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, 1996
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 1, 1996 was 31,330,764.
2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
March 31, 1996 and December 31, 1995 ................................... 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1996 and 1995 ............................ 4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 ............................. 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 ....................................................... 17
Item 6. Exhibits and Reports on Form 8-K ................................. 17
SIGNATURES ................................................................ 18
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(Unaudited - 000's omitted, except per share data)
March 31, December 31,
1996 1995
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 40,829 $ 24,094
Restricted cash ...................................... 538 538
Marketable securities ................................ 00 27,536
Receivables, net ..................................... 113,972 68,513
Inventories, net ..................................... 119,465 138,756
Prepaid expenses and other current assets ............ 28,014 24,179
-------- --------
Total current assets ................................. 302,818 283,616
Property, plant and equipment, net ................... 173,185 172,487
Deferred taxes, net .................................. 31,692 34,692
Other assets ......................................... 25,537 21,828
Goodwill and intangibles, net ........................ 10,894 5,675
-------- --------
Total assets ......................................... $544,126 $518,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables ....................................... $ 36,327 $ 33,402
Accrued liabilities .................................. 38,338 39,031
Notes payable ........................................ 4,139 4,426
Current portion of long-term debt .................... 10,053 7,650
Income taxes payable ................................. 4,638 8,305
-------- --------
Total current liabilities ............................ 93,495 92,814
Long-term debt, less current portion:.................
Convertible into common stock...................... 132,566 140,951
Other long-term debt............................... 12,875 13,242
Deferred license and royalty income .................. 14,980 15,139
Other liabilities .................................... 31,628 31,444
Minority interest .................................... 63,977 62,536
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $.01 par value; 100,000
shares authorized; 31,319 and 30,420
Shares outstanding at March 31,
1996 and December 31, 1995, respectively............ 313 304
Additional capital ................................... 302,811 290,106
Retained deficit ..................................... (86,202) (105,844)
Unrealized gain on marketable securities, net ........ 00 230
Foreign currency translation adjustments ............. (22,317) (22,624)
-------- ---------
Total stockholders' equity ......................... 194,605 162,172
-------- ---------
Total liabilities and stockholders' equity ..... $ 544,126 $ 518,298
======== =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months ended March 31, 1996 and 1995
(Unaudited - 000's omitted, except per share data)
Three Months Ended
March 31,
-------------------------
1996 1995
----------- ---------
Net sales ........................................ $ 138,162 $ 132,243
Cost of sales .................................... 68,028 54,316
--------- ---------
Gross profit ..................................... 70,134 77,927
Selling, general and administrative expenses ..... 38,236 45,703
Research and development costs ................... 3,531 4,545
--------- ---------
Income from operations ........................... 28,367 27,679
Translation and exchange losses, net ............. 482 1,298
Interest income .................................. (970) (1,662)
Interest expense ................................. 2,702 5,004
--------- ---------
Income before provision for income taxes
and minority interest ............................ 26,153 23,039
Provision for income taxes ....................... 1,938 1,741
Minority interest ................................ 2,212 4,264
--------- ---------
Net income ....................................... $ 22,003 $ 17,034
========= =========
Per Share Information:
Net income per share ............................. $ .65 $ .57
========= =========
Shares used in per share computation ............. 33,486 30,027
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1996 and 1995
(Unaudited - 000's omitted)
Three Months Ended
March 31,
---------------------
1996 1995
-------- ---------
Cash flows from operating activities:
Net income ............................................. $ 22,003 $ 17,034
Adjustments to reconcile net income
to net cash provided by operating
activities:
Allowances for losses on accounts receivable ......... (193) 106
Depreciation and amortization ........................ 3,095 3,686
Translation and exchange losses, net ................. 482 1,298
Minority interest .................................... 2,212 4,264
Increase in accounts receivable ...................... (44,366) (23,731)
Decrease in inventories .............................. 17,968 1,273
(Increase) decrease in prepaid expenses .............. (3,221) 1,906
Decrease in deferred taxes ........................... 3,000 00
Changes in other operating assets and liabilities, net (6,723) (5,679)
-------- --------
Net cash provided by (used in) operating activities .. (5,743) 157
-------- --------
Cash flows from investing activities:
Capital expenditures ................................... (3,736) (4,696)
Decrease in restricted cash ............................ 00 1,038
Sale of marketable securities .......................... 27,667 00
Acquisitions and other ................................. (4,744) (1,966)
-------- --------
Net cash provided by (used in) investing activities... 19,187 (5,624)
-------- --------
Cash flows from financing activities:
Net borrowings under line of credit arrangements ....... 141 1,861
Net payments of long-term debt ......................... (3,819) (5,572)
Proceeds from exercise of stock options ................ 3,324 456
Proceed from issuance of stock ......................... 6,000 00
Dividends and distribution paid ........................ (2,361) (1,906)
-------- --------
Net cash provided by (used in) financing activities.. 3,285 (5,161)
-------- --------
Effect of exchange rate changes on cash .............. 6 (945)
-------- --------
Net increase (decrease) in cash and cash equivalents.. 16,735 (11,573)
Cash and cash equivalents at beginning of period ..... 24,094 42,376
-------- --------
Cash and cash equivalents at end of the period ....... $ 40,829 $ 30,803
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
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, 1995 and Form 10-K/A filed on
April 29, 1996.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(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.
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 represent 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 14, 1996, the Company's Board of Directors declared a first quarter
cash dividend ("distribution") of $.077 per share, payable on April 10, 1996,
to stockholders of record on March 28, 1996.
Reclassifications
Certain prior year items have been reclassified to conform with the current
year presentation.
3. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes was $900,000 for the three months ended March 31,
1996, and $4,147,000 for the same period in 1995.
8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(Unaudited)
Cash paid for interest was $2,366,000 for the three months ended March 31,
1996, and $4,499,000 for the same period in 1995.
Non-cash Transactions
During the first quarter of 1996, a principal amount of SFr. 1,864,000 of the
3-1/4% Subordinated Double Convertible Bonds due 1997 was converted into 2,330
shares of Ciba-Geigy Ltd. common stock.
On March 29, 1996, the Company sold its instrument business division to
Titertek Instruments, Inc., an Alabama corporation ("Titertek"), for
approximately $4,400,000 in the form of a note receivable from Titertek. Such
amount represents the net book value of the assets and liabilities of the
division, excluding certain assets and liabilities as specified in the
contract, plus a deferred gain of $2,000,000 to be recognized as cash is
collected.
On February 29, 1996, the Company acquired GlyDerm, Inc. ("GlyDerm"), a
Michigan based privately held company that develops proprietary glycolic acid
and other skin care products, for a total purchase price of approximately
$5,000,000, which includes a $2,000,000 cash payment and $3,000,000 of Company
stock.
4. GEOGRAPHIC DATA -
The following table sets forth the amount of net sales and operating income
(loss) of the Company by geographical areas for the three months ended March
31, 1996 and 1995 and the identifiable assets of the Company by geographical
areas as of March 31, 1996 and December 31, 1995 (in thousands):
March 31, March 31,
1996 1995
--------- ---------
Sales:
United States ......................................... $ 34,883 $ 33,019
Canada ................................................ 4,783 4,715
--------- ---------
North America ...................................... 39,666 37,734
Latin America (principally Mexico) .................... 10,763 8,419
Western Europe ........................................ 15,631 13,461
Eastern Europe (principally Yugoslavia) 69,902 70,539
Asia, Africa, and Australia ........................... 2,200 2,090
--------- ---------
Total ................................................. $ 138,162 $ 132,243
========= =========
Operating Income (loss):
United States ......................................... $ 16,180 $ 18,059
Canada ................................................ 1,507 1,075
--------- ---------
North America 17,687 19,134
Latin America (principally Mexico) .................... 2,425 1,222
Western Europe ........................................ 1,538 1,216
Eastern Europe (principally Yugoslavia) 13,563 14,380
Asia, Africa, and Australia ........................... 96 274
Corporate ............................................. (6,942) (8,547)
--------- ---------
Total ................................................. $ 28,367 $ 27,679
========= =========
9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(Unaudited)
Identifiable assets:
March 31, December 31,
1996 1995
-------- --------
United States .......................................... $ 72,274 $ 57,070
Canada ................................................. 7,379 8,865
-------- --------
North America ........................................ 79,653 65,935
Latin America (principally Mexico) ..................... 26,139 23,823
Western Europe ......................................... 59,432 57,950
Eastern Europe (principally Yugoslavia) ................ 288,680 274,940
Asia, Africa, and Australia ............................ 2,571 1,786
Corporate .............................................. 87,651 93,864
-------- --------
Total .................................................. 544,126 $518,298
======== ========
5. 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 an 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. 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.
Throughout 1995, the effectiveness of the stabilization program weakened and
ICN Galenika began experiencing a decline in the availability of hard currency
in Yugoslavia. Additionally, inflation levels accelerated to an approximate
annual rate of 90% by the end of the year and on November 24, 1995, the dinar
devalued from a rate of 1.4 dinars per U.S. $1 to a rate of 4.7 dinars per U.S.
$1.
During the first quarter of 1996 the rate of inflation increased to an
approximate annual rate of 120%. As of March 31, 1996, ICN Galenika had a net
monetary asset exposure of $24,884,000 which would be subject to foreign
exchange loss if a devaluation of the dinar were to occur.
6. ACQUISITIONS -
On February 29, 1996, the Company acquired GlyDerm, Inc. ("GlyDerm"), a
Michigan based privately held company that develops proprietary glycolic acid
and other skin care products, for a total purchase price of approximately
$5,000,000, which includes a $2,000,000 cash payment and $3,000,000 of stock of
the Company. The acquisition is not material to the financial position or
results of operations of the Company.
In March, 1996, the Company purchased an additional 15% interest in the Russian
pharmaceutical company, Oktyabr, for $1,190,000. This transaction raised the
Company's ownership from 75% to 90%.
To fund the acquisition of GlyDerm and other several smaller acquisitions, in
January 1996, the Company sold approximately 400,000 shares to a foreign bank
for net proceeds of $6,000,000.
10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES -
The Predecessor Companies were defendants in 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.
Through May 1995, nineteen lawsuits were filed which named the Company, its
Board of Directors, the Chairman and several other officers of the Company as
defendants (the "Defendants"), all related to the Company's NDA for the use of
Virazole(R) for the treatment of chronic hepatitis C (the "Hepatitis C NDA").
Eighteen of those lawsuits were consolidated into either the Consolidated
Amended Class Action Complaint for Violations of Federal Securities Laws (the
"Securities Complaint") or the Second Amended Consolidated Verified Derivative
Complaint (the "Derivative Complaint"). Until recently, one derivative
lawsuit was still pending in Delaware (collectively, the "1995 Actions").
In general, it is alleged in the Securities Complaint that Defendants made
various deceptive and untrue statements of material fact and omitted material
facts regarding the Hepatitis C NDA in connection with: (i) the merger of the
Company, SPI, Viratek and Biomedicals in November 1994 and the issuance of
convertible debentures in connection therewith; and (ii) information provided to
the public. Plaintiffs also allege that the Chairman of the Company traded on
inside information relating to the Hepatitis C NDA. 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-judgment and post-judgment interest and attorneys' fees and costs.
Plaintiffs seek the certification of: (i) a class of persons who purchased ICN
securities from November 10, 1994 through February 17, 1995; and (ii) a subclass
consisting of persons who owned SPI and/or Biomedicals common stock prior to the
Merger. Defendants filed their answer to the Securities Complaint, have opposed
certification of the proposed class and subclass, and are actively engaged in
the pre-trial discovery process. Defendants intend to vigorously defend this
action.
With respect to the derivative litigation, in early April 1996, Defendants'
motion to transfer the derivative action pending in Delaware to the Central
District of California was granted. On April 15, 1996, Defendants' motion to
dismiss the Derivative Complaint was granted without leave to replead.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware (the "1994 Actions"). Three of these lawsuits
were filed by stockholders of SPI and, in one lawsuit, of Viratek, against ICN,
SPI, Viratek and certain directors and officers of ICN, SPI and/or Viratek
(including the Chairman) and purport to be class actions on behalf of all
persons who held shares of SPI and Viratek common stock. The fourth lawsuit was
filed by a stockholder of Viratek against ICN, Viratek and certain directors and
officers of ICN, SPI and Viratek (including the Chairman) 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 in the Merger was unfair and inadequate, and that the
defendants breached their fiduciary duties in approving the Merger and
otherwise. The 1994 Actions have been inactive for the past year. The Company
believes that these suits are without merit and intends to defend them
vigorously.
ICN, SPI and Viratek and certain of their current and former 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 PaineWebber Securities Litigation
(Case No. 86 Civ. 6776 (KMW)); In re ICN/Viratek Securities Litigation (Case No.
87 Civ. 4296 (KMW)) (collectively the "1987 Actions"). In the Third Amended
Complaint, plaintiffs alleged that the ICN Defendants made, or aided and abetted
PaineWebber, Inc. ("PaineWebber") in making, misrepresentations of material fact
and omitted material facts concerning the business, financial condition and
future prospects of ICN, Viratek and SPI in certain public announcements,
PaineWebber research reports and filings with the Securities and Exchange
Commission ("SEC"). The alleged misstatements and omissions primarily
11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(Unaudited)
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 Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and constitute common law fraud and
misrepresentation. Fact discovery is complete and expert discovery is virtually
complete. On December 15, 1995, the ICN Defendants filed a motion to dismiss in
part or for partial summary judgment, and in opposition to plaintiffs' motion to
amend the Third Complaint.
On January 3, 1996, the Court affirmed a report and recommendation certifying
classes of purchasers of ICN, Viratek and SPI common stock for the period
January 7, 1986 through April 15, 1987. On April 4, 1996, the Court dismissed
all claims by the plaintiff classes under state common law but permitted four
plaintiffs to pursue such claims in their individual capacities only, dismissed
plaintiffs' federal claim that the ICN Defendants aided and abetted PaineWebber
in making misrepresentations or omissions in four PaineWebber reports, and
rejected plaintiffs' request to add new allegations concerning roadshows in
connection with public offerings that were held during 1986. The Court declined
to dismiss any other claims before trial, and permitted the plaintiffs to
replace the claim that the ICN Defendants aided and abetted PaineWebber in
connection with the four PaineWebber reports with a claim that the ICN
Defendants are primarily responsible for alleged misrepresentations or omissions
in the first of those reports only. 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 and further assuming that all of the plaintiffs'
allegations were proven (including the allegations about the roadshows that the
Court has not permitted), 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. A trial date has been set for July
15, 1996.
Management believes that, having extensively reviewed the issues in the above
referenced matters, there are strong defenses and the Company intends to defend
the litigation 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.
In January 1995, an action was commenced by a former employee against ICN, SPI,
Viratek and the Chairman. 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. A trial date has been set for September 9,
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 total approximately $650,000). ICN Canada filed its Notice of Appeal and
Gencon filed a Notice of Cross-Appeal, seeking approximately $145,000 in
additional claimed costs. The appeal and cross-appeal were fully briefed and
oral argument was held on April 15, 1996. No decision has been rendered on the
appeal or cross-appeal.
12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(unaudited)
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. ICN and Viratek are seeking compensatory and
punitive damages in the amount of $25,000,000. Khan has filed counterclaims,
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. No decision has been rendered with respect to the Company's motion
to have a default judgment entered against Khan and to dismiss his
counterclaims. The Company intends to vigorously defend the counterclaims if
they are not dismissed.
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, amounts accrued for awards, assessments or potential losses in
connection with these matters and the matters referred to above, are adequate
and the ultimate resolution will not have a material effect on the Company's
consolidated financial position or results of operations.
Investigations: Pursuant to an Order Directing Private Investigation and
Designating Officers to Take Testimony, 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 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 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 has produced documents to the SEC pursuant to its
request and the SEC has taken the depositions of certain current and former
officers, directors, and employees of the Company. In addition, the Company
received a Subpoena from a Grand Jury of the United States District Court,
Central District of California, requesting the production of documents covering
a broad range of matters over various time periods. The Company and Milan Panic
are subjects of the investigation. The Company intends to cooperate in the
production of documents pursuant to the Subpoena.
8. SALE OF INSTRUMENT BUSINESS DIVISION -
On March 29, 1996, the Company sold its instrument business division to Titertek
Instruments, Inc., an Alabama corporation ("Titertek") for approximately
$4,400,000 in the form of a note receivable from Titertek. Such amount
represents the net book value of the assets and liabilities of the division,
excluding certain assets and liabilities as specified in the contract, plus a
deferred gain of $2,000,000 to be recognized as cash is collected.
13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1996
(unaudited)
9. DETAIL OF CERTAIN ACCOUNTS - (000's omitted)
Receivables, Net
March 31, December 31,
1996 1995
--------- ---------
Trade accounts receivables ........... $ 117,573 $ 71,539
Other ................................ 4,276 5,044
--------- ---------
121,849 76,583
Allowance for doubtful accounts (7,877) (8,070)
--------- ---------
$ 113,972 $ 68,513
========= =========
Inventories, Net
March 31, December 31,
1996 1995
--------- ---------
Raw materials and supplies ........... $ 46,543 $ 56,227
Work-in-process ...................... 19,792 14,865
Finished goods ....................... 65,854 80,373
--------- ---------
132,189 151,465
Allowance for inventory obsolescence (12,724) (12,709)
--------- ---------
$ 119,465 $ 138,756
========= =========
Property, Plant and Equipment, Net:
March 31, December 31,
1996 1995
--------- ----------
Property, plant and equipment, at cost $ 213,069 $ 209,845
Accumulated Depreciation ............. (39,884) (37,358)
--------- ---------
$ 173,185 $ 172,487
========= =========
10. RELATED PARTY TRANSACTION -
In February 1996, the Company loaned the Chief Operating Officer of the Company
$389,000 for the exercise of stock options. Such amount including accrued
interest has been repaid.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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).
Net Sales
Three Months Ended
March 31,
--------------------
1996 1995
--------- --------
Pharmaceutical................................... $ 122,110 $117,926
Biomedical ...................................... 16,052 14,317
--------- --------
Total Company ................................... $ 138,162 $132,243
========= ========
Pharmaceutical net sales for the three months ended March 31, 1996 and 1995 were
$122,110,000 and $117,926,000, respectively. The increase in net sales of
$4,184,000 or 4% reflects additional sales from its Russian acquistion and
improvement in Western Europe and Latin America sales which were partially
offset by lower Virazole(R) sales and lower sales in Yugoslavia.
Pharmaceutical net sales in Eastern Europe were $69,902,000 for the three months
ended March 31, 1996 compared to $70,539,000 for the same period in 1995.
Compared to 1995, net sales decreased $637,000 or 1%. Net sales at ICN Galenika
were $61,773,000 for the three months ended March 31, 1996 compared to
$70,539,000 for the same period in 1995. This decrease of $8,766,000 or 12% is
primarily due to changes in translation rates, partially offset by an increase
in unit sales and price increases and approximately $7,000,000 in export sales.
The Company's Russian subsidiary, which the Company began consolidating in its
financial results in the second quarter of 1995, contributed $8,129,000 of sales
to the Eastern European region in 1996.
Pharmaceutical net sales in North America were $31,110,000 for the three months
ended March 31, 1996 compared to $29,362,000 for the same period in 1995. This
increase in net sales of $1,748,000 or 6% is primarily due to increased unit
sales in the dermatological, medicinal and myasthenia gravis product lines,
partially offset by a decrease in unit sales of Virazole(R) in the amount of
$7,572,000. Virazole(R) is used to treat infants infected with respiratory
syncytial virus ("RSV"). This disease is a seasonal illness which occurs
primarily in late fall through early spring. Early in the 1995/1996 RSV season,
the number of hospital admissions and positive cultures for RSV suggested a
heavy incidence of infection. However, the severity of infection in this season
was not as high as the prior season resulting in a lower hospital demand for
Virazole(R) and consequently an increased level of inventory at the wholesale
level. The increased wholesale inventory levels could adversely impact total
1996 Virazole(R) sales depending on the severity of RSV infection this coming
fall.
Pharmaceutical net sales in Latin America were $10,217,000 for the three months
ended March 31, 1996 compared to $8,065,000 for the same period in 1995. This
increase in net sales of $2,152,000 or 27% is primarily due to price increases,
partially offset by currency exchange fluctuations.
Pharmaceutical net sales in Western Europe were $9,670,000 for the three months
ended March 31, 1996 compared to $8,882,000 for the same period in 1995. This
increase in net sales of $788,000 or 9% is primarily due to increased unit sales
of Virazole(R), and an increase in unit sales of antibiotics in Spain.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION (Continued)
Biomedical segment net sales for the three months ended March 31, 1996 were
$16,052,000 compared to $14,317,000 for the same period of 1995. This increase
in net sales of $1,735,000 or 12% is primarily due to the effect of the
additional sales of diagnostics products acquired from Becton Dickinson in May
1995.
Gross Profit
Gross profit as a percentage of sales was 51% for the three months ended March
31,1996 compared to 59% for the same period in 1995. The decrease in gross
profit margin is primarily due to a decrease in gross margins at ICN Galenika
which had a first quarter 1996 gross margin of 29% compared to 48% in 1995. This
decrease reflects the impact of the November 1995 devaluation which was only
partially offset by an 83% price increase in December 1995. First quarter 1996
sales are translated at a current devalued rate while inventory is expensed at
the historic and higher pre-devaluation rate. Management believes that the
government approved 30% price increase on April 25, 1996 will have a positive
impact on future margins for ICN Galenika.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 28%
for the three months ended March 31, 1996 compared to 35% for the same period in
1995. These expenses decreased primarily at ICN Galenika principally due to
differences in the exchange rates of the Yugoslavian dinar in 1996 compared to
1995 and spending reductions.
Translation and Exchange Losses, Net
Translation and exchange losses, net were $482,000 for the three months ended
March 31, 1996 compared to $1,298,000 for the same period in 1995. In the first
quarter of 1996, the Company's translation losses include translation losses of
$1,245,000 related to ICN Galenika's net monetary asset position, partially
offset by translation gains of $937,000 related to the Company's foreign
denominated debt. During the first quarter of 1995, the Company recorded a
translation loss of $3,130,000 related to its foreign denominated debt, which
was partially offset by translation gains of $1,823,000 related to ICN
Galenika's net positive monetary asset position.
Interest Expense
Interest expense during the three months ended March 31, 1996 decreased
$2,302,000 compared to the same period in 1995. This decrease resulted primarily
from the reduction in short and long term debt of the Company and the
capitalization of $1,124,000 interest related to plant construction at ICN
Galenika. During 1995, the Company retired $34,160,000 of its 12 7/8% Sinking
Fund Debentures and substantially reduced its notes payable.
Taxes
The Company's effective income tax rate for the three months ended March 31,
1996, was 7% compared to 8% for the same period in 1995. The Company's effective
rates were below the U.S. statutory rate primarily due to certain foreign
earnings which were taxed at rates significantly below the U.S. rate. The
Company's 1996 first quarter rate was also affected by a reduction of accrued
tax contingencies based on the current progress of the Company's tax audits.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (Continued)
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 an 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. 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.
Throughout 1995, the effectiveness of the stabilization program weakened and ICN
Galenika began experiencing a decline in the availability of hard currency in
Yugoslavia. Additionally, inflation levels accelerated to an approximate annual
rate of 90% by the end of the year and on November 24, 1995, the dinar devalued
from a rate of 1.4 dinars per U.S. $1 to a rate of 4.7 dinars per U.S. $1.
During the first quarter of 1996 the rate of inflation increased to an
approximate annual rate of 120%. As of March 31, 1996, ICN Galenika had a net
monetary asset exposure of $24,884,000 which would be subject to foreign
exchange loss if a devaluation of the dinar were to occur.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1996, cash used in operating activities
totaled $5,743,000 which included the effect of increased levels of accounts
receivable of $44,366,000 primarily at ICN Galenika and North America partially
offset by a decrease in inventory levels of $17,968,000 primarily at ICN
Galenika. The increase of accounts receivable at ICN Galenika of $27,000,000
relates to lower than normal accounts receivable levels at December 31, 1995.
The accounts receivable level at ICN Galenika at December 31, 1995 was impacted
by postponement of sales in anticipation of a December price increase and the
effects of actions to reduce its overall monetary exposure.
Cash provided by investing activities of $19,187,000 for the three months ended
March 31, 1996, related primarily to the sale of marketable securities at ICN
Galenika partially offset by $4,744,000 used for acquisitions.
Cash provided by financing activities of $3,285,000 for the first quarter of
1996 primarily includes proceeds from issuance of stock of $6,000,000 and
$3,324,000 of proceeds from the exercise of stock options partially offset by
net payments of long-term and short-term debt of $3,819,000 and $2,361,000 of
dividends paid. The increase in 1996 dividend payments is primarily due to
higher levels of shares outstanding and an increase in cash dividends from the
same period in 1995.
On March 14, 1996, the Company's Board of Directors declared a first quarter
cash dividend of $.077 per share payable on April 10, 1996 to shareholders of
record on March 28, 1996.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $24,632,000 at March 31, 1996, 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.
The Company is actively pursuing the acquisition of new businesses and products
that complement the Company's existing product lines and markets. In order to
fund these acquisitions, the Company intends to issue a public debt offering of
$100,000,000 to $150,000,000.
17
PART II - OTHER INFORMATION
Item 1. LITIGATION
See Note 7 of Notes to Consolidated Condensed Financial Statements
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 March 31, 1996.
18
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 9, 1996 /s/ Milan Panic
-------------------------------------
Milan Panic
President and Chief Operating Officer
Date: May 9, 1996 /s/ John E. Giordani
-------------------------------------
John E. Giordani
Executive Vice President and
Chief Financial Officer