UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 August 7, 1995 was 29,069,557.
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
June 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 1995 and 1994 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 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 21
-i-
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1995 1994
----------- -------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 11,503 $ 42,376
Restricted cash 387 1,425
Receivables, net 122,501 81,951
Inventories, net 106,898 89,448
Prepaid expenses and other current assets 26,635 25,146
----------- ---------
Total current assets 267,924 240,346
Marketable securities (used to collateralize
note payable of $8,029and $8,103 at
June 30, 1995 and December 31, 1994,
respectively) 35,967 33,179
Property, plant and equipment, net 135,009 128,623
Goodwill and intangibles, net 17,759 18,043
Other assets 17,995 21,282
----------- ---------
Total assets $ 474,654 $ 441,473
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables and accrued liabilities $ 69,396 $ 68,190
Notes payable 12,152 13,757
Current portion of long-term debt 7,556 6,067
Income taxes payable 11,459 14,530
----------- ---------
Total current liabilities 100,563 102,544
=========== =========
Long-term debt, less current portion 183,373 195,181
Other liabilities 10,007 9,960
Minority interest 57,993 44,880
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares
authorized; 29,014 and 28,028 shares
outstanding at June 30, 1995 and
December 31, 1994, respectively 290 282
Additional capital 265,569 251,713
Retained deficit (123,182) (142,946)
Unrealized loss on marketable securities, net (1,845) (3,432)
Foreign currency translation adjustments (18,114) (16,709)
------------ ----------
Total stockholders' equity 122,718 88,908
------------ ----------
Total liabilities and stockholders' equity $ 474,654 $ 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 AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
--------- -------- --------- ----------
Net sales $ 128,773 $ 78,927 $ 261,016 $151,094
Cost of sales 56,375 45,168 110,691 77,783
---------- --------- --------- ---------
Gross profit 72,398 33,759 150,325 73,311
Selling, general and
administrative expenses 43,675 22,916 88,687 43,997
Royalties to affiliates, net --- 842 --- 3,749
Research and development costs 4,273 1,630 8,818 2,476
Translation and exchange losses
(gains), net 352 (245) 1,650 2,254
Interest income (1,291) (1,241) (2,953) (2,206)
Interest expense 6,146 1,623 11,150 3,046
Other expense, net 832 335 1,523 1,099
---------- --------- --------- ---------
Income before provision for income taxes
and minority interest 18,411 7,899 41,450 18,896
Provision for income taxes 466 2,395 2,207 4,854
Minority interest 4,051 259 8,315 433
---------- --------- --------- ---------
Net income $ 13,894 $ 5,245 $ 30,928 $ 13,609
========== ========= ========= =========
Per Share Information:
Net income per share $.45 $.24 $ 1.06 $ .62
========== ========= ========= =========
Shares used in per share
computation 31,092 22,083 29,133 21,912
========== ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED - 000'S OMITTED)
SIX MONTHS ENDED
JUNE 30, 1995
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,928 $ 13,609
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Allowance for doubtful accounts (1,105) 2,996
Depreciation and amortization 8,255 3,770
Translation and exchange losses, net 1,650 2,254
Increase in receivables (35,199) (9,695)
(Increase) decrease in inventories (14,443) 15,403
Changes in other operating assets
and liabilities, net 3,926 (1,465)
----------- ----------
Net cash (used in) provided by
operating activities (5,988) 26,872
Cash flows from investing activities:
Capital expenditures (8,674) (3,846)
Decrease in restricted cash 1,038 --
Acquisition of foreign license rights (1,088) --
Acquisition of product line (3,000) --
Other (36) --
------------ ----------
Net cash used in investing activities (11,760) (3,846)
------------ ----------
Cash flows from financing activities:
Net (payments) borrowings under line of
credit arrangements (294) 570
Net payments of long-term debt (16,048) (1,690)
Issuance of common stock 5,753 --
Net payments to parent company -- (16,419)
Proceeds from exercise of stock options 1,084 374
Dividends paid (3,979) (1,435)
------------ ----------
Net cash used in financing activities (13,484) (18,600)
------------ ----------
Effect of exchange rate changes on cash 359 35
------------ ----------
Net increase (decrease) in cash and
cash equivalents (30,873) 4,461
Cash and cash equivalents at beginning of period 42,376 14,777
------------ ----------
Cash and cash equivalents at end of the period $ 11,503 $ 19,238
============ ==========
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 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
JUNE 30, 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. ("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 immediately 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.
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 include shares issuable upon exercise of stock
options, on the assumption that the proceeds would be used to repurchase
shares in the open market and also the shares issuable related to certain of
the Company's convertible debentures. Such convertible debentures are
considered common stock equivalents if they met certain criteria at the time
of issuance and had a dilutive effect, if converted.
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. On May 17,
1995, the Company's Board of Directors declared a second quarter cash
dividend of $.07 per share and a stock dividend of 1.4%, payable on June 14,
1995, to stockholders of record on May 30, 1995. All relevant share and per
share data have been restated to reflect these stock dividends.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current
year presentation.
3. RELATED PARTY TRANSACTIONS -
ROYALTY AGREEMENTS
As a result of the Merger, the Company is no longer required to pay
royalties on sales of Virazole. During the three and six months ended June
30, 1994, the Company sold $3,790,000 and $17,850,000, of Virazole(R),
respectively, generating royalties to Viratek of $758,000 and $3,570,000,
respectively. These royalties were based on a royalty agreement whereby 20%
of net sales of Virazole were payable to Viratek.
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 and six months ended June 30, 1994 were
$643,000 and $1,377,000, of which $460,000 and $955,000, respectively, were
allocated to ICN, Viratek and Biomedicals.
4. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes was $4,896,000 for the six months ended June 30,
1995 and $3,915,000 for the same period in 1994.
Cash paid for interest was $12,251,000 for the six months ended June 30,
1995 and $1,803,000 for the same period in 1994.
5. GEOGRAPHIC DATA
The following tables set forth the amount of net sales and income before
interest, provision for taxes and minority interest of the Company by
geographical areas for the three and six months ended June 30, 1995 and 1994
(in thousands):
SALES:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1994 1995 1994
------------------ -----------------
North America $ 27,102 $ 16,278 $ 64,836 $40,680
Latin America 10,390 15,767 18,809 28,972
Western Europe 15,425 7,466 28,886 14,222
Eastern Europe 73,786 37,671 144,325 63,826
Asia, Africa, and Australia 2,070 1,745 4,160 3,394
--------- -------- --------- --------
Total $128,773 $ 78,927 $ 261,016 $151,094
========= ======== ========= ========
INCOME BEFORE INTEREST, PROVISION FOR INCOME TAXES AND MINORITY INTEREST:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1994 1995 1994
----------------- -------------------
North America $ 9,189 $ 6,248 $ 28,106 $16,920
Latin America 847 1,862 1,636 3,569
Western Europe 1,399 498 2,321 990
Eastern Europe 16,300 1,192 32,502 1,710
Asia, Africa, and Australia (79) 292 214 565
Corporate (4,390) (1,811) (15,132) (4,018)
Income before interest,
provision for income taxes --------- -------- --------- --------
and minority interest 23,266 8,281 49,647 19,736
Net interest expense 4,855 382 8,197 840
--------- -------- --------- --------
Income before provision
for income taxes and minority
interest $ 18,411 $ 7,899 $ 41,450 $18,896
========= ======== ========= ========
IDENTIFIABLE ASSETS:
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
North America $ 72,746 $ 77,900
Latin America 25,791 26,787
Western Europe 59,004 52,469
Eastern Europe 260,792 203,357
Asia, Africa, and Australia 2,367 3,773
Corporate 53,954 77,187
--------- --------
Total $ 474,654 $441,473
========= ==========
The consolidated condensed statements of income for the three and six months
ended June 30, 1995 reflect the favorable impact to selling, general and
administrative expenses as a result of a reevaluation of accounts receivable
reserves at ICN Galenika of approximately $1,383,000. In addition, the
second quarter and first six months of 1995 benefited from the favorable
impact of certain changes in accounting estimates primarily in the United
States aggregating approximately $947,000.
6. ICN GALENIKA -
ICN Galenika, a 75% owned subsidiary, operates in a highly inflationary
economy and uses the dollar as the functional currency rather than the
Yugoslavian dinar. Before the enactment of the economic stabilization
program in January 1994, the rate of inflation in Yugoslavia was over 1
billion percent per year. The rate of inflation was dramatically reduced
when, on January 24, 1994, the Yugoslavian government enacted a
"Stabilization Program" designed to strengthen its currency. Under this
program the official exchange rate of the dinar is fixed at a ratio of one
dinar to one Deutsche mark. The Yugoslavian government guarantees the
conversion of dinars to Deutsche marks by exercising restraint in the amount
of dinars that it prints, thereby restricting cash in circulation to
correspond to hard currency reserves in Yugoslavia. Throughout 1994, this
program was successful in reducing inflation to approximately 5% per year,
increasing the availability of hard currency, stabilizing the exchange rate
of the dinar, and improving the overall economy in Yugoslavia.
During the first half of 1995, some weakness in the stabilization program
had been experienced. During the first quarter and continuing into the
second quarter of 1995, ICN Galenika experienced a decline in the
availability of hard currency in Yugoslavia and inflation has increased to
an approximate annual rate of 40%. 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. A continued weakening of the
stabilization program could potentially result in an adverse effect upon the
Company through a devaluation.
The net monetary asset position of ICN Galenika has risen to $42,389,000 as
of June 30, 1995 from $25,442,000 at December 31, 1994. The increase in the
net monetary asset position is primarily attributed to increases in accounts
receivable resulting from increased sales of ICN Galenika and the
lengthening of the collection period of receivables resulting from the lack
of availability of dinars in Yugoslavia. This net monetary asset position
would be subject to foreign exchange losses if a devaluation of the dinar
were to occur. In the near term, ICN Galenika will endeavor to reduce its
monetary exposure by shortening the payment terms on its receivables or
place restrictions on future credit terms; however, there can be no
assurance that these actions will be successful in reducing the net monetary
asset position. These actions could result in a decline from the current
sales levels in units and dollars and lead to higher inventory levels in the
future.
Recently the Yugoslavian Government announced efforts to reduce or limit
price increases on pharmaceutical products.
7. ACQUISITIONS
On May 5, 1995, the Company acquired the radioimmunoassay product line along
with inventory and property from Becton, Dickinson and Company ("B&D"),
located in Orangeburg, New Jersey, for a purchase price of approximately
$3,000,000. To fund this acquisition and to provide funds for working
capital of the B&D new product line, the Company sold 400,000 shares of its
common stock to a foreign bank for $5,753,000 which is net of transactions
fees and commissions. The financial results of B&D included in the
condensed financial statements for the three and six months ended June 30,
1995 were not significant.
On July 21, 1995, the Company purchased an additional 34% interest in the
Russian pharmaceutical company, Oktyabr, which raises ICN's ownership from
41% to 75%. The acquisition will be accounted for using the purchase method
of accounting. In connection with the acquisition of the additional
interest, the Company issued a promissory note in the amount of $3,500,000
due on September 21, 1995, which at the Company's option is payable in cash
or common stock of the Company.
8. 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, eighteen lawsuits were filed, and a nineteenth
was filed in May, 1995 (the "1995 Actions"), which named the Company, its
Board of Directors, Milan Panic and several other present and former
officers of the Company as defendants. Such lawsuits, filed in February and
March 1995, have been consolidated into one securities complaint and one
derivative complaint. The suit filed in May 1995 is pending in state court
in Delaware, subject to a motion to remand to state court and a separate
motion to transfer to the U.S. District Court for the Central District of
California.
In general, it is alleged in the Securities Complaint that the Company and
certain of its officers and directors made various deceptive and untrue
statements of material fact and omitted to state material facts in
connection with the merger of the Company, SPI Pharmaceuticals, Inc.
("SPI"), Viratek, Inc. and ICN Biomedicals, Inc. ("Biomedicals") in November
1994 and the issuance of convertible debentures in connection therewith and
(ii) information received from the FDA regarding the Company's NDA for the
use of Virazole for the treatment of chronic hepatitis C. The Securities
Complaint asserts claims for alleged violations of Sections 11 and 15 of the
Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs seek
unspecified compensatory damages, pre and post-judgment interest, attorneys'
fees, expert fees and other disbursements and costs.
With respect to the Derivative Complaint, plaintiffs assert purported claims
for intentional breach of fiduciary duty, negligent breach of fiduciary
duty, abuse of control, waste of corporate assets, unjust enrichment,
violation of California Corporations Code 25502.5, constructive fraud and
gross mismanagement. Plaintiffs seek declaratory relief, unspecified
compensatory and punitive damages, prejudgment interest, attorneys' fees,
experts' fees and costs and disbursements.
It is not possible at the present time 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 which named certain directors and officers
of SPI, ICN and/or Viratek (the "1994 Actions"). 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 the present time
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 (KMW))(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. Fact discovery is complete and expert discovery is
virtually complete. Plaintiffs sought the certification of classes of
persons who purchased ICN, Viratek or SPI common stock during the period
January 7, 1986 through April 15, 1987. On July 5, 1995, Magistrate Judge
Fox issued his report and recommendation (the "Report") in which he
recommended conditional certification of the classes as sought by plaintiffs
above. The ICN Defendants currently intend to appeal the Report.
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, but have yet to execute
such a stipulation. On October 20, 1993, plaintiffs informed the Court that
they had reached an agreement to settle with co-defendant Paine Webber and
on July 27, 1994, the settlement was approved by the court. The ICN
Defendants intend to move for summary judgment dismissing the 1987 Actions.
Management believes that, having extensively reviewed the issues in the 1987
Actions, 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. 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 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.
The defendants intend to vigorously defend this action.
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,
asserting causes of action for products liability and negligence and seek
unspecified damages. The Company filed a motion to dismiss asserting that
Plaintiffs' claims are barred by the statute of limitations. 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 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.
Pursuant to an Order Directing Private Investigation and Designating
Officers to Take Testimony, dated May 15, 1995, entitled In the Matter of
ICN Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is
being conducted by the SEC with respect to certain matters pertaining to the
status and disposition of the Company's Hepatitis C NDA. As set forth in
the Order, the investigation concerns whether, during the period June 1994
through February 1995, the Company, persons or entities associated with it
and others, in the offer and sale or in connection with the purchase and
sale of ICN common stock, engaged in possible violations of Section 17(a) of
the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, by having possibly (i) made false or
misleading statements or omitted to state material facts with respect to the
status and disposition of the Hepatitis C NDA, or (ii) purchased or sold ICN
common stock while in possession of material, non-public information
concerning the status and disposition of the Hepatitis C NDA or (iii)
conveyed material, non-public information concerning the status and
disposition of the Hepatitis C NDA to other persons who may have purchased
or sold ICN stock. The Company is cooperating with the SEC in its
investigation.
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.
9. DETAIL OF CERTAIN ACCOUNTS- (000's omitted)
RECEIVABLES, NET
JUNE 30, DECEMBER 31,
1995 1994
---------- ------------
Trade accounts receivable $ 122,959 $ 84,789
Other 9,034 7,198
----------- -----------
131,993 91,987
Allowance for doubtful accounts (9,492) (10,036)
---------- -----------
$ 122,501 $ 81,951
=========== ===========
Inventories, Net
JUNE 30, DECEMBER 31,
1995 1994
---------- -----------
Raw materials and supplies $ 35,104 $ 37,198
Work-in-process 14,020 13,167
Finished goods, net 57,774 39,083
----------- -----------
$ 106,898 $ 89,448
=========== ===========
Property, Plant and Equipment, Net:
JUNE 30, DECEMBER 31,
1995 1994
---------- -----------
Property, plant and equipment, at cost $ 171,985 $ 162,588
Accumulated depreciation (36,976) (33,965)
---------- -----------
$ 135,009 $ 128,623
=========== ===========
10. SUBSEQUENT EVENT
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement and a Stock Purchase Agreement with a subsidiary of Schering-
Plough Corporation to license the Company's proprietary anti-viral drug
ribavirin as a treatment for chronic hepatitis C in combination with
Schering-Plough's alpha interferon. The Agreement will provide an initial
licensing fee to the Company of $23 million dollars, and royalty payments
upon the marketing of the drug including certain minimum royalty rates.
Schering will have exclusive marketing rights for ribavirin for hepatitis C
worldwide, except that ICN will retain the right to co-market in the
countries of the European Economic Community. In addition, Schering will
purchase up to $42 million in common stock of the Company upon the
achievement of certain regulatory milestones. Under the agreement,
Schering will be responsible for all of the development costs worldwide.
The Agreement is subject to clearance under the Hart-Scott-Rodino Act.
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. Net
Sales for the two industry segments are set forth below (in thousands).
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1994 1995 1994
--------- --------- --------- --------
Net Sales:
Pharmaceutical $ 111,945 $ 78,927 $ 229,871 $151,094
Biomedical 16,828 -- 31,145 --
---------- ---------- ---------- --------
$ 128,773 $ 78,927 $ 261,016 $151,094
========== ========= =========== ========
NET SALES
Pharmaceutical net sales for the three and six months ended June 30, 1995, were
$111,945,000 and $229,871,000, respectively, compared to $78,927,000 and
$151,094,000 for the same periods in 1994. Compared to 1994, sales increased
$33,018,000 or 42% and $78,777,000 or 52% for the three and six months ended
June 30, 1995, respectively.
Pharmaceutical net sales at ICN Galenika were $67,627,000 and $138,166,000 for
the three and six months ended June 30, 1995, respectively, compared to
$37,671,000 and $63,826,000 for the same periods in 1994. Such increases are
primarily due to an increase in unit sales for the three and six months ended
June 30, 1995, compared to the same periods in 1994.
Pharmaceutical net sales at North America were $18,253,000 and $47,615,000 for
the three and six months ended June 30, 1995, respectively, compared to
$16,278,000 and $40,680,000 for the same periods in 1994. Sales in the second
quarter of 1995 increased due primarily to increased sales in the Myasthenia
Gravis, Dermatological and Medicinal product lines in the United States. Sales
for the six months ended June 30, 1995 compared to the same period in the prior
year, increased primarily due to increased Virazole sales resulting from
increased unit sales and favorable price increases.
Pharmaceutical net sales at Latin America were $10,390,000 and $18,809,000 for
the three and six months ended June 30, 1995, respectively, compared to
$15,767,000 and $28,972,000 for the same periods in 1994, primarily due to a
weakening of the peso compared to the U. S. dollar and a decrease in units sold.
The Biomedical business that was acquired in the Merger contributed $16,828,000
and $31,145,000 of sales during the three and six months ended June 30, 1995 or
approximately 13% and 12% of total Company net sales, respectively.
GROSS PROFIT
Gross profit as a percentage of sales was 56% and 58% for the three and six
months ended June 30, 1995, respectively, compared to 43% and 49% for the same
periods in 1994. The increase in gross profit is primarily due to improved
economic and business conditions in Yugoslavia for the three and six months
ended June 30, 1995 compared to the same periods in 1994. Additionally,
increased sales of Virazole in the first quarter of 1995 contributed to the
improved gross profit margin for the six months ended June 30, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales were 34%
and 34% for the three and six months ended June 30, 1995, respectively, compared
to 29% and 29% for the same periods in 1994. These expenses increased due to
increased marketing efforts and selling expenses in all of the Company's
operating units. The increase in expenses was partially offset by the favorable
impact of certain changes in accounting estimates aggregating approximately
$947,000 primarily in the North American operations and a favorable
re-evaluation of accounts receivable reserves at ICN Galenika of
approximately $1,383,000. Selling, general and administrative expenses for the
three and six months ended June 30, 1995 include $6,396,000 and $12,596,000,
respectively, 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 and six months ended June 30, 1994, the Company sold
$3,790,000 and $17,850,000, respectively, of Virazole(R), generating royalties
to Viratek of $758,000 and $3,570,000, respectively. These royalties were based
on a royalty agreement whereby 20% of net sales of Virazole were payable to
Viratek.
TRANSLATION AND EXCHANGE LOSSES, NET
Translation and exchange (gains) losses, net were $352,000 and $1,650,000, for
the three and six months ended June 30, 1995 compared to $(245,000) and
$2,254,000, respectively, for the same periods in 1994. In the second quarter
of 1995, the Company's net translation loss was primarily attributed to a
translation gain of $(168,000) on its foreign denominated debt and a translation
loss of $438,000 at ICN Galenika resulting from the exchange impact on its net
monetary position. During the six months ended June 30, 1995, the Company's net
translation loss was primarily attributed to a translation loss of $2,962,000
related to its foreign denominated debt which was acquired in the Merger, which
was partially offset by translation gains of $(1,385,000) related to ICN
Galenika's net positive monetary asset position. In the first six months of
1994, the Company's translation losses were related primarily to the
devaluation of the dinar at ICN Galenika.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 1995 was $6,146,000
and $11,150,000, respectively, compared to $1,623,000 and $3,046,000 for the
same periods in 1994. This increase is primarily due to higher interest expense
in the United States resulting from debt assumed from the Predecessor Companies
in connection with the Merger and increasing interest rates in Yugoslavia,
resulting in higher interest expense at ICN Galenika.
On April 28, 1995, the Company redeemed $10,000,000 of principal amount and
accrued interest on the Company's
12 7/8% Senior Subordinated Debentures.
TAXES
The Company's effective income tax rate for the three and six months ended June
30, 1995, was 3% and 5%, respectively, compared to 30% and 26% for the same
periods last year. The decline in the effective tax rate was due primarily to a
change in the mix of domestic and foreign earnings and other foreign permanent
differences.
RESEARCH AND DEVELOPMENT
Research and development costs for the three and six months ended June 30, 1995
were $4,273,000 and $8,818,000, respectively, compared to $1,630,000 and
$2,476,000 for the same periods in 1994, primarily due to research and
development efforts acquired in the Merger from Viratek.
EXCHANGE RATES AND STABILIZATION PROGRAM
ICN Galenika, a 75% owned subsidiary, operates in a highly inflationary economy
and uses the dollar as the functional currency rather than the Yugoslavian
dinar. Before the enactment of the economic stabilization program in January
1994, the rate of inflation in Yugoslavia was over 1 billion percent per year.
The rate of inflation was dramatically reduced when, on January 24, 1994, the
Yugoslavian government enacted a "Stabilization Program" designed to strengthen
its currency. Under this program the official exchange rate of the dinar is
fixed at a ratio of one dinar to one Deutsche mark. The Yugoslavian government
guarantees the conversion of dinars to Deutsche marks by exercising restraint in
the amount of dinars that it prints, thereby restricting cash in circulation to
correspond to hard currency reserves in Yugoslavia. Throughout 1994, this
program was successful in reducing inflation to approximately 5% per year,
increasing the availability of hard currency, stabilizing the exchange rate of
the Dinar, and improving the overall economy in Yugoslavia.
During the first half of 1995, some weakness in the stabilization program had
been experienced. During the first quarter and continuing into the second
quarter of 1995, ICN Galenika experienced a decline in the availability of hard
currency in Yugoslavia and inflation has increased to an approximate annual rate
of 40%. 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. A continued weakening of the stabilization program could potentially
result in an adverse effect upon the Company through a devaluation.
The net monetary asset position of ICN Galenika has risen to $42,389,000 as of
June 30, 1995 from $25,442,000 at December 31, 1994. The increase in the net
monetary asset position is primarily attributed to increases in accounts
receivable resulting from increased sales of ICN Galenika and the lengthening of
the collection period of receivables resulting from the lack of availability of
dinars in Yugoslavia. This net monetary asset position would be subject to
foreign exchange losses if a devaluation of the dinar were to occur. In the
near term, ICN Galenika will endeavor to reduce its monetary exposure by
shortening the payment terms on its receivables or place restrictions on future
credit terms; however, there can be no assurance that these actions will be
successful in reducing the net monetary asset position. These actions could
result in a decline from the current sales levels in units and dollars and lead
to higher inventory levels in the future.
Recently the Yugoslavian Government announced efforts to reduce or limit price
increases on pharmaceutical products.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1995, cash used in operating activities
totaled $5,988,000 which is primarily attributed to increased levels of accounts
receivable and inventory at ICN Galenika aggregating approximately $49,642,000.
Cash used in investing activities was $11,760,000 for the six months ended June
30, 1995, related primarily to the acquisition of the radioimmunoassay product
line along with inventory and property of Becton Dickinson and Company; and the
capital expenditures at ICN Galenika for the facility expansion and
modernization project. The project at ICN Galenika will include building two
new factories: one to manufacture cephalosporins and the other to 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 through 1998 is expected to be approximately $136,000,000. ICN
Galenika intends to fund this program through funds generated from local
operations and locally funded debt.
Cash used in financing activities was $13,484,000 for the six months ended June
30, 1995 which includes payments of long-term debt in the amount of $16,048,000
and dividend payments of $3,979,000. The Company issued common stock in the
amount of $5,753,000 of which approximately $3,000,000 was utilized to purchase
the radioimmunoassay product line from Becton, Dickinson and Company with the
remainder to be utilized for working capital purposes. The increase in 1995
dividend payments compared to 1994 is due primarily to higher levels of shares
outstanding resulting from the Merger. During the first half of 1994, cash used
in financing included cash payments to the parent company of $16,419,000 which
did not recur in 1995, as a result of the Merger. In order to reduce future
interest expense, the Company elected to call $10,000,000 of the 12-7/8% Sinking
Fund Debentures at par plus accrued interest in total of $10,368,000 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 June 30, 1995 to
shareholders of record on March 17, 1995. On May 17, 1995, the Company's Board
of Directors declared a second quarter cash dividend of $.07 per share and a
stock dividend of 1.4% payable June 14, 1995 to shareholders of record on May
30, 1995.
Since December 31, 1994, the Mexican peso has experienced a 22% 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 $3,138,000 during the
six months ended June 30, 1995. Approximately 30% of the Mexican subsidiary's
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.
In addition, the Company anticipates reduced gross profit margins on certain
products in Spain due to a recent agreement between the Spanish government and
the pharmaceutical industry.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $31,380,000 at June 30, 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.
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement and a Stock Purchase Agreement with a subsidiary of Schering-Plough
Corporation to license the Company's proprietary anti-viral drug ribavirin as a
treatment for chronic hepatitis C in combination with Schering-Plough's alpha
interferon. The Agreement will provide an initial licensing fee to the
Company of $23 million dollars, and royalty payments upon the marketing of the
drug including certain minimum royalty rates. Schering will have exclusive
marketing rights for ribavirin for hepatitis C worldwide, except that ICN will
retain the right to co-market in the countries of the European Economic
Community. In addition, Schering will purchase up to $42 million in common
stock of the Company upon the achievement of certain regulatory milestones.
Under the agreement, Schering will be responsible for all of the development
costs worldwide. The Agreement is subject to clearance under the Hart-Scott-
Rodino Act.
Management believes that funds on hand and to be generated from operations
during the year 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.
On July 21, 1995, the Company purchased an additional 34% interest in the
Russian pharmaceutical company, Oktyabr, which raises ICN's ownership from 41%
to 75%. The acquisition will be accounted for using the purchase method of
accounting. In connection with the acquisition of the additional interest, the
Company issued a promissory note in the amount of $3,500,000 due on September
21, 1995, which at the Company's option is payable in cash or common stock 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, eighteen lawsuits were filed, and a nineteenth was
filed in May 1995, which named the Company, its Board of Directors, Milan Panic
and several other officers of the Company as defendants. Twelve of the lawsuits
purported to be securities class actions, one was an individual securities
action and six purported to be derivative suits. Pursuant to Pre-Trial Order
No. 1 entered by the Court on May 2, 1995, on June 15, 1995 plaintiffs filed an
Amended Consolidated Class Action Complaint for Violation of Federal Securities
Laws (the "Securities Complaint") and a Consolidated and Amended Verified
Derivative Complaint (the "Derivative Complaint"). The twelve purported
securities class actions and the one individual securities action were
consolidated into the Securities Complaint, and five of the six derivative
lawsuits were consolidated into the Derivative Complaint. One derivative
lawsuit is pending in state court in Delaware, subject to a motion to remand to
state court and a separate motion to transfer to the U.S. District Court for the
Central District of California (the "1995 Actions").
In general, it is alleged in the Securities Complaint that the Company and
certain of its officers and directors made various deceptive and untrue
statements of material fact and omitted to state material facts in connection
with (i) the merger of the Company, SPI Pharmaceuticals, Inc. ("SPI"), Viratek,
Inc. and ICN Biomedicals, Inc. ("Biomedicals") in November 1994 and the issuance
of convertible debentures in connection therewith, and (ii) information received
from the FDA regarding the Company's NDA for the use of Virazole for the
treatment of chronic hepatitis C. The Securities Complaint asserts claims for
alleged violations of Sections 11 and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Plaintiffs seek unspecified compensatory damages, pre
and post-judgment interest, attorneys' fees, expert fees and other disbursements
and costs. Plaintiffs seek class certification for those who purchased ICN
securities from November 10, 1994 through February 17, 1995, and certification
of a "merger sub-class" for those who owned SPI or Biomedicals stock prior to
the Merger. The Company, Milan Panic, Dr. Roberts Smith and Dr. Nils
Johannesson are named as defendants in the Securities Complaint. Defendants'
answer or motion to dismiss is currently due on or before July 31, 1995.
With respect to the Derivative Complaint, plaintiffs assert purported claims for
intentional breach of fiduciary duty, negligent breach of fiduciary duty, abuse
of control, waste of corporate assets, unjust enrichment, violation of
California Corporations Code 25502.5, constructive fraud and gross
mismanagement. Plaintiffs seek declaratory relief, unspecified compensatory and
punitive damages, prejudgment interest, attorneys' fees, experts' fees and costs
and disbursements. Named as defendants in the Derivative Complaint are Milan
Panic, Norman Barker, Jr., Birch E. Bayh, Alan F. Charles, Robert F. Finch,
Roger Guillemin, Adam Jerney, Weldon B. Jolley, Vernon Knight, Jean-Francois
Kurz, Thomas H. Lenagh, Bill A. MacDonald, Charles T. Manatt, James P. Miscoll,
Stephen D. Moses, Michael Smith, Roberts A. Smith, Richard W. Starr and the
Company as a "nominal defendant". Defendants' answer or motion to dismiss is
currently due on or before July 31, 1995.
It is not possible at the present time 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 the present time 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
(KMW))(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 sought the certification of classes of persons who
purchased ICN, Viratek or SPI common stock during the period January 7, 1986
through April 15, 1987. On July 5, 1995, Magistrate Judge Fox issued his report
and recommendation (the "Report") in which he recommended conditional
certification of the classes as sought by plaintiffs above. The ICN Defendants
currently intend to file their appeal of the Report on September 11, 1995.
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, but have yet to execute such a stipulation. On October 20, 1993,
plaintiffs informed the Court that they had reached an agreement to settle with
co-defendant Paine Webber and on July 27, 1994, the settlement was approved by
the court. The ICN Defendants intend to move for summary judgment dismissing
the 1987 Actions. In accordance with the Court's individual rules, the ICN
Defendants intend to submit preliminary papers in support of that motion on
September 11, 1995. The Court has set a trial date of January 23, 1996.
Management believes that, having extensively reviewed the issues in the 1987
Actions, 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 in March 1995.
The Court has set a trial date of March 4, 1996. 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.
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 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 October 19, 1995.
Pursuant to an Order Directing Private Investigation and Designating Officers to
Take Testimony, dated May 15, 1995, entitled In the Matter of ICN
Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is being
conducted by the SEC with respect to certain matters pertaining to the status
and disposition of the Company's Hepatitis C NDA. As set forth in the Order,
the investigation concerns whether, during the period June 1994, through
February 1995, the Company, persons or entities associated with it and others,
in the offer and sale or in connection with the purchase and sale of ICN common
stock, engaged in possible violations of Section 17(a) of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, by having possibly (i) made false or misleading statements or
omitted to state material facts with respect to the status and disposition of
the Hepatitis C NDA, or (ii) purchased or sold ICN common stock while in
possession of material, non-public information concerning the status and
disposition of the Hepatitis C NDA or (iii) conveyed material, non-public
information concerning the status and disposition of the Hepatitis C NDA to
other persons who may have purchased or sold ICN stock. The Company is
cooperating with the SEC in its investigation.
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 of 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 June 30, 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: August 14, 1995 /s/ Milan Panic
_______________________________________________
Milan Panic
President and Chief Executive Officer
Date: August 14, 1995 /s/ John E. Giordani
_______________________________________________
John E. Giordani
Executive Vice President and Chief Financial
Officer