UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] 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)
(714) 545-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of outstanding shares of the registrant's
Common Stock, $.01 par value, as of May 12, 2000 was
79,453,811.
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - 3
March 31, 2000 and December 31, 1999
Consolidated Condensed Statements of Income - 4
Three months ended March 31, 2000 and 1999
Consolidated Condensed Statements of Comprehensive Income -
Three months ended March 31, 2000 and 1999 5
Consolidated Condensed Statements of Cash Flows - 6
Three months ended March 31, 2000 and 1999
Management's Statement Regarding Unaudited Financial Statements 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(unaudited, in thousands, except per share data)
March 31, December 31,
2000 1999
ASSETS
Current Assets:
Cash and cash equivalents 215,238 177,577
Restricted cash 343 414
Accounts receivable, net 221,180 231,902
Inventories, net 139,358 136,762
Prepaid expenses and other current assets 22,021 18,075
Total current assets 598,140 564,730
Property, plant and equipment, net 326,682 332,360
Deferred income taxes, net 81,825 81,095
Other assets 35,915 37,625
Goodwill and intangibles, net 454,293 456,451
1,496,855 1,472,261
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 56,475 $ 65,195
Accrued liabilities 75,244 66,185
Notes payable 8,690 8,762
Current portion of long-term debt 294 312
Income taxes payable 7,045 168
Total current liabilities 147,748 140,622
Long-term debt, less current portion 597,048 596,961
Deferred income and other liabilities 29,567 28,628
Minority interest 22,560 22,478
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized;
78,992 (March 31, 2000) and 78,950 (December 31, 1999)
shares outstanding (after deducting shares in treasury
of 814 and 814, respectively) 789 789
Additional capital 950,080 949,181
Retained deficit (175,783) (197,602)
Accumulated other comprehensive loss (75,154) (68,796)
Total stockholders'equity 699,932 683,572
$1,496,855 $1,472,261
The accompanying notes are an integral part of these consolidated
condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months ended March 31, 2000 and 1999
(unaudited, in thousands, except per share data)
Three Months Ended
March 31,
2000 1999
Revenues:
Product sales $ 159,340 $160,246
Royalties 33,000 15,828
Total revenues 192,340 176,074
Costs and expenses:
Cost of product sales 60,766 66,396
Selling, general and administrative expenses 67,435 55,200
Amortization of goodwill and intangibles 7,573 7,462
Research and development costs 4,001 2,242
Total expenses 139,775 131,300
Income from operations 52,565 44,774
Translation and exchange losses, net 1,591 7,259
Interest income (2,695) (1,644)
Interest expense 15,221 13,100
Income before provision for income taxes
and minority interest 38,448 26,059
Provision for income taxes 11,111 4,780
Minority interest (62) (1,340)
Net income $ 27,399 $ 22,619
Basic earnings per share $ 0.35 $ 0.29
Shares used in per share computation 78,975 76,853
Diluted earnings per share $ 0.34 $ 0.28
Shares used in per share computation 81,622 81,865
The accompanying notes are an integral part of these consolidated
condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2000 and 1999
(unaudited, in thousands)
Three Months Ended
March 31,
2000 1999
Net income $ 27,399 $ 22,619
Other comprehensive income:
Foreign currency translation adjustments (6,358) (14,150)
Comprehensive income $ 21,041 $ 8,469
The accompanying notes are an integral part of these consolidated
condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(unaudited, in thousands)
Three Months Ended
March 31,
2000 1999
Cash flows from operating activities:
Net income $ 27,399 $ 22,619
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,885 15,460
Provision for losses on accounts receivable 584 (616)
Provision for inventory obsolescence 1,449 1,211
Translation and exchange losses, net 1,591 7,259
Deferred income -- (4,516)
Loss (gain) on sale of assets 169 (3)
Other non-cash losses 583 988
Deferred income taxes (775) (3,526)
Minority interest (62) (1,340)
Change in assets and liabilities,
net of effects of acquisitions:
Accounts receivable 6,931 (10,935)
Inventories (6,189) 4,337
Prepaid expenses and other assets (4,039) (1,145)
Trade payables and accrued liabilities 784 (27,147)
Income taxes payable 7,095 (2,101)
Other liabilities 1,576 3,183
Net cash provided by operating activities 52,981 3,728
Cash flows from investing activities:
Capital expenditures (5,881) (12,085)
Proceeds from sale of assets 37 129
Decrease (increase) in restricted cash 71 (9)
Acquisition of license rights, product lines and businesses
(4,712) (1,948)
Net cash used in investing activities (10,485) (13,913)
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 26,155
Proceeds from issuance of notes payable 2,729 7,688
Payments on long-term debt (79) (27,473)
Payments on notes payable (2,789) (7,727)
Proceeds from exercise of stock options 929 1,332
Proceeds from issuance of common stock -- 27,000
Purchase of treasury stock -- (5,550)
Dividends paid (5,580) (4,637)
Net cash (used in) provided by financing activities (4,790) 16,788
Effect of exchange rate changes on cash
and cash equivalents (45) (677)
Net increase in cash and cash equivalents 37,661 5,926
Cash and cash equivalents at beginning of period 177,577 104,921
Cash and cash equivalents at end of period $ 215,238 $ 110,847
The accompanying notes are an integral part of these consolidated
condensed financial statements.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared on the basis of accounting
principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations.
The results of operations presented herein are not necessarily
indicative of the results to be expected for a full year.
Although the Company believes that all adjustments
(consisting only of normal, recurring adjustments) necessary
for a fair presentation of the interim periods presented are
included and that the disclosures are adequate to make the
information presented not misleading, these consolidated
condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company's Annual Reports on Form 10-K and Forms
10K/A for the year ended December 31, 1999.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated
condensed financial statements include the accounts of ICN
Pharmaceuticals, Inc. and Subsidiaries (the "Company") and all of
its majority-owned subsidiaries. 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. Investments in less than 20% owned
companies are recorded at the lower of cost or fair value. All
significant intercompany account balances and
transactions have been eliminated.
Effective November 26, 1998, the Company's equity ownership in
ICN Yugoslavia was effectively reduced from 75% to 35% based upon
a decision by the Yugoslavia Ministry of Economic and Property
Transformation. Additionally, representatives of the Company and
ICN Yugoslavia's management have been denied access to the
premises and any representation as to the management of ICN
Yugoslavia. As a result, the Company is no longer able to
influence the operating and financial affairs of ICN Yugoslavia.
Accordingly, the Company has deconsolidated the financial
statements of ICN Yugoslavia as of November 26, 1998, and reduced
the carrying value of its investment to fair value, currently
estimated to be zero. The Company will account for its ongoing
investment in ICN Yugoslavia under the cost method. The Company
did not recognize any revenues or expenses
related to its investment in ICN Yugoslavia in the quarters ended
March 31, 1999 and 2000.
Comprehensive Income: The balance of accumulated other
comprehensive income at March 31, 2000 and December 31, 1999
consists of accumulated foreign currency translation adjustments.
Other comprehensive income has not been recorded net of any tax
provision or benefit as the Company does not expect to realize
any significant tax benefit or expense from this item.
Per Share Information: In January 2000, the Company's Board of
Directors declared a fourth quarter 1999 cash dividend of $0.07
per share, which was paid in February 2000. In April 2000, the
Company's Board of Directors declared a first quarter cash
dividend of $0.0725 per share, payable on May 10, 2000, to
stockholders of record on April 25, 2000.
Reclassifications: Certain prior year amounts have been
reclassified to conform with the current period presentation,
with no effect on previously reported net income or stockholders'
equity.
2. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
Three Months Ended
March 31,
2000 1999
Income:
Net income $27,399 $22,619
Numerator for basic earnings per share--
income available to common stockholders 27,399 22,619
Effect of dilutive securities:
Other dilutive securities (2) --
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $27,397 $22,619
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 78,975 76,853
Effect of dilutive securities:
Employee stock options 2,386 2,711
Series D Preferred Stock -- 616
Other dilutive securities 261 1,685
Dilutive potential common shares 2,647 5,012
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 81,622 81,865
Basic earnings per share $0.35 $0.29
Diluted earnings per share $0.34 $0.28
Other dilutive securities includes the effect of shares which would be
contingently issuable in satisfaction of a guarantee made in
connection with the issuance of shares for the acquisition of the
rights to certain products from F. Hoffman - La Roche Ltd. ("Roche")
during 1998. Under the terms of the agreement, in the event that the
market value of the Company's common stock at the guarantee date does
not meet the specified guarantee price, the Company will be obligated
to satisfy the guarantee amount in cash or, in certain circumstances,
in additional shares of its common stock. Based upon the market price
of the Company's common stock at March 31, 2000, the guaranteed value
of the shares subject to such guarantee exceeded its market value by
approximately $3,726,000.
Additionally, other dilutive securities includes the dilutive effect
of certain put options. During 1999, the Company sold certain put
options to an independent third party; the proceeds were used to
purchase call options from the same party in a private placement
transaction not requiring any net cash outlay at the time. The put
options and the corresponding call options each expire from August
2000 through December 2000 and are exercisable only at the expiration
dates. The Company may, at its option, make a physical settlement, a
cash settlement, or a net share settlement of its positions under the
put options and the call options. The Company has a maximum potential
obligation under the put options to purchase 2,380,953 shares of its
common stock for an aggregate price of approximately $67,500,000.
The call options entitle the Company to buy 1,064,085 shares of its
common stock for approximately $33,519,000. The net shares issuable
in settlement of the put options are considered outstanding for the
purpose of computing diluted earnings per share, based upon the
market price of the Company's common stock on March 31, 2000. The net
settlement obligation of the Company was approximatley $2,619,000
or 96,112 shares at March 31, 2000.
3. Detail of Certain Accounts
March 31, December 31,
(in thousands) 2000 1999
Accounts receivable, net:
Trade accounts receivable $ 195,343 $206,766
Royalties receivable 33,494 34,725
Other receivables 17,293 16,958
246,130 258,449
Allowance for doubtful accounts (24,950) (26,547)
$ 221,180 $231,902
Inventories, net:
Raw materials and supplies $ 38,600 $ 32,683
Work-in-process 6,017 12,610
Finished goods 103,912 99,429
148,529 144,722
Allowance for inventory obsolescence (9,171) (7,960)
$ 139,358 $136,762
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 409,172 $409,482
Accumulated depreciation and amortization (82,490) (77,122)
$ 326,682 $332,360
4. Commitments and Contingencies
On August 11, 1999, the United States Securities and Exchange
Commission filed a complaint in the United States District
Court for the Central District of California against the Company,
the Chairman (Milan Panic) and one current and one former officer
of the Company (the "SEC Complaint"). The SEC Complaint alleges
that the Company and the individual named defendants made untrue
statements of material fact or omitted to state material facts
necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading and
engaged in acts, practices, and courses of business which
operated as a fraud and deceit upon other persons in violation of
Section 10(b) of the Securities Exchanges Act of 1934 and Rule
10b-5 promulgated thereunder. The action concerns the status and
the disposition of the Company's 1994 new drug application for
Virazole (R) as a monotherapy treatment for hepatitis C (the
"NDA"). The SEC Complaint seeks injunctive relief, unspecified
civil penalties, and an order barring Mr. Panic from acting as
officer or director of any publicly-traded company.
Beginning in 1996, the Company received subpoenas from a Grand
Jury in the United States District Court for the Central District
of California requesting the production of documents covering a
broad range of matters over various time periods. The Company
understands that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee,
and a former employee of the Company are targets of the
investigation. The Company also understands that a senior
executive officer, a director, a former officer, a current
employee and a former employee are subjects of the
investigation. The United States Attorney's office has advised
counsel for the Company that the areas of its investigation
include disclosures made and not made concerning the NDA to the
public and other third parties; stock sales for the benefit of
Mr. Panic following receipt on November 28, 1994 of a letter
from the FDA informing the Company that the NDA had been found
not approvable; possible violations of the economic embargo
imposed by the United States upon the Federal Republic of
Yugoslavia, based upon alleged sales by the Company and Mr.
of stock belonging to Company employees; and, with respect
Mr. Panic, personal disposition of assets of entities associated
with Yugoslavia, including possible misstatements and/ or
omissions in federal tax filings. The Company has, and continues
to, cooperate in the Grand Jury investigation. A number of
current and former employees of the Company have been interviewed
by the government in connection with the investigation. The
United States Attorney's office has issued subpoenas requiring
various current and former officers and employees of the Company
to testify before the Grand Jury. Certain current and former
officers and employees testified before the Grand Jury beginning
in July 1998.
On or about February 9, 1999, the Company commenced an action in
the United States District Court for the District of Columbia
("District Court") against the Federal Republic of Yugoslavia
("FRY"), the Republic of Serbia ("ROS"), and the State Health
Fund of Serbia ("State Fund") seeking damages in the amount of at
least $500,000,000 and declaratory relief arising out of the FRY
and ROS's seizure of the Company's majority ownership interest in
ICN Yugoslavia and the failure of the ROS and State Fund to pay
ICN Yugoslavia for goods sold and delivered. On or about March 9,
1999, the State Fund commenced an arbitration against the Company
before the International Chamber of Commerce ("ICC") for
unquantified damages due to alleged breaches of the agreement
pursuant to which the Company acquired its majority ownership
interest ICN Yugoslavia, and for unspecified injunctive relief.
The Company, in turn, counterclaimed against the State Fund, and
commenced an arbitration against the FRY and ROS in the ICC
arising out of the seizure of ICN Yugoslavia and the failure to
pay for goods sold and delivered, seeking damages and other
relief. By Order dated March 29, 2000, the District Court stayed
the action for 180 days (while retaining jurisdiction), at which
time the action will be administratively dismissed, without
prejudice, unless the stay is continued so that issues of
jurisdiction by and among the parties can be resolved at the ICC.
The Company intends to prosecute vigorously its claims against
the FRY, the ROS, and the State Fund, and to defend against the
State Funds' claims against the Company, which the Company
believes to be meritless and filed solely as a response to the
action filed earlier by the Company in the District Court.
The Company is a party to other pending lawsuits or subject to a
number of threatened lawsuits. While the ultimate outcome of
pending and threatened lawsuits and the Grand Jury investigation
cannot be predicted with certainty, and an unfavorable outcome
could have a negative impact on the Company, at this time in the
opinion of management, the ultimate resolution of these matters
will not have a material effect on the Company's consolidated
financial position, results of operations or liquidity.
5. Business Segments
During 1999, the Company decided to manage its Central European
businesses from the Western European headquarters in
anticipation of the entry of Poland, Hungary and the Czech
Republic into the European Union. As a result, the Company
integrated ICN Hungary, ICN Czech Republic and ICN Poland, which
were previously reported under the Other Eastern Europe segment,
into the Western and Central Europe segment. All amounts for 1999
have been restated to conform with the current year presentation.
The Company's Latin America segment principally comprises Mexico.
The following table sets forth the amounts of segment revenues
and operating income (loss) of the Company for the three months
ended March 31, 2000 and 1999 (in thousands):
Revenues Operating Income (Loss)
Three Months Ended Three Months Ended
March 31 March 31
2000 1999 2000 1999
Pharmaceuticals
North America $62,801 $54,256 $ 47,519 $37,524
Western and Central Europe 46,757 46,273 6,255 5,351
Latin America 29,227 22,611 8,907 7,838
Russia 26,570 23,008 1,525 (2,449)
Asia, Africa, Australia 11,399 13,940 1,253 4,163
Total Pharmaceuticals 176,754 160,088 65,459 52,424
Biomedicals 15,586 15,986 2,279 2,088
Consolidated revenues and
segment operating income $192,340 $176,074 67,738 54,512
Corporate expenses 15,173 9,738
Interest income (2,695) (1,644)
Interest expense 15,221 13,100
Translation and exchange losses, net 1,591 7,259
Income before provision for income $38,448 $26,059
taxes and minority interest
The following table sets forth the segment total assets of the
Company as of March 31, 2000 and December 31, 1999 (in thousands):
Assets
March 31, December 31,
2000 1999
Pharmaceuticals
North America $ 514,879 $ 516,231
Western and Central Europe 213,515 218,577
Latin America 108,251 100,118
Russia 174,307 174,838
Asia, Africa, Australia 11,399 13,940
Total Pharmaceuticals 1,111,390 1,108,166
Biomedicals 65,350 67,692
Corporate 320,115 296,403
$ 1,496,855 $ 1,472,261
6. Supplemental Cash Flow Information
Cash paid for income taxes for the three months ended March 31,
2000 and 1999 was $4,787,000 and $3,380,000, respectively. Cash
paid for interest for the three months ended March 31, 2000 and
1999 was $13,020,000 and $14,301,000 respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain financial information for the Company's business
segments is set forth below. This discussion should be read in
conjunction with the consolidated condensed financial statements
of the Company included elsewhere in this document. For
additional financial information by business segment, see Note 5
of Notes to Consolidated Condensed Financial Statements included
elsewhere in this Quarterly Report.
Revenues: Three Months Ended
March 31,
(in thousands) 2000 1999
Pharmaceuticals
North America $ 62,801 $ 54,256
Western and Central Europe (1) 46,757 46,273
Latin America principally Mexico 29,227 22,611
Russia 26,570 23,008
Asia, Africa, Australia 11,399 13,940
Total Pharmaceuticals 176,754 160,088
Biomedicals 15,586 15,986
Total revenues 192,340 176,074
Product sales 159,340 160,246
Royalty revenues 33,000 15,828
Total revenues $ 192,340 $176,074
Cost of product sales $ 60,766 $ 66,396
Gross profit margin on product sales 62% 59%
(1) The Western and Central Europe segment includes Czech
Republic, Hungary and Poland, which were previously included in
the Other Eastern Europe segment in 1999. All amounts for 1999
have been restated to conform with the current year presentation.
Royalty Revenues: Royalty revenues, which are included in the
North America Pharmaceuticals segment revenues, represent amounts
earned under the Company's Exclusive License and Supply
Agreement (the "License Agreement") with Schering-Plough. Under
the License Agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C ("HCV") in
combination with Schering-Plough's alpha interferon (the
"Combination Therapy"). In 1998, Schering-Plough received
approval from the United States Food and Drug Administration
("FDA") to market Rebetron(T) Combination Therapy. Rebetron(T)
combines Rebetol(R) (ribavirin) capsules and Intron(R) A
(interferon alfa-2b, recombinant) injection, for the treatment
of HCV in patients with compensated liver disease. In May 1999,
the European Union's ("EU") Commission for the European
Communities granted marketing authorization to Schering-Plough to
market Rebetol(R) (ribavirin) capsules for use in combination
with interferon alfa-2b injection (marketed as Intron(R) A in
certain countries) for the treatment of both relapsed and
previously untreated (naive) HCV patients. The Commission's
approval resulted in a single Marketing Authorization with
unified labeling that is immediately valid in all 15 European
Union-Member States. Schering-Plough commenced marketing
Rebetol(R) in Germany (May 1999), the United Kingdom (July 1999),
and in Italy (October 1999). The Company anticipates that
Schering-Plough will introduce Rebetol(R) in the other EU markets
upon receiving pricing approvals, where necessary, from
individual EU countries.
Royalty revenues for the three months ended March 31, 2000 were
$33,000,000 compared to $15,828,000 for the same period of 1999,
reflective of additional sales of Rebetron(T) by Schering-Plough
resulting from the 1999 launch into certain European markets.
Regional Revenues: In the North America Pharmaceuticals segment,
revenues for the three months ended March 31, 2000 were
$62,801,000, compared to $54,256,000 for the same period of 1999.
The $8,545,000 increase is reflective of the $17,172,000 increase
in royalty income offset by lower unit sales in many of the
various product lines. Additionally, product sales in the first
quarter of 1999 were higher than the same period in 2000 due to
the fulfillment of back-orders from 1998 and increased sales to
wholesalers in anticipation of April 1998 price increases.
In the Western and Central Europe Pharmaceuticals segment,
revenue for the three months ended March 31, 2000 of $46,757,000
when compared to the same period of 1999 increased only $484,000
or (1%). Excluding the effect of translation, revenues would have
increased 17%. Spain led sales growth, where two new products
were introduced - a wound healing agent and an anti-ulcer
product.
In the Latin America Pharmaceuticals segment, revenues for the
three months ended March 31, 2000 were $29,227,000, compared to
$22,611,000 for the same period of 1999. The increase of
$6,616,000 (29%), is primarily related to the expansion of its
base business, including anti-infectives, central nervous system
treatments, and new product introductions.
In the Russian Pharmaceuticals segment, revenues for the three
months ended March 31, 2000 were $26,570,000, compared to
$23,008,000 for the same period of 1999. The increase was
attributed to expansion of the retail pharmacy base, and a new
sales and marketing effort for certain over-the-counter products.
In the Asia, Africa and Australia Pharmaceuticals segment,
revenues for the three months ended March 31, 2000 decreased
$2,541,000 compared to the same period in 1999, primarily
reflecting a change in product mix and discontinuance of certain
low margin product sales.
Gross Profit: Gross profit margin on product sales increased to
62% for the three months ended March 31, 2000, compared to 59%
for 1999. The improvement in gross profit margin is primarily due
to increased margin in the Russia and Western and Central Europe
Pharmaceuticals segments. Gross profit margins in the Western
and Central European Pharmaceuticals segment improved primarily
from price increases and improved product mix in Hungary. The
overall gross margins for the Company's Russian Pharmaceuticals
segment were 40% for 2000, compared to 27% for the 1999 first
quarter, which resulted from an increase in both sales volume
and sales price increases partially offset by a fluctuation in
the ruble.
Selling, General and Administrative Expenses: Selling, general
and administrative expenses were $67,435,000 for the three months
ended March 31, 2000, compared to $55,200,000 for the same period
in 1999, an increase of $12,235,000. The increase primarily
reflects an increase in selling and advertising expenses of
$7,312,000 in all regions for the expanded marketing of new
products acquired in 1998 and 1999 plus an increase in corporate
expenses, including compensation and legal expenses.
Research and Development: Research and development expenditures
for the 2000 first quarter were $4,001,000, compared to
$2,242,000 for the same period in 1999. The increase resulted
from the expansion of research and development primarily in the
area of antiviral and anticancer drugs.
Translation and Exchange Losses, Net: Translation and exchange
losses, net were $1,591,000 for the three months ended March 31,
2000 compared to $7,259,000 for the same period in 1999. In the
first quarter of 2000, translation losses principally consisted
of losses of $2,355,000 related to transaction losses and the net
monetary asset position of the Company's Russian subsidiaries
partially offset by transaction gains in North America. In the
first quarter of 1999, translation losses principally consisted
of losses of $4,742,000 related to the net monetary asset
position of the Company's Russian subsidiaries and losses
of $1,929,000 in Hungary resulting from foreign-denominated debt.
Interest Income and Expense: Interest expense during the three
months ended March 31, 2000 increased $2,121,000 compared to the
same period in 1999, primarily due to increased debt. Interest
income increased to $2,695,000 in 2000 from $1,644,000 in 1999,
due to the increase in cash and higher yields on investments.
Income Taxes: The Company's effective income tax rate was 29% for
2000 compared to 18% for 1999. The Company operates in many
regions where the tax rate is lower than the U.S. Federal
statutory rate or where it benefits from tax relief. The increase
in the Company's provision for income taxes for the three months
ended March 31, 2000 over the same period of 1999 reflects higher
taxable income in the United States and Latin America, where tax
rates are relatively higher or no such tax relief is available.
Liquidity and Capital Resources
During the three months ended March 31, 2000, cash provided by
operating activities totaled $52,981,000, compared to $3,728,000
in 1999. Operating cash flows reflect the Company's net income
of $27,399,000, net non-cash charges (including depreciation,
minority interest, and translation and exchange gains and losses)
of $19,424,000, and working capital decreases totaling
approximately $6,158,000. The working capital decrease
principally consists of a decrease of $6,931,000 in accounts
receivable and an increase of $7,095,000 in income taxes
payable offset by an increase of $6,189,000 in inventories and
$4,039,000 in prepaid expenses.
Cash used in investing activities was $10,485,000 for the three
months ended March 31, 2000 compared to $13,913,000 for the same
period of 1999. In 2000, the Company made capital expenditures of
$5,881,000, principally representing production equipment in
Western and Central Europe and replacement assets in other
regions. In addition, the Company made various product
acquisitions in 2000 amounting to $4,712,000. In 1999, net
cash used in investing activities of $13,913,000 principally
consisted of payments for capital expenditures of $12,085,000,
which were partially offset by proceeds from the sale of assets
of $129,000, and acquisitions totaling $1,948,000.
Cash used in financing activities totaled $4,790,000 for the
three months ended March 31, 2000, including cash dividends paid
on common stock of $5,580,000, offset by proceeds from the
exercise of employee stock options of $929,000. During the first
quarter of 1999, cash provided by financing activities totaled
$16,788,000, including proceeds of long-term borrowings totaling
$26,155,000. In addition, as provided for under the terms of a
Stock Purchase Agreement entered into with Schering-Plough in
1995, the Company sold to Schering-Plough 1,141,498 shares of its
common stock for $27,000,000. Proceeds from the exercise of
employee stock options provided an additional $1,332,000. These
amounts were partially offset by principal payments on long-term
debt of $27,473,000, cash dividends paid on common stock of
$4,637,000, and a net reduction of short-term borrowings of
$39,000. Also during the quarter ended March 31, 1999, the
Company repurchased 223,967 shares of its common stock for
$5,550,000, completing the initial $10,000,000 portion of the
Stock Repurchase Program authorized by the Company's Board of
Directors in 1998. At March 31, 2000, certain of the Company's
lines of credit and long term borrowings include covenants
restricting payment of dividends, issuance of new indebtedness
and repurchase of the Company's common stock.
The current economic condition in Russia continues to impact the
Company's operating cash flows in Russia, as some of the
Company's Russian customers continue to experience liquidity
shortages. The Company may need to invest additional working
capital in Russia to sustain its operations, to provide
increasing levels of working capital necessary to support renewed
growth, and to fund the purchase or upgrading of facilities. The
Company also has several preliminary acquisition prospects that
may require funds through the year 2000. However, there is no
assurance that any such acquisitions will be consummated.
Management believes that the Company's existing cash and cash
equivalents and funds generated from operations will be
sufficient to meet its operating requirements in the near term
and to fund anticipated acquisitions and capital expenditures,
including the continued development of its research and
development program. The Company may also seek additional debt
financing or issue additional equity securities to finance future
acquisitions.
The Company evaluates the carrying value of its inventories at
least quarterly, taking into account such factors as historical
and anticipated future sales compared with quantities on hand,
the price the Company expects to obtain for its products in their
respective markets compared with historical cost, and the
remaining shelf life of goods on hand. The Company also
evaluates the collectibility of its receivables at least
quarterly. The Company's methodology for establishing the
allowance for bad debts varies with the regions in which it
operates. With the exception of Russia, the allowance for bad
debts is based upon specific identification of customer accounts
and the Company's best estimate of the likelihood of potential
loss, taking into account such factors as the financial condition
and payment history of major customers. In Russia, the allowance
for bad debts is based upon a combination of specific
identification of customer account balances and an overall
provision based upon anticipated developments and historical
experience. In Russia, factors such as the economic crisis in
August 1998 and the subsequent stabilization in the middle of
1999 were utilized in the analysis. As of March 31, 2000, the
Company believes that adequate provision has been made for
inventory obsolescence and for anticipated losses on
uncollectible accounts receivable.
The Company is currently self-insured with respect to product
liability claims. 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 negative impact on the
Company's liquidity and financial performance.
Foreign Operations
Approximately 65% and 67% of the Company's revenues for the
three months ended March 31, 2000 and 1999, respectively, were
generated from operations outside the United States. All of the
Company's 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. The Company does not currently
provide any hedges on its foreign currency exposure and, in
certain countries in which the Company operates, no effective
hedging programs are available.
Russia
Russia continues to experience economic difficulties following
the financial crisis of August 1998 when the ruble was 6.3 to
$1 and subsequently devalued to 27.5 rubles to $1 by the end of
1999. Consequently, the ruble continues to devalue, there is
continued volatility in the debt and equity market,
hyperinflation persists, confidence in the banking sector has yet
to be restored and there continues to be general lack of
liquidity in the economy. In addition, laws and regulations
affecting businesses operating within Russia continue to evolve.
Russia's return to economic stability is dependent to a large
extent on the effectiveness of the measures taken by the
government, decisions of international lending organizations, and
other actions, including regulatory and political developments,
which are beyond the Company's control.
Since December 31, 1999, the ruble fell from a rate of 27.5
rubles to $1 to a rate of 28.5 rubles to $1 at March 31, 2000. As
a result of these declines in the ruble exchange rate, the
Company recorded translation and exchange losses of $2,355,000
related to its Russian operations during the first quarter of
2000. As of March 31, 2000, ICN Russia had a net monetary asset
position of approximately $10,704,000, which is subject to
foreign exchange loss as further declines in the value of the
ruble in relation to the dollar occur. Due to the fluctuation in
the ruble exchange rate, the ultimate amount of any future
translation and exchange loss the Company may incur cannot
presently be determined and such loss may have a negative impact
on the Company's results of operations. The Company's management
continues to work to reduce its net monetary exposure by reducing
account receivable balances and lengthening its payments to
suppliers. However, there can be no assurance that such efforts
will be successful.
The Company's collections on accounts receivable in Russia have
been adversely affected by the Russian economic situation. Prior
to the August 1998 devaluation of the ruble, the Company had
favorable experience with the collection of receivables from its
customers in the region. Subsequently, the Company has taken
additional steps to ensure the creditworthiness of its customers
and the collectibility of accounts receivable by tightening its
credit policies in the region. These steps include a shortening
of credit periods, suspension of sales to customers with past-due
balances and discounts for cash sales.
The Company believes that the economic and political
environment in Russia has affected the pharmaceutical industry in
the region. Many Russian companies, including many of the
Company's customers, continue to experience liquidity problems as
monetary policy has limited the money supply, and Russian
companies often lack access to an effective banking system. As a
result, many Russian companies have limited ability to pay their
debts, which has led to a number of business failures in the
region. In addition, the devaluation has reduced the purchasing
power of Russian companies and consumers, thus increasing
pressure on the Company and other producers to limit price
increases in hard currency terms.
Inflation And Changing Prices
The effects of inflation are experienced by the Company through
increases in the costs of labor, services and raw materials. The
Company is subject to price control restrictions on its
pharmaceutical products in the majority of countries in which it
operates. While the Company attempts to raise selling prices in
anticipation of inflation, the Company operates in some markets
which have price controls that may limit its ability to raise
prices in a timely fashion. Future sales and gross profit will be
reduced if the Company is unable to obtain price increases
commensurate with the levels of inflation.
The Russian government has recently instituted a process for
establishing prices for pharmaceutical products, which may lead
to price controls in the Russian market in the future. Currently,
this process requires the Company to register the prices for
some of its products included on the government's list of
"products important for health". The next procedure for
registration includes the negotiation and approval of such prices
between the Company and the relevant state bodies. The Company is
currently working with all relevant state bodies to approve its
prices and the Company is not presently able to determine the
effect, if any, that this process may have on its results of
operations. However, such developments could have a negative
impact on the Company's results of operations and cash flows in
Russia.
The Year 2000 Issue
Many computer systems and equipment or instruments with
embedded microprocessors were designed to recognize only the last
two digits of a calendar year. As previously reported, the
Company undertook an extensive project to remediate or replace
its date-sensitive systems and microprocessors that might have
encountered operational problems due to their inability to
distinguish the years after 1999 from years preceding 1999.
Since January 1, 2000 the Company's computer systems and other
potentially date sensitive types of equipment have operated
properly and there has been no adverse impact on operations. In
addition, there was no material impact from Year 2000 related
issues at any of the Company's customers, suppliers, or other
outside service providers.
The Company did not experience any significant impact on
product sales or revenues as a result of Year 2000 concerns. As
of December 31, 1999, the Company has spent approximately
$8,300,000 on the overall Year 2000 remediation and equipment
upgrade project. The project is now complete and no future costs
are planned. All systems have functioned properly since January
2000 and the Company's management believes that future operations
will be unaffected by the Year 2000 issue.
The Company believes that the most reasonable likely worst case
scenario would be a year 2000 induced failure among one of its
key suppliers, vendors, or customers, which could result in a
slowdown or temporary disruption of manufacturing operations at
one or more of the Company's facilities and/ or a temporary
inability to process and fulfill customer orders.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the
European Union introduced a new currency called the "Euro". The
conversion rates between the Euro and the participating nations'
existing legacy currencies were fixed irrevocably as of January
1, 1999. Prior to full implementation of the new currency on
January 1, 2002, there will be a transition period during which
parties may, at their discretion, use either the legacy
currencies or the Euro for financial transactions.
The Company expects its affected subsidiaries to continue to
operate primarily in their respective legacy currencies through
December, 2000. The majority of the Company's affected
subsidiaries currently can accommodate transactions for customers
or suppliers operating in either the legacy currency or the Euro.
Action plans are currently being implemented which are expected
to result in full compliance with all laws and regulations
relating to the Euro conversion. Such plans include the
adaptation of information technology and other systems to
accommodate Euro-denominated transactions as well as the
requirements of the transition period. The Company is also
addressing the impact of the Euro on its currency exchange-rate
risk, taxation, contracts, competition and pricing. While it is
not possible to accurately predict the impact the Euro will have
on the Company's business or on the economy in general,
management currently does not anticipate that the Euro conversion
will have a negative impact on the Company's market risk with
respect to foreign exchange, its results of operations, or its
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by
fluctuations in world financial markets. The Company evaluates
its exposure to such risks on an ongoing basis, and reviews its
risk management policy to manage these risks to an acceptable
level, based on management's judgment of the appropriate trade-
off between risk, opportunity and costs. The Company does not
hold any significant amount of market risk sensitive instruments
whose value is subject to market price risk.
In the normal course of business, the Company also faces risks
that are either non-financial or non-quantifiable. Such risks
principally include country risk, credit risk, and legal risk and
are not discussed or quantified in the following analysis.
Interest Rate Risk: The Company does not hold financial
instruments for trading or speculative purposes. The financial
assets of the Company are not subject to significant interest
rate risk due to their short duration. At March 31, 2000, the
Company does not have any significant financial instruments
denominated in foreign currencies that would subject it to both
interest and currency risk. The principal financial liabilities
of the Company that are subject to interest rate risk are its
fixed-rate long-term debt (principally its 8-3/4% Senior Notes
due 2008 and its 9-1/4% Senior Notes due 2005) totaling
$600,000,000. The Company does not use any derivatives or
similar instruments to manage its interest rate risk. A 90 basis-
point increase in interest rates (approximately 10% of the
Company's weighted-average interest rate on fixed-rate debt)
affecting the Company's financial instruments would have an
immaterial effec on the Company's 2000 pretax earnings.
However, such a change would reduce the fair value of the
Company's fixed-rate debt instruments (principally its 8-3/4%
and 9-1/4% Senior Notes) by approximately $25,400,000 as of
March 31, 2000.
During 1999, the Company entered into certain option transactions
which allow the Company to establish a price range in which the
Company has the option to repurchase its stock at a later date,
without any immediate outlay of its cash resources. Under this
program, the Company sold put options, which entitle the holder
to sell the Company's stock to the Company at a specified price.
At the same time, in a cashless transaction, the Company
purchased call options, which entitle the Company to purchase
its stock at a specified price from the same party. The put and
call options have essentially established a price range within
which the Company can repurchase its stock. If the stock price
rises above the call option strike price, the repurchase of stock
will be at a variable price compared to the market price.
Conversely, if the stock price falls below the put option
strike price, the repurchase of stock is more costly than
the market price. The put options and the corresponding call
options each expire from August 2000 through December 2000 and
are exercisable only at the expiration dates. The Company may,
at its option, make a physical settlement, a cash settlement
or a net share settlement of its positions under the put and
call options. The Company has a maximum potential obligation
under the put options to buy back 2,380,953 shares of its
common stock for an aggregate price of approximately
$67,500,000. The call options entitle the Company to buy
1,064,085 shares of its common stock for approximately
$33,519,000. The net settlement obligation of the Company, based
on the closing market price of the stock at December 31, 1999,
was approximately $7,200,000 or 285,714 shares. The Company
continually reevaluates the potential impact of these option
positions and believes its capital resources are sufficient
to meet the potential obligations of these option positions.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION ACT OF 1995
This Quarterly Report on Form 10-Q contains statements that
constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Those
statements appear in a number of places in this Quarterly Report
on Form 10-Q and include statements regarding, among other
matters, the Company's growth opportunities, the Company's
acquisition strategy, regulatory matters pertaining to
governmental approval of the marketing or manufacturing of
certain of the Company's products and other factors affecting the
Company's financial condition or results of operations.
Stockholders are cautioned that any such forward looking
statements are not guarantees of future performance and involve
risks, uncertainties and other factors which may cause actual
results, performance or achievements to differ materially from
the future results, performance or achievements, expressed or
implied in such forward looking statements. Such factors are
discussed in this Quarterly Report on Form 10-Q and also include,
without limitation, the Company's dependence on foreign
operations (which are subject to certain risks inherent in
conducting business abroad, including possible nationalization or
expropriation, restrictions on the exchange of currencies,
limitations on foreign participation in local enterprises, health-
care regulations, price controls, and other restrictive
governmental conditions); the risk of operations in Eastern
Europe, Russia, Latin America, and China in light of the unstable
economic, political and regulatory conditions in such regions;
the risk of potential claims against certain of the Company's
research compounds; the Company's ability to successfully develop
and commercialize future products; the limited protection
afforded by the patents relating to Virazole, and possibly on
future drugs, techniques, processes or products the Company may
develop or acquire; the potential impact of the Year 2000 issue;
the potential impact of the Euro currency; the Company's ability
to continue its expansion plan and to integrate successfully any
acquired companies; the Company's ability to maintain adequate
supply of products to meet customer demand; the Company's
dependence on key members of management; the results of lawsuits
or the outcome of investigations pending against the Company; the
Company's potential product liability exposure and lack of any
insurance coverage thereof; government regulation of the
pharmaceutical industry (including review and approval for new
pharmaceutical products by the FDA in the United States and
comparable agencies in other countries) and competition.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 4 of Notes to Consolidated Condensed Financial
Statements
Item 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: July 7, 2000 /s/ Milan Panic
Milan Panic
Chairman of the Board and
Chief Executive Officer
Date: July 7, 2000 /s/ Richard A. Meier
Richard A. Meier
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Page No.
15.1 Review Report of Independent Accountants 24
15.2 Awareness Letter of Independent Accountants 25
27.1 Financial Data Schedule 26
Exhibit 15.1
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
We have reviewed the accompanying consolidated condensed balance
sheet of ICN Pharmaceuticals, Inc. and its subsidiaries as of
March 31, 2000 and the related consolidated condensed statements
of income, comprehensive income and cash flows for the three-
month periods ended March 31, 2000 and 1999. These consolidated
condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
consolidated condensed interim financial statements for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1999, and the related consolidated statements of income,
stockholders'equity, and cash flows for the year then ended (not
presented herein), and in our report dated March 2, 2000, which
included an emphasis of matter paragraph related to the Company's
change in method of accounting for ICN Yugoslavia, a previously
consolidated subsidiary, as more fully described in Notes 2 and
14 to those consolidated statements, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 1999, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Newport Beach, California
May 4, 2000
Exhibit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
July 6, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 4, 2000, on our review of
interim financial information of ICN Pharmaceuticals, Inc. (the
"Company") as of and for the period ended March 31, 2000 and
included in the Company's quarterly report on Form 10-Q/A for the
quarter then ended is incorporated by reference in its Registration
Statements on Form S-8 (File Nos. 33-56971 and 333-81383) and Form
S-3 (File No. 333-10661).
Very truly yours,
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Newport Beach, California