- ------------------------------------------------------------------------------
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, 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 August 5, 1996 was 31,992,279.
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ICN PHARMACEUTICALS, INC.
INDEX
Page
NUMBER
======
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
June 30, 1996 and December 31, 1995 ................................ 3
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 1996 and 1995 ................. 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 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 Operations................................. 16
PART II - OTHER INFORMATION
Item 1. Litigation...................................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES............................................................... 21
-i-
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,869 $ 24,094
Marketable securities 451 27,536
Receivables, net 160,416 68,513
Inventories, net 111,790 138,756
Prepaid expenses and other current assets 14,265 24,717
---------- -----------
Total current assets 323,791 283,616
Property, plant and equipment, net 181,915 172,487
Deferred taxes, net 33,374 34,692
Other assets (includes loan to officer of $3,500) 26,621 21,828
Goodwill and intangibles, net 13,104 5,675
---------- -----------
Total assets $ 578,805 $ 518,298
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 34,382 $ 33,402
Accrued liabilities 42,236 39,031
Notes payable 8,073 4,426
Current portion of long-term debt 5,595 7,650
Income taxes payable 5,060 8,305
---------- -----------
Total current liabilities 95,346 92,814
Long-term debt, less current portion:
Convertible into common stock 131,824 140,951
Other long-term debt 13,779 13,242
Deferred license and royalty income 14,847 15,139
Other liabilities 33,448 31,444
Minority interest 71,413 62,536
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares
authorized; 31,979 and 30,420 shares
outstanding at June 30, 1996 and
December 31, 1995, respectively 320 304
Additional capital 314,692 290,106
Retained deficit (73,549) (105,844)
Unrealized gain on marketable securities, net 00 230
Foreign currency translation adjustments (23,315) (22,624)
---------- -----------
Total stockholders' equity 218,148 162,172
---------- -----------
Total liabilities and stockholders' equity $ 578,805 $ 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 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1995
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
Net sales $ 143,746 $ 128,773 $ 281,908 $ 261,016
Cost of sales 72,307 56,375 140,335 110,691
----------- ---------- ---------- ----------
Gross profit 71,439 72,398 141,573 150,325
Selling, general and administrative expenses 46,930 44,507 85,166 90,210
Research and development costs 3,379 4,273 6,910 8,818
----------- ---------- ---------- ----------
Income from operations 21,130 23,618 49,497 51,297
Translation and exchange losses, net 206 352 688 1,650
Interest income (549) (1,291) (1,519) (2,953)
Interest expense 2,890 6,146 5,592 11,150
----------- ---------- ----------- ----------
Income before provision for income taxes
and minority interest 18,583 18,411 44,736 41,450
Provision (benefit) for income taxes (898) 466 1,040 2,207
Minority interest 4,588 4,051 6,800 8,315
----------- ---------- ---------- ----------
Net income $ 14,893 $ 13,894 $ 36,896 $ 30,928
=========== ========== ========== ==========
PER SHARE INFORMATION:
Net income per share $ .42 $ .44 $1.07 $ 1.04
=========== =========== ========== ==========
Shares used in per share computation 34,370 31,864 33,800 29,856
=========== =========== ========== ==========
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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED - 000'S OMITTED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,896 $ 30,928
Adjustments to reconcile net income to net
cash provided by operating activities:
Allowances for losses on accounts receivable 129 (1,105)
Depreciation and amortization 6,484 8,255
Translation and exchange losses, net 688 1,650
Minority interest 6,800 8,315
Increase in accounts receivable (88,560) (35,199)
Decrease (increase) in inventories 27,988 (14,443)
Decrease in prepaid expenses 11,349 1,641
Decrease in deferred taxes 1,318 00
Changes in other operating assets and liabilities, net (7,580) (6,030)
---------- ----------
Net cash used in operating activities (4,488) (5,988)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,939) (8,674)
Decrease in restricted cash 00 1,038
Sale of marketable securities 27,667 00
Acquisitions and other (11,578) (4,124)
---------- ----------
Net cash provided by (used in) investing activities 8,150 (11,760)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line
of credit arrangements 3,200 (294)
Net payments of long-term debt (6,374) (16,048)
Proceeds from exercise of stock options 9,500 1,084
Proceeds from issuance of common stock 8,601 5,753
Dividends paid (2,325) (3,979)
Increase in loan to officer (3,500) 00
---------- -----------
Net cash provided by (used in) financing activities 9,102 (13,484)
---------- -----------
Effect of exchange rate changes on cash 11 359
---------- -----------
Net increase (decrease) in cash and cash equivalents 12,775 (30,873)
Cash and cash equivalents at beginning of period 24,094 42,376
---------- -----------
Cash and cash equivalents at end of the period $ 36,869 $ 11,503
========== ===========
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
JUNE 30, 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 finan-
cial 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 distribution of $.077 per share, payable on April 10, 1996,
to stockholders of record on March 28, 1996.
On June 28, 1996, the Company's Board of Directors declared a second
quarter cash distribution of $.077 per share, payable on July 25, 1996 to
stockholders of record on July 11, 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 $1,932,000 for the six months ended June
30, 1996, and $4,896,000 for the same period in 1995. Cash paid for
interest was $5,765,000 for the six months ended June 30, 1996, and
$12,251,000 for the same period in 1995. During the six months ended June
30, 1996, the Company capitalized $2,193,000 of interest related to the
Company's plant construction in Yugoslavia.
8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NON-CASH TRANSACTIONS
During the first six months 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. The
effect of that conversion was to reduce long term debt and other
assets by $4,200,000.
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 and six
months ended June 30, 1996 and 1995 and the identifiable assets of the
Company by geographical areas as of June 30, 1996 and December 31, 1995
(in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------------------
1996 1995 1996 1995
-------------------------- ------------------------
Sales:
United States $ 23,091 $ 22,418 $ 57,974 $ 55,437
Canada 4,763 4,684 9,546 9,399
---------- ---------- ---------- ----------
North America 27,854 27,102 67,520 64,836
Latin America (principally Mexico) 11,819 10,390 22,582 18,809
Western Europe 16,565 15,425 32,196 28,886
Eastern Europe (principally Yugoslavia) 84,970 73,786 154,872 144,325
Asia, Africa, and Australia 2,538 2,070 4,738 4,160
---------- ---------- ---------- ----------
Total $ 143,746 $ 128,773 $ 281,908 $ 261,016
========== ========== ========== ==========
Operating Income (Loss):
United States $ 8,595 $ 8,203 $ 24,775 $ 26,262
Canada (2,277)* 1,204 (770)* 2,279
----------- ---------- ---------- ----------
North America 6,318 9,407 24,005 28,541
Latin America (principally Mexico) 2,772 1,424 5,197 2,646
Western Europe 1,518 1,501 3,056 2,717
Eastern Europe (principally Yugoslavia) 21,667 16,738 35,230 31,118
Asia, Africa, and Australia 11 (90) 107 184
Corporate (11,156) (5,362) (18,098) (13,909)
---------- ---------- ----------- -----------
Total $ 21,130 $ 23,618 $ 49,497 $ 51,297
========== ========== =========== ===========
* Includes $3,500,000 of expenses related to one-time charge in
connection with a resolution of a commercial dispute and a penalty from
the Canadian Patent Price Review Board.
9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
Identifiable Assets:
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
United States $ 73,071 $ 57,070
Canada 7,300 8,865
----------- -----------
North America 80,371 65,935
Latin America (principally Mexico) 27,765 23,823
Western Europe 58,797 57,950
Eastern Europe (principally Yugoslavia) 318,336 274,940
Asia, Africa, and Australia 3,388 1,786
Corporate 90,148 93,864
----------- ------------
Total $ 578,805 $ 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 six months of 1996, the trend toward a weakening
economy continued. The rate of inflation increased to an approximate
annual rate of 120% and the availability of hard currency had declined
along with shortages of local currency. The suspension of United
Nations sanctions at the beginning of the year provides economic
opportunities for Yugoslavia, however, the realization of the benefits
from the suspension will be dependent on the implementation of economic
reform in Yugoslavia that includes increased privatization. ICN
Galenika maintains an approximate 50% market share of the
pharmaceutical business in Yugoslavia. With 81% of ICN Galenika sales
arising from government or government sponsored entities, ICN Galenika
is economically dependent on the government.
The future profitability of ICN Galenika is heavily dependent upon the
overall business climate in Yugoslavia, the political stability of the
Yugoslavia government and the ability of the government to fund health
care spending.
As of June 30, 1996, ICN Galenika had a net monetary asset exposure of
$59,000,000 which would be subject to foreign exchange loss if a
devaluation of the dinar were to occur.
10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
6. ACQUISITIONS -
On February 29, 1996, the Company acquired the assets and liabilities
of GlyDerm, Inc. ("GlyDerm"), a Michigan based privately held company
that develops proprietary glycolic acid and other skin care products,
with a net book value of $1,093,000, for a total purchase price of
approximately $7,420,000, which includes a $2,000,000 cash payment,
$3,000,000 of stock of the Company and $2,420,000 which represents the
adjusted earn-out payable, as provided in the acquisition agreement of
which the first $1,000,000 is payable in cash and the balance payable
50% in cash and 50% in shares of common stock. The acquisition was
accounted for using the purchase method of accounting. The purchase
price allocation is preliminary pending appraisals, evaluations and
other studies of fair value of the assets and liabilities acquired. The
acquisition is not material to the financial position or results of
operations of the Company.
To fund the acquisition of GlyDerm and several other smaller
acquisitions, in January 1996, the Company sold approximately 400,000
shares to a foreign bank for net proceeds of $6,000,000.
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%.
In May 1996, the Company purchased a 40% interest in KAMED Financial,
Inc. ("KF"), a Delaware company, for an anticipated investment of
$3,000,000. KF formed a joint venture with Biomedpreparat ("BP"), a
Kazak joint stock company which is owned by the State Property
committee and by the employees of BP, to convert BP from a Soviet
scientific production complex located in Kazakhstan into a
pharmaceutical manufacturing and distribution plant. KF has a 51%
interest in the joint venture. The acquisition is not material to the
financial position or results of operations of the Company.
In June 1996, the Company acquired a 72.4% interest in Leksredstva, a
Russian pharmaceutical company, for approximately $5.7 million in cash.
The Company has subsequently acquired an additional approximate 16%
interest in Leksredstva from existing stockholders and intends to make
additional purchases to increase its interest in Leksredstva to 95%,
subject to approval from Russia's Anti-Monopoly Committee. It is
estimated that these purchases will cost approximately $600,000 in the
aggregate. The acquisition is not material to the financial position or
results of operations of the Company.
In June 1996, the Company won a competitive bid to purchase up to a 59%
interest in Alkaloida Chemical Co., a Hungarian state-owned
pharmaceutical company, for approximately $21.9 million in cash. The
Company anticipates that this transaction will close in September 1996,
subject to the negotiation of a definitive agreement. The acquisition
is not material to the financial position or results of operations of
the Company.
During July 1996, the Company acquired a 49% interest in Polipharm
("Polipharm"), a Russian pharmaceutical company. The Company paid
approximately $1,100,000 in exchange for shares of Polipharm. The
acquisition is not material to the financial position or results of
operations of the Company.
11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES -
In the Consolidated Amended Class Action Complaint for Violations of
Federal Securities Laws (the "Securities Complaint") (the "1995
Actions"), plaintiffs allege that Defendants made various deceptive and
untrue statements of material fact and omitted material facts regarding
its 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.
Plaintiff's motion seeking 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 was recently granted.
Defendants filed their answer to the Securities Complaint, and are
actively engaged in the pre-trial discovery process. Defendants intend
to vigorously defend this action.
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 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.
12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
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 issued a decision granting in part and denying in part
plaintiffs' motion to amend the Third Complaint, and granting in part
and denying in part the ICN Defendants' motion for partial summary
judgment. 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. The jury trial began on July 15, 1996 and is
continuing.
Management believes that, having extensively reviewed the issues in the
above referenced matters, there are strong defenses and the Company has
and continues 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 sought
injunctive relief and unspecified compensatory and punitive damages.
The case has been settled.
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. On May 9, 1996, the Appelate
Court confirmed the trial court's judgment and granted Gencon's
cross-appeal for apporoximately $145,000 in additional costs. On June
18, 1996, ICN Canada filed a Petition for Review in the Supreme Court
of California. The Petition was denied on July 31, 1996. Accordingly,
the judgment rendered by the trial court stands.
13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 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.
14
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
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.
9. DETAIL OF CERTAIN ACCOUNTS - (000's omitted)
RECEIVABLES, NET
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
Trade accounts receivable $ 164,800 $ 71,539
Other 3,925 5,044
------------ -----------
168,725 76,583
Allowance for doubtful accounts (8,309) (8,070)
------------ -----------
$ 160,416 $ 68,513
============ ============
INVENTORIES, NET
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
Raw materials and supplies $ 44,860 $ 56,227
Work-in-process 13,637 14,865
Finished goods 63,566 80,373
------------ ------------
122,063 151,465
Allowance for inventory obsolescence (10,273) (12,709)
------------ ------------
$ 111,790 $ 138,756
============ ============
PROPERTY, PLANT AND EQUIPMENT, NET:
JUNE 30, DECEMBER 31,
1996 1995
------------ -------------
Property, plant and equipment, at cost $ 222,995 $ 209,845
Accumulated depreciation (41,080) (37,358)
------------ -------------
$ 181,915 $ 172,487
============ =============
10. RELATED PARTY TRANSACTION -
On June 30, 1996, the Company made a short term advance to the Chairman
and CEO in the amount of $3,500,000 for certain personal obligations of
the Chairman and CEO. Such amount is expected to be repaid by August
16, 1996. Additionally, the Company anticipates that it will guarantee
$3,600,000 of debt of the Chairman and CEO with a third party. The
guarantee is collateralized by certain stock options of the Chairman
and CEO. Both the transaction and sufficiency of the collateral for the
guarantee were approved by the Board of Directors.
15
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
11. SUBSEQUENT EVENT -
On July 18, 1996, the Company acquired the assets and liabilities of
the Dosimetry Service Division ("Dosimetry") of Siemens Medical
Systems, Inc. ("Siemens Medical") with a net book value of
approximately $1,500,000, for 965,000 shares of the Company's common
stock, valued at approximately $22,700,000, based upon the market price
of the stock at the time the shares were issued. Per the terms of the
purchase, Siemens Medical has the right, exercisable on or before
September 16, 1996, to require the Company to repurchase on September
27, 1996, all of the shares then owned by Siemens Medical for $23.51
per share in cash. The acquisition was accounted for using the purchase
method of accounting. The purchase price allocation is preliminary
pending appraisals, evaluations and other studies of the fair value of
the assets and liabilities acquired.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
Pharmaceutical $ 127,420 $ 112,750 $ 249,530 $ 230,676
Biomedical 16,326 16,023 32,378 30,340
---------- ---------- ----------- ----------
Total Company $ 143,746 $ 128,773 $ 281,908 $ 261,016
========== ========== =========== ==========
Pharmaceutical net sales in Eastern Europe were $84,970,000 and $154,872,000 for
the three and six months ended June 30, 1996, respectively, compared to
$73,786,000 and $144,325,000 for the same periods in 1995. Net sales in the
second quarter of 1996 increased $11,184,000 or 15% primarily due to higher
sales at ICN Oktyabr and additional sales contributed by the Company's new
Russian acquisition, Leksredstva. Net sales at ICN Galenika were slightly higher
compared to 1995, reflecting higher unit sales offset by unfavorable exchange
rates. Pharmaceutical net sales in Eastern Europe for the six months ended June
30, 1996 increased $10,547,000 or 7%, primarily due to additional sales from the
Company's new acquisition, Lekstredstva, as mentioned above, and $12,136,000 of
additional sales contributed by ICN Oktyabr. The Company began consolidating ICN
Oktyabr in the second quarter of 1995. Partially offsetting such increases is a
decrease in sales of $8,174,000, or 6%, at ICN Galenika, where sales for the six
months ended June 30, 1996 were $129,992,000 compared to $138,166,000 for the
same period in 1995. Such decrease is primarily due to changes in translation
rates, partially offset by an increase in unit sales, price increases and
approximately $14,300,000 in export sales.
Pharmaceutical net sales in North America were $20,629,000 and $51,739,000 for
the three months and six months ended June 30, 1996 compared to $18,253,000 and
$47,615,000 for the same periods in 1995. Net sales in the second quarter of
1996 increased $2,376,000 or 13% primarily due to increased unit sales in the
dermatological product line, partially offset by a decrease in unit sales of
Virazole(R) in the amount of $1,089,000. Net sales for the six months ended June
30, 1996 increased $4,124,000 or 9% 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 $8,661,000.
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 seasons 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.
Additionally, future sales may be impacted by a recently approved product
designed to prevent RSV.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Pharmaceutical net sales in Latin America were $11,256,000 and $21,473,000 for
the three and six months ended June 30, 1996, respectively, compared to
$9,840,000 and $17,905,000 for the same periods in 1995. Net sales in the second
quarter and six months ended June 30, 1996 increased $1,416,000 or 14% and
$3,568,000 or 20%, respectively, compared to the same periods in 1995. Such
increases in net sales were primarily due to price increases, partially offset
by currency exchange fluctuations.
Pharmaceutical net sales in Western Europe were $9,381,000 and $19,051,000 for
the three and six months ended June 30, 1996, respectively, compared to
$9,606,000 and $18,488,000 for the same periods in 1995. Net sales in the second
quarter of 1996 decreased $225,000 or 2% primarily due to a decline in Vision
Care and Medical Supplies sales in Holland, partially offset by an increase in
antibiotic unit sales in Spain of $729,000. Net sales for the six months of 1996
increased $563,000 or 3% primarily due to an increase in antibiotic unit sales
in Spain.
Biomedical segment net sales for the three and six months ended June 30, 1996
were $16,326,000 and $32,378,000, respectively, compared to $16,023,000 and
$30,340,000 for the same periods of 1995. Net sales in the second quarter and
six months ended June 30, 1996 increased $303,000 or 2% and $2,038,000 or 7%,
respectively. The increase in net sales for the six months ended June 30, 1996
is primarily due to the effect of the additional sales of diagnostic products
acquired from Becton-Dickinson in May, 1995.
GROSS PROFIT
Gross profit as a percentage of sales was 50% for the three and six months ended
June 30, 1996, compared to 56% and 58% for the same periods in 1995. The
decrease in gross profit margin is primarily due to a decrease in gross margins
at ICN Galenika which had gross margins of 37% and 33% for the three and six
months ended June 30, 1996, respectively, compared to 52% and 50% for the same
periods 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 and a 30% price increase in April 1996. Typically, sales made subsequent to
a devaluation are lower due to higher exchange rates and a lack of immediate
price increases while the cost of sales for inventory manufactured prior to the
devaluation is expensed at a higher (historic) exchange rate. Margins will begin
to improve after a devaluation if price increases are obtained and when older,
higher priced inventory is replaced with inventory manufactured after the
devaluation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales were 33%
and 30% for the three and six months ended June 30, 1996, respectively, compared
to 35% and 35% for the same periods in 1995. This improvement reflects
decreasing expenses at ICN Galenika principally due to differences in the
exchange rates of the Yugoslavian dinar in 1996 compared to 1995. During the
second quarter of 1996, the Company recorded a one-time charge of $3,500,000
related to the settlement of a commercial dispute and a penalty imposed by the
Canadian Patent Price Review Board.
TRANSLATION AND EXCHANGE LOSSES, NET
Translation and exchange losses, net, were $206,000 and $688,000 for the three
and six months ended June 30, 1996, respectively, compared to $352,000 and
$1,650,000 for the same periods in 1995. In the second quarter of 1996, the
Company's translation losses, net, include translation losses of $ $1,234,000
related to ICN Galenika's net monetary asset position, offset by translation
gains of $1,028,000 related to the Company's foreign denominated debt. During
the second quarter of 1995, the Company recorded a translation gain of $168,000
related to its foreign denominated debt, which was partially offset by
translation losses of $438,000 related to ICN Galenika's net positive monetary
asset position. For the six months ended June 30, 1996, the Company's
translation losses, net,
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
include $ 2,264,000 of translation losses related to ICN Galenika's net monetary
asset position, partially offset by translation gains of $1,965,000 related to
the Company's foreign denominated debt. For the six months ended June 30, 1995,
the Company's translation losses, net, included a translation loss of $2,964,000
related to its foreign denominated debt, partially offset by translation gains
of $1,385,000 related to ICN Galenika's net positive monetary asset position.
INTEREST EXPENSE
Interest expense during the three and six months ended June 30, 1996 decreased
$3,256,000 and $5,558,000 compared to the same periods in 1995. This decrease
resulted primarily from the reduction in short and long term debt of the Company
and the capitalization of 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 and six months
ended June 30, 1996, was (5%) and 2%, respectively, compared to 3% and 5% for
the same periods in 1995. The Company's effective rate for the three months
ended June 30, 1996 was below the U.S. statutory rate primarily due to certain
foreign earnings which were taxed at rates significantly below the U.S. rate and
tax benefits arising from domestic tax losses. The effective rate for the six
months ended June 30, 1996 was impacted by a reduction of accrued tax
contingencies based on the current progress of the Company's tax audits.
OPERATIONS IN YUGOSLAVIA
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 six months of 1996, the trend toward a weakening economy
continued. The rate of inflation increased to an approximate annual rate of 120%
and the availability of hard currency had declined along with shortages of local
currency. The suspension of United Nations sanctions at the beginning of the
year provides economic opportunities for Yugoslavia, however, the realization of
the benefits from the suspension will be dependent on the implementation of
economic reform in Yugoslavia that includes increased privatization. ICN
Galenika maintains an approximate 50% market share of the pharmaceutical
business in Yugoslavia. With 81% of ICN Galenika sales arising from government
or government sponsored entities, ICN Galenika is economically dependent on the
government.
The future profitability of ICN Galenika is heavily dependent upon the overall
business climate in Yugoslavia, the political stability of the Yugoslavian
government and the ability of the government to fund health care spending.
As of June 30, 1996, ICN Galenika had a net monetary asset exposure of
$59,000,000 which would be subject to foreign exchange loss if a devaluation of
the dinar were to occur.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1996, cash used in operating activities
totaled $4,488,000 which included the effect of increased levels of accounts
receivable of $88,560,000 primarily at ICN Galenika and North America partially
offset by a decrease in inventory levels of $27,988,000 primarily at ICN
Galenika. The increase of accounts receivable at ICN Galenika of $68,845,000
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 $8,150,000 for the six months ended
June 30, 1996, related primarily to the sale of marketable securities at ICN
Galenika partially offset by $11,578,000 invested in acquisitions, and
$7,939,000 of capital expenditures.
Cash provided by financing activities of $9,102,000 for the first six months of
1996 primarily includes proceeds from issuance of stock of $8,601,000
principally related to funding of acquisitions and $9,500,000 of proceeds from
the exercise of stock options partially offset by net payments of long-term and
short-term debt of $6,374,000, $2,325,000 of dividends paid, and a $3,500,000
loan to an officer of the Company.
On March 14, 1996, the Company's Board of Directors declared a first quarter
cash distribution of $.077 per share payable on April 10, 1996 to shareholders
of record on March 28, 1996.
On June 28, 1996, the Company's Board of Director's declared a second quarter
cash distribution of $.077 per share payable on July 25, 1996 to stockholders of
record on July 11, 1996.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $19,768,000 at June 30, 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 intends aggressively to continue its strategy of targeted expansion
through the acquisition of compatible businesses and product lines and the
formation of strategic alliances, joint ventures and other business
combinations. Should the Company complete any material acquisition, the
Company's success or failure in integrating the operations of the acquired
company may have a material impact on the future growth or success of the
Company.
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 convertible debt
or stock offering or a combination thereof of approximately $100,000,000 prior
to the end of the year.
20
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 15.1: Review Report of Independent Accountants
Exhibit 15.2: Awareness Letter 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,
1996.
21
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 13, 1996 /S/ MILAN PANIC
----------------------------------------
Milan Panic
President and Chief Operating Officer
Date: August 13, 1996 /S/ JOHN E. GIORDANI
----------------------------------------
John E. Giordani
Executive Vice President and Chief
Financial Officer