- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
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 August 6, 2001 was 81,458,686.
- --------------------------------------------------------------------------------
7
15
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - June 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income - Three months and six months ended June 30, 2001 and 2000 4
Consolidated Condensed Statements of Comprehensive Income -
Three months and six months ended June 30, 2001 and 2000 5
Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 2001 and 2000 6
Management's Statement Regarding Unaudited Financial Statements 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2001 and December 31, 2000
(unaudited, in thousands, except per share data)
June 30, December 31,
2001 2000
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 165,899 $ 155,205
Restricted cash 1,975 380
Accounts receivable, net 207,879 225,639
Inventories, net 159,915 170,263
Prepaid expenses and other current assets 18,405 13,929
-------------- --------------
Total current assets 554,073 565,416
Property, plant and equipment, net 389,562 367,229
Deferred income taxes, net 74,837 75,037
Other assets 42,087 32,300
Goodwill and intangibles, net 430,666 437,090
-------------- --------------
$ 1,491,225 $ 1,477,072
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 44,701 $ 61,741
Accrued liabilities 96,065 91,447
Notes payable and current portion of long-term debt 845 907
Income taxes payable 14,573 4,682
-------------- --------------
Total current liabilities 156,184 158,777
Long-term debt, less current portion 505,517 510,781
Deferred income and other liabilities 34,247 40,988
Minority interest 9,640 9,332
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized; 81,391 (June 30, 2001)
and 80,197 (December 31, 2000) shares outstanding (after deducting shares
in treasury of
814 and 814, respectively) 814 802
Additional capital 982,279 973,157
Accumulated deficit (105,696) (130,087)
Accumulated other comprehensive loss (91,760) (86,678)
-------------- --------------
Total stockholders' equity 785,637 757,194
-------------- --------------
$ 1,491,225 $ 1,477,072
=============== ==============
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 and six months ended June 30, 2001 and 2000
(unaudited, in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Revenues:
Product sales $ 174,340 $ 148,331 $ 345,759 $ 307,671
Royalties 31,431 43,102 58,981 76,102
------------ ------------ ------------ -------------
Total revenues 205,771 191,433 404,740 383,773
------------ ------------ ------------ -------------
Costs and expenses:
Cost of product sales 69,176 60,935 138,950 121,701
Selling, general and administrative expenses 79,221 71,430 152,640 138,865
Research and development costs 6,451 2,852 12,823 6,853
Amortization of goodwill and intangibles 7,902 7,837 16,108 15,410
------------ ------------ ------------ -------------
Total expenses 162,750 143,054 320,521 282,829
------------ ------------ ------------ -------------
Income from operations 43,021 48,379 84,219 100,944
Other (income) loss, net including translation and exchange (4,740) 2,465 (4,340) 4,056
Interest income (1,894) (3,117) (4,134) (5,812)
Interest expense 12,803 15,414 25,820 30,635
------------ ------------ ------------ -------------
Income before income taxes,
minority interest and extraordinary loss 36,852 33,617 66,873 72,065
Provision for income taxes 14,530 3,431 23,793 14,542
Minority interest 845 (907) 581 (969)
------------ ------------ ------------ -------------
Income before extraordinary loss 21,477 31,093 42,499 58,492
Extraordinary loss, net of income taxes 214 -- 214 --
------------ ------------ ------------ -------------
Net income $ 21,263 $ 31,093 $ 42,285 $ 58,492
============ ============ ============ =============
Basic earnings per share:
Income per share before extraordinary loss $ 0.27 $ 0.39 $ 0.53 $ 0.74
Extraordinary loss per share 0.01 -- 0.01 --
------------ ------------ ------------ -------------
Basic net income per share $ 0.26 $ 0.39 $ 0.52 $ 0.74
============ ============ ============ =============
Diluted earnings per share:
Income per share before extraordinary loss $ 0.26 $ 0.38 $ 0.51 $ 0.72
Extraordinary loss per share -- -- -- --
------------ ------------ ------------ -------------
Diluted net income per share $ 0.26 $ 0.38 $ 0.51 $ 0.72
============ ============ ============ =============
Shares used in per share computation:
Basic 80,911 79,072 80,653 79,024
============ =========== =========== ===========
Diluted 83,175 81,957 82,733 81,790
============ =========== =========== ===========
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 and six months ended June 30, 2001 and 2000
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Net income $ 21,263 $ 31,093 $ 42,285 $ 58,492
Other comprehensive income:
Foreign currency translation adjustments 4,825 (8,947) (5,082) (15,305)
------------ ------------ ------------ -------------
Comprehensive income $ 26,088 $ 22,146 $ 37,203 $ 43,187
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2000
(unaudited, in thousands)
Six Months Ended
June 30,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income $ 42,285 $ 58,492
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 35,219 31,377
Provision for losses on accounts receivable 1,208 4,638
Provision for inventory obsolescence 1,423 3,784
Translation and exchange losses, net 660 4,056
Loss on sale of assets 83 696
Other non-cash losses 1,166 1,167
Deferred income taxes 516 4,338
Minority interest 581 (969)
Change in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable 18,435 (3,085)
Inventories 7,424 (9,098)
Prepaid expenses and other assets (15,833) 2,156
Trade payables and accrued liabilities (20,853) (17,839)
Income taxes payable 10,024 226
Other liabilities (5,130) 2,324
-------------- --------------
Net cash provided by operating activities 77,208 82,263
-------------- --------------
Cash flows from investing activities:
Capital expenditures (36,974) (13,923)
Proceeds from sale of assets 742 603
(Increase) decrease in restricted cash (1,595) 71
Acquisition of license rights, product lines and businesses (19,897) (34,153)
-------------- --------------
Net cash used in investing activities (57,724) (47,402)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 315 --
Proceeds from issuance of notes payable 22 4,856
Payments on long-term debt (5,738) (12,734)
Payments on notes payable -- (6,080)
Proceeds from exercise of stock options 8,301 2,994
Dividends paid (11,818) (11,173)
-------------- --------------
Net cash used in financing activities (8,918) (22,137)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 128 (1,493)
-------------- --------------
Net increase in cash and cash equivalents 10,694 11,231
Cash and cash equivalents at beginning of period 155,205 177,577
-------------- --------------
Cash and cash equivalents at end of period $ 165,899 $ 188,808
============== ==============
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 in accordance
with generally accepted accounting principles 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 Report on Forms
10-K and 10-K/A for the year ended December 31, 2000.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(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 of 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 limited
access to the premises and representation as to the management of ICN
Yugoslavia. As a result, the Company had and continues to have no effective
control over 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, estimated to be zero. The Company accounts for its ongoing investment in
ICN Yugoslavia under the cost method. The Company did not recognize any income
or losses from ICN Yugoslavia in the quarter and six months ended June 30, 2000
and 2001.
Comprehensive Income: The balance of accumulated other comprehensive loss
at June 30, 2001 and December 31, 2000 consists of accumulated foreign currency
translation adjustments. Other comprehensive loss 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 2001, the Company's Board of Directors
declared a fourth quarter 2000 cash dividend of $0.0725 per share, which was
paid in January 2001. In February 2001, the Company's Board of Directors
declared a first quarter cash dividend of $.075 per share, which was paid in
April 2001. In June 2001, the Company's Board of Directors declared a second
quarter cash dividend of $0.075, which was paid on July 25, 2001, to
stockholders of record on July 11, 2001.
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.
New Accounting Pronouncements: In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and FASB No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 142 changes
the accounting for goodwill from an amortization approach to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of that Statement, which for the
Company, will be January 1, 2002.
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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Income:
Net income $ 21,263 $ 31,093 $ 42,285 $ 58,492
----------- ----------- ----------- -----------
Numerator for basic earnings per share--
income available to common stockholders 21,263 31,093 42,285 58,492
Effect of dilutive securities (1) 3 (3) 1
----------- ----------- ----------- -----------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 21,262 $ 31,096 $ 42,282 $ 58,493
=========== =========== =========== ===========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 80,911 79,072 80,653 79,024
Effect of dilutive securities:
Employee stock options 2,243 2,705 2,059 2,545
Other dilutive securities 21 180 21 221
----------- ----------- ----------- -----------
Dilutive potential common shares 2,264 2,885 2,080 2,766
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--
weighted-average shares adjusted
for assumed conversions 83,175 81,957 82,733 81,790
=========== =========== =========== ===========
Basic earnings per share:
Income per share before extraordinary loss $ 0.27 $ 0.39 $ 0.53 $ 0.74
Extraordinary loss per share 0.01 -- 0.01 --
---------- ---------- ----------- -----------
Basic net income per share $ 0.26 $ 0.39 $ 0.52 $ 0.74
========== ========== =========== ===========
Diluted earnings per share:
Income per share before extraordinary loss $ 0.26 $ 0.38 $ 0.51 $ 0.72
Extraordinary loss per share -- -- -- --
---------- ---------- ----------- -----------
Diluted net income per share $ 0.26 $ 0.38 $ 0.51 $ 0.72
========== ========== =========== ===========
3. Detail of Certain Accounts
June 30, December 31,
(in thousands) 2001 2000
---------------- --------------
Accounts receivable, net:
Trade accounts receivable $ 166,582 $ 190,386
Royalties receivable 35,723 39,741
Other receivables 19,798 15,372
---------------- --------------
222,103 245,499
Allowance for doubtful accounts (14,224) (19,860)
---------------- --------------
$ 207,879 $ 225,639
================ ==============
Inventories, net:
Raw materials and supplies $ 52,198 $ 61,623
Work-in-process 24,476 22,701
Finished goods 101,943 103,932
---------------- --------------
178,617 188,256
Allowance for inventory obsolescence (18,702) (17,993)
---------------- --------------
$ 159,915 $ 170,263
================ ==============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 506,257 $ 471,386
Accumulated depreciation and amortization (116,695) (104,157)
---------------- --------------
$ 389,562 $ 367,229
================ ==============
4. Related Party Transactions
In January 2001, the Company made a loan to Mr. Adam Jerney, Chief
Operating Officer and President of the Company, of $1,197,864 as part of a
program adopted by the Board of Directors of the Company to encourage directors
and officers of the Company to exercise stock options (the "Stock Option
Program"). The loan is collateralized by 148,537 shares of the Company's Common
Stock and is due in payments through January 2003. In April 2001, the Company
made a loan to Mr. Milan Panic, Chairman of the Board and Chief Executive
Officer of the Company, of $2,731,519 as part of the Stock Option Program. The
loan is collateralized by 286,879 shares of the Company's Common Stock and is
due in April 2004. These loans bear interest at a rate of 5.61% per annum in the
case of Mr. Jerney and 4.63% per annum in the case of Mr. Panic, compounded
annually. Interest is payable annually. These loans are non-recourse with
respect to principal and full recourse to the obligor with respect to interest.
As of June 30, 2001, the loans are included in the accompanying consolidated
condensed balance sheet as a reduction of stockholders' equity.
5. License Agreement
In June 2001, the Company's 100% owned subsidiary Ribapharm, Inc.
("Ribapharm") licensed Levovirin(TM), a compound that is currently in Phase I
clinical trials for the treatment of hepatitis C, to F. Hoffmann-La Roche
("Roche"). Ribapharm received a one time licensing fee and will be eligible to
receive future payments based upon Roche achieving certain milestones. Roche
will be responsible for all future development costs of Levovirin. If Levovirin
is successfully developed and receives regulatory approval, Ribapharm will be
entitled to receive royalty payments. In addition, Roche licensed to the Company
a compound that is at a similar stage of development. The Company will be
responsible for the development costs of this compound, milestone payments and
royalties if the compound is successfully developed.
6. 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 captioned Securities and Exchange Commission v. ICN
Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt,
Civil Action No. SACV 99-1016 DOC (ANx) (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 Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The SEC Complaint concerns the status and disposition of the
Company's 1994 New Drug Application for Virazole 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 an officer or
director of any publicly-traded company. A pre-trial schedule has been set which
requires the submission of summary judgment motions in late 2002, the end of
discovery by March 17, 2003, and the commencement of trial on May 6, 2003. The
Company and the SEC are engaged in discussions in an effort to determine whether
the litigation can be resolved by settlement agreement.
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 understood that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee, and a former
employee of the Company were targets of the investigation. The Company also
understood that a senior executive officer and a director were subjects of the
investigation. The United States Attorney for the Central District of California
(the "Office") advised counsel for the Company that the areas of its
investigation included disclosures made and not made concerning the 1994
Hepatitis C monotherapy 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 1994 Hepatitis C monotherapy 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. Panic of stock belonging to Company employees; and,
with respect to Mr. Panic, personal disposition of assets of entities associated
with Yugoslavia, including possible misstatements and/or omissions in federal
tax filings. The Company has cooperated, and continues to cooperate, in the
Grand Jury investigation. A number of current and former officers and employees
of the Company were interviewed by the government in connection with the
investigation. The Office had 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 March 15, 2001, the Company was notified by the Office that a decision
had been made to decline prosecution of all of the individual targets and
subjects of the Grand Jury investigation. At the same time, the Company was also
notified that the United States Attorney had authorized the Office to seek an
indictment of the Company based upon alleged false and misleading
misrepresentations concerning the 1994 hepatitis C monotherapy NDA. The Company
and the Office are engaged in discussions in an effort to determine whether the
matter can be settled by plea bargain, which could include a plea by the Company
to one felony count.
In connection with the Grand Jury investigation and SEC litigation, the
Company recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover
the potential combined settlement liability and all other related costs. The
Company's estimate of the fourth quarter reserve was based upon the nature and
amounts noted during settlement discussions with the SEC and the Office. The
Company believes that additional loss in settling these matters, based upon
discussions to date, is not reasonably possible. There can, of course, be no
assurance that the Grand Jury investigation will be settled by plea agreement or
that the SEC litigation will be settled by mutual agreement or what the amount
of any settlement may ultimately be. In the event that a settlement of either
matter is not reached, the Company will vigorously defend any litigation.
The Company is a party to a legal matter at one of its distribution
companies in Russia. The matter involves a claim relating to non-payment under a
contract entered into in January 1995, prior to the Company's acquisition of
this Russian distribution company. The claimant is seeking to recover $6.2
million in damages, plus expenses. Due to the complex and changing legal
environment in Russia, the Company can not estimate the range or amount of
possible loss, if any, that may be incurred. The Company intends to vigorously
defend this matter, however, an adverse decision could have a material effect on
the results of operations of the Company.
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.
7. Business Segments
The Company's six reportable pharmaceutical segments have been combined
into two geographical groups: ICN Americas (comprised of the Company's
pharmaceutical operations in North America and Latin America) and ICN
International (comprised of the Company's pharmaceutical operations in Western
Europe, Eastern Europe and Asia, Africa and Australia).
Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. Due to the Company's proposed restructuring
plan, the Company now evaluates the performance of its North America
Pharmaceuticals segment in a manner consistent with how the Company will be
organized subsequent to the proposed restructuring. All amounts for 2000 have
been restated to conform with the current year presentation.
The following table sets forth the amounts of segment revenues and
operating income of the Company for the three months and six months ended June
30, 2001 and 2000 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
-------------- ------------- ------------- -------------
Revenues
Product Sales
Pharmaceuticals
ICN Americas
North America $ 44,137 $ 26,960 $ 86,420 $ 56,759
Latin America 29,638 28,757 55,730 57,984
------------- ------------- ------------- -------------
Total ICN Americas 73,775 55,717 142,150 114,743
------------- ------------- ------------- -------------
ICN International
Western Europe 49,844 43,317 102,377 90,074
Russia 22,957 23,464 47,356 50,034
Asia, Africa, Australia 13,003 10,625 23,641 22,024
------------- ------------- ------------- -------------
Total ICN International 85,804 77,406 173,374 162,132
------------- ------------- ------------- -------------
Total Pharmaceuticals 159,579 133,123 315,524 276,875
Biomedicals 14,761 15,210 30,235 30,796
------------- ------------- ------------- -------------
Total product sales 174,340 148,333 345,759 307,671
Royalties 31,431 43,100 58,981 76,102
------------- ------------- ------------- -------------
Consolidated revenues $ 205,771 $ 191,433 $ 404,740 $ 383,773
============= ============= ============= =============
Operating Income
Pharmaceuticals
ICN Americas
North America $ 18,967 $ 11,582 $ 37,277 $ 26,101
Latin America 9,501 8,506 17,656 17,413
------------ ------------ ------------ ------------
Total ICN Americas 28,468 20,088 54,933 43,514
------------ ------------ ------------ ------------
ICN International
Western Europe 6,525 4,395 10,847 10,650
Russia (4,328) (3,596) (6,503) (2,071)
Asia, Africa, Australia 1,606 590 2,867 1,843
------------ ------------ ------------ ------------
Total ICN International 3,803 1,389 7,211 10,422
Biomedicals 1,939 (658) 4,614 1,621
Royalties 31,431 43,100 58,981 76,100
------------ ------------ ------------ ------------
Consolidated segment operating income 65,641 63,919 125,739 131,657
Corporate expenses 22,620 15,540 41,520 30,713
Interest income (1,894) (3,117) (4,134) (5,812)
Interest expense 12,803 15,414 25,820 30,635
Other (income) loss, net including
translation and exchange (4,740) 2,465 (4,340) 4,056
------------ ------------ ------------ ------------
Income before provision for income taxes,
minority interest and extraordinary loss $ 36,852 $ 33,617 $ 66,873 $ 72,065
============ ============ ============ ============
The following table sets forth the segment total assets of the Company as of
June 30, 2001 and December 31, 2000 (in thousands):
Assets
-----------------------------
June 30, December 31,
2001 2000
-------------- --------------
Pharmaceuticals
ICN Americas
North America $ 535,212 $ 518,033
Latin America 138,929 127,031
-------------- --------------
Total ICN Americas 674,141 645,064
-------------- --------------
ICN International
Western Europe 264,698 271,914
Russia 161,837 169,032
Asia, Africa, Australia 70,996 82,206
-------------- --------------
Total ICN International 497,531 523,152
-------------- --------------
Total Pharmacueticals 1,171,672 1,168,216
Biomedicals 58,571 61,938
Corporate 260,982 246,918
-------------- --------------
Total $ 1,491,225 $ 1,477,072
============== ==============
8. Supplemental Cash Flow Information
Cash paid for income taxes for the six months ended June 30, 2001 and 2000
was $10,688,000 and $10,658,000, respectively. Cash paid for interest for the
six months ended June 30, 2001 and 2000 was $24,196,000 and $28,883,000,
respectively.
Other non-cash losses for the six months ended June 30, 2001 and 2000
included $1,166,000 and $1,167,000, respectively, for compensation expense
related to the vesting of restricted stock under the Company's long-term
incentive plan.
9. Subsequent Events
In July 2001, the Company completed an offering of $525 million of 6 1/2%
convertible subordinated notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm
will become jointly and severally liable for the obligations under the notes. In
the event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on July 18, 2001, the Company mailed a notice of
redemption with respect to the entire aggregate principal amount outstanding of
$188,978,000 of the Company's 9 1/4% Senior Notes due 2005. Pursuant to the
notice, the Company will redeem the 9 1/4% Senior Notes on August 17, 2001 at a
redemption price of 104.625% of the principal amount thereof, plus accrued and
unpaid interest. In connection with this redemption, the Company will record an
extraordinary loss on extinguishment of debt of $7,900,000, net of tax, in the
third quarter of 2001.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
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 7
of Notes to Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report.
Revenues (in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2001 2000 2001 2000
-------------- ------------- ------------- ------------
Product sales
Pharmaceuticals
ICN Americas
North America (1) $ 44,137 $ 26,960 $ 86,420 $ 56,759
Latin America (principally Mexico) 29,638 28,757 55,730 57,984
------------- ------------- ------------- -------------
Total ICN Americas 73,775 55,717 142,150 114,743
------------- ------------- ------------- -------------
ICN International
Western Europe 49,844 43,317 102,377 90,074
Russia 22,957 23,464 47,356 50,034
Asia, Africa, Australia 13,003 10,625 23,641 22,024
------------- ------------- ------------- -------------
Total ICN International 85,804 77,406 173,374 162,132
------------- ------------- ------------- -------------
Total pharmaceuticals 159,579 133,123 315,524 276,875
Biomedicals 14,761 15,210 30,235 30,796
------------- ------------- ------------- -------------
Total product sales 174,340 148,333 345,759 307,671
Royalty revenues (1) 31,431 43,100 58,981 76,102
------------- ------------- ------------- -------------
Total revenues $ 205,771 $ 191,433 $ 404,740 $ 383,773
============= ============= ============= =============
Cost of product sales $ 69,176 $ 60,935 $ 138,950 $ 121,701
Gross profit margin on product sales 60% 59% 60% 60%
(1) Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. All amounts for 2000 have been restated to
conform with the current year presentation.
Quarter ended June 30, 2001 compared to 2000
Royalty Revenues: Royalty revenues represent amounts earned under the
Company's Exclusive License and Supply Agreement (the "License Agreement") with
Schering-Plough Corporation ("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(TM) Combination Therapy. Rebetron(TM) 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. On July 26, 2001,
Schering-Plough announced that the FDA granted Schering-Plough marketing
approval for Rebetol(R) Capsules as a separately marketed product for use only
in combination with Intron(R) A injection for the treatment of chronic hepatitis
C in patients with compensated liver disease previously untreated with alpha
interferon or who have relapsed following alpha interferon therapy. On August 8,
2001, Schering-Plough announced that the FDA also granted Schering-Plough
approval for Peg-Intron(TM) (peginterferon alfa-2b), a longer lasting form of
Intron(R) A, for use in combination therapy with Rebetol(R) for the treatment of
chronic hepatitis C in patients with compensated liver disease previously
untreated with alpha interferon and who are at least 18 years of age.
On March 28, 2001, Schering-Plough received notice that the European's
Union Commission of the European Communities (the "Commission") granted
centralized marketing authorization to Peg-Intron(TM) (peginterferon alfa-2b)
Injection and Rebetol(R) (ribavirin) Capsules as combination therapy for the
treatment of both relapsed and naive adult patients with histologically proven
chronic hepatitis C. Commission approval of the centralized Type II variations
to the Marketing Authorization for Peg-Intron(TM) and Rebetol(R) resulted in
unified labeling that was immediately valid in all 15 EU-Member States.
Royalty revenues for the three months ended June 30, 2001 were $31,431,000
compared to $43,102,000 for the same period of 2000, a decrease of $11,671,000
(27%). The decrease is reflective of a slowdown in sales of Rebetron(TM) by
Schering-Plough as physicians await marketing authorization pending FDA review
and clearance for the use of pegylated interferon with ribavirin. The Company
anticipates royalty revenues to increase over the remainder of 2001, due to the
approval of Rebetol(R) for use in combination therapy with Peg-Intron(TM)
(peginterferon alfa-2b).
Schering-Plough has informed the Company that it believes royalties paid
under the license agreement should not include royalties on product distributed
as part of an indigent patient marketing program. In raising the dispute,
Schering-Plough has not clearly articulated a contractual basis for the
nonpayment of royalties. Rather it has based its arguments on primarily moral or
humanitarian grounds, essentially equitable arguments, indicating that they
believe they should not have an obligation to pay royalties on product given to
indigent patients. The Company has not been provided with appropriate
information or documentation, and does not agree with such adjustment as the
license agreement articulates those programs for which royalties would not be
due. Should Schering-Plough successfully apply the proposed adjustment
retroactively since the inception of the license agreement, the adjustment would
be approximately $15,000,000. Further, if Schering-Plough were to apply the
proposed adjustment to future royalty payments, royalties could be reduced in
approximately the same proportion as the proposed historical adjustment.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the three months
ended June 30, 2001 were $44,137,000, compared to $26,960,000 for the same
period of 2000, an increase of $17,177,000 (64%). In 2001, revenues include
sales of $9,106,000 attributable to the assets purchased from Medical Alliance
in January 2001. Additionally, sales of Efudex(R) and Mestinon(TM) in the second
quarter of 2001 were higher by approximately $3,900,000 and $2,600,000,
respectively, than in the same period in 2000.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended June 30, 2001 were $29,638,000, compared to $28,757,000 for the same
period of 2000. The increase of $881,000, or 3%, is primarily due to an increase
in sales in Mexico.
ICN International
In the Western Europe Pharmaceuticals segment, revenues for the three
months ended June 30, 2001 were $49,844,000 compared to $43,317,000 for the same
period of 2000. The increase of $6,527,000, or 15%, includes revenues of
$2,387,000 attributable to the Swiss pharmaceutical company Solco which was
acquired in July 2000 and an increase in sales across the region particularly in
sales of Mestinon(TM) and Nuclosina(R) (omeprazole), partially offset by the
negative impact of the stronger US Dollar.
In the Russia Pharmaceuticals segment, revenues for the three months ended
June 30, 2001 were $22,957,000, compared to $23,464,000 for the same period of
2000. The decrease of $507,000, or 2%, is attributable to lower sales volume in
2001, partially offset by revenues attributable to the Solco acquisition of
$1,375,000 included in the three months ended June 30, 2001.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended June 30, 2001 were $13,003,000 compared to $10,625,000 for
the same period of 2000. The increase of $2,378,000, or 22%, is due to the
acquisition of the Solco product line and higher demand for Nyal, a decongestant
in Australia.
Gross Profit: Gross profit margin on product sales increased to 60% for the
three months ended June 30, 2001, compared to 59% for 2000. The improvement in
gross margin is reflective of the continuing shift toward higher margin products
in all regions partially offset by a decrease in gross profit margins in 2001 in
the Company's Russian operations, which is a result of the decline in sales
volume.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $79,221,000 for the three months ended June 30,
2001, compared to $71,430,000 for the same period in 2000, an increase of
$7,791,000 (11%). The increase reflects additional selling expenses of
$9,679,000 related to acquisitions and higher professional fees related to
shareholder matters partially offset by lower bad debt expense of $4,100,000 in
2001.
Research and Development: Research and development expenses for the 2001
second quarter were $6,451,000, compared to $2,852,000 for the same period in
2000. The increase resulted from the Company's continued expansion of research
and development activities. The Company continues to expect to increase its
research and development spending in 2001.
Amortization of goodwill and intangibles: Amortization of goodwill and
intangibles was $7,902,000 for the three months ended June 30, 2001, compared to
$7,837,000 for the same period of 2000 and primarily relates to the amortization
of intangibles related to products acquired in late 1999.
Other (income) loss, net including translation and exchange: Other (income)
loss, net including translation and exchange losses were income of ($4,740,000)
for the three months ended June 30, 2000 compared to a loss of $2,465,000 for
the same period in 2000. In the second quarter of 2001, the Company recorded
other income in connection with the Levovirin(TM) license agreement offset by
translation and exchange losses of $261,000 . In the second quarter of 2000,
transaction losses principally consisted of losses of $1,516,000 related to the
Company's operations in Puerto Rico and $374,000 in the Company's Italian
subsidiary. In addition, the Company incurred translation losses of $478,000
related to the net monetary asset position of the Company's Russian subsidiaries
during the second quarter of 2000.
Interest Income and Expense: Interest expense during the three months ended
June 30, 2001 decreased $2,611,000 compared to the same period in 2000. The
decrease was the result of the repurchase of approximately $97,000,000 of Senior
Notes during the fourth quarter of 2000. Interest income decreased from
$3,117,000 in 2000 to $1,894,000 in 2001 due to the decrease in cash and lower
yields on investments.
Income Taxes: The Company's effective income tax rate for the three months
ended June 30, 2001 was 39% compared to 10% for the same period of 2000. The
difference in the effective tax rate results from the recognition of deferred
tax assets amounting to $12,250,000 through the reduction of the related
valuation allowance for capital tax loss carryforwards during the second quarter
of 2000, which was partially offset by losses incurred in tax jurisdictions that
do not create a corresponding reduction in current taxes.
Six months ended June 30, 2001 compared to 2000
Royalty Revenues: Royalty revenues for the six months ended June 30, 2001
were $58,981,000 compared to $76,102,000 for the same period of 2000, a decrease
of $17,121,000 (22%). The decrease is reflective of a slowdown in sales of
Rebetron(TM) by Schering-Plough as physicians await marketing authorization
pending FDA review and clearance for the use of pegylated interferon with
ribavirin. The Company anticipates royalty revenues to increase over the
remainder of 2001, due to the approval of Rebetol(R) for use in combination
therapy with Peg-Intron(TM) (peginterferon alpha-2b).
ICN Americas
In the North America Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $86,420,000, compared to $56,759,000 for the same
period of 2000, an increase of $29,661,000 (52%). In 2001, revenues include
sales of $17,390,000 attributable to the assets purchased from Medical Alliance
in January 2001. Additionally, sales of Efudex(R) and Mestinon in 2001 were
higher by $7,927,000 and $3,448,000, respectively, than in the same period in
2000.
In the Latin America Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $55,730,000, compared to $57,984,000 for the same
period of 2000. The decrease of $2,254,000, or 4%, is primarily due to a
decrease in sales volume in Mexico related to reduced inventory levels at
distributors.
ICN International
In the Western Europe Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $102,377,000 compared to $90,074,000 for the same
period of 2000. The increase of $12,303,000, or 14%, includes revenues of
$5,721,000 attributable to the Swiss pharmaceutical company Solco which was
acquired in July 2000 and an increase in sales in Poland of $4,459,000.
In the Russia Pharmaceuticals segment, revenues for the six months ended
June 30, 2001 were $47,356,000, compared to $50,034,000 for the same period of
2000. The decrease of $2,678,000, or 5%, is attributable to lower sales volume
in 2001, partially offset by revenues attributable to the Solco acquisition of
$2,774,000 included in the six months ended June, 2001 and higher retail
pharmacy sales of $2,059,000.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended June 30, 2001 were 23,641,000 compared to $22,024,000 for the
same period of 2000. The increase of $1,617,000, or 7%, is due to the
acquisition of the Solco product line ($5,872,000), partially offset by a
decrease in sales due to the discontinuance of certain low margin product sales
and the pharmaceutical industry mandated withdrawal from the market of
Eskornade, a cough and cold product, which contains the active ingredient PPA
(phenyl-propanolamin).
Gross Profit: Gross profit margin on product sales remained consistent at
60% for the six months ended June 30, 2001, compared to 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $152,640,000 for the six months ended June 30,
2001, compared to $138,865,000 for the same period in 2000, an increase of
$13,775,000 (10%). The increase reflects additional selling general and
administrative expenses of $19,398,000 related to acquisitions and higher
professional fees related to shareholder matters partially offset by lower bad
debt expense of $3,580,000 in 2001.
Research and Development: Research and development expenses for the six
months ended June 30, 2001 were $12,823,000, compared to $6,853,000 for the same
period in 2000. The 87% increase resulted from the expansion of research and
development primarily in the areas of antiviral and anticancer drugs. The
Company continues to expect to increase its research and development investment,
which includes laboratory upgrades and installation of state-of-the-art
equipment, in the second half of the year.
Other (income) loss, net including translation and exchange: Other (income)
loss, net including translation and exchange losses reflects income of
($4,340,000) for the six months ended June 30, 2001, compared to a loss of
$4,056,000 for the same period in 2000. In 2001, the Company recorded other
income in connection with the Levovirin(TM) license agreement offset by
translation and exchange losses of $660,000. In 2000, translation losses
principally consisted of translation losses of $2,834,000 related to the net
monetary asset position of the Company's Russian subsidiaries and transaction
losses of $559,000 in the Company's Italian subsidiary and $502,000 related to
operations in Puerto Rico.
Interest Income and Expense: Interest expense during the six months ended
June 30, 2000 decreased $4,815,000 compared to the same period in 2000, which
was the result of the repurchase of approximately $97,000,000 of Senior Notes
during the fourth quarter of 2000. Interest income decreased from $5,812,000 in
2000 to $4,134,000 in 2001 due to the decrease in cash and lower yields on
investments.
Income Taxes: The Company's effective income tax rate for the six months
ended June 30, 2001 was 36% compared to 20% for 2000. The increase in the
effective tax rate results from the recognition of deferred tax assets amounting
to $12,250,000 through the reduction of the related valuation allowance for
capital loss carryforwards during the second quarter of 2000, which was
partially offset by losses incurred in tax jurisdictions that do not create a
corresponding reduction in current taxes.
Liquidity and Capital Resources
During the six months ended June 30, 2001 cash provided by operating
activities totaled $77,208,000 compared to $82,263,000 in 2000. Operating cash
flows reflect the Company's net income of $42,285,000 and net noncash charges
(including depreciation, minority interest, and foreign exchange gains and
losses) of $40,856,000, partially offset by working capital increases (after the
effect of business acquisitions and currency translation adjustments) totaling
approximately $5,933,000. The working capital increases principally consist of a
decrease of $18,435,000 in accounts receivable, a decrease of $7,424,000 in
inventories and an increase of $10,024,000 in income taxes payable offset by an
increase of $15,833,000 in prepaids and other assets, a decrease of $20,853,000
in trade payables and accrued liabilities and a decrease of $5,130,000 in other
liabilities.
Cash used in investing activities was $57,724,000 for the six months ended
June 30, 2001 compared to $47,402,000 for the same period of 2000. In 2001, net
cash used in investing activities principally consisted of acquisitions totaling
$19,897,000 and payments for capital expenditures of $36,974,000 principally
representing an increase in the investment in research and development in North
America and distribution facilities in Western Europe. In 2000, the Company made
capital expenditures of $13,923,000, principally representing production
equipment in Western Europe and an increase in research and development in North
America. In addition, the Company used $34,153,000 for the acquisition of a
business and product rights ($9,697,000) and for the deposit of cash required
for the acquisition of Solco Basel AG in early July ($24,456,000).
Cash used in financing activities totaled $8,918,000 for the six months
ended June 30, 2001, including cash dividends paid on common stock of
$11,818,000 and payments on long-term debt of $5,738,000 (including the
repurchase of $3,338,000 of the Company's outstanding 8 3/4% Senior Notes and
$1,667,000 of its outstanding 9 1/4% Senior Notes), offset by the proceeds from
the exercise of stock options of $8,301,000. In 2000, cash used in financing
activities totaled $22,137,000, including payments on long-term debt of
$12,734,000, payments of cash dividends on common stock of $11,173,000 and
payments on notes payable $6,080,000. These payments were offset by proceeds on
notes payable of $4,856,000 and proceeds from the exercise of stock options of
$2,994,000. At June 30, 2001, certain of the Company's lines of credit and
long-term borrowings include covenants restricting the amount of dividends paid,
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.
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 also has several preliminary acquisition
prospects that may require funds through the year 2001. However, there is no
assurance that any such acquisitions will be consummated. The Company may also
seek additional debt financing or issue additional equity securities to finance
future acquisitions.
In July 2001, the Company completed an offering of $525 million of 6 1/2%
convertible subordinated notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm
will become jointly and severally liable for the obligations under the notes. In
the event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on July 18, 2001, the Company mailed a notice of
redemption with respect to the entire aggregate principal amount outstanding of
$188,978,000 of the Company's 9 1/4% Senior Notes due 2005. Pursuant to the
notice, the Company will redeem the 9 1/4% Senior Notes on August 17, 2001 at a
redemption price of 104.625% of the principal amount thereof, plus accrued and
unpaid interest. In connection with this redemption, the Company will record an
extraordinary loss on extinguishment of debt of $7,900,000, net of tax, in the
third quarter of 2001.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
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 June 30, 2001, 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 effect
on the Company's liquidity and financial performance.
In 2000, the Company publicly announced a restructuring plan to split its
business into three separate publicly traded companies: Ribapharm Inc.
(comprised of the Company's royalty stream from ribavirin and the Company's U.S.
research & development operations), ICN International AG (comprised of the
Company's operations in Western Europe, Eastern Europe and Asia, Africa and
Australia) and ICN Americas (comprised of the Company's operations in North
America, Latin America and Biomedicals). The Company can give no assurance as to
whether or when the restructuring will take place. The Company believes that a
public offering or spin-off of ICN International would not require the consent
of noteholders but that a public offering or spin-off of Ribapharm Inc. would
require the consent of noteholders.
The Company intends for Ribapharm to become a separate publicly traded
company. To achieve this objective, the Company may sell a minority of
Ribapharm's common stock in an underwritten public offering. The Company has
filed a registration statement with the Securities and Exchange Commission to
effect the Ribapharm public offering. Following the Ribapharm public offering,
the Company may distribute its remaining interest in Ribapharm to the Company's
stockholders on a tax-free basis. Any distribution by the Company of its
remaining interest in Ribapharm to the Company's stockholders is subject to
obtaining a ruling from the Internal Revenue Service or an opinion of counsel
that the distribution will qualify as a tax-free spin-off, compliance with all
other applicable laws and approval of the holders of the Company's 8 3/4% senior
notes or repayment of those notes. The Company may effect the Ribapharm
distribution without undertaking a Ribapharm public offering if the maximum
number of shares that could be sold in the Ribapharm public offering would not
provide a sufficiently liquid market for those shares or if the Company
concludes that, taking into account the funds that the Company received from the
private placement of the 6 1/2% convertible subordinated notes, cash on hand and
other financings, an additional equity financing would not be necessary to
repurchase all of the Company's outstanding 8 3/4% senior notes and provide for
the Company's working capital requirements.
The Company intends to sell up to 40% interest in ICN International in an
offering. The Company intends to apply for listing of the shares of ICN
International on the Budapest Stock Exchange and global depositary receipts on
the London Stock Exchange. Subject to market conditions and regulatory approvals
the Company expects to complete the offering of ICN International as soon as
possible.
In addition to continuing the Company's operations in North America, Latin
America and Biomedicals, ICN Americas will hold the remaining interests in ICN
International and Ribapharm until these interests are disposed of by ICN
Americas, as discussed above.
Foreign Operations
Approximately 62% and 63% of the Company's revenues for the six months
ended June 30, 2001 and 2000, respectively, were generated from operations
outside the United States. All of the Company's foreign operations are subject
to risks inherent in conducting business abroad, including possible
nationalization or expropriation, 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 some 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 some countries in which the Company operates, no
effective hedging programs are available.
Russia
While the Russian economy continues to show improvement since the financial
crisis that began in 1998, the economy continues to experience difficulties. In
1998, the ruble fell sharply from a rate of 6.3 to $1 to a rate of 27.5 rubles
to $1 by the end of 1999. To date, the ruble continues to fluctuate, there is
continued volatility in the debt and equity markets, 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.
At June 30, 2001, the ruble exchange rate was 29.1 rubles to $1 as compared
with a rate of 28.2 rubles to $1 at December 31, 2000. As a result of the change
in the ruble exchange rate, the Company recorded translation losses of $68,000
and $469,000, respectively, related to its Russian operations during the three
and six month periods ended June 30, 2001. As of June 30, 2001, ICN Russia had a
net monetary asset position of approximately $8,588,000, 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. 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.
See Note 6 of Notes to the Consolidated Condensed Financial Statements for
legal proceedings that effect the Company's Russian subsidiaries.
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.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced 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 for the remainder of 2001. 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.
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 June 30, 2001,
the Company had $9,920,000 of foreign denominated debt 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 approximately $498,000,000. The Company does not use any
derivatives or similar instruments to manage its interest rate risk. As of June
30, 2001, the fair market value of the Company's fixed rate debt (principally
its 8 3/4% and 9 1/4% Senior Notes) exceeded the face value by approximately $55
million.
On July 2001, the Company completed an offering of $525 million of 6 1/2%
convertible subordinated notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. On July 18, 2001, the Company mailed a notice of
redemption with respect to the entire aggregate principal amount outstanding of
the Company's 9 1/4% Senior Notes due 2005. Pursuant to the notice, the Company
will redeem the 9 1/4% Senior Notes on August 17, 2001 at a redemption price of
104.625% of the principal amount thereof, plus accrued and unpaid interest. In
July and August 2001, the Company repurchased $114,221,000 principal amount of
its 8 3/4% Senior Notes due 2008.
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,
the Company's reorganization plans, 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, Latin America, as well as
Russia 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 ribavirin, and possibly on future drugs, techniques, processes or
products the Company may develop or acquire; the potential impact of the Euro
currency; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; 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 6 of Notes to Consolidated Condensed Financial Statements
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY VOTERS
The Company's Annual Meeting of Stockholders was held on May 30, 2001 in Costa
Mesa, California. At the Meeting, the vote on the election of three (3)
directors to hold office until the 2004 Annual Meeting of Stockholders and
thereafter until their successors are elected and qualified, was as follows:
In Favor Withheld
Kim Campbell 18,957,002 1,549,577
Ray Irani, Ph.D. 18,947,851 1,558,728
Charles T. Manatt 18,957,720 1,548,859
Edward A. Burkhardt 39,646,322 684,046
Ronald R. Fogleman 39,732,614 597,754
Steven J. Lee 39,735,109 595,259
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Indenture, dated as of July 18, 2001, by and among ICN Pharmaceuticals,
Inc., Ribapharm Inc. and The Bank of New York, as trustee, relating to the
6 1/2% Convertible Subordinated Notes due 2008, previously filed as Exhibit
4.2 to Registration Statement No. 333-67376 on Form S-3 dated August 13, 2001,
which is incorporated herein by reference.
4.2 Registration Rights Agreement, dated as of July 18, 2001 by and among ICN
Pharmaceuticals, Inc., Ribapharm Inc. and UBS Warburg LLC, previously filed as
Exhibit 4.3 to Registration Statement No. 333-67376 on Form S-3 dated August 13,
2001, which is incorporated herein by reference.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30, 2001.
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: August 14, 2001 /s/ Milan Panic
--------------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: August 14, 2001 /s/ Richard A. Meier
--------------------------------------------------------
Richard A. Meier
Executive Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit
- -------
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
Exhibit 15.1
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
ICN Pharmaceuticals, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of ICN
Pharmaceuticals, Inc. and subsidiaries as of June 30, 2001 and the related
consolidated condensed statements of income, comprehensive income and cash flows
for each of the three month and six month periods ended June 30, 2001 and 2000.
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 have previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2000, 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 4,
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 the consolidated
financial statements, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
consolidated condensed balance sheet as of December 31, 2000, 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
Orange County, California
August 2, 2001
Exhibit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
August 14, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 2, 2001 on our review of interim
financial information of ICN Pharmaceuticals, Inc. (the "Company') as of and for
the period ended June 30, 2001 and included in the Company's quarterly report on
Form 10-Q 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 on
Form S-3 (File No. 333-10661).
Very truly yours,
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California