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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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(Address of principal executive offices)
(Zip Code)
(714) 545-0100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
The number of outstanding shares of the registrant's Common Stock, $.01
par value, as of November 7, 2001 was 81,543,552.
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ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - September 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income - Three months and nine months
ended September 30, 2001 and 2000 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and nine months ended September 30, 2001 and 2000 5
Consolidated Condensed Statements of Cash Flows - Nine months
ended September 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 2001 and December 31, 2000
(unaudited, in thousands, except per share data)
September 30, December 31,
2001 2000
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 332,741 $ 155,205
Restricted cash 3,999 380
Accounts receivable, net 206,022 225,639
Inventories, net 170,289 170,263
Prepaid expenses and other current assets 17,189 13,929
-------------- --------------
Total current assets 730,240 565,416
Property, plant and equipment, net 398,261 367,229
Deferred income taxes, net 74,788 75,037
Other assets 63,308 32,300
Goodwill and intangibles, net 451,825 437,090
-------------- --------------
$ 1,718,422 $ 1,477,072
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 52,954 $ 61,741
Accrued liabilities 102,759 91,447
Notes payable and current portion of long-term debt 8,563 907
Income taxes payable 1,673 4,682
-------------- --------------
Total current liabilities 165,949 158,777
Long-term debt, less current portion 738,016 510,781
Deferred income and other liabilities 34,169 40,988
Minority interest 8,458 9,332
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized; 81,621
(September 30, 2001) and 80,197 (December 31, 2000) shares outstanding
(after deducting shares in treasury of 814 and 814, respectively) 816 802
Additional capital 985,690 973,157
Accumulated deficit (123,482) (130,087)
Accumulated other comprehensive loss (91,194) (86,678)
-------------- --------------
Total stockholders' equity 771,830 757,194
-------------- --------------
$ 1,718,422 $ 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 nine months
ended September 30, 2001 and 2000
(unaudited, in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Revenues:
Product sales $ 167,053 $ 158,342 $ 512,812 $ 466,013
Royalties 24,007 49,000 82,988 125,102
------------ ------------ ------------ -------------
Total revenues 191,060 207,342 595,800 591,115
------------ ------------ ------------ -------------
Costs and expenses:
Cost of product sales 65,465 64,230 204,415 185,931
Selling, general and administrative expenses 83,206 66,164 235,846 205,029
Research and development costs 6,944 5,711 19,767 12,564
Amortization of goodwill and intangibles 7,898 7,453 24,006 22,863
------------ ------------ ------------ -------------
Total expenses 163,513 143,558 484,034 426,837
------------ ------------ ------------ -------------
Income from operations 27,547 63,784 111,766 164,728
Other (income) loss, net including translation and exchange 1,347 491 (2,993) 4,547
Interest income (3,406) (3,241) (7,540) (9,053)
Interest expense 15,510 15,339 41,330 45,974
------------ ------------ ------------ -------------
Income before income taxes,
minority interest and extraordinary loss 14,096 51,195 80,969 123,260
Provision for income taxes 4,665 15,045 28,458 29,587
Minority interest 275 (459) 856 (1,428)
------------ ------------ ------------ -------------
Income before extraordinary loss 9,156 36,609 51,655 95,101
Extraordinary loss, net of income taxes 20,852 -- 21,066 --
------------ ------------ ------------ -------------
Net income (loss) $ (11,696) $ 36,609 $ 30,589 $ 95,101
============ ============ ============ =============
Basic earnings per share:
Income per share before extraordinary loss $ 0.11 $ 0.46 $ 0.64 $ 1.20
Extraordinary loss per share (0.25) -- (0.26) --
----------- ------------ ------------ ------------
Basic net income (loss) per share $ (0.14) $ 0.46 $ 0.38 $ 1.20
=========== ============ ============ ============
Diluted earnings per share:
Income per share before extraordinary loss $ 0.11 $ 0.45 $ 0.62 $ 1.16
Extraordinary loss per share (0.25) -- (0.25) --
----------- ------------ ------------ ------------
Diluted net income (loss) per share $ (0.14) $ 0.45 $ 0.37 $ 1.16
=========== ============ ============ ============
Shares used in per share computation:
Basic 81,534 79,548 80,950 79,200
=========== ============ ============ ============
Diluted 83,604 82,099 83,029 81,883
=========== ============ ============ ============
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
nine months ended September 30, 2001 and 2000
(unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Net income (loss) $ (11,696) $ 36,609 $ 30,589 $ 95,101
Other comprehensive income:
Foreign currency translation adjustments 566 (10,830) (4,516) (26,135)
------------ ------------ ------------ -------------
Comprehensive income (loss) $ (11,130) $ 25,779 $ 26,073 $ 68,966
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2000
(unaudited, in thousands)
Nine Months Ended
September 30,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income $ 30,589 $ 95,101
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 53,286 47,090
Provision for losses on accounts receivable 2,564 6,361
Provision for inventory obsolescence 1,559 4,388
Translation and exchange losses, net 2,007 4,547
Loss on sale of assets 361 642
Other non-cash losses 1,750 1,750
Deferred income taxes 233 4,302
Minority interest 856 (1,428)
Extraordinary loss 21,066 --
Change in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable 19,349 (18,608)
Inventories (173) (20,912)
Prepaid expenses and other assets (25,948) (1,245)
Trade payables and accrued liabilities 2,896 (1,687)
Income taxes payable 9,178 10,212
Other liabilities (4,708) 4,250
-------------- --------------
Net cash provided by operating activities 114,865 134,763
-------------- --------------
Cash flows from investing activities:
Capital expenditures (53,023) (28,617)
Proceeds from sale of assets 1,327 729
(Increase) decrease in restricted cash (3,619) 71
Acquisition of license rights, product lines and businesses (38,857) (30,854)
-------------- --------------
Net cash used in investing activities (94,172) (58,671)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 508,872 --
Proceeds from issuance of notes payable 22 5,724
Payments on long-term debt (345,346) (12,746)
Payments on notes payable -- (7,890)
Proceeds from exercise of stock options 11,130 7,248
Dividends paid (17,902) (16,992)
-------------- --------------
Net cash provided by (used in) financing activities 156,776 (24,656)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 67 (1,055)
-------------- --------------
Net increase in cash and cash equivalents 177,536 50,381
Cash and cash equivalents at beginning of period 155,205 177,577
-------------- --------------
Cash and cash equivalents at end of period $ 332,741 $ 227,958
============== ==============
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
September 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 nine months ended September 30,
2000 and 2001.
Comprehensive Income: The balance of accumulated other comprehensive loss
at September 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 2001, the Company's Board of Directors declared a
quarterly cash dividend of $0.075 per share for each quarter, including the
third quarter dividend paid on October 24, 2001, to stockholders of record on
October 10, 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. Under SFAS No. 142
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statement. Other intangible assets will continue to
be amortized over their useful lives. The Company will apply the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. The Company will perform the first of the required impairment
tests as of January 1, 2002 and has not yet determined what the effects of these
tests will be on the results of operations and financial position of the
Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144, which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of, supercedes SFAS No. 121 and is
effective for fiscal years beginning after December 15, 2001. While the Company
is currently evaluating the impact the adoption of SFAS No. 144 will have on its
results of operations and financial position, it does not expect such impact to
be material.
2. Acquisitions
On August 17, 2001, the Company acquired certain assets from an Argentine
company, for a total cost of $23,774,000 Argentine pesos (US $23,774,000 as of
September 30, 2001), of which $8,440,000 was paid in cash and the balance as a
note payable. The note is payable through February 2003 and accrues interest at
6% per annum. The acquisition is not material to the financial position or
results of operations of the Company.
3. 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Income:
Net income (loss) $ (11,696) $ 36,609 $ 30,589 $ 95,101
Effect of dilutive securities 5 (3) 2 (2)
----------- ----------- ----------- -----------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ (11,691) $ 36,606 $ 30,591 $ 95,099
=========== =========== =========== ===========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 81,534 79,548 80,950 79,200
----------- ----------- ----------- -----------
Effect of dilutive securities:
Employee stock options 2,049 2,482 2,058 2,513
Other dilutive securities 21 69 21 170
----------- ----------- ----------- -----------
Dilutive potential common shares 2,070 2,551 2,079 2,683
----------- ----------- ----------- -----------
Denominator for diluted earnings per share--
weighted-average shares adjusted
for assumed conversions 83,604 82,099 83,029 81,883
=========== =========== =========== ===========
Basic earnings per share:
Income per share before extraordinary loss $ 0.11 $ 0.46 $ 0.64 $ 1.20
Extraordinary loss per share (0.25) -- (0.26) --
---------- ---------- ----------- -----------
Basic net income (loss) per share $ (0.14) $ 0.46 $ 0.38 $ 1.20
========== ========== =========== ===========
Diluted earnings per share:
Income per share before extraordinary loss $ 0.11 $ 0.45 $ 0.62 $ 1.16
Extraordinary loss per share (0.25) -- (0.25) --
---------- ---------- ----------- -----------
Diluted net income (loss) per share $ (0.14) $ 0.45 $ 0.37 $ 1.16
========== ========== =========== ===========
The weighted-average shares for diluted earnings per share for the three
and nine months ended September 30, 2001 excludes if converted effect of
15,326,000 shares of common stock. These shares are related to the 6.5%
subordinated convertible debt, and are excluded due to their antidilutive
effect.
4. Detail of Certain Accounts
September 30, December 31,
(in thousands) 2001 2000
---------------- --------------
Accounts receivable, net:
Trade accounts receivable $ 166,332 $ 190,386
Royalties receivable 38,101 39,741
Other receivables 16,048 15,372
---------------- --------------
220,481 245,499
Allowance for doubtful accounts (14,459) (19,860)
---------------- --------------
$ 206,022 $ 225,639
================ ==============
Inventories, net:
Raw materials and supplies $ 58,124 $ 61,623
Work-in-process 26,425 22,701
Finished goods 102,242 103,932
---------------- --------------
186,791 188,256
Allowance for inventory obsolescence (16,502) (17,993)
---------------- --------------
$ 170,289 $ 170,263
================ ==============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 527,128 $ 471,386
Accumulated depreciation and amortization (128,867) (104,157)
---------------- --------------
$ 398,261 $ 367,229
================ ==============
5. 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"). As of September 30, 2001, $318,329 was outstanding under the loan,
which is collateralized by 41,427 shares of the Company's common stock and is
due in 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 September 30, 2001, the
loans are included in the accompanying consolidated condensed balance sheet as a
reduction of stockholders' equity.
6. Debt
In July 2001, the Company completed an offering of $525,000,000 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 the Company's wholly-owned subsidiary
Ribapharm ("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 August 17, 2001, the Company redeemed the entire aggregate
principal amount outstanding of $188,978,000 of the Company's 9 1/4% Senior
Notes due 2005 at a redemption price of 104.625% of the principal amount
thereof, plus accrued and unpaid interest. In connection with this redemption,
the Company recorded an extraordinary loss on early extinguishment of debt of
$7,692,000, 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 recorded an extraordinary loss on early extinguishment
of debt of $13,160,000, net of tax, in the third quarter of 2001.
7. 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. The Company and the SEC have engaged in
discussions in an effort to determine whether the litigation can be resolved by
settlement agreement, but those discussions now appear to be at an impasse. 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.
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 $6,200,000
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.
8. Business Segments
The Company's five 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 nine months ended
September 30, 2001 and 2000 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2001 2000 2001 2000
------------- --------------- ------------- -------------
Revenues
Product Sales
Pharmaceuticals
ICN Americas
North America $ 39,014 $ 25,474 $ 125,434 $ 82,235
Latin America 30,682 32,422 86,412 90,406
------------- ------------- ------------- -------------
Total ICN Americas 69,696 57,896 211,846 172,641
------------- ------------- ------------- -------------
ICN International
Western Europe 47,564 46,502 149,941 136,576
Russia 22,909 25,486 70,265 75,520
Asia, Africa, Australia 12,527 14,425 36,168 36,449
------------- ------------- ------------- -------------
Total ICN International 83,000 86,413 256,374 248,545
------------- ------------- ------------- -------------
Total Pharmaceuticals 152,696 144,309 468,220 421,186
Biomedicals 14,357 14,033 44,592 44,829
------------- ------------- ------------- -------------
Total product sales 167,053 158,342 512,812 466,015
Royalties 24,007 49,000 82,988 125,100
------------- ------------- ------------- -------------
Consolidated revenues $ 191,060 $ 207,342 $ 595,800 $ 591,115
============= ============= ============= =============
Operating Income
Pharmaceuticals
ICN Americas
North America $ 11,083 $ 8,379 $ 48,360 $ 34,480
Latin America 7,974 11,687 25,630 29,100
------------ ------------ ------------ ------------
Total ICN Americas 19,057 20,066 73,990 63,580
------------ ------------ ------------ ------------
ICN International
Western Europe 6,765 6,750 17,612 17,400
Russia (1,542) (983) (8,045) (3,054)
Asia, Africa, Australia 1,222 1,114 4,089 2,957
------------ ------------ ------------ ------------
Total ICN International 6,445 6,881 13,656 17,303
Biomedicals 933 2,324 5,547 3,945
Royalties 24,007 49,000 82,988 125,100
------------ ------------ ------------ ------------
Consolidated segment operating income 50,442 78,271 176,181 209,928
Corporate expenses 22,895 14,487 64,415 45,200
Interest income (3,406) (3,241) (7,540) (9,053)
Interest expense 15,510 15,339 41,330 45,974
Other (income) loss, net, including
translation and exchange 1,347 491 (2,993) 4,547
------------ ------------ ------------ ------------
Income before provision for income taxes,
minority interest and extraordinary loss $ 14,096 $ 51,195 $ 80,969 $ 123,260
============ ============ ============ ============
The following table sets forth the segment total assets of the Company as of
September 30, 2001 and December 31, 2000 (in thousands):
Assets
September 30, December 31,
2001 2000
----------------- -----------------
Pharmaceuticals
ICN Americas
North America $ 552,060 $ 518,033
Latin America 140,496 127,031
----------------- -----------------
Total ICN Americas 692,556 645,064
----------------- -----------------
ICN International
Western Europe 281,051 271,914
Russia 159,463 169,032
Asia, Africa, Australia 68,593 82,206
----------------- -----------------
Total ICN International 509,107 523,152
----------------- -----------------
Total Pharmacueticals 1,201,663 1,168,216
Biomedicals 60,303 61,938
Corporate 456,456 246,918
----------------- -----------------
Total $ 1,718,422 $ 1,477,072
================= =================
9. Supplemental Cash Flow Information
Cash paid for income taxes for the nine months ended September 30, 2001 and
2000 was $19,607,000 and $16,658,000, respectively. Cash paid for interest for
the nine months ended September 30, 2001 and 2000 was $35,791,000 and
$41,824,000, respectively.
Other non-cash losses for the nine months ended September 30, 2001 and 2000
included $1,750,000 and $1,750,000, respectively, for compensation expense
related to the vesting of restricted stock under the Company's long-term
incentive plan.
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 8
of Notes to Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report.
Revenues (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Product sales
Pharmaceuticals
ICN Americas
North America $ 39,014 $ 25,474 $ 125,434 $ 82,235
Latin America (principally Mexico) 30,682 32,422 86,412 90,406
------------- ------------- ------------- -------------
Total ICN Americas 69,696 57,896 211,846 172,641
------------- ------------- ------------- -------------
ICN International
Western Europe 47,564 46,502 149,941 136,576
Russia 22,909 25,486 70,265 75,520
Asia, Africa, Australia 12,527 14,425 36,168 36,449
------------- ------------- ------------- -------------
Total ICN International 83,000 86,413 256,374 248,545
------------- ------------- ------------- -------------
Total pharmaceuticals 152,696 144,309 468,220 421,186
Biomedicals 14,357 14,033 44,592 44,829
------------- ------------- ------------- -------------
Total product sales 167,053 158,342 512,812 466,015
Royalty revenues 24,007 49,000 82,988 125,100
------------- ------------- ------------- -------------
Total revenues $ 191,060 $ 207,342 $ 595,800 $ 591,115
============= ============= ============= =============
Cost of product sales $ 65,465 $ 64,230 $ 204,415 $ 185,931
Gross profit margin on product sales 61% 59% 60% 60%
Three months ended September 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 September 30, 2001 were
$24,007,000 compared to $49,000,000 for the same period of 2000, a decrease of
$24,993,000 (51%). The Company believes the decrease is primarily due to lower
sales of Rebetron(TM) by Schering-Plough resulting from a delay in the launch of
Peg-Intron(TM) (pegylated interferon) until October 2001.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the three months
ended September 30, 2001 were $39,014,000, compared to $25,474,000 for the same
period of 2000, an increase of $13,540,000 (53%). In 2001, revenues include
sales of $6,418,000 attributable to the assets purchased from Medical Alliance
in January 2001. Additionally, North American revenues benefited from strong
gains in sales of skin care products, which includes Efudex(R), Kinerase(R) and
bleaches. Sales of skin care products increased $5,982,000 (60%) in the third
quarter of 2001 compared to 2000.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended September 30, 2001 were $30,682,000, compared to $32,422,000 for the same
period of 2000. The decrease of $1,740,000, or 5%, 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 three
months ended September 30, 2001 were $47,564,000 compared to $46,502,000 for the
same period of 2000, an increase of $1,062,000. The increase is primarily due to
new product acquisitions partially offset by a 3% decrease in the value of the
Euro.
In the Russia Pharmaceuticals segment, revenues for the three months ended
September 30, 2001 were $22,909,000, compared to $25,486,000 for the same period
of 2000. The decrease of $2,577,000, or 10%, is primarily attributable to a
decrease in Russia's wholesale distribution business.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended September 30, 2001 were $12,527,000 compared to $14,425,000
for the same period of 2000. The decrease of $1,898,000, or 13%, is due to a
decrease in product sales.
Gross Profit: Gross profit margin on product sales increased from 59% for
the three months ended September 30, 2000 to 61% for the same period of 2001.
The increase in gross margin is reflective of higher margins on sales of
products in the North American region. Gross profit margins in Western Europe
and Latin America regions for the three months ended September 30, 2001 were
consistent with the comparable period of 2000. The AAA region experienced a
decrease in gross margin as a result of higher manufacturing costs incurred on
the transfer of products acquired from Roche and SmithKline Beecham to
company-owned facilities or toll manufacturers. The Russian region experienced a
decrease in gross margin due to a shift in product mix.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $83,206,000 for the three months ended September
30, 2001, compared to $66,164,000 for the same period in 2000, an increase of
$17,042,000 (26%). The increase reflects additional expenses of $6,633,000
related to acquisitions and higher selling expenses associated with the 6%
increase in product sales. Additionally, corporate general and administrative
expenses increased $6,482,000 due to increased professional fees, and two
insurance recoveries totaling $2,550,000 received in the third quarter of 2000.
Research and Development: Research and development expenses were $6,944,000
for the three months ended September 30, 2001, compared to $5,711,000 for the
same period in 2000, an increase of $1,233,000 (22%). 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
the fourth quarter of 2001.
Amortization of goodwill and intangibles: Amortization of goodwill and
intangibles was $7,898,000 for the three months ended September 30, 2001,
compared to $7,453,000 for the same period of 2000. The increase of $445,000 was
primarily the result of the amortization of goodwill related to the acquisition
of Medical Alliance, which occurred in early 2001.
Other (income) loss, net including translation and exchange: Other (income)
loss, net including translation and exchange was $1,347,000 for the three months
ended September 30, 2001 compared to $491,000 for the same period in 2000. In
the third quarter of 2001, translation and exchange losses consisted primarily
of translation losses of $428,000 related to the net monetary asset position of
the Company's Russian subsidiaries and transaction losses of $334,000 and
$473,000 related to the Company's operations in Puerto Rico and AAA regions,
respectively. In the third quarter of 2000, transaction losses principally
consisted of losses of $715,000 related to our operations in Puerto Rico and
$274,000 in the Company's Biomedical Segment offset by transaction gains of
$233,000 in the Western and Central Europe Segment and translation gains of
$188,000 related to the net monetary asset position of the Company's Russian
subsidiaries.
Interest Income and Expense: Interest expense during the three months ended
September 30, 2001 increased $171,000 compared to the same period in 2000.
During July 2001, the Company completed its offering of $525,000,000 of 6.5%
convertible debt. In connection with the offering of the convertible debt, the
Company redeemed the entire aggregate principal amount outstanding of
$188,978,000 of the Company's 9 1/4% Senior Notes on August 17, 2001. The
reduction of interest expense related to the lower effective interest rate on
the convertible debt was offset by a higher average aggregate principal balance
of all debt outstanding during the third quarter of 2001.
Income Taxes: The Company's effective income tax rate for the three months
ended September 30, 2001 was 33% compared to 29% for the comparable period of
2000. The provision for income taxes reflects higher taxable income in the
United States and losses incurred in tax jurisdictions that do not create a
corresponding reduction in current taxes.
Nine months ended September 30, 2001 compared to 2000
Royalty revenues: Royalty revenues for the nine months ended September 30,
2001 were $82,990,000 compared to $125,102,000 for the same period of 2000, a
decrease of $42,112,000 (34%). The Company believes the decrease is primarily
reflective of a slowdown in sales of Rebetron(TM) by Schering-Plough as
physicians awaited marketing authorization pending FDA review and clearance for
the use of pegylated interferon with ribavirin, which occurred in August 2001.
Additionally, the launch of Peg-Intron(TM) (pegylated interferon) was delayed
until October 2001.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the nine months
ended September 30, 2001 were $125,434,000, compared to $82,235,000 for the same
period of 2000. The increase of $43,199,000, or 53%, includes sales of
$23,808,000 attributable to the assets purchased from Medical Alliance in
January 2001. Additionally, North American revenues benefited from strong gains
in sales of skin care products, which were $49,872,000 in 2001 compared to
$33,181,000 in 2000, an increase of $16,691,000 (50%).
In the Latin America Pharmaceuticals segment, revenues for the nine months
ended September 30, 2001 were $86,412,000, compared to $90,406,000 for the same
period of 2000. The decrease of $3,994,00, 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 nine months
ended September 30, 2001 were $149,941,000 compared to $136,576,000 for the same
period of 2000. The increase of $13,365,000, or 10%, includes revenues of
$7,369,000 attributable to acquisitions and an increase in sales in Poland of
$5,329,000.
In the Russia Pharmaceuticals segment, revenues for the nine months ended
September 30, 2001 were $70,265,000, compared to $75,520,000 for the same period
of 2000. The decrease of $5,255,000, or 7%, is primarily attributable to a
decrease in Russia's wholesale distribution business.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
nine months ended September 30, 2001 were $36,168,000 compared to $36,449,000
for the same period of 2000. The decrease of $281,000, is 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),
partially offset by the acquisition of the Solco product line of $5,872,000.
Gross Profit: Gross profit margin on product sales remained consistent at
60% for the nine months ended September 30, 2001, compared to 2000. Higher gross
margin in the North American region was offset by lower margins in the Western
and Central Europe and Russian regions. Gross profit margins in the Latin
America and AAA regions were consistent with the comparable period of 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $235,846,000 for the nine months ended September
30, 2001, compared to $205,029,000 for the same period in 2000, an increase of
$30,817,000 (15%). The increase reflects additional selling, general and
administrative expenses of $22,638,000 related to acquisitions completed in
early 2001 and in the third quarter of 2000. Additionally, corporate general and
administrative expenses increased $8,519,000 due to increased professional fees
related to shareholder matters.
Research and Development: Research and development expenses for the nine
months ended September 30, 2001 were $19,767,000, compared to $12,564,000 for
the same period in 2000. The increase reflects the continued expansion of
research and development primarily in the areas of antiviral and anticancer
drugs.
Other (income) loss, net including translation and exchange: Other (income)
loss, net including translation and exchange was $(2,993,000) for the nine
months ended September 30, 2001 compared to $4,547,000 for the same period in
2000. In the nine months of 2001, the Company recorded other income in
connection with the licensing of Levovirin(TM) to F. Hoffmann-La Roche in 2001
offset by translation and exchange losses of $2,007,000. Translation losses for
2001 principally consisted of translation losses of $897,000 related to the net
monetary asset position of the Company's Russian subsidiaries and transaction
losses of $850,000 related to the AAA operations. Translation losses for 2000
principally consisted of translation losses of $2,646,000 related to the net
monetary asset position of the Company's Russian subsidiaries and transaction
losses of $1,217,000 related to operations in Puerto Rico.
Interest Income and Expense: Interest expense during the nine months ended
September 30, 2001 decreased $4,644,000 compared to the same period in 2000,
primarily due to the repurchase of Senior Notes during the fourth quarter of
2000 and in the second quarter of 2001. Interest income decreased from
$9,052,000 in 2000 to $7,540,000 in 2001, as a result of the decrease in cash
balance and decline in interest rates during the first nine months of 2001 as
compared to the same period of 2000.
Income Taxes: The Company's effective income tax rate for the nine months
ended September 30, 2001 was 35% compared to 24% 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 2000. Excluding the reduction of the valuation
allowance, the effective tax rate for the nine-months of 2000 was 34%.
Liquidity and Capital Resources
During the nine months ended September 30, 2001 cash provided by operating
activities totaled $114,865,000 compared to $134,763,000 in 2000. Operating cash
flows reflect the Company's net income of $30,589,000 net of noncash charges
(including depreciation, minority interest, extraordinary loss and foreign
exchange gains and losses) of $83,682,000, and working capital decreases (after
the effect of business acquisitions and currency translation adjustments)
totaling approximately $594,000. The working capital decreases principally
consist of a decrease of $19,349,000 in accounts receivable, an increase of
$9,178,000 in income taxes payable and an increase of $2,896,000 in trade
payables and accrued liabilities offset by an increase of $25,948,000 in prepaid
expenses and other assets and a decrease of $4,708,000 in other liabilities.
Cash used in investing activities was $94,172,000 for the nine months ended
September 30, 2001 compared to $58,671,000 for the same period of 2000. In 2001,
net cash used in investing activities principally consisted of acquisitions
totaling $38,857,000 and payments for capital expenditures of $53,023,000
principally representing an increase in the investment in research and
development facilities in North America and distribution facilities in Western
Europe. In 2000, the Company made acquisitions of license rights, product lines
and businesses amounting to $30,854,000 (net of acquired cash of $4,613,000) and
capital expenditures of $28,617,000, principally representing production
equipment in Western Europe and an increase in the investment in research and
development facilities in North America.
Cash provided by financing activities totaled $156,776,000 for the nine
months ended September 30, 2001. Proceeds from issuance of long-term debt
totaled $508,872,000 including net proceeds from an offering of $525,000,000 of
6 1/2% convertible subordinated notes due 2008 which the company completed in
July 2001. Proceeds from the exercise of stock options totaled $11,130,000. The
Company used cash for payments on long-term debt of $345,346,000 principally
consisting of the repurchase of $190,645,000 principal of its outstanding 9 1/4%
Senior Notes and $117,559,000 principal of its outstanding 8 3/4% Senior Notes.
Cash dividends paid on common stock totaled $17,902,000. Cash used in financing
activities totaled $24,656,000 for the nine months ended September 30, 2000,
including payments of cash dividends on common stock of $16,992,000, payments on
long-term debt of $12,746,000 and payments on notes payable of $7,890,000. These
payments were offset by proceeds from the exercise of stock options of
$7,248,000 and proceeds from the issuance of notes payable of $5,724,000.
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 maintain 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 years 2001 and 2002. However, there
is no assurance that any such acquisitions will be consummated. The Company may
also seek additional financing 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 September 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
Restructuring
On June 15, 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 and development operations) ("Ribapharm"), ICN International AG
(comprised of the Company's operations in Western Europe, Eastern Europe and
Asia, Africa and Australia) ("ICN International") and ICN Americas (comprised of
the Company's operations in North America, Latin America and Biomedicals) ("ICN
Americas"). The Company can give no assurance as to whether or when the
restructuring will take place. The Company believes that sale of interests in
ICN International would not require the consent of noteholders but that the
initial public offering or spin-off of Ribapharm would require the consent of
the holders of the Company's 8 3/4% senior notes.
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 may
seek approval from its stockholders for the public offering The shares to be
sold in the Ribapharm public offering will either be already outstanding shares
held by the Company or new shares issued by Ribapharm. If the Company were to
sell Ribapharm common shares in the Ribapharm offering, the Company would
recognize taxable income on the proceeds it receives, which may be offset
against the Company's net operating loss carryforwards. 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 a 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
practicable.
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 63% of the Company's revenues for the nine months ended
September 30, 2001 and 2000 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 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.
As a result of the changing political environment in Yugoslavia, the
Company is attempting to regain control of ICN Yugoslavia. There can be no
assurance that the Company will be successful in its efforts.
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 rubles 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 September 30, 2001 the ruble exchange rate was 29.4 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 $428,000 and $897,000, respectively, related to its Russian operations during
the three and nine month periods ended September 30, 2001. As of September 30,
2001, ICN Russia had a net monetary asset position of approximately $11,012,000,
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 manage its net monetary exposure.
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 7 of Notes to the Consolidated Condensed Financial Statements for
legal proceedings that affect 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 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 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 material
adverse impact on the Company's market risk with respect to foreign exchange,
its results of operations, or its financial condition.
Item 3. 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
September 30, 2001, the Company had $11,005,000 of foreign-currency-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 6-1/2% Convertible Subordinated Notes due 2008) totaling approximately
$719,600,000. The Company does not use any derivatives or similar instruments to
manage its interest rate risk. As of September 30, 2001, the fair market value
of the Company's fixed rate debt (principally its 8 3/4% and 6 1/2% Convertible
Notes) exceeded the face value by approximately $40 million.
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 7 of Notes to Consolidated Condensed Financial Statements
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.
During the quarter ended September 30, 2001, the following reports on
Form 8-K were filed by the Registrant:
1. Current report on Form 8-K dated July 2, 2001 (the date of the
earliest event reported), filed on July 3, 2001, for the purpose of
reporting , under Item 7, the Registrant's announcement of proposed
$250 million convertible subordinated notes offering.
2. Current report on Form 8-K dated July 13, 2001 (the date of the
earliest event reported), filed on July 13, 2001, for the purpose of
reporting, under Item 5 and 7, the agreement to sell in a private
offering $400 million of convertible subordinated notes.
3. Current report on Form 8-K dated July 18, 2001 (the date of the
earliest event reported), filed on July 18, 2001, for the purpose of
reporting, under Item 5 and 7, the closing of a private offering of
$400 million of convertible subordinated notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: November 14, 2001 /s/ Milan Panic
--------------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: November 14, 2001 /s/ Richard A. Meier
--------------------------------------------------------
Richard A. Meier
Executive Vice President and Chief Financial Officer
Date: November 14, 2001 /s/ John E. Giordani
--------------------------------------------------------
John E. Giordani
Executive Vice President
(principal accounting 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 its subsidiaries as of September 30, 2001 and the
related consolidated condensed statements of income, comprehensive income and
cash flows for each of the three-month and nine-month periods ended September
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 accounting principles generally accepted in
the United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, 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 1, 2001, except for Note 12, as to which
the date is March 15, 2001, 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
November 1, 2001
Exhibit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
November 14, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated November 1, 2001 on our review of interim
financial information of ICN Pharmaceuticals, Inc. (the "Company') as of and for
the period ended September 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-4 (File No. 333-63721), on Form S-8 (File
Nos. 33-56971, 333-81383 and 333-73098) and on Form S-3 (File Nos. 333-10661
and 333-67376).
Very truly yours,
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California