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 MARCH 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11397,
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of outstanding shares of the registrant's Common Stock, $.01
par value, as of May 5, 1995 was 28,168,001.
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
March 31, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1995 and 1994 4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1995 and 1994 5
Management's Statement Regarding Unaudited Financial
Statements 6
Notes to Consolidated Condensed Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operation 14
PART II - OTHER INFORMATION
Item 1. Litigation 18
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
(UNAUDITED-000'S OMITTED, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $30,803 $42,376
Restricted cash 387 1,425
Receivables, net 105,879 81,951
Inventories, net 87,717 89,448
Prepaid expenses and other current assets 23,583 25,146
Total current assets 248,369 240,346
Marketable securities (used to
collateralize note payable of $8,326
and $8,193 at March 31, 1995
and December 31, 1994, respectively) 33,747 33,179
Property, plant and equipment, net 130,005 128,623
Goodwill and intangibles, net 21,511 18,043
Other assets 18,753 21,282
Total assets $452,385 $441,473
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $26,671 $25,079
Accrued liabilities 38,143 43,111
Notes payable 12,747 13,757
Current portion of long-term debt 16,425 6,067
Income taxes payable 12,626 14,530
Total current liabilities 106,612 102,544
Long-term debt, less current portion 186,289 195,181
Other liabilities 10,045 9,960
Minority interest 49,144 44,880
Commitments and contingencies (Note 7)
Stockholder's equity:
Common stock, $.01 par value; 100,000
shares authorized; 28,119 and 28,028
shares outstanding at March 31, 1995
and December 31, 1994, respectively 282 282
Additional capital 252,206 251,713
Retained deficit (128,182) (142,946)
Unrealized loss on marketable
securities, net (3,592) (3,432)
Foreign currency translation adjustments (20,419) (16,709)
Total stockholders' equity 100,295 88,908
Total liabilities and
stockholder's equity $452,385 $441,473
The accompanying notes are an integral part of these consolidated condensed
financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
1995 1994
Net sales $ 132,243 $ 72,167
Cost of sales 54,316 32,615
Gross profit 77,927 39,552
Selling, general and administrative expenses 45,012 21,081
Royalties to affiliates, net -- 2,907
Research and development costs 4,545 846
Translation and exchange losses, net 1,298 2,499
Interest income (1,662) (965)
Interest expense 5,004 1,423
Other expense, net 691 764
Income before provision for income taxes
and minority interest 23,039 10,997
Provision for income taxes 1,741 2,459
Minority interest 4,264 174
Net income $ 17,034 $ 8,364
PER SHARE INFORMATION:
Net income per share $ .59 $ .39
Shares used in per share computation 28,895 21,651
The accompanying notes are an integral part of these consolidated condensed
financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED - 000'S OMITTED)
THREE MONTHS ENDED
MARCH 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,034 $ 8,364
Adjustments to reconcile net income to net
cash provided by operating activities:
Allowances for losses on accounts receivable 106 901
Depreciation and amortization 3,686 1,988
Translation and exchange losses, net 1,298 2,499
Increase in accounts receivable (23,731) (5,862)
Changes in other operating assets and liabilities, net 1,764 3,604
Net cash provided by operating activities 157 11,494
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,696) (881)
Decrease in restricted cash 1,038 --
Acquisition of foreign license rights and other (1,966) --
Net cash used in investing activities (5,624) (881)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit arrangements 1,861 1,293
Net payments of long-term debt (5,572) (192)
Net payments to parent company -- (9,422)
Proceeds from exercise of stock options 456 365
Dividends paid to non-affiliated stockholders (1,906) (481)
Net cash used in financing activities (5,161) (8,437)
Effect of exchange rate changes on cash (945) (182)
Net increase in cash and cash equivalents (11,573) 1,994
Cash and cash equivalents at beginning of period 42,376 14,777
Cash and cash equivalents at end of the period $ 30,803 $16,771
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 ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results to be expected
for a full year. Although the Company believes that all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the interim period presented are included and that the
disclosures are adequate to make the information presented not misleading,
these consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIP -
On November 1, 1994, the stockholders of ICN Pharmaceuticals, Inc. ("ICN"),
SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor
Companies") approved the Merger of the Predecessor Companies, ("the
Merger"). On November 10, 1994, SPI, ICN and Viratek merged into ICN Merger
Corp., and Biomedicals merged into ICN Subsidiary Corp. a wholly-owned
subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN Merger
Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company").
The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring
company and as a result, the Company has reported the historical financial
data of SPI in its financial results and includes the results of ICN,
Viratek and Biomedicals since November 1, 1994.
SPI was incorporated on November 30, 1981, as a wholly-owned subsidiary of
ICN and was 39%-owned by ICN prior to the Merger. Viratek and Biomedicals
were 63%- owned and 69%- owned by ICN, respectively, prior to the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany account balances and transactions have been eliminated.
The December 31, 1994 balance sheet data was derived from the audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common
shares outstanding and the dilutive effect of common share equivalents.
Common share equivalents represents shares issuable upon exercise of stock
options, on the assumption that the proceeds would be used to repurchase
shares in the open market.
On March 3, 1995, the Company's Board of Directors declared a first quarter
cash dividend of $.07 per share and a stock dividend of 1.7%, payable on
March 31, 1995, to stockholders of record on March 17, 1995. All relevant
share and per share data have been restated to reflect this stock dividend.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current
year presentation.
3. RELATED PARTY TRANSACTIONS -
ROYALTY AGREEMENTS
During the three months ended March 31, 1994, the Company sold $14,105,000 of
Virazole(R), generating royalties to Viratek of $2,821,000. These royalties
were based on a royalty agreement whereby 20% of net sales of Virazole(R) were
payable to Viratek. As a result of the Merger, the Company is no longer
required to pay royalties on sales of Virazole(R).
COST ALLOCATIONS
Prior to the Merger, ICN, SPI, Viratek and Biomedicals occupied ICN's
facility in Costa Mesa, California. The cost of common services such as
maintenance, purchasing and personnel were incurred by SPI and allocated to
ICN, Viratek and Biomedicals based on services utilized. As a result of the
Merger, the Company is no longer required to allocate common services among
affiliates.
Common service costs for the three months ended March 31, 1994 were
$734,000, of which $495,000 was allocated to ICN, Viratek and Biomedicals.
4. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes was $4,147,000 for the three months ended March
31, 1995, and $1,167,000 for the same period in 1994.
Cash paid for interest was $1,332,000 for the three months ended March 31,
1995, and $723,000 for the same period in 1994.
5. RESULTS EXCLUDING ICN GALENIKA -
The results of ICN Galenika and the results of ICN Pharmaceuticals, Inc.,
excluding ICN Galenika, for the three months ended March 31, 1995 and 1994
are presented below: (000's omitted)
ICN WITHOUT
ICN GALENIKA ICN GALENIKA
1995 1994 1995 1994
Sales $70,539 $26,155 $61,704 $46,012
Gross profit 33,722 7,138 44,205 32,414
Income before provision for income
taxes and minority interest 17,056 807 5,983 10,190
Net Income 12,792 520 4,242 7,844
The Company's effective income tax rate for the three months ended March 31,
1995 was 8% compared to 22% for the same period last year. The decline in
the effective rate was due primarily to recently enacted Yugoslavian tax
credits which are anticipated to favorably effect the tax rate for ICN
Galenika for 1995.
6. ICN GALENIKA -
ICN Galenika operates in a highly inflationary economy and uses the dollar
as the functional currency rather than the Yugoslavian dinar. At December
31, 1993, the rate used to remeasure ICN Galenika's results was over one
trillion dinars per $1 U.S. On January 1, 1994, the Yugoslavian government
changed the denomination of its currency by dropping nine zeros. The
effect of this redenomination on the Yugoslavian dinar resulted in an
exchange rate of 1,053 dinars to $1 U.S. Subsequent to the redenomination
and prior to the enactment of the stabilization program described below,
the dinar had devalued to 12,563,000 dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the
official exchange rate of the dinar is fixed at a ratio of one dinar to one
Deutsche mark. The Yugoslavia government guarantees the conversion of
dinars to Deutsche marks by exercising restraint in the amount of dinars
that it prints, thereby restricting cash in circulation to correspond to
hard currency reserves in Yugoslavia. Since the inception of this program
the exchange rate of dinars to Deutsche marks has remained stable. The
trading of dinars at other than official rates has been virtually
eliminated and inflation and interest rates have declined from over one
billion percent a year to a current rate of approximately 5% since January
24, 1994, based on information currently available to the Company. The
Company believes that the period of time that the stabilization program has
been operating successfully is significant given that past attempts at
monetary control by the Yugoslavian government have generally been short
lived. In the near term, the positive effects of the stabilization program
may not necessarily continue and a return to prior levels of hyperinflation
could occur. During the first quarter of 1995, ICN Galenika realized a
decline in the availability of hard currency in Yugoslavia. A continuation
of this trend may weaken the positive effects of the stabilization program
and could potentially result in an adverse effect upon the Company through
a devaluation. The success of this stabilization program is dependent upon
improvement in the Yugoslavian economy, which is in part dependent upon the
lifting of United Nations sanctions.
7. COMMITMENTS AND CONTINGENCIES-
The Predecessor Companies were parties to a number of lawsuits. As a
result of the Merger, the Company has assumed all of the Predecessor
Companies' liabilities with respect to such lawsuits.
In February and March 1995, nineteen actions were filed which named the
Company, its Board of Directors, Milan Panic and several other officers of
the Company, in various combinations, as defendants (the "Defendants")
("the 1995 Actions"). Twelve of the actions purport to be securities class
actions, one is an individual securities action and six purport to be
derivative suits.
In general, all of the securities class actions allege that the Company
made various deceptive and untrue statements of material fact and omitted
to state material facts in connection with information it received from the
FDA regarding the Company's NDA for the use of Virazole for the treatment
of chronic hepatitis C. Plaintiffs also allege that various officers of
the Company traded on inside information. The purported securities class
actions and the individual securities action assert claims for alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, Rule 10b-5 promulgated thereunder, common law fraud, misrepresentation
and punitive damages, attorneys' fees and costs, injunctive and equitable
relief, and disgorgement. With respect to the purported securities class
actions, plaintiffs seek certification of classes of persons who purchased
ICN common stock, ICN debentures and ICN call options or sold ICN put
options. The securities class actions seek certification for differing
time periods, the longest alleged time period being from June 2, 1994
through February 17, 1995.
With respect to the purported derivative suits, plaintiffs assert claims
for breach of fiduciary duty, intentional breach of fiduciary duty,
negligent breach of fiduciary duty, breach of the fiduciary duty of candor,
waste of corporate assets, constructive fraud, disgorgement, gross
mismanagement, abuse of control and unjust enrichment. In these actions
plaintiffs seek unspecified compensatory and punitive damages, attorneys'
fee and costs and injunctive and equitable relief.
On May 2, 1995 , the Court entered Pre-Trial Order No. 1 (the "Order").
Pursuant to the Order, plaintiffs will file an Amended Consolidated Class
Action Complaint and an Amended Consolidated Derivative Complaint within 45
days. Defendants then have 45 days from the filing of the Amended
Consolidated Complaints to answer or move. It is not possible at present
for the Company to predict the outcome or the range of potential loss, if
any, that might result from the 1995 Actions. The Defendants intend to
vigorously defend the 1995 Actions.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware. Three of these lawsuits, entitled Helmut
Kling v. Milan Panic, et al., Jallath v. Milan Panic, et al., and Amy
Hoffman v. Milan Panic, et al. ("the 1994 Actions"), were filed by
stockholders of SPI and, in the Jallath lawsuit, of Viratek, against ICN,
SPI, Viratek (in the Jallath lawsuit) and certain directors and officers of
ICN, SPI and/or Viratek (including Milan Panic) and purport to be class
actions on behalf of all persons who held shares of SPI common stock and,
in the Jallath lawsuit, Viratek common stock. The fourth lawsuit, entitled
Joice Perry v. Nils O. Johannesson, et. al., was filed by a stockholder of
Viratek against ICN, Viratek and certain directors and officers of ICN, SPI
and Viratek (including Milan Panic) and purports to be a class action on
behalf of all persons who held shares of Viratek common stock. These suits
allege that the consideration provided to the public stockholders of SPI
and/or Viratek (as applicable) in the Merger was unfair and inadequate, and
that the defendants breached their fiduciary duties in approving the Merger
and otherwise. The Company believes that the 1994 Actions are without merit
and intends to defend them vigorously. It is not possible at present for
the Company to predict the outcome or the range of potential loss, if any,
that might result from the 1994 Actions.
ICN, SPI and Viratek and certain of their officers and directors
(collectively, the "ICN Defendants") were named defendants in certain
consolidated class actions pending in the United States District Court for
the Southern District of New York entitled In re Paine Webber Securities
Litigation (Case No. 86 Civ. 6776 (VLB)); In re ICN/Viratek Securities
Litigation (Case No. 87 Civ. 4296 (VLB))(collectively "the 1987 Actions").
In the Third Amended Consolidated Class Action Complaint, plaintiffs allege
that the ICN Defendants made, or aided and abetted Paine Webber, Inc. ("Paine
Webber") in making, mis-representations of material fact and omitted to state
material facts concerning the business, financial condition and future
prospects of ICN, Viratek and SPI in certain public announcements, Paine
Webber research reports and filings with the Securities and Exchange
Commission. The alleged misstatements and omissions primarily concern
developments regarding Virazole(R), including the efficacy, safety and
market for the drug. The plaintiffs allege that such misrepresentations
and omissions violate Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and constitute common law fraud and
misrepresentation. Fact discovery is complete and expert discovery is
virtually complete. Plaintiffs seek the certification of classes of persons
who purchased ICN, Viratek or SPI common stock during the period January 7,
1986 through April 15, 1987. Oral argument on plaintiffs' motion for class
certification was held on June 2, 1994. To date, no decision has been
rendered. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN Defendants' damages experts find to be
inappropriate under the circumstances, has testified that assuming that
classes were certified for purchasers of ICN, Viratek and SPI common stock
for the entire class periods alleged by plaintiffs, and further assuming
that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to
$315,000,000. The ICN Defendants' four damages experts have testified that
damages are zero. On May 4, 1994, plaintiffs' counsel agreed to stipulate
to the dismissal of the aiding and abetting claim asserted against the ICN
Defendants and a formal stipulation will be submitted to the Court in the
near future. October 20, 1993, plaintiffs informed the Court that they
had reached an agreement to settle with co-defendant Paine Webber and on
July 27, 1994, the settlement was approved by the court. Management
believes that, having extensively reviewed the issues in the above
referenced matters, there are strong defenses and the Company intends to
defend the 1987 Actions vigorously. While the ultimate outcome of the 1987
Actions cannot be predicted with certainty, and an unfavorable outcome
could have a material adverse effect on the Company, at this time
management does not expect these matters will have a material adverse
effect on the financial position and results of operations of the Company.
The purchase price allocation related to the Merger is preliminary, pending
resolution of the 1987 Actions.
In late January 1995, an action was commenced by Deborah Levy against ICN,
SPI, Viratek and Milan Panic. The complaint asserts causes of action for
sex discrimination and harassment, and for violations of the California
Department of Fair Employment and Housing statute and a provision of the
California Government Code. The complaint seeks injunctive relief and
unspecified compensatory and punitive damages. Defendants filed their
answer, demand for production of documents and request for interrogatories
in March 1995. Plaintiff has produced documents and responded to
defendants' interrogatories. The defendants have taken plaintiff's
deposition and intend to continue that deposition. The defendants intend
to vigorously defend the suit.
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN
Canada Limited ("ICN Canada"), SPI, and ICN alleging breach of contract and
related claims arising out of a manufacturing contract between Gencon and
ICN Canada. ICN and SPI were dismissed from the action in March 1993 based
on SPI's agreement to guarantee any judgment against ICN Canada. Following
trial in 1993, the judge granted judgment in favor of Gencon for breach of
contract in the amount of approximately $2,100,000 plus interest, costs and
attorneys' fees (which sums total approximately $650,000). ICN Canada
timely filed its Notice of Appeal and Gencon filed a Notice of Cross-
Appeal, seeking the award of approximately $145,000 in additional claimed
costs. Both the appeal and the cross-appeal have been fully briefed. No
date has been set for oral argument. The defendants intend to vigorously
defend this action.
On January 25, 1995, GRC International, Inc. ("GRC") filed a motion in the
Superior Court of the State of California, County of Orange, to confirm a
$2,260,807 arbitration award issued against Biomedicals. The dispute
centered on the last payment due from Biomedicals to GRC as a result of
Biomedical's acquisition of Flow General Inc. in 1989. Biomedicals filed
its papers in opposition to the motion to confirm or to vacate the
arbitration award on February 28, 1995. On March 23, 1995, GRC's motion
to confirm the arbitration award was granted and a judgment against Biomedicals
was entered in the approximate amount of $2,300,000. The Company paid the full
amount of the judgment in April, 1995.
In October 1994, an action entitled Engelhardt v. ICN Pharmaceuticals, Inc.
(Case No. 94-2-2322) was filed in the United States District Court for the
District of Colorado. The action was commenced by Lauri and Kenneth
Engelhardt on behalf of themselves and their infant daughter, Hannah. It
is alleged that Lauri Engelhardt was exposed to Virazole(R) early in her
pregnancy, and that as a result of such exposure, Hannah was born with
birth defects. Plaintiffs assert causes of action for products liability
and negligence and seek unspecified damages. On February 28, 1995, the
Company filed a motion to dismiss asserting that Plaintiffs' claims are
barred by the statute of limitations. No decision has been rendered with
respect to that motion. The Company believes that the allegations are
without merit and intends to vigorously defend this action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan") in
the United States District Court for the Southern District of New York.
The complaint alleged, among other things, that Khan violated numerous
provisions of the securities laws and breached his fiduciary duty to ICN
and Viratek by attempting to effectuate a change in control of ICN while
acting as an agent and fiduciary of ICN and Viratek, and are seeking
compensatory and punitive damages in the amount of $25,000,000. Khan has
filed counterclaims on April 12, 1993, asserting causes of action for
slander, interference with economic relations, a shareholders' derivative
action for breach of fiduciary duties, violations of the federal securities
laws and tortious interference with economic relations, and is seeking
compensatory damages, interest and exemplary damages of $29,000,000. On
November 4, 1994, ICN and Viratek moved to have a default judgment entered
against Khan and to dismiss his counterclaims. Khan submitted his
opposition papers on March 15, 1995, and a full evidentiary hearing is
currently scheduled for July 6, 1995.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the
opinion of management, these various other pending lawsuits will not have a
material adverse effect on the consolidated financial position or
operations of the Company.
8. DETAIL OF CERTAIN ACCOUNTS- (000's omitted)
RECEIVABLES, NET
MARCH 31, DECEMBER 31,
1995 1994
Trade accounts receivables $ 109,905 $ 84,789
Other 7,407 7,198
117,312 91,987
Allowance for doubtful accounts (11,433) (10,036)
$ 105,879 $ 81,951
INVENTORIES, NET
MARCH 31, DECEMBER 31,
1995 1994
Raw materials and supplies $ 26,894 $ 37,198
Work-in-process 11,943 13,167
Finished goods, net 48,880 39,083
$ 87,717 $ 89,448
PROPERTY, PLANT AND EQUIPMENT, NET:
MARCH 31, DECEMBER 31,
1995 1994
Property, plant and equipment, at cost $ 165,466 $ 162,588
Accumulated Depreciation (35,461) (33,965)
$ 130,005 $ 128,623
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
INTRODUCTION
Since 1981, the ICN group of companies included a pharmaceuticals products
company, SPI Pharmaceuticals, Inc. ("SPI"); a research products company, ICN
Biomedicals, Inc. ("Biomedicals"); a research and development company, Viratek,
Inc. ("Viratek"); and the parent company, ICN Pharmaceuticals, Inc. ("ICN")
(collectively, the "Predecessor Companies"). Until November 1, 1994, the
effective date of the Merger, ICN maintained a controlling interest in the
subsidiary companies.
On November 10, 1994, SPI, ICN and Viratek merged into New ICN, and Biomedicals
merged into ICN Subsidiary Corp., a wholly-owned subsidiary of New ICN. The
Merger was accounted for using the purchase method of accounting. Additionally,
for accounting purposes, SPI was treated as the acquiring company and as a
result, the Company has reported the historical financial data of SPI in its
financial results and the results of ICN, Viratek and Biomedicals have been
included with the results of the Company since the effective date of the Merger.
RESULTS OF OPERATIONS
For financial reporting purposes the Company's operations are divided into two
industry segments, the Pharmaceutical segment and the Biomedical segment.
Certain financial information for the two industry segments is set forth below
(in thousands).
THREE MONTHS ENDED
MARCH 31,
1995 1994
Pharmaceutical $ 118,486 $ 72,167
Biomedical 13,757 --
Total Company $ 132,243 $ 72,167
NET SALES
Pharmaceutical segment net sales for the three months ended March 31, 1995 were
$118,486,000 compared to $72,167,000 for the same period in 1994. This increase
is net sales of $46,319,000, or 64% is primarily a result of higher sales at ICN
Galenika. Net sales at ICN Galenika were $70,539,000 for the three months ended
March 31, 1995 compared to $26,155,000 for the same period in 1994. This
increase of $44,384,000, or 170%, is primarily due to an increase in unit sales
of 162% and favorable exchange rates in the first quarter of 1995 compared to
the first quarter of 1994. In late January 1994, the Yugoslavian Government
initiated an economic stabilization program to control inflation. This program
created a more stable business environment that allowed ICN Galenika to increase
unit sales, increase production and improve product mix.
Pharmaceutical segment net sales for the operating units excluding ICN Galenika
increased to $47,947,000 for the three months ended March 31, 1995 compared to
$46,012,000 for the same period in 1994. This increase in net sales of
$1,935,000, or 4%, is primarily due to an increase in Virazole(R) sales in the
United States of 36% and increased sales in the Myasthenia Gravis,
Dermatological and Medicinal product lines in the United States for the three
months ended March 31, 1995 compared to 1994. The sales increase in Virazole is
primarily due to increased unit sales and favorable price increases. These
increases were offset by a decrease in net sales from the Company's operations
in Mexico. Net sales in Mexico were $8,419,000 for the three months ended March
31, 1995 compared to $13,205,000 for the same period in 1994. This decrease is
primarily due to a weakening of the peso as compared to the U.S. dollar.
As a result of the Merger, the Biomedical businesses contributed $13,757,000 of
sales during the three months ended March 31, 1995 or approximately 10% of total
Company sales.
GROSS PROFIT
Gross profit as a percentage of sales was 59% for the three months ended March
31,1995 compared to 55% for the same period in 1994. The increase in gross
profit is primarily due to increased sales of Virazole(R) in the United States
and improved economic and business conditions in Yugoslavia for the three
months ended March 31, 1995 compared to the same period in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales were 34%
for the three months ended March 31, 1995 compared to 29% for the same period in
1994. These expenses increased primarily due to increased marketing efforts and
selling expenses in all of the Company's operating units primarily in ICN
Galenika and in the U.S. offset by a re-evaluation of accounts receivable
reserves. Selling, general and administrative expenses for the first quarter
ended March 31, 1995 include $6,200,000 of expenses associated with the
Company's Biomedical business that was acquired in the Merger.
ROYALTIES TO AFFILIATES
As a result of the Merger, the Company is no longer required to pay royalties to
Viratek. During the three months ended March 31, 1994, the Company sold
$14,105,000 of Virazole(R), generating royalties to Viratek of $2,821,000. These
royalties were based on a royalty agreement whereby 20% of net sales of
Virazole(R) were payable to Viratek.
TRANSLATION AND EXCHANGE LOSSES, NET
Translation and exchange losses, net were $1,298,000 for the three months ended
March 31, 1995 compared to $2,499,000 for the same period in 1994. During the
first quarter of 1995, the Company recorded a translation loss of $3,130,000
related to its foreign denominated debt which was acquired as a result of the
Merger, which was partially offset by translation gains of $1,823,000 related to
ICN Galenika's net positive monetary asset position. In the first quarter of
1994, the Company's translation losses related primarily to the devaluation of
the dinar at ICN Galenika.
INTEREST EXPENSE
Interest expense during the three months ended March 31, 1995 increased
$3,581,000 compared to the same period in 1994 primarily due to higher interest
expense in the United States resulting from debt assumed from ICN and
Biomedicals, in connection with the Merger.
During April 1995, the Board of Directors approved the redemption of $10,000,000
of principal outstanding on the Company's 12 7/8% Senior Subordinated
Debentures. The redemption occurred on April 28, 1995.
TAXES
The Company's effective income tax rate for the three months ended March 31,
1995, was 8% compared to 22% for the same period last year. The decline in the
effective rate was due primarily to recently enacted Yugoslavian tax credits
which are anticipated to favorably effect the tax rate for ICN Galenika for
1995.
RESEARCH AND DEVELOPMENT
Research and development costs during the three months ended March 31, 1995
increased $3,699,000 compared to the same period in 1994 primarily due to
increased research and development efforts acquired in the Merger.
EXCHANGE RATES AND STABILIZATION PROGRAM
ICN Galenika operates in a highly inflationary economy and uses the dollar as
the functional currency rather than the Yugoslavian dinar. At December 31,
1993, the rate used to remeasure ICN Galenika's results was over one trillion
dinars per $1 U.S. On January 1, 1994, the Yugoslavian government changed the
denomination of its currency by dropping nine zeros. The effect of this
redenomination on the Yugoslavian dinar results in an exchange rate of 1,053
dinars to $1 U.S. Subsequent to the redenomination and prior to the enactment
of the stabilization program described below, the dinar had devalued to
12,563,000 dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Duetsche
mark. The Yugoslavia government guarantees the conversion of dinars to Deutsche
marks by exercising restraint in the amount of dinars that it prints, thereby
restricting cash in circulation to correspond to hard currency reserves in
Yugoslavia. Since the inception of this program the exchange rate of dinars to
Deutsche marks has remained stable. The trading of dinars at other than
official rates has been virtually eliminated and inflation and interest rates
have declined from over 1 billion percent a year to a current rate of
approximately 5% since January 24, 1994, based on information currently
available to the Company. The Company believes that the period of time that the
stabilization program has been operating successfully is significant given that
past attempts at monetary control by the Yugoslavian government have generally
been short lived. In the near term, the positive effects of the stabilization
program may not necessarily continue and a return to prior levels of
hyperinflation could occur. During the first quarter of 1995, ICN Galenika
realized a decline in the availability of hard currency in Yugoslavia. A
continuation of this trend may weaken the positive effects of the stabilization
program and could potentially result in an adverse effect upon the Company
through a devaluation. The success of this stabilization program is dependent
upon improvement in the Yugoslavian economy, which is in part dependent upon the
lifting of United Nations sanctions.
As a result of the stabilization program and the absence of large and frequent
devaluations, the net monetary asset position of ICN Galenika has increased to
$41,853,000 as of March 31, 1995 from $25,442,000 at December 31, 1994. The
increase in the net monetary position is primarily attributed to increases in
accounts receivable and cash resulting from increased sales of ICN Galenika.
This net monetary asset position would be subject to foreign exchange losses if
a devaluation of the dinar were to occur.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1995, cash provided by operating
activities totaled $157,000. Included in this balance is the effect of
increased levels of accounts receivables at ICN Galenika of approximately
$24,000,000.
Cash used in investing activities of $5,624,000 for the three months ended March
31, 1995, related primarily to the facility expansion and modernization project
at ICN Galenika. This project will include two new factories, one of which will
manufacture cephalosporins and the other will manufacture steroids and hormones.
Additionally, ICN Galenika's existing drug plant will be modernized and
upgraded. The total cost of this facility expansion and modernization is
expected to be approximately $136,000,000 through 1998. ICN Galenika intends to
fund this program through funds generated from local operations and locally
funded debt.
Cash used in financing activities of $5,161,000 for the first quarter of 1995
includes payments on long-term debt acquired in the Merger of $5,572,000. The
increase in 1995 dividend payments is primarily due to higher levels of non-
affiliated stockholders resulting from the Merger and an increase in cash
dividends from the same period in 1994. Cash used in financing in the first
quarter of 1994 includes payments to parent company of $9,422,000 which did not
recur in the first quarter of 1995, as result of the Merger.
In an effort to reduce future interest expense, the Company elected to call
$10,000,000 of the 12-7/8% Sinking Fund Debentures, at par, with payment on
April 28, 1995.
On March 3, 1995, the Company's Board of Directors declared a first quarter cash
dividend of $.07 per share and a stock dividend of 1.7% payable March 31, 1995
to shareholders of record on March 17, 1995.
Since December 31, 1994, the Mexican peso experienced a 20% devaluation that has
and will continue to result in lower U.S. dollar sales and gross margins. This
devaluation resulted in an increase in the foreign currency translation charge
included as a component of stockholders' equity of $4,389,000 during the three
months ended March 31, 1995. Also, approximately 30% of the Mexican cost of
inventory includes materials purchased outside of Mexico that creates added
pressure on the gross margins for these products. In addition, inflation
continues to increase along with a weakening of the Mexican peso against the
U.S. dollar. The Company will endeavor to mitigate these effects by seeking
price increases, adjusting its product mix, and seeking local sources for
materials that had previously been foreign sourced. However, the implementation
of these actions may be affected by recently enacted economic restraint plans by
the Mexican government, which include stricter price controls.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $32,871,000 at March 31, 1995, which is primarily denominated
in Swiss francs.
The Company and certain subsidiaries do not maintain product liability
insurance. While the Company has never experienced a material adverse claim for
personal injury resulting from allegedly defective products, a successful claim
could have a material adverse effect on the Company's liquidity and financial
performance.
Management believes that funds generated from operations will be sufficient to
meet its normal operating requirements during the coming year. If these funds
prove to be insufficient , or if new opportunities require the Company to raise
capital, the Company may seek additional financing or issue additional common
stock.
SUBSEQUENT EVENT
On May 5, 1995, the Company acquired the radioimmunoassay division of Becton,
Dickinson and Company ("B&D"), located in Orangeburg, New Jersey, for a purchase
price of $3,000,000. To fund this acquisition and to provide funds for working
capital of the B&D operations, the Company sold 400,000 shares of its common
stock to a foreign bank for $6,092,000 which is net of transaction fees and
commissions. The acquisition will be accounted for using the purchase method of
accounting and, accordingly, will include the results of B&D from the
acquisition date. The financial results of B&D are expected to be insignificant
to the consolidated operations of the Company.
PART II - OTHER INFORMATION
ITEM 1. LITIGATION
Litigation
The Predecessor Companies were parties to a number of lawsuits. As a result of
the Merger, the Company has assumed all of the Predecessor Companies'
liabilities with respect to such lawsuits.
In February and March 1995, nineteen actions were filed which named the Company,
its Board of Directors, Milan Panic and several other officers of the Company,
in various combinations, as defendants (the "Defendants") ("the 1995 Actions").
Twelve of the actions purport to be securities class actions, one is an
individual securities action and six purport to be derivative suits.
In general, all of the securities class actions allege that the Company made
various deceptive and untrue statements of material fact and omitted to state
material facts in connection with information it received from the FDA regarding
the Company's NDA for the use of Virazole for the treatment of chronic hepatitis
C. Plaintiffs also allege that various officers of the Company traded on inside
information. The purported securities class actions and the individual
securities action assert claims for alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder,
common law fraud, misrepresentation and negligent misrepresentation. They seek
unspecified compensatory and punitive damages, attorneys' fees and costs,
injunctive and equitable relief, and disgorgement. With respect to the
purported securities class actions, plaintiffs seek certification of classes of
persons who purchased ICN common stock, ICN debentures and ICN call options or
sold ICN put options. The securities class actions seek certification for
differing time periods, the longest alleged time period being from June 2, 1994
through February 17, 1995.
With respect to the purported derivative suits, plaintiffs assert claims for
breach of fiduciary duty, intentional breach of fiduciary duty, negligent breach
of fiduciary duty, breach of the fiduciary duty of candor, waste of corporate
assets, constructive fraud, disgorgement, gross mismanagement, abuse of control
and unjust enrichment. In these actions plaintiffs seek unspecified
compensatory and punitive damages, attorneys' fee and costs and injunctive and
equitable relief.
On May 2, 1995 , the Court entered Pre-Trial Order No. 1 (the "Order").
Pursuant to the Order, plaintiffs will file an Amended Consolidated Class Action
Complaint and an Amended Consolidated Derivative Complaint within 45 days.
Defendants then have 45 days from the filing of the Amended Consolidated
Complaints to answer or move. It is not possible at present for the Company to
predict the outcome or the range of potential loss, if any, that might result
from the 1995 Actions. The Defendants intend to vigorously defend the 1995
Actions.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware. Three of these lawsuits, entitled Helmut
Kling v. Milan Panic, et al., Jallath v. Milan Panic, et al., and Amy Hoffman v.
Milan Panic, et al. ("the 1994 Actions"), were filed by stockholders of SPI and,
in the Jallath lawsuit, of Viratek, against ICN, SPI, Viratek (in the Jallath
lawsuit) and certain directors and officers of ICN, SPI and/or Viratek
(including Milan Panic) and purport to be class actions on behalf of all persons
who held shares of SPI common stock and, in Perry v. Nils O. Johannesson, et.
al., was filed by a stockholder of Viratek against ICN, Viratek and certain
directors and officers of ICN, SPI and Viratek (including Milan Panic) and
purports to be a class action on behalf of all persons who held shares of
Viratek common stock. These suits allege that the consideration provided to
the public stockholders of SPI and/or Viratek (as applicable) in the Merger
was unfair and inadequate, and that the defendants breached their fiduciary
duties in approving the Merger and otherwise. The Company believes that the
1994 Actions are without merit and intends to defend them vigorously. It is
not possible at present for the Company to predict the outcome or the range
of potential loss, if any, that might result from the 1994 Actions.
ICN, SPI and Viratek and certain of their officers and directors (collectively,
the "ICN Defendants") were named defendants in certain consolidated class
actions pending in the United States District Court for the Southern District of
New York entitled In re Paine Webber Securities Litigation (Case No. 86 Civ.
6776 (VLB)); In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296
(VLB))(collectively "the 1987 Actions"). In the Third Amended Consolidated
Class Action Complaint, plaintiffs allege that the ICN Defendants made, or aided
and abetted Paine Webber, Inc. ("Paine Webber") in making, misrepresentations of
material fact and omitted to state material facts concerning the business,
financial condition and future prospects of ICN, Viratek and SPI in certain
public announcements, Paine Webber research reports and filings with the
Securities and Exchange Commission. The alleged misstatements and omissions
primarily concern developments regarding Virazole(R), including the efficacy,
safety and market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder and constitute common law fraud and
misrepresentation. Fact discovery is complete and expert discovery is virtually
complete. Plaintiffs seek the certification of classes of persons who purchased
ICN, Viratek or SPI common stock during the period January 7, 1986 through April
15, 1987. Oral argument on plaintiffs' motion for class certification was held
on June 2, 1994. To date, no decision has been rendered. Plaintiffs' damages
expert, utilizing assumptions and methodologies that the ICN Defendants' damages
experts find to be inappropriate under the circumstances, has testified that
assuming that classes were certified for purchasers of ICN, Viratek and SPI
common stock for the entire class periods alleged by plaintiffs, and further
assuming that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000.
The ICN Defendants' four damages experts have testified that damages are zero.
On May 4, 1994, plaintiffs' counsel agreed to stipulate to the dismissal of the
aiding and abetting claim asserted against the ICN Defendants and a formal
stipulation will be submitted to the Court in the near future.
October 20, 1993, plaintiffs informed the Court that they had reached an
agreement to settle with co-defendant Paine Webber and on July 27, 1994, the
settlement was approved by the court. Management believes that, having
extensively reviewed the issues in the above referenced matters, there are
strong defenses and the Company intends to defend the 1987 Actions vigorously.
While the ultimate outcome of the 1987 Actions cannot be predicted with
certainty, and an unfavorable outcome could have a material adverse effect on
the Company, at this time management does not expect these matters will have a
material adverse effect on the financial position and results of operations of
the Company. The purchase price allocation related to the Merger is
preliminary, pending resolution of the 1987 Actions.
In late January 1995, an action was commenced by Deborah Levy against ICN, SPI,
Viratek and Milan Panic. The complaint asserts causes of action for sex
discrimination and harassment, and for violations of the California Department
of Fair Employment and Housing statute and a provision of the California
Government Code. The complaint seeks injunctive relief and unspecified
compensatory and punitive damages. Defendants filed their answer, demand for
production of documents and request for interrogatories in March 1995.
Plaintiff has produced documents and responded to defendants' interrogatories.
The defendants have taken plaintiff's deposition and intend to continue that
deposition. The defendants intend to vigorously defend the suit.
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN Canada
Limited ("ICN Canada"), SPI, and ICN alleging breach of contract and related
claims arising out of a manufacturing contract between Gencon and ICN Canada.
ICN and SPI were dismissed from the action in March 1993 based on SPI's
agreement to guarantee any judgment against ICN Canada. Following trial in 1993,
the judge granted judgment in favor of Gencon for breach of contract in the
amount of approximately $2,100,000 plus interest, costs and attorneys' fees
(which sums total approximately $650,000). ICN Canada timely filed its Notice
of Appeal and Gencon filed a Notice of Cross-Appeal, seeking the award of
approximately $145,000 in additional claimed costs. Both the appeal and the
cross-appeal have been fully briefed. No date has been set for oral argument.
The defendants intend to vigorously defend this action.
On January 25, 1995, GRC International, Inc. ("GRC") filed a motion in the
Superior Court of the State of California, County of Orange, to confirm a
$2,260,807 arbitration award issued against Biomedicals. The dispute centered
on the last payment due from Biomedicals to GRC as a result of Biomedical's
acquisition of Flow General Inc. in 1989. Biomedicals filed its papers in
opposition to the motion to confirm or to vacate the arbitration award on
February 28, 1995. On March 23, 1995, GRC's motion to confirm the arbitration
award was granted and a judgment against Biomedicals was entered in the
approximate amount of $2,300,000. The Company paid the full amount of the
judgment in April, 1995.
In October 1994, an action entitled Engelhardt v. ICN Pharmaceuticals, Inc.
(Case No. 94-2-2322) was filed in the United States District Court for the
District of Colorado. The action was commenced by Lauri and Kenneth Engelhardt
on behalf of themselves and their infant daughter, Hannah. It is alleged that
Lauri Engelhardt was exposed to Virazole early in her pregnancy, and that as a
result of such exposure, Hannah was born with birth defects. Plaintiffs assert
causes of action for products liability and negligence and seek unspecified
damages. On February 28, 1995, the Company filed a motion to dismiss asserting
that Plaintiffs' claims are barred by the statute of limitations. No decision
has been rendered with respect to that motion. The Company believes that the
allegations are without merit and intends to vigorously defend this action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan") in the
United States District Court for the Southern District of New York. The
complaint alleged, among other things, that Khan violated numerous provisions of
the securities laws and breached his fiduciary duty to ICN and Viratek by
attempting to effectuate a change in control of ICN while acting as an agent and
fiduciary of ICN and Viratek, and are seeking compensatory and punitive damages
in the amount of $25,000,000. Khan has filed counterclaims on April 12, 1993,
asserting causes of action for slander, interference with economic relations, a
shareholders' derivative action for breach of fiduciary duties, violations of
the federal securities laws and tortious interference with economic relations,
and is seeking compensatory damages, interest and exemplary damages of
$29,000,000. On November 4, 1994, ICN and Viratek moved to have a default
judgment entered against Khan and to dismiss his counterclaims. Khan submitted
his opposition papers on March 15, 1995, and a full evidentiary hearing is
currently scheduled for July 6, 1995.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the opinion
of management, these various other pending lawsuits will not have a material
adverse effect on the consolidated financial position or operations of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11: Computation of Per Share Earnings
Exhibit 15: Review Report from Independent Accountants
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 1995.
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: May 15, 1995 /s/ Milan Panic
Milan Panic
President and Chief Operating Officer
Date: May 15, 1995 /s/ John E. Giordani
John E. Giordani
Executive Vice President and Chief
Financial Officer