . . . . . . . . . . . 1,415 810
Interest . . . . . . . . . . . . . . . . . . . . 5,513 111
Taxes (other than income taxes) . . . . . . . . . 1,361 139
Arbitration settlements . . . . . . . . . . . . . 5,040 --
Dividends . . . . . . . . . . . . . . . . . . . . 1,547 1,358
Insurance . . . . . . . . . . . . . . . . . . . . 2,624 1,028
Deferred income . . . . . . . . . . . . . . . . . 2,572 --
Other . . . . . . . . . . . . . . . . . . . . . . 10,643 5,976
----------- ---------
$ 43,111 $ 17,700
=========== =========
The Company has accrued for certain arbitration settlements of
$5,040,000 that were assumed as a result of the Merger. Final arbitration
decisions were rendered in February 1995 that fixed the amount of liabilities
in these cases. The events that prompted the arbitration awards were
preexisting conditions as of the date of the Merger.
1994 1993 1992
---- ---- ----
INTEREST:
Interest (income) . . . . . . . . . . . . . . . . . . . $ (3,213) $ (5,983) $ (6,599)
Interest (income) -- affiliates . . . . . . . . . . . . (1,515) (2,050) (3,080)
--------- --------- --------
$ (4,728) $ (8,033) $ (9,679)
========= ========= ========
Interest expense . . . . . . . . . . . . . . . . . . . . $ 7,810 $ 20,900 $ 8,790
Interest expense -- affiliates. . . . . . . . . . . . . . 1,507 2,850 4,275
--------- --------- --------
$ 9,317 $ 23,750 $ 13,065
========= ========= ========
It is the Company's policy to segregate significant non-operating items and
report them separately as Other expense, net, as follows:
OTHER EXPENSE, NET:
Litigation settlements and damages . . . . . . . . . . . $ -- $ 988 $ 447
Profit sharing plan expense in Mexico . . . . . . . . . 333 557 419
Amortization of goodwill and intangibles . . . . . . . . 886 248 677
Employee severance in Spain . . . . . . . . . . . . . . -- 1,000 --
(Gain) loss on sale of fixed assets . . . . . . . . . . (294) (194) 151
Unrealized loss on marketable securities . . . . . . . . -- 1,312 --
Other, net . . . . . . . . . . . . . . . . . . . . . . . 606 (85) 388
--------- --------- --------
Other expense, net . . . . . . . . . . . . . . . . . . . $ 1,531 $ 3,826 $ 2,082
========= ========= ========
55
58
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
10. INDUSTRY BUSINESS SEGMENTS AND GEOGRAPHIC DATA:
The Company operates in two industry segments: pharmaceutical (the
"Pharmaceutical group") and biomedical (the "Biomedical group"). The
Pharmaceutical group produces and markets pharmaceutical products in the United
States, Mexico, Canada and Europe. The Biomedical group markets research
chemical and cell biology products and related services, biomedical
instrumentation and immunodiagnostic reagents and instrumentation.
The following tables set forth the amount of net sales, income (loss)
before interest, provision for taxes and minority interest and identifiable
assets of the Company by industry segment and geographical areas for 1994, 1993
and 1992 (in thousands):
INDUSTRY SEGMENTS
1994 1993 1992
---- ---- ----
SALES
Pharmaceutical . . . . . . . . . . . . . $ 357,821 $ 403,957 $ 476,118
Biomedical . . . . . . . . . . . . . . . . 9,030 -- --
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 366,851 $ 403,957 $ 476,118
============ =========== ===========
INCOME (LOSS) BEFORE INTEREST, PROVISION FOR INCOME TAXES AND MINORITY INTEREST.
Pharmaceutical . . . . . . . . . . . . . . $ (159,875)(1) $ 49,885 $ 64,797
Biomedical . . . . . . . . . . . . . . . . 582 -- --
Corporate . . . . . . . . . . . . . . . . (6,070) (7,101) (8,205)
------------ ----------- -----------
Income before interest,
provision for income taxes
and minority interest. . . . . . . . . (165,363) 42,784 56,592
Net interest expense . . . . . . . . . . . 4,589 15,717 3,386
------------ ----------- -----------
Income (loss) before provision
for income taxes and minority
interest. . . . . . . . . . . . . . . $ (169,952) $ 27,067 $ 53,206
============ =========== ===========
IDENTIFIABLE ASSETS:
Pharmaceutical . . . . . . . . . . . . . . $ 314,517 $ 292,132 $ 329,679
Biomedical . . . . . . . . . . . . . . . . 49,769 -- --
Corporate . . . . . . . . . . . . . . . . 77,187 9,885 3,539
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 441,473 $ 302,017 $ 333,218
============ =========== ===========
DEPRECIATION AND AMORTIZATION:
Pharmaceutical . . . . . . . . . . . . . . $ 8,303 $ 8,276 $ 6,743
Biomedical . . . . . . . . . . . . . . . . 524 -- --
Corporate . . . . . . . . . . . . . . . . 421 237 27
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 9,248 $ 8,513 $ 6,770
============ =========== ===========
(1) Includes a write-off of purchased and development for which no alternative
use exists of $221,000,000 as a result of the Merger.
56
59
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
CAPITAL EXPENDITURES:
1994 1993 1992
---- ---- ----
Pharmaceutical . . . . . . . . . . . . . . $ 19,745 $ 8,260 $ 11,610
Biomedical . . . . . . . . . . . . . . . . 299 -- --
Corporate . . . . . . . . . . . . . . . . 161 171 --
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 20,205 $ 8,431 $ 11,610
============ =========== ===========
GEOGRAPHIC DATA
SALES
North America . . . . . . . . . . . . . . $ 97,536 $ 69,576 $ 62,446
Latin America . . . . . . . . . . . . . . 56,737 57,782 48,654
Western Europe . . . . . . . . . . . . . . 31,789 30,601 34,290
Eastern Europe . . . . . . . . . . . . . . 172,124 239,832 325,903
Asia, Africa, and Australia . . . . . . . 8,665 6,166 4,825
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 366,851 $ 403,957 $ 476,118
============ =========== ===========
INCOME (LOSS) BEFORE INTEREST, PROVISION FOR INCOME TAXES AND MINORITY INTEREST:
North America . . . . . . . . . . . . . . $ (182,093)(1) $ 25,308 $ 18,389
Latin America . . . . . . . . . . . . . . 5,644 7,371 3,772
Western Europe . . . . . . . . . . . . . . 1,176 4,079 3,871
Eastern Europe . . . . . . . . . . . . . . 14,088 11,828 37,692
Asia, Africa, and Australia . . . . . . . 1,892 1,299 1,073
Corporate . . . . . . . . . . . . . . . . (6,070) (7,101) (8,205)
------------ ----------- -----------
Income (loss) before interest, . . . .
provision for income taxes
and minority interest. . . . . . . . . (165,363) 42,784 56,592
Net interest expense . . . . . . . . . . . 4,589 15,717 3,386
------------ ----------- -----------
Income (loss) before provision
for income taxes and minority
interest. . . . . . . . . . . . . . . $ (169,952) $ 27,067 $ 53,206
============ =========== ===========
IDENTIFIABLE ASSETS:
North America . . . . . . . . . . . . . . $ 77,900 $ 44,115 $ 40,926
Latin America . . . . . . . . . . . . . . 26,787 33,874 32,085
Western Europe . . . . . . . . . . . . . . 52,469 33,284 40,719
Eastern Europe . . . . . . . . . . . . . . 203,357 180,055 215,282
Asia, Africa, and Australia . . . . . . . 3,773 804 667
Corporate . . . . . . . . . . . . . . . . 77,187 9,885 3,539
------------ ----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 441,473 $ 302,017 $ 333,218
============ =========== ===========
1) Includes a write-off of purchased and development for which no
alternative use exists of $221,000,000 or $9.93 per share as a result
of the Merger.
During the year ended December 31, 1994, approximately 88% of ICN
Galenika's sales were to the Federal Republic of Yugoslavia or government
sponsored entities. At December 31, 1994, there were no significant receivables
from the Yugoslavian government, however future sales of ICN Galenika could be
dependent on the ability of the Yugoslavian government to generate cash to
purchase pharmaceuticals and the continuation of its current policy to buy
products from ICN Galenika. No other customer accounts for more than 10% of
the Company's net sales.
57
60
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
11. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Non-cash Transactions
In September 1993, SPI issued 200,000 shares of common stock to ICN in
exchange for reducing its debt outstanding to ICN by $3,075,000.
During 1994, 1993, and 1992, the Company issued common stock dividends
and distributions of $24,175,000, $20,634,000 and $3,440,000, respectively.
Cash and non-cash financing activities consisted of the following (in
thousands):
MERGER OF PREDECESSOR COMPANIES:
1994
----
Fair value of assets acquired (other than cash) . . . . . . . . . . . $319,349
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . (191,223)
--------
128,126
Stock issued in connection with Merger . . . . . . . . . . . . . . . . (134,393)
Direct acquisition costs . . . . . . . . . . . . . . . . . . . . . . . (3,654)
--------
Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,921)
========
The following table sets forth the amounts of interest and income taxes paid
during 1994, 1993 and 1992 (in thousands):
1994 1993 1992
---- ---- ----
Interest paid . . . . . . . . . . . . . $5,237 $ 11,203 $5,565
====== ========= ======
Income taxes paid . . . . . . . . . . . $2,062 $ 3,156 $1,730
====== ========= ======
12. ICN GALENIKA:
The summary balance sheets of ICN Galenika as of December 31, 1994 and
1993, and the summary income statements for the years ended December 31, 1994,
1993 and 1992, are presented below.
ICN GALENIKA SUMMARY BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
1994 1993
---- ----
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,193 $ 7,542
Marketable securities (used to collateralize $10,000 note payable) . . . . -- 32,587
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,320 7,650
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,475 88,392
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,939 21,120
Marketable securities (used to collateralize $8,103 note payable) . . . . . 29,155 --
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . 46,783 38,264
-------- --------
$216,865 $195,555
======== ========
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,982 $ 18,400
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 46,156 40,802
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,727 136,353
-------- --------
$216,865 $195,555
======== ========
58
61
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
ICN GALENIKA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
1994 1993 1992
---- ---- ----
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172,124 $ 239,832 $ 325,903
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 121,701 156,189 151,918
---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 50,423 83,643 173,985
Operating expenses . . . . . . . . . . . . . . . . . . . 33,803 83,160 107,504
Translation and exchange losses, net . . . . . . . . . . 1,417 173 27,963
---------- ---------- ----------
Income before provision for income
taxes and minority interest . . . . . . . . . . . . . . $ 15,203 $ 310 $ 38,518
========== ========== ==========
SANCTIONS:
A substantial majority of ICN Galenika's business is conducted in the
Federal Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the
United Nations Security Council ("UNSC") adopted a resolution that imposed
economic sanctions on the Federal Republic of Yugoslavia and on April 17, 1993,
the UNSC adopted a resolution that imposed additional economic sanctions on the
Federal Republic of Yugoslavia. The sanctions specifically exempt certain
medical supplies for humanitarian purposes, a portion of which are distributed
by ICN Galenika. ICN Galenika continues to apply for, and has received,
licenses under the sanctions, however, the efforts to enforce sanctions create
administrative burdens that slow the shipments of licensed raw materials to
Yugoslavia. Shipments of imported raw materials in 1994 and 1993 were 60% and
38% of pre-sanction levels, respectively. Additionally, the sanctions have
contributed to an overall deteriorating business environment in which ICN
Galenika must operate.
The sanctions provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of sanctions may create
a restriction on ICN Galenika's corporate bond security holdings of
approximately $29,155,000 that are maintained in a bank outside of Yugoslavia.
Of this amount $8,103,000 serves as collateral for a note payable to this bank.
Management believes, however, that these funds will be available for drawdowns
on lines of credit for shipments specifically licensed under the sanctions.
As a result of continuing political and economic instability within Yugoslavia,
including the long-term impact of the sanctions, wage and price controls, and
devaluations, there may be further limits on the availability of hard and local
currency and, consequently, an adverse impact on the future operating results
of the Company.
HYPERINFLATION AND PRICE CONTROLS:
Under existing Yugoslavian price controls imposed in July of 1992, ICN
Galenika can no longer continue the unrestricted practice of increasing selling
prices in anticipation of inflation. Rather, price increases must be approved
by the government prior to implementation. During 1994, ICN Galenika received
fewer price increases than in the past, a trend that is expected to continue,
applying increased pressure on gross profit margins. The imposition of price
controls along with the effect of sanctions and recurring currency devaluations
resulted in reduced sales levels in the last half of 1992 and for 1993. U.S.
dollar sales in 1994 were below 1993 levels due to exchange rate differences
despite an increase in units sold of 20%. This trend of reduced U.S. dollar
sales levels could continue as long as sanctions are in place.
59
62
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
ICN Galenika operates in a highly inflationary environment that has,
prior to January 1994, experienced high levels of inflation along with large
and frequent devaluations. This necessitated ICN Galenika to translate the
results using daily average exchange rates. 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 Deutsche mark. The Yugoslavian government
guarantees the conversion of dinars to Deutsche 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 Deutsche 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 5% since early 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.
As a result of the stabilization program and the absence of large and
frequent devaluations, the net monetary asset position of ICN Galenika has
increased to $25,442,000 as of December 31, 1994, representing the balance
sheet increases in accounts receivable and cash from the beginning of the year.
This net monetary asset position would be subject to foreign exchange loss if a
devaluation of the dinar were to occur.
As required by Generally Accepted Accounting Principles ("GAAP"), the
Company translates ICN Galenika financial results at the dividend payment rate
established by the National Bank of Yugoslavia. To the extent that changes in
this rate lag behind the level of inflation, sales and expenses will, at times,
tend to be inflated. Future sales and expenses can substantially increase if
the timing of future devaluations falls significantly behind the level of
inflation. While the impact of sanctions, price controls, and devaluations on
future sales and net income cannot be determined with certainty, they may,
under the present political and economic environment, result in an adverse
impact in the future.
At December 31, 1994, ICN Galenika has U.S. $29,155,000 invested in
corporate bond securities with a financial institution outside of Yugoslavia.
These funds came from the initial cash investment made by the Company of
$14,453,000 and from the sale of SPI's stock transferred to ICN Galenika by
ICN, also in conjunction with the acquisition. Under the terms of the
acquisition agreement, these funds were originally intended to finance business
expansion. However, in light of the current economic conditions in Yugoslavia,
these funds are used for letters of guarantee on ICN Galenika's raw material
purchases and to collateralize the payment of dividends. These funds are
encumbered by a letter of guarantee for raw material purchases, of which no
amount was outstanding at December 31, 1994, and as collateral for $8,103,000
of loans, included in Notes Payable bearing interest at 6.7%, that were issued
to pay a 1992 dividend of $10,000,000. Other uses of these funds in the
future, such as capital investment, additional letters of guarantee, or future
dividends are subject to review and licensing under the UNSC sanctions.
As noted above, ICN Galenika paid a $10,000,000 dividend in 1992 of
which the Company received 75% or $7,500,000. Yugoslavian law allows free
distribution of earnings whether to domestic (Yugoslavian) or international
investors. Under this law a dividend must be declared and paid immediately
after year end. Earnings that are not immediately paid as a dividend can not
be used for future dividends. Additionally, ICN Galenika is allowed to pay
dividends out of earnings calculated under Yugoslavian Accounting Practices
("YAP"), not earnings calculated under GAAP. ICN Galenika dividends are
payable in dinars which must be exchanged for dollars before the dividend is
repatriated. During high levels of inflation the dinar denominated dividend
could devalue substantially by the time the dividend is exchanged for dollars.
Future dividends from ICN Galenika will depend
60
63
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
heavily on future earnings and the current level of inflation at the time of
the dividend. Under GAAP, ICN Galenika had accumulated earnings, which are not
available for distributions, of approximately $71,592,000 at December 31, 1994.
However, additional repatriation of cash could be declared from contributed
capital as provided for in the original purchase agreement. In 1992, the
Company made the decision to no longer repatriate the earnings of ICN Galenika
and instead will use these earnings for local operations, plant expansion and
reduction of debt.
13. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist primarily of
cash deposits and marketable securities. The Company places its cash and cash
equivalents with respected financial institutions and limits the amount of
credit exposure to any one financial institution, however, in connection with
the acquisition of ICN Galenika, the cash contributed to ICN Galenika was
required, under the terms of the agreement, to be placed on deposit in a single
high credit quality financial institution outside of Yugoslavia. At December
31, 1994, ICN Galenika had corporate bond securities of $29,155,000 on deposit
with this financial institution.
14. INVESTMENT IN RUSSIA
During 1993 and 1994 the Company acquired a 41% interest in Oktyabr,
a Russian pharmaceutical company. The Company intends to increase its
ownership interest in Oktyabr to approximately 62% through a
government-sponsored investment program. Participation in this program does
not require significant expenditure of future funds. Once the Company achieves
its ownership goals it will begin a program to construct a new pharmaceutical
manufacturing facility in Russia built pursuant to "good manufacturing
practices." Although Russia may, in time, evolve into a large, free market
oriented economy, because of the present unpredictable political, social and
economic factors in Russia, the Company intends to penetrate this market in a
gradual manner. There can be no assurance as to when or if the new facility
will be constructed or as to its future success.
61
64
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO (CREDITED) DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER FROM AT END
OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
--------- -------- -------- -------- ---------
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful receivables $ 7,633 $ 1,410 $ 1,507 $ 514 $ 10,036
======== ========= ========= ======== ========
Reserve for inventory obsolescence $ 1,317 $ 3,835 $ (48) $ 1,193 $ 3,911
======== ========= ========= ======== ========
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful receivables $ 10,188 $ 11,261 $ (13,664)(1) $ 152 $ 7,633
======== ========= ========= ======== ========
Reserve for inventory obsolescence $ 3,671 $ 1,281 $ (532) $ 3,103 $ 1,317
======== ========= ========= ======== ========
YEAR ENDED DECEMBER 31, 1992
Allowance for doubtful receivables $ 21,566 $ 48,312 $ (59,569)(1) $ 121 $ 10,188
======== ========= ========= ======== ========
Reserve for inventory obsolescence $ 3,280 $ 2,456 $ (19) $ 2,046 $ 3,671
======== ========= ========= ======== ========
(1) The credit to other accounts is primarily due to the impact of
devaluations on the outstanding allowance for doubtful accounts. In
highly inflationary countries such as Yugoslavia, a devaluation will
result in a reduction of accounts receivable and a proportionate
reduction in the accounts receivable allowance. The reduction of
accounts receivable is recorded as a foreign currency translation loss
and the reduction of the allowance is recorded as a translation gain.
Shortly after a devaluation the level of accounts receivable will rise
as a result of subsequent price increases. In conjunction with the
rise in receivables, additions to the allowance for receivables will
be made for existing doubtful accounts. This process will repeat
itself for each devaluation that occurs during the year. The effect
of this process results in a high level of bad debt expense that does
not necessarily reflect credit risk or difficulties in collecting
receivables. For the year ended 1993, ICN Galenika recorded
provisions for doubtful accounts of $10,968,000 compared to
$48,279,000 for 1992. The timing of devaluations has a material
impact on the size of the provision for doubtful accounts. The
decrease in the 1993 provision is primarily a result of devaluations
occurring more frequently in the current year, smaller price increases
in 1993 compared to 1992, and lower levels of accounts receivable
compared to the prior year. The reduction of the accounts receivable
allowance from devaluation resulted in a translation gain of
$9,118,000 and $40,191,000 resulting in a net expense from bad debts
and bad debt translation gain of $1,850,000 and $8,088,000 for 1993
and 1992, respectively.
62
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
63
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING DIRECTORS
On November 10, 1994, SPI Pharmaceuticals, Inc., ICN Pharmaceuticals,
Inc. and Viratek, Inc. merged into ICN Merger Corp., and ICN Biomedicals, Inc.
merged into ICN Subsidiary Corp., subsequently renamed ICN Biomedicals, Inc., a
wholly-owned subsidiary of ICN Merger Corp. In connection with the Merger, ICN
Merger Corp. was renamed ICN Pharmaceuticals, Inc. The current Board of
Directors consists of sixteen members: Messrs. Barker, Bayh, Charles, Finch,
Guillemin, Jerney, Jolley, Knight, Kurz, Lenagh, Manatt, Moses, Panic, M.
Smith, R. Smith and Starr. The names of the sixteen directors are listed
below, together with certain personal information, including the present
principal occupation and recent business experience of each.
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
------------------------------ --- ----------- -------------
Norman Barker, Jr. (a)(c)(f) 72 1988(S) Pacific American Income Shares,
Mr. Barker is the retired Chairman of the Inc.; Southern California Edison
Board of First Interstate Bank of California Company; TCW Convertible Securities Fund,
and Former Vice Chairman of the Board of First Inc.
Interstate Bankcorp. Mr. Barker joined First
Interstate Bank of California in 1957 and was
elected President and Director in 1968, Chief
Executive Officer in 1971 and Chairman of the
Board in 1973. He retired as Chairman of the
Board at the end of 1985.
Birch E. Bayh, Jr., Esq. (a) 67 1992(I) Acordia, Inc. and Simon Property Group
Mr. Bayh is a partner in the law firm of
Bayh, Connaughton, Fensterheim & Malone.
Mr. Bayh was previously a partner of the
Indianapolis, Indiana and Washington, D.C. law
firm of Bayh, Tabbert & Capehart from April
1981 through June 1985. From 1963 to 1981,
Mr. Bayh served as United States Senator from
the State of Indiana.
Alan F. Charles (a)(f) 57 1986(S)
Mr. Charles was Vice Chancellor of
University Relations at the University of
California, Los Angeles from 1980 to 1993 and
served in various administrative capacities at
that university since 1972.
64
67
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
------------------------------ --- ----------- -------------
Robert H. Finch, Esq. (b)(e) 69 1976(I) Nationwide Health Properties, Inc.;
Mr. Finch has been a partner in the Continental Graphics
Pasadena, California law firm of Fleming,
Anderson, McClung & Finch since 1976. Prior
thereto he was Counsel to the President of the
United States from 1971 to 1972, Secretary of
the United States Department of Health,
Education and Welfare from 1969 to 1972, and
Lieutenant Governor of the State of California
from 1967 to 1969.
Roger Guillemin, M.D., Ph.D. (d) 71 1989(S) Prizm Pharmaceuticals, Inc.
Dr. Guillemin has been distinguished
Scientist at the Whittier Institute in La
Jolla, California since March 1989 and was
Resident Fellow and Chairman of the
Laboratories for Neuroendocrinology at the
Salk Institute in La Jolla, California, and
Adjunct Professor of Medicine at the Medical
School of the University of California at San
Diego. Dr. Guillemin was awarded the Nobel
Prize in Medicine in 1977 and, in the same
year, was presented the National Medal of
Science by the President of the United States.
He was affiliated with the Department of
Physiology at Baylor College of Medicine in
Houston, Texas from 1952 to 1970. Dr.
Guillemin is a member of the National Academy
of Sciences, and a Fellow of the American
Association for the Advancement of Science.
Dr. Guillemin has also served as President of
the American Endocrine Society.
Adam Jerney
Adam Jerney is Chief Operating Officer of 53 1992(I)
ICN. He served as Chairman of the Board and
Chief Executive Officer of ICN, SPI, Viratek
and Biomedicals from July 14, 1992 to March 4,
1993 during Milan Panic's leave of absence.
Mr. Jerney joined ICN in 1973 as Director of
Marketing Research in Europe and assumed the
position of General Manager of ICN Netherlands
in 1975. In 1981, he was elected Vice
President - Operations and in 1987 he became
President and Chief Operating Officer of ICN.
Prior to joining ICN he spend four years with
F. Hoffmann-LaRoche & Company.
65
68
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
------------------------------ --- ----------- -------------
Weldon B. Jolley, Ph.D. (d)
Dr. Jolley is President of Golden 68 1960(I)
Opportunities and was President of the Nucleic
Acid Research Institute, a former division of
ICN, from 1985 to 1989. Dr. Jolley was a Vice
President of ICN until 1990. Prior to that,
he was, for eleven years, Professor of Surgery
at the Loma Linda University School of
Medicine in Loma Linda, California and a
physiologist at the Veterans Hospital in Loma
Linda, California.
Vernon Knight, M.D. (d) 77 1981(V)
Dr. Knight is Professor at Baylor College of
Medicine in Houston, Texas. He has also
served as a consultant to the United States
Army Medical Research Institute of Infectious
Diseases and has served as a member of the
National Institutes of Health's Task Force on
Immunization, Research and Development Panel.
Jean-Francois Kurz (c) 60 1989(B) Board of Banque Pasche S.A., Geneva
Mr. Kurz was a member of the Board of
Directors and the Executive Committee of the
Board of DG Bank Switzerland Ltd. from 1990 to
1992. In 1988 and 1989, Mr. Kurz served as a
General Manager of TDB American Express Bank
of Geneva and from 1969 to 1988, he was Chief
Executive Officer of Banque Gutzweiler, Kurz,
Bungener in Geneva. Mr. Kurz is also Chairman
of the Board of Banque Pasche S.A., Geneva.
Thomas H. Lenagh (b)(c) 73 1979(I) Adams Express Company;
Mr. Lenagh is an independent financial U.S. Life Corporation; SCI Systems, Inc.;
advisor. He was Chairman of the Board of Gintel Funds; Irvine Sensors, Inc.; CML,
Greiner Engineering, Inc. from 1982 to 1985. Inc.; Clemente Global Funds; Franklin
Mr. Lenagh served as Financial Vice President Quest; V Band Corp.; Styles On Video
to the Aspen Institute from 1978 to 1980, and
since then as an independent financial
consultant. From 1964 to 1978 he was
Treasurer of the Ford Foundation.
66
69
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
------------------------------ --- ----------- -------------
Charles T. Manatt(c) 58 1992(S) Federal Express;
Mr. Manatt is a partner in the law firm of GTE;
Manatt, Phelps & Phillips, of which he was a Castle & Cooke Homes
founder in 1964. Mr. Manatt served as
Chairman of the Democratic Party from 1981 to
1985.
Stephen D. Moses (a)(e)(f) 60 1988(S)
Mr. Moses is Chairman of the Board of
Stephen Moses Interests. He was formerly
Chairman of the Board of National Investment
Development Corporation and Brentwood Bank in
Los Angeles, California and a member of the
National Advisory Board of the Center for
National Policy. Mr. Moses serves on the
Board of Visitors of Hebrew Union College as
well as the Board of Trustees of Franklin and
Marshall College and the UCLA Foundation.
From 1967 to 1971, Mr. Moses was an executive
of the Boise Cascade Corporation, serving in
several capacities, including President of
Boise Cascade Home and Land Corporation. In
the early 1970's, Mr. Moses was President of
Flagg Communications, Inc.
Milan Panic (e) 65 1960(I)
Mr. Panic, the founder of ICN, has been
Chairman of the Board, Chief Executive Officer
and President of ICN since its inception in
1960; except for a leave of absence from July
14, 1992 to March 4, 1993 while he was serving
as Prime Minister of Yugoslavia and a leave of
absence from October 1979 to June 1980. Mr.
Panic served as Chairman of the Board and
Chief Executive Officer of SPI, Viratek and
Biomedicals from their respective inceptions
(except for such leaves of absence), and he
may be deemed to be a "control person" of the
Company.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
------------------------------ --- ----------- -------------
Michael Smith, Ph.D. (d) 62 1994
Dr. Smith is Director of the Biomedical
Research Center, a privately funded research
institute at the University of British
Columbia. In 1993, Dr. Smith received the
Nobel Prize in Chemistry. He has been a
career investigator of the Medical Research
Council of Canada since 1979 and is a member
of the American Endocrine Society.
Roberts A. Smith, Ph.D. (d)(e) 66 1960(I) Nucleic Acid Research Institute; PLC
Dr. Smith was President of Viratek and Vice Systems
President - Research and Development of SPI
through 1992. For more than eleven years, Dr.
Smith was Professor of Chemistry and
Biochemistry at the University of California
at Los Angeles.
Richard W. Starr (b) 74 1983(I)
Mr. Starr is the retired Executive Vice
President and Chief Credit Officer Worldwide
of First Interstate Bank of California. Mr.
Starr spent 31 years with First Interstate
before retiring in 1983 and has over 44 years
of experience in commercial banking.
(B) Predecessor ICN Biomedicals, Inc. Board Member
(I) Predecessor ICN Pharmaceuticals, Inc. Board Member
(S) Predecessor SPI Pharmaceuticals, Inc. Board Member
(V) Predecessor Viratek, Inc. Board Member
(a) Member of the Compensation and Benefits Committee
(b) Member of the Audit Committee
(c) Member of the Finance Committee
(d) Member of the Science and Technology Committee
(e) Member of the Executive Committee
(f) Member of the Special Committee
None of the directors are related by blood or marriage to one another
or to an executive officer of the Company.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors has a standing Executive Committee, Audit
Committee, Finance Committee, Science and Technology Committee, Compensation
and Benefits Committee and Special Committee, but does not have a standing
nominating committee.
The members of the Executive Committee are Messrs. Panic, Finch,
Moses, and R. Smith. This Committee is empowered to act upon any matter for
the Board of Directors, other than matters which may not be delegated under
Delaware law. Subsequent to the Merger, the Executive Committee did not meet
during the year ended December 31, 1994.
The current members of the Audit Committee, which held one meeting
during the year ended December 31, 1994, are Messrs. Starr, Lenagh and Finch.
Its functions include recommending to the Board of Directors the selection of
the Company's independent public accountants and reviewing with such
accountants the plan and results of their audit, the scope and results of the
Company's internal audit procedures and the adequacy of the Company's systems
of internal accounting controls. In addition, the Audit Committee reviews the
independence of the independent public accountants and reviews the fees for
audit and non-audit services rendered to the Company by its independent public
accountants.
The Compensation and Benefits Committee recommends to the Board of
Directors the compensation and benefits for senior management and directors,
including the grant of stock options. The current members of this Committee
are Messrs. Barker, Bayh, Charles and Moses. This Committee held two meetings
during the year ended December 31, 1994.
The Finance Committee oversees investment and commercial banking
issues and investment guidelines. The current members of this Committee are
Messrs. Barker, Kurz, Manatt and Lenagh. This Committee did not meet during
the year ended December 31, 1994.
The Science and Technology Committee formulates and oversees the
scientific and technology policy of the Company. The current members of this
Committee are Messrs. Guillemin, M. Smith, R. Smith, Jolley and Knight. This
Committee did not meet during the year ended December 31, 1994.
A Special Committee (the "Committee") was formed in February, 1995 to
review certain issues of concern to the Shareholders, including the review of
trading by executives of the Company and issues surrounding the timely
disclosure of information received from the FDA regarding the Company's NDA for
the use of Virazole in the treatment of chronic hepatitis C. The Committee
investigation is still in progress. It is anticipated that the Committee will
finalize its report and present its findings to the Board of Directors in
mid-April 1995. The current members of this Committee are Messrs. Barker,
Charles and Moses.
Subsequent to the Merger, the Board of Directors met one time and all
of the Board attended except Messrs. Bayh, Guillemin, Lenagh, Kurz, Manatt,
Miscoll, M. Smith and Starr.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE PRESENT POSITION WITH THE COMPANY
Milan Panic 65 Chairman of the Board, President and Chief Executive Officer
Adam Jerney 53 Director, Executive Vice President and Chief Operating Officer
Roberts A. Smith, Ph.D. 66 Director, Executive Vice President Research and Development
John E. Giordani 52 Executive Vice President, Chief Financial Officer and Corporate Controller
Bill A. MacDonald 47 Executive Vice President, Corporate Development and Strategic Planning
John F. Phillips 54 Executive Vice President, Administration
David C. Watt 42 Executive Vice President, General Counsel and Corporate Secretary
Jack L. Sholl 53 Senior Vice President, Human Resources
Mr. Panic is employed under an Employment Agreement (which was to be
assumed by the Company) which has been extended from its expiring date of
November 30, 1994 to September 30, 1995. The Company, through the proposed
Compensation and Benefits Committee of its Board of Directors, and Mr. Panic
are presently discussing the terms of a new employment agreement to replace the
existing agreement. The Company also assumed, from the Predecessor Companies,
employment agreements with Messrs. Jerney, Giordani, MacDonald, Phillips, Watt
and Sholl. Each of these agreements, which were entered into in March 1993,
has an initial term of three years and is automatically extended for one year
terms unless either the employee or the Company elects not to extend it. These
agreements also provide for certain payments if, after a change of control (as
defined), the employee's employment is terminated under certain circumstances.
Executive officers are elected annually.
Milan Panic, the founder of ICN, has been Chairman of the Board, Chief
Executive Officer and President of ICN since its inception in 1960; except for
a leave of absence from July 14, 1992 to March 4, 1993 while he was serving as
Prime Minister of Yugoslavia and a leave of absence from October 1979 to June
1980. Mr. Panic has also served as Chairman of the Board and Chief Executive
Officer of SPI, Viratek and Biomedicals since their respective inceptions
(except for such leaves of absence).
Adam Jerney has served as a director of ICN, SPI, Viratek and
Biomedicals since 1992. Prior to the Merger, Mr. Jerney was President and
Chief Operating Officer of SPI. He served as Chairman of the Board and Chief
Executive Officer of ICN, SPI, Viratek and Biomedicals from July 14, 1992 to
March 4, 1993 during Milan Panic's leave of absence (as discussed below). Mr.
Jerney joined ICN in 1973 as Director of Marketing Research in Europe and
assumed the position of General Manager of ICN Netherlands in 1975. In 1981, he
was elected Vice President Operations and in 1987 he assumed his current
position. Prior to joining ICN, he spent four years with F. Hoffmann-LaRoche &
Company.
Roberts A. Smith, Ph.D., has served as a director of ICN since 1960
and as a director of Viratek since 1992. Dr. Smith was President of Viratek
and Vice President Research and Development of SPI through 1992. Dr. Smith
was also a director of the Nucleic Acid Research Institute from 1985 to 1989.
For more than eleven years, Dr. Smith was Professor of Chemistry and
Biochemistry at the University of California at Los Angeles. Dr. Smith is
also a director of PLC Systems.
70
73
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
John E. Giordani joined ICN in June 1986 after serving as Vice
President and Corporate Controller of Revlon, Inc., in New York, New York since
February 1982. Prior to the Merger, Mr. Giordani's primary duties were as
Chief Financial Officer of ICN. He devoted substantial time to Biomedicals and
Viratek. From 1978 until February 1982, he held Deputy and Assistant Corporate
Controller positions with Revlon, Inc. He was with Peat, Marwick, Mitchell &
Co. from 1969 to 1978.
Bill A. MacDonald joined ICN in March 1982 as Director of Taxes. In
1983, he became Vice President - Taxes and Corporate Development. In 1987, he
was Senior Vice President Tax and Corporate Development, and in 1992 Executive
Vice President Tax and Corporate Development. Prior to the Merger in November,
1994, he had been President of Biomedicals since March 18, 1993. From 1980 to
1982, he served as the Tax Manager of Pertec Computer Corporation. From 1973
to 1980, he was Tax Manager and Assistant Treasurer of Republic Corporation.
John F. Phillips joined SPI in April 1988 as Senior Vice President and
Chief Financial Officer. Prior to the Merger, he was Executive Vice President
and Chief Financial Officer of SPI. He managed private assets and was a
business consultant from January 1986 to March 1988. From June 1984 through
November 1985, he was Senior Vice President and Chief Financial Officer for
Playboy Enterprises, Inc. From 1978 through 1984, he was with Max Factor and
Company as Senior Vice President and Financial Officer.
David C. Watt joined ICN in March 1988 as Assistant General Counsel
and Secretary. He was elected Vice President Law and Secretary in December
1988. In January 1992, Mr. Watt was promoted to Senior Vice President of ICN.
On February 1, 1994, Mr. Watt was elected Executive Vice President, General
Counsel and Secretary of ICN. From 1986 to 1987, he was President and Chief
Executive Officer of Unitel Corporation. He also served as Executive Vice
President and General Counsel and Secretary of Unitel Corporation during 1986.
From 1983 to 1986, he served with ICA Mortgage Corporation as Vice President,
General Counsel and Corporate Secretary. Prior to that time, he served with
Central Savings Association as Assistant Vice President and Associate Counsel
from 1981 to 1983 and as Assistant Vice President from 1980 to 1981.
Jack L. Sholl joined ICN in August 1987 as Vice President, Public
Relations. Prior to the Merger, he was promoted to Senior Vice President of
SPI. From 1979 to August 1987, he served as Director of Financial and Media
Communications with Warner-Lambert Company of Morris Plains, New Jersey, and
from 1973 to 1979 as Manager, Department of Communications with Equibank, N.A.
of Pittsburgh, Pennsylvania. Prior to that time, he served on the Public
Relations staff of the New York Stock Exchange (1971-1973) and in editorial
positions with The Associated Press (1986-1971), the last as supervising
Business and Financial Editor in New York.
71
74
ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation
awarded to, earned by, or paid to the Chief Executive Officer and the four most
highly paid executive officers of ICN, for services rendered to the Predecessor
Companies and ICN in all capacities during the twelve months ended December 31,
1994, 1993 and 1992.
SUMMARY COMPENSATION TABLE
LONG-TERM OTHER
NAME AND ANNUAL COMPENSATION ANNUAL SECURITIES
PRINCIPAL POSITION COMPENSATION AWARDS COMPENSATION UNDERLYING ALL OTHER
WITH THE COMPANY($)(3) YEAR SALARY($) BONUS($) ($)(1) OPTIONS (2) COMPENSATION
------------------ ---- ------------ ------------ ------------ ---------- ------------
Milan Panic 1994 535,000 195,626 702,600(4) 70,603(5)
Chairman, President 1993 535,000 -- 60,000(4) 49,245(5)
and Chief Executive Officer 1992 535,000 5,675,000 900,000(4) 49,041(5)
Adam Jerney 1994 380,000 146,719 212,415(6) 60,741(8)
Executive Vice 1993 380,000 38,100 150,000(6) 18,730(8)
President - Chief 1992 321,821 370,000(7) 450,000(6) 20,268(8)
Operating Officer
Bill A. MacDonald 1994 200,000 96,671 105,520(9) 16,860
Executive Vice 1993 200,000 -- 125,000(9) 13,496
President Corporate 1992 168,322 90,000(7) 30,000(9) 15,125
Development
John E. Giordani 1994 225,195 96,671 55,000(10) 32,045
Executive Vice 1993 225,195 -- 65,000(10) 38,886
President Chief 1992 210,472 90,000(7) 30,000(10) 25,778
Financial Officer and
Corporate Controller
Nils Johannesson 1994 210,000 101,671 85,520(13) 1,517
Former Executive Vice 1993 193,333 6,667 15,000(13) --
President 1992 120,697 74,480(7) 15,000(13) --
John F. Phillips 1994 190,000 96,671 150,519(11) 7,932
Executive Vice 1993 190,000 -- 55,000(11) 7,617
President 1992 140,000 228,600(7) 20,000(11) 4,200
Administration
(1) Unless otherwise indicated, with respect to any individual named in
the above table, the aggregate amount of perquisites and other
personal benefits, securities or property was less than either $50,000
or 10% of the total annual salary and bonus reported for the named
executive officer.
(2) Includes grants of options to purchase shares of common stock of ICN
("ICN common stock"), common stock of SPI ("SPI common
stock")(adjusted for stock dividend after the grant date and prior to
the Merger), common stock of Viratek ("Viratek common stock") and
common stock of Biomedicals ("Biomedicals common stock") and grants of
options to purchase new ICN shares of common stock.
72
75
ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS
(3) Except where otherwise indicated, the amounts in this column represent
matching contributions to ICN's 401(K) plan, amounts accrued under an
executive deferral plan and medical benefits and medical and life
insurance premiums.
(4) Mr. Panic was granted options to purchase the following shares of ICN
common stock, SPI common stock, Viratek common stock and Biomedicals
common stock.
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 300,000 202,600 200,000 --
1993 -- -- -- 60,000
1992 -- 400,000 200,000 300,000
1994 post-merger options equal 465,482 shares of new ICN.
In January 1995, the Company advanced Milan Panic $1,406,682, in
regards to tax matters relating to the exercise of stock options. The advance,
plus accrued interest thereon, was fully paid by March, 1995 with cash of
$1,271,013 and common stock of the Company of $135,669.
In July 1992, Milan Panic, Chairman of the Board, President and Chief
Executive Officer of ICN, with the approval of ICN's Board of Directors, became
Prime Minister of Yugoslavia and was granted a paid leave of absence from all
duties to ICN while retaining his title as Chairman of the Board. Mr. Panic and
ICN entered into a Leave of Absence and Reemployment Agreement which contained
mutual obligations, requiring, among other things, that ICN reemploy Mr. Panic
and that Mr. Panic return to his previous positions with ICN. Mr. Panic was
succeeded as Prime Minister on March 4, 1993, and pursuant to the Leave of
Absence and Reemployment Agreement, returned to his duties at ICN.
In addition to the salaries of Mr. Panic and certain ICN employees
assisting him during his leave of absence, ICN and Mr. Panic incurred certain
other expenses in connection with Mr. Panic's transition to and return from his
leave of absence. ICN then retained a recently retired member of the
California Superior Court to review all such expenses to determine that such
expenses represented a valid expense of the Company. The Judge prepared a
report for the Audit Committees of ICN and SPI that indicated that these costs
represented costs of the Company. Such report was reviewed and approved by
these Audit Committees,
Mr. Panic has reimbursed certain withholding taxes due as of December
31, 1992, previously advanced by ICN, in connection with the exercise of stock
options, in the amount of $1,351,000. Mr. Panic paid these amounts in 1993, in
the form of cash in the amount of $678,000 and Viratek common stock in the
amount of $776,000 valued at fair market value.
On April 1, 1992, the Board of Directors granted Mr. Panic a bonus of
200,000 shares of SPI common stock for his extraordinary efforts in completing
the Galenika transaction. The value of these shares at the date of grant was
$5,375,000. Mr. Panic sold the shares during 1993 for a realized value of
$4,005,223. Additionally, in 1993, Mr. Panic realized $1,881,250 and $1,853,000
on other sales of shares of ICN common stock and SPI common stock,
respectively.
(5) In 1994, the $70,603 of "All Other Compensation" consists of the
following: legal $23,835, accounting $34,045, executive medical
$6,107 and life insurance $6,616. All other compensaton also includes
$70,603, $39,262 and $38,242 for miscellaneous fringe benefits in
1994, 1993 and 1992, respectively. For the three years ended December
31, 1994, Mr. Panic realized $7,498,500, $4,771,220 and $1,461,306 on
the exercise of stock options for ICN, SPI, and Viratek common stock,
respectively. These stock option gains are not reflected in the "All
Other Compensation" column.
73
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ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS - CONTINUED
(6) Mr. Jerney was granted options to purchase the following shares of ICN
common stock, SPI common stock (adjusted for stock dividend after the
grant date and prior to the Merger), Viratek common stock and
Biomedicals common stock:
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 50,000 50,650 50,000 61,765
1993 50,000 50,000 50,000 --
1992 100,000 150,000 100,000 100,000
1994 post-merger options equal 115,722 shares of new ICN.
(7) Includes 1991 performance bonus paid in 1992 on the completion of the
Galenika transaction and the early payment of the 1992 performance
bonus in anticipation of the increase in federal income tax rates
(which bonus would have ordinarily been paid 1993).
(8) In 1994, the $60,741 is further broken out as follows: accounting-tax
$27,871, deferred compensation interest $16,928, executive medical
$8,523; 401K employee contribution $4,620, tennis club $415, and life
insurance $2,384. For the three years ended December 31, 1994, Mr.
Jerney realized $372,795 and $894,569 on the exercise of stock option
for ICN and SPI common stock, respectively. These stock option gains
are not reflected in the "All Other Compensation" column.
(9) Mr. MacDonald was granted options to purchase the following shares of
ICN common stock, SPI common stock (adjusted for stock dividend after
the grant date and prior to the Merger), Viratek common stock and
Biomedicals common stock:
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 25,000 40,520 10,000 30,000
1993 25,000 40,000 10,000 50,000
1992 -- 30,000 -- --
1994 post-merger options equal 65,552 shares of new ICN.
(10) Mr. Giordani was granted options to purchase the following shares of
ICN common stock, SPI common stock (adjusted for stock dividend after
the grant date and prior to the Merger), Viratek common stock and
Biomedicals common stock:
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 25,000 -- 10,000 20,000
1993 25,000 -- 10,000 30,000
1992 -- 30,000 -- --
1994 post-merger options equal 22,179 shares of new ICN.
(11) Mr. Phillips was granted options to purchase the following shares of
ICN common stock, SPI common stock (adjusted for stock dividend after
the grant date and prior to the Merger), Viratek common stock and
Biomedicals common stock:
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 25,000 40,519 35,000 50,000
1993 25,000 20,000 10,000 --
1992 -- 20,000 -- --
1994 post-merger options equal 82,308 shares of new ICN.
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ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS - CONTINUED
(12) Dr. Johannesson has granted options to purchase the following shares
of ICN common stock, SPI common stock (adjusted for stock dividend
after the grant date and prior to the Merger), Viratek common stock
and Biomedicals common stock:
ICN SPI VIRATEK BIOMEDICALS
--- --- ------- -----------
1994 25,000 40,520 20,000 --
1993 -- -- 15,000 --
1992 -- 15,000 -- --
1994 post-merger options equal 64,613 shares of new ICN.
OPTION GRANTS
The following table sets forth information with respect to options to
purchase shares of ICN common stock, SPI common stock, Viratek common stock and
Biomedicals common stock granted in 1994 adjusted for stock dividends occurring
following grant and prior to November 10, 1994 to the Executive Officers. No
executive officer was granted New ICN options following the Merger through
December 31, 1994.
OPTION GRANTS IN LAST FISCAL YEAR
Numbers of Percent of
Securities Total Options Grant
Underlying Granted to Date
Options Employees in Exercise Expiration Present
Name Company Granted Fiscal Year Price Date (1) Value(2)
---- ------- ------- ----------- ----- -------- --------
Milan Panic ICN 300,000 43.1% $9.375 4/28/04 $ 2,181,000
SPI 202,600 24.6% 15.424 4/28/04 2,139,456
Viratek 200,000 38.5% 9.750 4/27/04 1,676,000
Adam Jerney ICN 50,000 7.2% 9.375 4/28/04 363,300
SPI 50,650 6.1% 15.424 4/28/04 534,864
Viratek 50,000 9.6% 9.750 4/27/04 419,000
Biomedicals 61,765 26.1% 4.250 1/11/04 183,442
Bill A. MacDonald ICN 25,000 3.6% 9.375 4/28/04 181,750
SPI 40,520 4.9% 15.424 4/28/04 427,891
Viratek 10,000 1.9% 9.750 4/27/04 83,800
Biomedicals 30,000 12.7% 4.250 1/06/04 89,100
John E. Giordani ICN 25,000 3.6% 9.375 4/28/04 181,750
Viratek 10,000 1.9% 9.750 4/27/04 93,800
Biomedicals 20,000 8.4% 4.250 1/06/04 59,400
Nils Johannesson ICN 25,000 3.6% 9.375 4/28/04 109,050
SPI 40,520 4.9% 15.424 4/28/04 427,880
Viratek 20,000 3.8% 9.750 4/27/04 167,600
John F. Phillips ICN 25,000 3.6% 9.375 4/28/04 181,750
SPI 40,519 4.9% 15.424 4/28/04 427,880
Viratek 10,000 1.9% 9.750 4/27/04 83,800
Viratek 25,000 4.8% 7.875 6/14/04 169,250
Biomedicals 50,000 21.1% 4.250 6/14/04 148,500
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ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS - CONTINUED
(1) The options granted have ten year terms. The options vest according to
the following schedule: 25% on the first anniversary of the date of
grant and 25% on each of the next succeeding three anniversary dates
of the grant date. The options were granted with an exercise price
equal to the fair market value of the underlying shares on the date of
grant.
(2) Based on the Black-Scholes option pricing model adapted for use in
valuing executive stock options. The actual value, if any, an
executive may realize will depend on the excess of the stock price
over the exercise price on the date the option is exercised, so that
there is no assurance the value realized by an executive will be at or
near the value estimated by the Black-Scholes model. The estimated
values under that model are based on arbitrary assumptions as to
variables such as interest rates, stock price volatility and future
dividend yield.
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79
ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS - CONTINUED
POST MERGER CONVERTED OPTION GRANT INFORMATION
The following table sets forth information with respect to options to
purchase shares described in the Option Grants in Last Fiscal Year table on the
preceding page expressed here in shares of new ICN common stock to the
Executive Officers, adjusted for a stock dividend occurring after grant through
December 31, 1994:
OPTION GRANTS IN LAST FISCAL YEAR
(EXPRESSED IN CONVERTED NEW ICN SHARES)
Numbers of Percent of
Securities Total Options Grant
Underlying Granted to Date
Options Employees in Exercise Expiration Present
Name Company Granted Fiscal Year Price Date Value
---- ------- ------- ----------- ----- ---- -----
Milan Panic ICN 156,794 43.1% $ 17.9374 4/28/04 $ 2,181,000
SPI 206,813 24.6% 15.1102 4/28/04 2,139,456
Viratek 101,875 38.5% 19.1410 4/27/04 1,676,000
------- ------- ----- ------- ------- ---------
Total New ICN 465,482 5,996,456
Adam Jerney ICN 26,131 7.2% 17.9394 4/28/04 363,300
SPI 51,703 6.1% 15.1102 4/28/04 534,864
Viratek 25,468 9.6% 19.1410 4/27/04 419,000
Biomedicals 12,420 26.1% 21.1340 1/11/04 183,442
----------- ------ ----- ------- ------- -------
Total New ICN 115,722 1,500,806
Bill A. MacDonald ICN 13,065 3.6% 17.9374 4/28/04 181,750
SPI 41,362 4.9% 15.1102 4/28/04 427,891
Viratek 5,093 1.9% 19.1410 4/27/04 83,800
Biomedicals 6,032 12.7% 21.1340 1/06/04 89,100
----------- ----- ------ ------- ------- -------
Total New ICN 65,552 782,541
John E. Giordani ICN 13,065 3.6% 17.9374 4/28/04 181,750
Viratek 5,093 1.9% 19.1410 4/27/04 93,800
Biomedicals 4,021 8.4% 21.1340 1/06/04 59,400
----------- ----- ---- ------- ------- ------
Total New ICN 22,179 334,950
Nils Johannesson ICN 13,065 3.6% 17.9374 4/28/04 109,050
SPI 41,361 4.9% 15.1102 4/28/04 427,880
Viratek 10,187 3.8% 19.1410 4/27/04 167,600
------- ------ ---- ------- ------- -------
Total New ICN 64,613 704,530
John F. Phillips ICN 13,065 3.6% 17.9374 4/28/04 181,750
SPI 41,362 4.9% 15.1102 4/28/04 427,880
Viratek 5,093 1.9% 19.1410 4/27/04 83,800
Viratek 12,734 4.8% 15.4600 6/14/04 169,250
Biomedicals 10,054 21.1% 17.4045 6/14/04 148,500
----------- ------ ----- ------- ------- -------
Total New ICN 82,308 1,011,180
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ITEM 11. EXECUTIVE COMPENSATION AND RELATED MATTERS - CONTINUED
(1) The options granted have ten year terms. The options vest according to
the following schedule: 25% on the first anniversary of the date of
grant and 25% on each of the next succeeding three anniversary dates
of the grant date. The options were granted with an exercise price
equal to the fair market value of the underlying shares on the date of
grant.
(2) Based on the Black-Scholes option pricing model adapted for use in
valuing executive stock options. The actual value, if any, an
executive may realize will depend on the excess of the stock price
over the exercise price on the date the option is exercised, so that
there is no assurance the value realized by an executive will be at or
near the value estimated by the Black-Scholes model. The estimated
values under that model are based on arbitrary assumptions as to
variables such as interest rates, stock price volatility and future
dividend yield.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each of the
Predecessor Companies regarding (i) stock option exercises by the Named
Executive Officers during 1994 and (ii) unexercised stock options held by the
Named Executive Officers at February 28, 1995:
AGGREGATED OPTION EXERCISES
IN 1994 AND FEBRUARY 28, 1995 OPTION VALUES
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options
Shares Options at 2/28/95 at 2/28/95
Acquired Value ---------------------------- ----------------------------
Name Company Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------- -------- ----------- ----------- ------------- ----------- -------------
Milan Panic New ICN -- $ -- 971,658 394,961 $2,141,274 $ --
Adam Jerney New ICN -- -- 363,703 319,003 784,509 513,123
Bill A. MacDonald New ICN -- -- 98,032 99,434 200,864 145,057
John E. Giordani New ICN -- -- 66,335 42,188 101,872 23,365
SPI 7,155 79,329 -- -- -- --
Nils Johannesson New ICN -- -- 28,678 60,988 7,540 7,539
John Phillips New ICN 2,463 44,742 70,704 101,533 100,752 86,480
(1) Difference between the fair market value of common stock of the
respective Predecessor Company at the date of exercise and the
exercise price.
(2) Difference between the fair market value of the shares of common stock
of each of the Predecessor Companies on February 28, 1995 and the
exercise price.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 28, 1995, certain
information regarding the beneficial ownership of New ICN common stock and the
percent of shares owned beneficially by each Named Executive Officer and all
directors and executive officers of New ICN as a group:
Identity of Number of Shares and Nature
Owner of Beneficial Ownership Percentage
or Group of ICN Common Stock of Class
-------- ------------------- --------
Norman Barker, Jr. 32,567 (3) (2)
Birch E. Bayh, Jr. 18,657 (4) (2)
Alan F. Charles 14,708 (5) (2)
Robert H. Finch 13,272 (6) (2)
Roger Guillemin, M.D., Ph.D. 42,608 (7) (2)
Adam Jerney 413,454 (8) (2)
Weldon B. Jolley, Ph.D. 141,230 (9) (2)
Vernon Knight, M.D. 18,387 (10) (2)
Jean-Francois Kurz 2,714 (11) (2)
Thomas H. Lenagh 6,724 (12) (2)
Charles T. Manatt 13,922 (13) (2)
James P. Miscoll 13,922 (14) (2)
Stephen D. Moses 13,922 (15) (2)
Milan Panic 1,217,276 (16) (2)
Michael Smith, Ph.D. 1,306 (17) (2)
Roberts A. Smith, Ph.D. 134,508 (18) (2)
Richard W. Starr 22,273 (19) (2)
John E. Giordani 74,123 (20) (2)
Bill A. MacDonald 104,095 (21) (2)
John F. Phillips 121,441 (22) (2)
Nils Johannesson 12,524 (23) (2)
Directors and executive officers
of the Company as a group (27 persons) 2,594,930 (24)
(1) Except as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess
sole voting and investment power. However, under the laws of
California and certain other states, personal property owned by a
married person may be community property which either spouse may
manage and control, and the Company has no information as to whether
any shares shown in this table are subject to community property laws.
(2) Less than 1%
(3) Includes 29,589 shares of ICN common stock which Mr. Barker has the
right to acquire upon the exercise of currently exercisable stock
options.
(4) Includes 18,657 shares of ICN common stock which Mr. Bayh has the
right to acquire upon the exercise of currently exercisable stock
options.
(5) Includes 13,922 shares of ICN common stock which Mr. Charles has the
right to acquire upon the exercise of currently exercisable stock
options.
(6) Includes 13,219 shares of ICN common stock which Mr. Finch has the
right to acquire upon the exercise of currently exercisable stock
options.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
CONTINUED
(7) Includes 42,086 shares of ICN common stock which Dr. Guillemin has the
right to acquire upon the exercise of currently exercisable stock
options.
(8) Includes 370,389 shares of ICN common stock which Mr. Jerney has the
right to acquire upon the exercise of currently exercisable stock
options.
(9) Includes 136,004 shares of ICN common stock which Dr. Jolley has the
right to acquire upon the exercise of currently exercisable stock
options.
(10) Includes 6,686 shares of ICN common stock which Dr. Knight has the
right to acquire upon the exercise of currently exercisable stock
options.
(11) Includes 2,714 shares of ICN common stock which Mr. Kurz has the right
to acquire upon the exercise of currently exercisable stock options.
(12) Includes 2,714 shares of ICN common stock which Mr. Lenagh has the
right to acquire upon the exercise of currently exercisable stock
options.
(13) Includes 13,922 shares of ICN common stock which Mr. Manatt has the
right to acquire upon the exercise of currently exercisable stock
options.
(14) Includes 13,922 shares of ICN common stock which Mr. Miscoll has the
right to acquire upon the exercise of currently exercisable stock
options.
(15) Includes 13,922 shares of ICN common stock which Mr. Moses has the
right to acquire upon the exercise of currently exercisable stock
options.
(16) Includes 971,658 shares of ICN common stock which Mr. Panic has the
right to acquire upon the exercise of currently exercisable stock
options.
(17) Includes 1,306 shares of ICN common stock which Dr. Michael Smith has
the right to acquire upon the exercise of currently exercisable stock
options.
(18) Includes 99,476 shares of ICN common stock which Dr. Roberts A. Smith
has the right to acquire upon the exercise of currently exercisable
stock options.
(19) Includes 16,986 shares of ICN common stock which Mr. Starr has the
right to acquire upon the exercise of currently exercisable stock
options.
(20) Includes 66,335 shares of ICN common stock which Mr. Giordani has the
right to acquire upon the exercise of currently exercisable stock
options.
(21) Includes 98,032 shares of ICN common stock which Mr. MacDonald has the
right to acquire upon the exercise of currently exercisable stock
options.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
CONTINUED
(22) Includes 72,041 shares of ICN common stock which Mr. Phillips has the
right to acquire upon the exercise of currently exercisable stock
options.
(23) Includes 12,524 shares of ICN common stock which Dr. Johannesson has
the right to acquire upon the exercise of currently exercisable stock
options.
(24) Includes 2,170,233 shares of ICN common stock which certain directors
and officers have the right to acquire upon the exercise of currently
exercisable stock options.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
COMPENSATION PURSUANT TO STOCK OPTION PLANS OF THE PREDECESSOR COMPANIES
ICN
As of November 10, 1994, under ICN's 1981 Employee Incentive Stock
Option Plan (which terminated in 1991) options to acquire 25,378 shares of ICN
common stock were outstanding and 25,378 shares were exercisable (at prices
ranging from $3.00 to $5.50). There were no options exercised during 1994.
There were options to acquire 30,256 shares of ICN common stock exercised
during 1993 at $4.65 per share. There were options to acquire 2,250 shares of
ICN common stock exercised during 1992 at $3.00.
Pursuant to non-qualified stock option agreements with key employees
and officers of ICN, options to acquire 214,363 shares of ICN common stock were
outstanding (at prices ranging from $3.00 to $5.75) of which options to acquire
170,363 shares of ICN common stock were exercisable at November 10, 1994.
There were options to acquire 250 shares exercised during 1994 at an average
price of $5.75. There were options to acquire 153,808 shares exercised during
1993 at an average price of $4.736. There were options to acquire 181,855
shares exercised during 1992 at an average price of $3.55.
During 1992, the stockholders of ICN approved the 1992 ICN
Non-Qualified Stock Option Plan (the "1992 ICN Non-Qualified Plan") and the
1992 ICN Employee Incentive Stock Plan (the "1992 ICN Incentive Plan"),
reserving 500,000 shares per plan of ICN common stock for issuance to employees
and directors of ICN. ICN has granted options for shares under both plans.
Options under both plans are exercisable over a period to be determined by the
Compensation Committee, which shall not exceed ten years from the date of grant
and will expire at the end of the option period.
As of November 10, 1994, options to acquire 642,250 shares of ICN
common stock were outstanding under the 1992 ICN Non-Qualified Plan (at prices
ranging from $6.375 to $22.875) of which 34,500 were exercisable at November
10, 1994. Options to acquire 359,000 shares of ICN common stock were
outstanding under the 1992 ICN Incentive Plan (at prices ranging from $6.375 to
$9.50) of which 62,500 were exercisable at November 10, 1994. There were no
options exercised under either plan during 1994.
SPI
As of November 10, 1994, under SPI's 1982 Incentive Stock Option Plan
(the "1982 ISO Plan") (which terminated in 1992) options to acquire 1,001
shares of SPI common stock were outstanding and exercisable at a price of $4.71
per share. There were 405 shares exercised in 1994 at $4.71 per share.
Pursuant to the 1982 Non-Qualified Stock Option Plan (the "1982 SPI
Non-Qualified Plan") as of November 10, 1994, there were options to acquire
826,070 shares of SPI common stock outstanding (at prices ranging from $0.62 to
$29.45 per share) of which 659,864 shares were exercisable at November 10,
1994. During 1994, 51,719 options were exercised at an average price of $6.57
per share of SPI common stock.
As of November 10, 1994, under SPI's 1992 Incentive Stock Option Plan
(the "1992 SPI Incentive Plan") options to acquire 541,464 shares of SPI common
stock were outstanding (at prices ranging from $9.02 to $24.05 per share) of
which 183,112 shares were exercisable. During 1994, there were 416 shares
exercised at $24.06 per share.
As of November 10, 1994, under SPI's 1992 Non-Qualified Stock Option
Plan (the "1992 SPI Non-Qualified Plan"), options to acquire 2,204,849 shares
of SPI common stock were outstanding (at prices ranging from $9.33 to $29.11
per share) of which 811,396 shares were exercisable. During 1994, there were
5,912 shares exercised at an average of $9.42 per share.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
COMPENSATION PURSUANT TO STOCK OPTION PLANS OF THE PREDECESSOR COMPANIES
Viratek
As of November 10, 1994, under Viratek's 1980 Stock Option Plan and
the 1982 Non-Qualified Stock Option Plan (the "1982 Viratek Non-Qualified
Plan") (which terminated in 1992) options for 331,222 shares were outstanding
(at prices ranging from $2.023 to $4.52 per share) of which 325,973 shares were
exercisable. During 1994, 7,350 shares were exercised at an average price of
$4.29 per share.
As of November 10, 1994 under Viratek's 1992 Incentive Stock Option
Plan (the "1992 Viratek ISO Plan") options to acquire 450,250 shares of Viratek
common stock were outstanding (at prices ranging from $7.61 to $21.19 per
share) of which 186,376 shares were exercisable. During 1994, there were no
exercises.
As of November 10, 1994, under Viratek's 1992 Non-Qualified Stock
Option Plan (the "1992 Viratek Non-Qualified Plan") options to acquire 659,625
shares of Viratek common stock were outstanding (at prices ranging from $6.42
to $13.21 per share) of which 55,784 shares were exercisable. During 1994,
there were 10,500 shares exercised at $10.48 per share.
Biomedicals
As of November 10, 1994, under Biomedicals' 1983 Incentive Stock
Option Plan (the "1983 Biomedicals ISO Plan") (which terminated in 1993)
options to acquire 323,260 shares of Biomedicals common stock were outstanding
of which 226,760 shares were exercisable (at prices ranging from $3.125 to
$10.50 per share). There were no exercises in 1994.
Pursuant to the 1983 Non-Qualified Stock Option Plan (the "1983
Biomedicals Non-Qualified Plan"), as of November 10, 1994, there were options
to acquire 208,190 shares of Biomedicals common stock outstanding (at prices
ranging from $4.38 to $9.27 per share) of which 190,690 options were
exercisable. There were no options exercised in 1994.
At November 10, 1994, under the Biomedicals 1992 Incentive Stock
Option Plan (the "1992 Biomedicals Incentive Plan") options to acquire 501,250
shares of Biomedicals common stock were outstanding (at prices ranging from
$3.25 to $4.25 per share) of which 84,437 options were exercisable. During
1994, there were 18,000 shares exercised at $3.25 per share.
At November 10, 1994 , under the Biomedicals 1992 Non-Qualified Stock
Option Plan (the "1992 Biomedicals Non-Qualified Plan"), options to acquire
544,265 shares of Biomedicals common stock were outstanding (at prices ranging
from $3.25 to $7.00 per share) of which there were 232,500 options exercisable.
During 1994, there were no exercises.
Plan Amendments
At each of the Annual Meetings of Stockholders held to consider the
Merger Agreement, the stockholders of each of the Predecessor Companies
approved amended and restated Stock Option Plans. The amendments, among other
things, increased the amount of shares available for grant under the plans. ICN
amended its 1992 Non-Qualified Plan to increase the number of shares available
for grant thereunder from 500,000 to 1,250,000 and amended its 1992 Incentive
Plan to increase the number of shares available for
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
COMPENSATION PURSUANT TO STOCK OPTION PLANS OF THE PREDECESSOR COMPANIES
(CONTINUED)
grant thereunder from 500,000 to 750,000. SPI amended its 1992 Non-Qualified
Plan to increase the number of shares available for grant thereunder from
1,000,000 to 3,000,000 and amended its 1992 Incentive Plan to increase the
number of shares available for grant thereunder from 500,000 to 1,000,000.
Viratek amended its 1992 Non-Qualified Plan to increase the number of shares
available for grant thereunder from 500,000 to 1,000,000 and amended its 1992
ISO Plan to increase the number of shares available for grant thereunder from
500,000 to 1,000,000. Biomedicals amended its 1992 Non-Qualified Plan to
increase the number of shares available for grant thereunder from 500,000 to
1,000,000 and amended its 1992 Incentive Plan to increase the number of shares
available for grant thereunder from 500,000 to 1,000,000. Upon consummation of
the Merger, New ICN will assume all options outstanding under these Stock
Option Plans. See "Principal Stockholders."
COMPENSATION OF DIRECTORS OF THE PREDECESSOR COMPANIES AND NEW ICN
Members of the Board of Directors of ICN, other than employees, were
paid an annual fee of $22,000, payable quarterly, plus a fee of $500 for every
Board meeting attended and an additional fee of $500 for every committee
meeting attended, and were reimbursed for their out-of-pocket expenses in
attending meetings. During 1994, Mr. Bayh, or the firm with which he is
affiliated, received legal or consulting fees from ICN in the amount of
$80,688. Dr. Guillemin received $94,000 from SPI for consulting services
rendered. Dr. M. Smith received $28,000 in 1994 from ICN for consulting
services rendered. In addition, non-employee directors on the first business
day following each annual meeting of stockholders were granted options to
purchase 10,000 shares of ICN common stock pursuant to the 1992 ICN
Non-Qualified Plan.
Members of the Board of Directors of SPI, other than employees, were
paid an annual fee of $20,000 in 1994. In addition, all members other than Mr.
Panic and Mr. Jerney received fees in the amount of $500 per Board meeting and
$500 per committee meeting actually attended, and were reimbursed for their
out-of-pocket expenses in attending meetings. In addition, non-employee
directors on the first business day following each annual meeting of
shareholders were granted options to acquire 10,000 shares of SPI common stock
on such date pursuant to the 1992 SPI Non-Qualified Plan.
Members of the Board of Directors of Viratek, other than employees,
were paid an annual fee of $20,000, payable quarterly, plus a fee of $500 for
every Board meeting and $500 for every committee meeting actually attended, and
were reimbursed for their out-of-pocket expenses in attending meetings. Dr.
Jolley received $1,000 for a Scientific Advisory Committee meeting and Dr. R.
Smith received $1,000 for a Scientific Advisory Committee meeting. Dr. Knight
is a professor at Baylor. ICN has a royalty agreement with Baylor (see
"Certain transactions") and SPI paid a royalty of $741,000 in 1994. In
addition, non-employee directors on the first business day following each
annual meeting of shareholders were granted options to acquire 10,000 shares of
Viratek common stock on such date pursuant to the Viratek 1992 Non-Qualified
Plan.
Members of the Board of Directors of Biomedicals, other than
employees, were paid an annual fee of $20,000 in 1994. In addition, all
members other than employees received fees in the amount of $500 per Board
meeting and $300 per committee meeting actually attended, and were reimbursed
for their out-of-pocket expenses. In addition, non-employee directors on the
first business day following each annual meeting of shareholders were granted
options to acquire 10,000 shares of Biomedicals common stock pursuant to the
1992 Biomedicals Non-Qualified Plan.
Members of the Board of Directors of New ICN, other than employees,
were paid $500 each for the Board meetings attended. See above Predecessor
Company information for a description of any director's compensation beyond
board fees paid in 1994.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
CERTAIN EMPLOYMENT AGREEMENTS
On March 18, 1993, the Board of Directors of ICN adopted Employment
Agreements ("Employment Agreements") which contained "Change in Control"
benefits for six current key senior executive officers of ICN. The executives
include Messrs. Jerney, Giordani, MacDonald and Watt, former officers of ICN,
and Messrs. Phillips and Sholl, former officers of SPI. The Employment
Agreements were assumed by New ICN.
The Employment Agreements are intended to retain the services of these
executives and provide for continuity of management in the event of any actual
or threatened Change in Control. Each agreement has an initial term ending
March 30, 1996 and is automatically extended for one year terms each year
thereafter unless either the executive or ICN elects not to extend it (provided
that any notice by ICN not to extend the agreement cannot cause the agreement
to be terminated prior to the expiration of the third anniversary of the date
of any Change in Control). These Employment Agreements provide that each
executive shall receive severance benefits equal to three times salary and
bonus (and certain other benefits) if the executive's employment is terminated
without cause, following a Change in Control of ICN or a subsidiary, as the
case may be, or if the executive terminates employment for certain enumerated
reasons (including a significant reduction in the executive's compensation,
duties, title or reporting responsibilities or a change in the executive's job
location) or the executive leaves ICN for any reason or without reason during a
sixty day period commencing six months after the Change in Control. The
executive is under no obligation to mitigate amounts payable under the
Employment Agreements.
For purposes of the Employment Agreements, a "Change in Control" means
any of the following events: (i) the acquisition (other than from ICN) by any
person, subject to certain exceptions, of beneficial ownership, directly or
indirectly, of 20% or more of the combined voting power of ICN's then
outstanding voting securities; (ii) the existing Board of Directors cease for
any reason to constitute at least two-thirds of the Board, unless the election,
or nomination for election by ICN's stockholders, of any new director was
approved by a vote of at least two-thirds of the existing Board of Directors;
or (iii) approval by stockholders of ICN of (a) a merger or consolidation
involving ICN if the stockholders of ICN, immediately before such merger or
consolidation, do not, as a result of such merger or consolidation, own,
directly or indirectly, more than 80% of the combined voting power of the then
outstanding voting securities of the corporation resulting from such merger or
consolidation in substantially the same proportion as their ownership of the
combined voting power of the voting securities of ICN outstanding immediately
before such merger or consolidation, or (b) a complete liquidation or
dissolution of ICN or an agreement for the sale or other disposition of all or
substantially all of the assets of ICN. Removal of ICN's Board of Directors
would also constitute a Change in Control under the Employment Agreements. If
the employment of such key senior executives is terminated under any of the
circumstances described above following a Change in Control, the executives
would be entitled to receive the following amounts (based upon present
compensation): Adam Jerney $2,092,623; John Giordani $1,238,277; Bill MacDonald
$1,179,486 and John Phillips $1,180,251. In addition, the vesting of certain
options granted to the executives would be accelerated. The value of the
accelerated options would depend upon the market price of the shares at that
time.
In connection with the Merger, each of the senior executives has
executed an agreement waiving the effect under the Employment Agreements of any
Change in Control which may be deemed to arise as a result of the Merger.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
PANIC EMPLOYMENT AGREEMENT
ICN and Milan Panic entered into an Employment Agreement effective
October 1, 1988, which, as amended and extended, terminates on September , 1995
(the "Panic Employment Agreement"). The base amount of salary for Mr. Panic was
determined by the Compensation Committee of the Board of Directors of ICN in
1988. In setting the base amount, the Compensation Committee took into
consideration Mr. Panic's then- current base salary, the base salaries of chief
executives of companies of similar scope and complexity and the Compensation
Committee's desire to retain Mr. Panic's services, given his role as founder of
ICN. The Panic Employment Agreement provides for an annual salary, currently
$535,000, with an annual 7% increase payable under certain circumstances. The
Panic Employment Agreement provides that during the period of his employment,
Mr. Panic will not engage in businesses competitive with ICN without the
approval of the Board of Directors. Under the Panic Employment Agreement, Mr.
Panic agreed to waive and eliminate retirement benefits contained in his prior
employment contract with ICN. Instead, Mr. Panic may, at his option, retire
upon termination of the Panic Employment Agreement.
Upon retirement, Mr. Panic has agreed to provide consulting services
to ICN for $120,000 per year, which amount is subject to annual cost-of-living
adjustments from the base year of 1967 until the date of retirement not to
exceed his salary at the date of retirement (currently estimated to be in
excess of $535,000 per year, as adjusted). Mr. Panic's agreement to provide
consulting services to ICN is a lifetime agreement. The consulting fee shall
not at any time exceed the highest annual compensation, as adjusted, paid to
Mr. Panic during his employment by ICN. Upon Mr. Panic's retirement, the
consulting fee shall not be subject to further cost-of-living adjustments. The
Panic Employment Agreement includes a severance compensation provision in the
event of a Change in Control of ICN. The Panic Employment Agreement provides
that if within two years after a Change in Control of ICN, Mr. Panic's
employment with ICN is terminated, except as a result of death, disability or
illness, or if Mr. Panic leaves the employ of ICN within such two-year period,
then Mr. Panic will receive as severance compensation, five times his annual
salary, as adjusted, and Mr. Panic will be deemed to have retired and will
receive the same consulting fees to which he would otherwise have been entitled
under the Panic Employment Agreement. A Change in Control of ICN would occur,
for purposes of the Panic Employment Agreement, if (i) a Change in Control
shall occur of a nature which would be required to be reported in response to
Item 6(e) of Schedule 14A under the Exchange Act (for purposes of that Item,
"control" is defined as the power to direct or cause the direction of the
management and policies of ICN, whether through the ownership of voting
securities, by contract, or otherwise) unless two-thirds of the Existing Board
of Directors, as defined below, decide in their discretion that no Change in
Control has occurred for purposes of the agreement; (ii) any person is or
becomes the beneficial owner, directly or indirectly, of securities of ICN
representing 15% or more of the combined voting power of ICN's then outstanding
securities; (iii) the persons constituting the Existing Board of Directors, as
defined below, cease for any reason to constitute a majority of ICN's Board of
Directors; or (iv) shares of ICN common stock cease to be registered under the
Exchange Act. "Existing Board of Directors" is defined in the Panic Employment
Agreement as those persons constituting the Board of Directors at the date of
the Panic Employment Agreement, together with each new director whose election
or nomination for election by ICN's stockholders was previously approved, or is
approved within thirty days of such election or nomination, by a vote of at
least two-thirds of the directors in office prior to such person's election as
a director. If Mr. Panic's employment is terminated under any of the
circumstances described above following such a Change in Control, in addition
to the consulting fee as described above, Mr. Panic would be entitled to
receive (based upon present compensation) $2,675,000.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
PANIC EMPLOYMENT AGREEMENT - CONTINUED
In connection with the Merger, Mr. Panic has executed an agreement
waiving the effect under the Panic Employment Agreement of any Change in
Control which may be deemed to arise as a result of the Merger. Upon
consummation of the Merger, the Panic Employment Agreement will be assumed by
New ICN. New ICN through the proposed Compensation and Benefits Committee of
its Board of Directors and Mr. Panic are presently discussing the terms of a
new employment agreement to replace the existing agreement upon its expiration.
No terms of the new agreement have been determined as of the date hereof.
COMPENSATION REPORT
The Compensation Committee ("Committee") is composed of four
independent non-employee directors, Messrs. Barker, Bayh, Charles and Moses.
The following statement made by the members of the Committee shall not
be deemed incorporated by reference into any filing under the Securities Act of
1933 or under the Securities Exchange Act of 1934 and shall not otherwise be
deemed filed under such Acts.
COMPENSATION PHILOSOPHY
The Board of Directors adopts an annual budget and financial plan
which incorporates the goals and objectives to be achieved by the Company and
the specific operating units. The goals focus on growth in operating income
and growth in earnings per share. Each executive is responsible for the
performance of their unit in relation to the plan. Specific goals and
objectives for each executive are reviewed by the executive and their
supervisor. In reviewing the annual performance which will determine the
executive's compensation, the supervisor assesses a performance grade based on
the pre-set performance objectives. This assessment is used to determine base
salary for the following fiscal year. Eligibility for bonus awards was based
on the pre-set performance guidelines and growth in operating income and
earnings per share. However, bonuses may be paid even when these objective
standards are not met if specific contributions by an employee merit a bonus or
the reasons for failure to meet the objective standards are beyond the control
of the Company and/or the employee. Stock options are granted based on a
program developed for the Company by Towers Perrin, a compensation consulting
company. Each individual's base number of options is derived from a formula
which ties to their base salary. The Committee may then consider the
achievement of individual as well as corporate performance goals in determining
the ultimate number of options granted.
The compensation of executives consists of salary, a bonus plan to
reward performance and a long-term incentive stock option program.
BASE SALARY
Salaries are paid within certain grades which are established by the
Human Resources Department reviewing data of other like companies in the same
industry. The Company reviewed salary surveys prepared by Towers Perrin.
These surveys did not state which companies participated in the surveys. The
salary levels were in the median of compensation for similar positions. Grades
are updated to reflect changes in the marketplace. The salaries of executives
are reviewed on an annual basis by supervisory managers and the Committee.
BONUS PLAN
The Company has adopted an Incentive Bonus Plan which is based on
target goals of growth in both operating income and earnings per share.
Individual performance goals are compared against the target goals established.
Recommendations are made by individual supervisors and approved by the
Committee.
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ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - CONTINUED
LONG-TERM STOCK INCENTIVE PLANS
Stock options are granted as long range incentives to executives.
Options vest over a ten year period. Options are granted at fair market value.
The amount of options granted is tied to salary and performance and each grant
is evaluated. No grant to executives is automatic.
The Committee determines the compensation of the Chief Executive
Officer based on a number of factors. The goal of the Committee is to grant
compensation consistent with compensation granted to other chief executive
officers of companies in the same industry. The Chief Executive Officer's
compensation is based on a contract comprised of a base salary and based on the
Company's performance. Special one-time bonuses will be paid, at the
Committee's discretion, based on special contributions made to the Company.
Mr. Milan Panic is compensated by ICN pursuant to an employment agreement with
ICN (See "Executive Compensation"). Substantial bonuses are approved by the
Board of Directors.
Compensation and Benefits Committee
Norman Barker
Senator Birch Bayh
Alan F. Charles
Stephen D. Moses
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PERFORMANCE GRAPH
The following compares ICN's cumulative total stock return on the
shares with the cumulative return on the Standard & Poor's 500 Stock Index and
the 5-Stock Custom Composite Index for the five years ended December 31, 1994.
The graph assumes that the value of the investment of the ICN Common Stock in
each index as $100 at December 31, 1989 and that all dividends were reinvested.
The cumulative total return for ICN Pharmaceuticals is based on an initial
investment in SPI Pharmaceuticals beginning December 31, 1989 until its merger
with ICN Pharmaceuticals on November 11, 1994. The cumulative total return
from November 11, 1994 until December 31,1994 is based upon the performance of
ICN Pharmaceuticals (New).
CUMULATIVE TOTAL RETURNS
BASED ON REINVESTMENT OF $100 BEGINNING DECEMBER 31, 1988
[CHART]
SOURCE: GEORGESON & COMPANY INC.
CUSTOM
MEASUREMENT PERIOD ICN S&P COMPOSITE INDEX
(FISCAL YEAR COVERED) PHARMACEUTICALS, INC. 500(R) (5 STOCKS)
12/89 $100 $100 $100
12/90 $118 $ 97 $129
12/91 $524 $126 $272
12/92 $193 $136 $208
12/93 $280 $150 $158
12/94 $355 $152 $196
The 5-Stock Custom Composite Index includes Allergan Inc., Carter Wallace Inc.,
Amgen Inc., Forest Labs Inc.--Class A, and Syntex Corp.
89
92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
Financial Statements of the Registrant are listed in the index
to Consolidated Financial Statements and filed under Item 8,
"Financial Statements and Supplementary Data", included
elsewhere in the Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule of the Registrant is listed in
the index to Consolidated Financial Statements and filed under
Item 8, "Financial Statements and Supplementary Data,"
included elsewhere in this Form 10-K.
3. EXHIBITS
3.1. Certificate of Incorporation of Registrant, previously filed as Exhibit 3.1 to Registration Statement No.
2-84984 on Form S-1, which is incorporated herein by reference.
3.2. Certificate of Amendment of Certificate of Incorporation, dated May 10, 1985, previously filed as Exhibit 3.2
to Registration Statement No. 2-99069, which is incorporated herein by reference.
3.3. Certificate of Amendment of Certificate of Incorporation, dated December 24, 1986, previously filed as
Exhibit 3.3 to annual report on Form 10-K for the year ended November 30, 1986, which is incorporated herein
by reference.
3.4. Bylaws of ICN, previously filed as Exhibit 3.2 to Registration Statement No. 2-84984 on Form S-1, which is
incorporated herein by reference. Amendment of bylaws approved by stockholders on November 21, 1986,
previously filed as Exhibit 3.4 to annual report on Form 10-K for the year ended November 30, 1986, which is
incorporated herein by reference.
10.1. Tax Sharing Agreement dated as of January 1, 1983, between ICN Pharmaceuticals, Inc. and SPI Pharmaceuticals,
Inc., previously filed as Exhibit 10.7 to Registration Statement No. 2-84984 on Form S-1, which is
incorporated herein by reference.
10.2. 1982 Employee Incentive Stock Option Plan, previously filed as Exhibit 10.9 to Registration Statement No.
2-84984 on Form S-1, which is incorporated herein by reference.
10.3. 1982 Non-Qualified Stock Option Plan, previously filed as Exhibit 10.10 to Registration Statement No. 2-84984
on Form S-1, which is incorporated herein by reference.
90
93
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CONTINUED
10.4. Agreement for the Transfer of Inventory and Operating Functions of Viratek, Inc. to SPI Pharmaceuticals,
Inc., dated as of November 27, 1985 between Viratek, Inc. and SPI Pharmaceuticals, Inc., previously filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is
incorporated herein by reference.
10.5. Xr Capital Holding Trust Instrument between ICN Pharmaceuticals, Inc. and Ansbacher (C.I.) Limited dated as
of September 17, 1986; Subscription Agreement between Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc.,
SPI Pharmaceuticals, Inc., and Banque Gutzwiller, Kurz, Bungener S.A. and the other financial institutions
named therein dated as of September 17, 1986; Bond Issue Agreement between ICN Pharmaceuticals, Inc. and
Ansbacher (C.I.) Limited dated as of September 17, 1986; and Exchange Agency Agreement between ICN
Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. Banque Gutzwiller, Kurz, Bungener S.A., and the other
financial institutions named therein dated as of September 17, 1986, previously filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended November 30, 1986, which is incorporated herein by
reference.
10.6. Pro forma deed of sale of shares representing 100 percent of Capital Stock of Laboratorios Hubber, S.A.
between ICN Pharmaceuticals, Holland B.V., Patrimonio Del Estado, an agency of the Spanish government, and
Rumasa, S.A., previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K dated February 18,
1987, previously filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992, which is incorporated herein by reference.
10.7. License Agreement between SPI Pharmaceuticals, Inc. and Viratek, Inc., dated as of December 1, 1990,
previously filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31,
1994, which is incorporated herein by reference.
10.8. Tax Sharing Agreement effective June 1, 1990 between ICN Pharmaceuticals, Inc. and SPI Pharmaceuticals, Inc.
previously filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended November 30,
1990, which is incorporated herein by reference.
10.9. Pledge Agreement dated November 30, 1990 between ICN Pharmaceuticals, Inc. and SPI Pharmaceuticals, Inc.
previously filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended November 30,
1990, which is incorporated herein by reference.
10.10. Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated November 22, 1990 previously
filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended November 30, 1990,
which is incorporated herein by reference.
91
94
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CONTINUED
10.11. Closing Date Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated April 26, 1991, previously
filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991,
which is incorporated herein by reference.
10.12. Asset Transfer Agreement between Viratek, Inc. and SPI Pharmaceuticals, Inc. dated April 26, 1991, previously
filed as Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991,
which is incorporated herein by reference.
10.13. Asset Transfer Agreement between ICN Pharmaceuticals, Inc. and SPI Pharmaceuticals, Inc. dated April 26,
1991, previously filed as Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991, which is incorporated herein by reference.
10.14. Amendment to Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated December 31, 1991,
previously filed as Exhibit 10.39 to the Company's Annual Report on Form 10-K for the year ended December 31,
1991, which is incorporated herein by reference.
10.15. Additional Amendment to Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated
February 27, 1992, previously filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, which is incorporated herein by reference.
10.16. Letter of Credit issued by SPI Pharmaceuticals, Inc. in favor of ICN Galenika previously filed as Exhibit
10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, which is incorporated
herein by reference.
10.17 1992 Employee Incentive Stock Option Plan and Employee Incentive Stock Option Agreement Thereunder previously
filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992,
which is incorporated herein by reference.
10.18 1992 Non-Qualified Stock Option Plan and Non-Qualified Stock Option Agreement Thereunder previously filed as
Exhibit 10.43 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is
incorporated herein by reference.
10.19 Leave of Absence and Reemployment Agreement between SPI Pharmaceuticals, Inc. and Milan Panic dated July 25,
1992, previously filed as Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992, which is incorporated herein by reference.
10.20 License Agreement between Viratek, Inc. and SPI Pharmaceuticals, Inc. dated December 1, 1990, previously
filed as Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992,
which is incorporated herein by reference.
92
95
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CONTINUED
10.21 Application for Registration, Foundation Agreement, Joint Venture - ICN Oktyabr previously filed as Exhibit
10.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated
herein by reference.
10.22 Charter of the Joint Stock Company - ICN Oktyabr previously filed as Exhibit 10.47 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.23 Supplemental Agreement to Subscription Agreement, dated October 14, 1994 between ICN Subsidiary Corp., ICN
Merger Corp., DG Bank (Schweiz) AG and Bank Leu AG.
10.24 Supplemental Agreement to Conversion Agency Agreement dated October 14, 1994 between ICN Merger Corp. and E.
Gutzwiller & Cie.
10.25 First Supplement To Indenture dated October 19, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and
Bank of America National Trust and Savings Association.
10.26 Supplemental Agreement to Subscription Agreement dated October 14, 1994 between ICN Merger Corp. and Banque
Parisbas S.A.
10.27 First Supplement To Indenture dated October 14, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and
Citibank, N.A.
10.28 Supplemental Agreement to Subscription Agreement dated October 14, 1994 between ICN Merger Corp. and Bank Leu
AG.
10.29 Second Supplement To Indenture dated October 14, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp.,
and IBJ Schroder Bank and Trust Company.
10.30 Supplemental Agreement to Bond Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc, ICN
Subsidiary Corp., ICN Merger Corp. and Ansbacher (Guernsey) Limited.
10.31 Supplemental Agreement to the Bonds dated October 14, 1994 between ICN Merger Crop. and DG Bank.
10.32 Supplemental Agreement to the Bond Issue Agreement dated October 31, 1994 between ICN Biomedicals, Inc, ICN
Pharmaceuticals, Inc., ICN Subsidiary Corp., ICN Merger Crop. and Ansbacher (Guernsey) Limited.
10.33 Supplemental Agreement to the Bonds dated October 31, 1994 between ICN Merger Crop. and DG Bank.
10.34 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Ansbacher (Guernsey) Limited.
93
96
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CONTINUED
10.35 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Ansbacher (Guernsey) Limited.
10.36 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc
ICN Merger Corp. and Ansbacher (Guernsey) Limited.
11. Computation of Earnings per Share.
21. Subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand L.L.P. Independent Public Accountants.
27. Financial Data Schedule.
(B) REPORTS ON FORM 8-K IN FOURTH QUARTER
None.
94
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 1995
By /s/ Milan Panic
------------------------------
Milan Panic,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Milan Panic Date: March 30, 1995
-------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
/s/ John E. Giordani Date: March 30, 1995
-------------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
/s/ Norman Barker, Jr. Date: March 30, 1995
-------------------------------------------------
Norman Barker, Jr., Director
/s/ Birch Bayh Date: March 30, 1995
-------------------------------------------------
Senator Birch Bayh, Director
/s/ Alan F. Charles Date: March 30, 1995
-------------------------------------------------
Alan F. Charles, Director
/s/ Robert H. Finch Date: March 30, 1995
-------------------------------------------------
Robert H. Finch, Esq., Director
/s/ Roger Guilemin Date: March 30, 1995
-------------------------------------------------
Roger Guillemin, M.D., Ph.D., Director
/s/ Adam Jerney Date: March 30, 1995
-------------------------------------------------
Adam Jerney, Executive Vice President, Director
95
98
SIGNATURES - CONTINUED
/s/ Weldon B. Jolley Date: March 30, 1995
-------------------------------------------------
Weldon B. Jolley, Ph. D., Director
/s/ Vernon Knight Date: March 30, 1995
-------------------------------------------------
Vernon Knight, M.D., Director
/s/ Jean-Francois Kurz Date: March 30, 1995
-------------------------------------------------
Jean-Francois Kurz, Director
/s/ Thomas Lenagh Date: March 30, 1995
-------------------------------------------------
Thomas Lenagh, Ph.D., Director
/s/ Charles T. Manatt Date: March 30, 1995
-------------------------------------------------
Charles T. Manatt, Director
/s/ Stephen Moses Date: March 30, 1995
-------------------------------------------------
Stephen Moses, Director
/s/ Michael Smith Date: March 30, 1995
-------------------------------------------------
Michael Smith, Ph.D., Director
/s/ Roberts A. Smith Date: March 30, 1995
-------------------------------------------------
Roberts A. Smith, Ph.D., Director
/s/ Richard W. Starr Date: March 30, 1995
-------------------------------------------------
Richard W. Starr, Director
96
99
EXHIBIT INDEX
EXHIBIT PAGE NO.
------- ---------
10.23 Supplemental Agreement between ICN Subsidiary Corp.,
ICN Merger Corp., and DG Bank dated October 14,1994. . . . . . . . . . . . . . 101
10.24 Supplemental Agreement between ICN Merger Corp.,
and E. Gutzwiller & Cie dated October 14,1994. . . . . . . . . . . . . . . . . . 104
10.25 First Supplemental Indenture between ICN Pharmaceuticals, Inc.,
and Bank of America National Trust and Savings Association. dated
October 14,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
10.26 Supplemental Agreement between ICN Merger Corp.,
and Banque Parisbas (Luxembourg) S.A. dated October 14,1994. . . . . . . . . . . 108
10.27 First Supplemental Indenture between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Citibank, N.A. dated October 14,1994. . . . . . . . . . . 110
10.28 Supplemental Agreement between ICN Merger Corp., and Bank Leu AG
dated October 14,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
10.29 Second Supplemental Indenture between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and IBJ Schroder Bank & Trust Company
dated October 14,1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
10.30 Supplemental Agreement between ICN Pharmaceuticals, Inc.,
ICN Subsidiary Corp., ICN Merger Corp.
and Ansbacher (Guernsey) Limited dated October 31,1994 . . . . . . . . . . . . 116
10.31 Supplemental Agreement between ICN Merger Corp., and DG Bank
dated October 31,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
10.32 Supplemental Agreement between ICN Biomedicals, Inc.,
ICN Subsidiary Corp., ICN Merger Corp. and Ansbacher (Guernsey) Limited
dated October 31,1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
10.33 Supplemental Agreement between ICN Merger Corp. and DG Bank
dated October 31,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
10.34 Supplemental Agreement between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Ansbacher (Guernsey) Limited
dated October 31,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
10.35 Supplemental Agreement between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Ansbacher (Guernsey) Limited
dated October 31,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
10.36 Supplemental Agreement between ICN Pharmaceuticals, Inc.,
ICN Merger Corp. and Ansbacher (Guernsey) Limited
dated October 31,1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
97
100
EXHIBIT INDEX (CONTINUED)
EXHIBIT PAGE NO.
------- --------
11. Computation of Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . 130
21. Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 131
23. Consent of Coopers & Lybrand L.L.P. Independent Public Accountants . . . . . . . 132
27. Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
98