- -------------------------------------------------------------------------------
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, 1997
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 2, 1997 was 34,495,039.
- -------------------------------------------------------------------------------
ICN PHARMACEUTICALS, INC.
INDEX
Page
NUMBER
------
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
March 31, 1997 and December 31, 1996 ................................. 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1997 and 1996 ......................... 4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 ......................... 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................................... 13
PART II - OTHER INFORMATION
Item 1. Litigation...................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
SIGNATURES............................................................... 20
ii
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 42,994 $ 39,366
Restricted cash 552 552
Receivables, net 208,520 258,531
Notes receivable 80,000 00
Inventories, net 109,442 120,973
Prepaid expenses and other current assets 27,644 24,979
------------ -----------
Total current assets 469,152 444,401
Property, plant and equipment, net 229,902 234,209
Deferred taxes, net 34,502 34,334
Other assets 36,603 32,230
Goodwill and intangibles, net 35,719 33,477
------------ -----------
Total assets $ 805,878 $ 778,651
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 52,912 $ 62,049
Accrued liabilities 51,047 55,383
Notes payable 17,182 13,231
Current portion of long-term debt 10,958 5,961
Income taxes payable 1,626 1,013
------------ -----------
Total current liabilities 133,725 137,637
Long-term debt, less current portion:
Convertible into common stock 126,743 130,941
Other long-term debt 44,343 45,548
Deferred license and royalty income 13,372 13,850
Other liabilities 17,397 15,622
Minority interest 107,337 96,583
Common stock subject to Put Agreement,
1,065 shares 23,120 23,120
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized; 46 and 50 shares of Series B issued
and outstanding at March 31, 1997 and December
31, 1996, respectively ($50,000 liquidation
preference) 1 1
Common stock, $.01 par value; 100,000 shares
authorized; 34,362 and 33,422 shares outstanding
at March 31, 1997 and December 31, 1996,
respectively (including shares subject to
put agreement) 331 324
Additional capital 381,403 368,187
Retained deficit (10,441) (25,915)
Foreign currency translation adjustments (31,453) (27,247)
----------- -----------
Total stockholders' equity 339,841 315,350
----------- -----------
Total liabilities and stockholders' equity $ 805,878 $ 778,651
=========== ===========
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, 1997 AND
1996 (UNAUDITED - 000'S OMITTED, EXCEPT PER
SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
---------- ----------
Net sales $ 158,968 $ 138,162
Cost of sales 74,804 68,028
---------- ----------
Gross profit 84,164 70,134
Selling, general and administrative expenses 45,435 38,236
Research and development costs 4,310 3,531
---------- ----------
Income from operations 34,419 28,367
Translation and exchange losses, net 3,995 482
Interest income (539) (970)
Interest expense 3,959 2,702
---------- ----------
Income before provision (benefit) for income
taxes and minority interest 27,004 26,153
Provision (benefit) for income taxes (196) 1,938
Minority interest 4,888 2,212
---------- ----------
Net income $ 22,312 $ 22,003
========== ==========
Primary:
Net income per share $ .50 $ .65
========== ==========
Shares used in per share computation 36,678 33,486
========== ==========
Fully Diluted:
Net income per share $ .48 $ .64
========== ==========
Shares used in per share computation 41,881 39,329
========== ==========
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, 1997 AND 1996
(UNAUDITED - 000'S OMITTED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,312 $ 22,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,365 3,095
Decrease in allowance for losses
on accounts receivable (440) (193)
Translation and exchange losses, net 3,995 482
Minority interest 4,888 2,212
Increase in accounts and notes receivable (34,606) (44,366)
Decrease in inventories 14,207 17,968
Increase in prepaid expenses (2,338) (3,221)
Decrease (increase) in deferred taxes (168) 3,000
Changes in other operating assets and liabilities, net 3,190 (6,723)
--------- --------
Net cash provided by (used in) operating activities 16,405 (5,743)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,986) (3,736)
Sale of marketable securities 00 27,667
Acquisitions and other (11,298) (4,744)
--------- --------
Net cash (used in) provided by investing activities (14,284) 19,187
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable 3,989 141
Net payments of long-term debt (2,785) (3,819)
Proceeds from exercise of stock options 3,237 3,324
Proceeds from issuance of stock 00 6,000
Dividends paid (2,645) (2,361)
--------- --------
Net cash provided by financing activities 1,796 3,285
--------- --------
Effect of exchange rate changes on cash (289) 6
--------- --------
Net increase in cash and cash equivalents 3,628 16,735
Cash and cash equivalents at beginning of period 39,366 24,094
--------- --------
Cash and cash equivalents at end of the period $ 42,994 $ 40,829
========= ========
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, 1996.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. 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. Investments in 20% through
50% owned affiliated companies are included under the equity method where the
Company exercises significant influence over operating and financial affairs.
Investments in less than 20% owned companies are recorded at cost. All
significant intercompany account balances and transactions have been eliminated.
PER SHARE INFORMATION
Net income per share is based on net income after preferred stock dividend
requirements, the weighted average number of common shares outstanding,
including shares issued subject to put option, and the dilutive effect of common
share equivalents. Common share equivalents represent shares issuable for
outstanding options, on the assumption that the proceeds would be used to
repurchase shares in the open market, and the shares issuable related to certain
of the Company's convertible preferred stock and to certain of the Company's
convertible debentures. Such convertible preferred stock and 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 25, 1997, the Company's Board of Directors declared a first quarter
cash dividend ("distribution") of $.08 per share, payable on April 23, 1997, to
stockholders of record on April 9, 1997.
2. RELATED PARTY TRANSACTIONS -
On April 15, 1997, the Company made a short-term advance to the Chairman and CEO
in the amount of $327,000.
3. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes for the three months ended March 31, 1997 and 1996,
was $1,806,000 and $900,000, respectively.
Cash paid for interest for the three months ended March 31, 1997 and 1996 was
$1,833,000 and $2,366,000, respectively.
In January of 1997, the Company issued approximately 541,000 shares of common
stock as payment of its $10,000,000 obligation under the 1987 class action
settlement.
During the quarter, the Company accrued a first quarter preferred dividend of
$692,000 and a first quarter common stock dividend of $2,752,000.
During the quarter, the Company issued approximately 39,000 shares of common
stock as payment of a fourth quarter 1996 preferred stock dividend of $750,000.
8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
4. GEOGRAPHIC DATA -
The following table sets forth the amount of net sales and operating income of
the Company by geographical areas (includes pharmaceuticals and biomedical
operations) for the three months ended March 31, 1997 and 1996 and the
identifiable assets of the Company by geographical areas as of March 31, 1997
and December 31, 1996 (in thousands):
MARCH 31, MARCH 31,
1997 1996
---------- -----------
SALES:
United States $ 28,484 $ 34,883
Canada 4,996 4,783
---------- ----------
North America 33,480 39,666
Latin America (principally Mexico) 13,441 10,763
Western Europe 14,269 15,631
Yugoslavia 51,022 61,773
Russia 26,129 8,129
Hungary 15,129 00
---------- ----------
Eastern Europe 92,280 69,902
Asia, Africa, and Australia 5,498 2,200
---------- ----------
Total $ 158,968 $ 138,162
========== ==========
OPERATING INCOME:
United States $ 8,017 $ 16,180
Canada 1,868 1,507
---------- ----------
North America 9,885 17,687
Latin America (principally Mexico) 2,711 2,425
Western Europe 1,184 1,538
Yugoslavia 19,307 10,508
Russia 6,438 3,055
Hungary 3,090 00
---------- ----------
Eastern Europe 28,835 13,563
Asia, Africa, and Australia 144 96
Corporate (8,340) (6,942)
---------- ----------
Total $ 34,419 $ 28,367
========== ==========
9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
IDENTIFIABLE ASSETS:
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
United States $ 90,840 $ 105,670
Canada 7,269 7,433
----------- ------------
North America 98,109 113,103
Latin America (principally Mexico) 28,764 30,691
Western Europe 54,927 56,578
Yugoslavia 357,446 342,983
Russia 64,481 54,990
Hungary 74,808 77,245
----------- -----------
Eastern Europe 496,735 475,218
Asia, Africa, and Australia 26,301 2,524
Corporate 101,042 100,537
----------- -----------
Total $ 805,878 $ 788,651
=========== ===========
5. ICN YUGOSLAVIA -
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
economic conditions in Yugoslavia include continuing liquidity problems, a
history of high inflation, unemployment, a weakened banking system and a high
trade deficit. The future of the economic and political environment of
Yugoslavia is uncertain and could deteriorate to the point that a material
adverse impact on the Company's financial position and results of operations
could occur.
ICN Yugoslavia began the year with a net asset monetary exposure of $134,000,000
which was subject to foreign exchange loss if a devaluation of the dinar were to
occur. During the quarter, the Company was successful in reducing its monetary
exposure by converting dinar denominated accounts receivable into notes
receivable payable in dinars, but fixed in dollar amounts. The first conversion
was made early in the quarter with $50,000,000 accounts receivable converted
into a one year note with interest at the European LIBOR rate plus one percent.
A second conversion was arranged in the middle of the quarter through an
agreement with the Yugoslavian government to purchase $50,000,000 of drugs. The
sales under this agreement will be converted into a non-interest bearing note
receivable that has special payment guarantees with the payment fixed in dollar
amounts. Approximately $30,000,000 of accounts receivable has been converted to
notes receivable under this arrangement with the remainder expected to be
converted in the second quarter. The second agreement also allows the Company to
offset payroll tax obligations against outstanding accounts receivable balances.
As of March 31, 1997, ICN Yugoslavia had a net monetary asset position of
$47,000,000 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)
MARCH 31, 1997
(UNAUDITED)
6. ACQUISITIONS -
During the first quarter of 1997, the Company finalized the terms and conditions
of the joint venture between ICN China, Inc. ("ICN China"), a wholly owned
subsidiary of the Company, and Wuxi Pharmaceutical Corporation ("Wuxi"), a
Chinese state-owned company. The newly formed limited liability company (the
"Chinese Joint Venture Entity") was established for the production and sale of
pharmaceutical products. The Chinese Joint Venture Entity is 75% owned by ICN
China and 25% owned by Wuxi. Wuxi is a supplier of injectable antibiotics. Wuxi
contributed its existing operation, with an approximate net book value of
$6,000,000, to the Chinese Joint Venture Entity and ICN China will contribute a
total of $24,000,000 in cash over three years, primarily for the construction of
a new pharmaceutical production plant and the purchase of related machinery and
equipment. 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. The acquisition is not material to the financial position or results
of operations of the Company.
7. COMMITMENTS AND CONTINGENCIES -
In a 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 I 10b-5 promulgated thereunder.
Plaintiffs seek unspecified compensatory damages, pre-judgment and post-judgment
interest and attorneys' fees and costs. Plaintiffs 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
granted. Defendants filed their answer to the Securities Complaint, and are
actively engaged in the pre-trial discovery process. This trial is currently
scheduled to commence in January 1998. 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 (in the one lawsuit) 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. The Company
believes that these suits are without merit and intends to defend them
vigorously.
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 1995
Actions and 1994 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.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
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 and continues to produce 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 has and
continues to cooperate in the production of documents pursuant to the Subpoena.
A number of current and former employees of the Company have been interviewed by
the government in connection with the investigation.
The Company is a party to a number of other pending or threatened lawsuits. In
the opinion of management, the ultimate resolution of these other matters will
not have a material effect on the Company's consolidated financial position or
results of operations.
Commitments: In January 1997, ICN Yugoslavia entered into a forward exchange
contract with a Yugoslavian bank to purchase $18,700,000 in hard currency at a
fixed exchange rate of 5.25 dinars to one U.S. dollar. Under the terms of the
agreement, the bank is to provide $5,000,000, $5,700,000 and $8,000,000 by
August 30, 1997, September 30, 1997 and November 3, 1997, respectively, to ICN
Yugoslavia. The dinars shall be paid to the bank two days after receipt of the
hard currency. Should the bank fail to provide the hard currency, ICN Yugoslavia
is under no obligation to pay the dinars. Additionally, this contract is
automatically canceled should there be an official devaluation of the dinar.
12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
8. DETAIL OF CERTAIN ACCOUNTS - (000's omitted)
RECEIVABLES, NET
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Trade accounts receivables $ 205,731 $ 257,619
Other 10,809 9,782
------------ ------------
216,540 267,401
Allowance for doubtful accounts (8,020) (8,870)
------------ ------------
$ 208,520 $ 258,531
============ ============
INVENTORIES, NET
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Raw materials and supplies $ 45,291 $ 48,656
Work-in-process 11,897 14,625
Finished goods 62,836 67,845
------------ ------------
120,024 131,126
Allowance for inventory obsolescence (10,582) (10,153)
------------ ------------
$ 109,442 $ 120,973
============ ============
PROPERTY, PLANT AND EQUIPMENT, NET:
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Property, plant and equipment, at cost $ 279,195 $ 280,629
Accumulated Depreciation (49,293) (46,420)
------------ ------------
$ 229,902 $ 234,209
============ ============
13
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,
--------------------------
1997 1996
----------- ----------
Pharmaceutical $ 140,216 $ 122,110
Biomedical 18,752 16,052
----------- ----------
Total Company $ 158,968 $ 138,162
=========== ==========
Pharmaceutical net sales for the three months ended March 31, 1997 and 1996 were
$140,216,000 and $122,110,000, respectively. The increase in pharmaceutical net
sales of $18,106,000 or 15% reflects additional sales from the Company's
acquisitions in Eastern Europe and China and improvement in Latin America sales
which were partially offset by lower sales in North America and Yugoslavia.
Pharmaceutical net sales in Eastern Europe were $92,280,000 for the three months
ended March 31, 1997 compared to $69,902,000 for the same period in 1996, an
increase of $22,378,000 or 32%. The Company's new acquisitions of Alkaloida in
Hungary, Leksredstva and Polypharm in Russia have contributed $29,688,000 of
sales to the Eastern European region during the first quarter of 1997. Sales in
Russia, excluding acquisitions, grew 42% with $11,570,000 recorded in the
current quarter compared to $8,129,000 recorded last year. Sales in Yugoslavia
were $10,751,000 lower than last year primarily related to decreased unit sales.
Pharmaceutical net sales in North America were $22,276,000 for the three months
ended March 31, 1997 compared to $31,110,000 for the same period in 1996. This
decrease in net sales of $8,834,000 is primarily due to a decrease in unit sales
of Virazole(R). Virazole(R) is used in aerosol form to treat infants
hospitalized with respiratory infection caused by respiratory syncytial virus
("RSV") and is the only antiviral therapeutic for this infection. RSV is a
seasonal illness which occurs primarily in late fall through early spring. Sales
of Virazole(R) this quarter have been adversely impacted by increased wholesale
inventory levels that developed early in the 1995/1996 season along with
continuing trends in the industry toward cost containment. Additionally, sales
of Virazole(R) may have been (and may continue to be) affected by a January 1996
change in the American Academy of Pediatrics guidelines for the use of
Virazole(R) in RSV from "should be used" to "may be considered". Future sales
may also be impacted by the increased level of inventory still remaining at the
wholesale level and by a recently approved product designed to prevent RSV. Due
to the fact that RSV is a seasonal disease, Virazole(R) sales from year to year
are subject to the incidence and severity of the disease which cannot be
predicted with certainty.
Pharmaceutical net sales in Latin America were $12,805,000 for the three months
ended March 31, 1997 compared to $10,217,000 for the same period in 1996. This
increase in net sales of $2,588,000 or 25% is primarily due to price increases
and increased unit volume.
Pharmaceutical net sales in Western Europe were $8,762,000 for the three months
ended March 31, 1997 compared to $9,670,000 for the same period in 1996. This
decrease in net sales of $908,000 or 9% is primarily due to lower unit sales of
antibiotics in Spain and changes in translation rates.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION (CONTINUED)
Pharmaceutical net sales in Asia, Africa and Australia were $4,093,000 for the
three months ended March 31, 1997 compared to $1,211,000 for the same period in
1996. This increase of $2,882,000 is primarily due to the additional sales
contributed by the Company's acquisition of Wuxi Pharmaceutical Corporation
("Wuxi") in China, which the Company started consolidating in the first quarter
of 1997.
Biomedical segment net sales for the three months ended March 31, 1997 were
$18,752,000 compared to $16,052,000 for the same period of 1996. This increase
in net sales of $2,700,000 or 17% is primarily due to the effect of additional
dosimetry sales resulting from the acquisition of the former Siemens Dosimetry
Service in July of 1996 of $3,618,000, partially offset by a decrease in
instrument sales resulting from the sale of the Company's instrument business in
March 1996.
GROSS PROFIT
Gross profit as a percentage of sales was 53% for the three months ended March
31, 1997 compared to 51% for the same period in 1996. The increase in gross
profit margin is due to improvement in gross profit margins primarily at ICN
Yugoslavia where gross profit margins increased to 50% from 29% in 1996. ICN
Yugoslavia margins were lower last year due to the impact of the devaluation of
the dinar in November 1995. The improvement at ICN Yugoslavia was partially
offset by the gross profit margins resulting from the recent acquisitions in
Eastern Europe of Alkaloida in Hungary and Leksredstva and Polypharm in Russia.
The sales contributed by these acquisitions carried gross profit margins of
approximately 35%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $45,345,000 or 29% of sales
for the three months ended March 31, 1997 compared to $38,236,000 or 28% of
sales for the same period in 1996. The increase of $7,109,000 is primarily due
to the effect of the additional selling, general and administrative expenses
contributed by the acquisitions of Alkaloida in Hungary, Leksredstva and
Polypharm in Russia, and the former Siemens Dosimetry Service in the United
States.
RESEARCH AND DEVELOPMENT
Research and development expenditures increased 22% primarily due to the
acquisition of personnel and modern research facilities at Alkaloida in Hungary.
TRANSLATION AND EXCHANGE LOSSES, NET
Translation and exchange losses, net were $3,995,000 for the three months ended
March 31, 1997 compared to $482,000 for the same period in 1996. In the first
quarter of 1997, translation losses include $4,635,000 of translation losses
related to ICN Yugoslavia's net monetary asset position, partially offset by
translation gains of $1,427,000 related to the Company's foreign denominated
debt. In the first quarter of 1996, the Company's translation losses include
translation losses of $1,245,000 related to ICN Yugoslavia's net monetary asset
position, partially offset by translation gains of $937,000 related to the
Company's foreign denominated debt.
INTEREST EXPENSE
Interest expense during the three months ended March 31, 1997 increased
$1,257,000 compared to the same period in 1996. This increase resulted primarily
from the increase in short and long term debt of the Company primarily due to
the effect of the debt assumed with the acquisition of Alkaloida in Hungary.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION (CONTINUED)
TAXES
The Company operates in many regions where the tax rate is low or it benefits
from tax exemptions. In the current quarter, the Company recorded a tax benefit
resulting from the favorable resolution of a $1,255,000 tax liability in Spain.
Additionally, the Company recorded a deferred tax benefit of approximately
$500,000 resulting from changes in Spanish tax law. In the first quarter of
1996, the Company benefited from a reduction of accrued tax contingencies based
on progress of the Company's tax audits.
COMPUTATION OF PER SHARE EARNINGS
In the Company's calculation of per share earnings, certain adjustments are made
to reported net income to arrive at an adjusted net income that is divided by
the number of shares for the period. Last year these adjustments related to the
impact of the Company's convertible debt, while in the current quarter there are
additional adjustments related to preferred dividends. In October of 1996, the
Company issued $50,000,000 of preferred stock having a 6% dividend and a
convertibility feature that allows conversion into common stock at a discount
from the current market price at the time of the exercise. This discount
represents an embedded dividend and is treated similar to the 6% stated
preferred dividend in the calculation of earnings per share.
In the current quarter, the preferred stock is not assumed to be converted as to
do so would be anti-dilutive. Accordingly, the earnings per share calculation
includes an adjustment to net income of $3,309,000 related to the stated
preferred and embedded dividends compared to no preferred dividend deduction
last year. The embedded dividend is deducted from earnings in the per share
calculation based on when the convertible feature of the preferred becomes
exercisable, which occurs over a year with most of the discount amortized early
on. The discount will be fully amortized by the third quarter of this year with
amortization in the second and third quarter of 1997 of approximately $650,000.
The ongoing 6% stated preferred dividend is approximately $700,000 which will be
deducted each quarter from reported earnings as long as the preferred remain
outstanding.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
ICN YUGOSLAVIA
ICN Yugoslavia, a 75 percent owned subsidiary, operates in a business
environment that is subject to significant economic volatility and political
instability. The economic conditions in Yugoslavia include continuing liquidity
problems, a history of high inflation, unemployment, a weakened banking system
and a high trade deficit. The future of the economic and political environment
of Yugoslavia is uncertain and could deteriorate to the point that a material
adverse impact on the Company's financial position and results of operations
could occur.
ICN Yugoslavia began the year with a net asset monetary exposure of $134,000,000
which was subject to foreign exchange loss if a devaluation of the dinar were to
occur. During the quarter, the Company was successful in reducing its monetary
exposure by converting dinar denominated accounts receivable into notes
receivable payable in dinars, but fixed in dollar amounts. The first conversion
was made early in the quarter with $50,000,000 accounts receivable converted
into a one year note with interest at the European LIBOR rate plus one percent.
A second conversion was arranged in the middle of the quarter through an
agreement with the Yugoslavian government to purchase $50,000,000 of drugs. The
sales under this agreement will be converted into a non-interest bearing note
receivable that has special payment guarantees with the payment fixed in dollar
amounts. Approximately $30,000,000 of accounts receivable has been converted to
notes receivable under this arrangement with the remainder expected to be
converted in the second quarter. The second agreement also allows the Company to
offset payroll tax obligations against outstanding accounts receivable balances.
As of March 31, 1997, ICN Yugoslavia had a net monetary asset position of
$47,000,000 which would be subject to foreign exchange loss if a devaluation of
the dinar were to occur.
The Company was able to reduce its overall accounts receivable balance from the
beginning of the year through collections of approximately $21,000,000 and the
conversion of $80,000,000 of accounts receivable into notes receivable discussed
above. As of March 31, 1997, the accounts receivable balance was $98,102,000.
Based on current levels of collections, the Company will impose even stricter
credit terms on its customers which will likely result in lower future domestic
sales. The willingness of the government to provide the Company protection
against devaluation on its receivables in exchange for longer payment terms is a
reflection of the strict adherence to government policy on controlling inflation
by limiting the amount of hard currency in circulation. This policy was
initially established with the start of the stabilization program in 1994.
In spite of lower quarterly sales of $10,751,000 compared to last year, the
operating income of ICN Yugoslavia increased to $19,307,000 for the quarter from
$10,508,000 last year, an increase of 84 percent. The increase is primarily due
to improved gross margins of 50 percent in the current quarter compared to 29%
last year. Last year's quarterly margins reflected the impact of the devaluation
of the dinar in November of 1995. After deducting the impact of foreign
translation losses, ICN Yugoslavia contributed $11,279,000 of net income
compared to $8,092,000 last year. This improvement over last year should not be
viewed as an indication of improvement to be expected in future quarters. The
Yugoslavian economy is weak and liquidity continues to be a problem.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997, cash provided by operating
activities totaled $16,405,000 which included the effect of $22,312,000 of
earnings and a decrease in inventory levels of $14,207,000, primarily at ICN
Yugoslavia. The level of accounts and notes receivable increased $34,606,000,
primarily at ICN Yugoslavia resulting from the lengthening of the collection
period of receivables, the conversion of accounts receivables into one-year
notes receivables and general liquidity problems in Yugoslavia.
Cash used in investing activities of $14,284,000 for the three months ended
March 31, 1997 include $11,936,000 of cash paid for acquisitions that were
initially acquired in 1996.
Cash provided by financing activities of $1,796,000 for the first quarter of
1997 primarily includes $3,237,000 of proceeds from the exercise of stock
options and $3,989,000 of proceeds from short term borrowings partially offset
by net payments of long-term debt of $2,785,000 and $2,645,000 of dividends
paid. The increase in 1997 dividend payments is primarily due to higher levels
of shares outstanding and an increase in cash dividends from the same period in
1996.
On March 25, 1997, the Company's Board of Directors declared a first quarter
cash dividend of $.08 per share payable on April 23, 1997 to shareholders of
record on April 9, 1997.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $14,438,000 at March 31, 1997, which is primarily denominated
in Swiss francs.
In April 1997, the Company obtained and used a $15,000,000 revolving credit
facility with a European financial institution. Funds borrowed under this
facility will be used for general operating requirements at a rate of LIBOR plus
one percent. This credit facility contains covenants that include restrictions
on redemption or repurchase of stock, limitation on dividend payments and on
acquiring new debt and the maintenance of certain financial ratios.
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 may seek additional financing or issue
additional common stock.
DEMANDS ON LIQUIDITY: Management believes that funds generated from operations
will be sufficient to meet its normal operating requirements during the coming
year. The Company's recent acquisitions in Hungary, Russia and China will
require $23,000,000 of cash in 1997. Also, if the historic rate of growth in
Eastern Europe continues, these operations will require increasing levels of
working capital and funds for additional facilities or upgrading of existing
facilities. Additionally, the Company has several preliminary acquisition
prospects that may require significant funds in 1997. Management believes that
funds generated from operations will not be sufficient for all of these needs
and will seek refinancing of existing short term debt, some of which was assumed
in the 1996 acquisitions and additional financing through debt or equity issues,
although there can be no assurance that the Company can raise additional funds.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 on the computation
and presentation of earnings per share ("EPS"). SFAS No. 128 simplifies the
computation for and replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement. The statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, and requires restatement of all prior period earnings per share data
presented. Earlier application is not permitted. The Company will implement the
accounting standard beginning with its annual financial statements for the year
ended December 31, 1997.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995.
This Form 10-Q contains statements that constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Form 10-Q and include
statements regarding, among other matters, the factors affecting the Company's
financial condition or results of operations, liquidity in Yugoslavia,
management of monetary exposure, economic conditions in Yugoslavia, credit
policies in Yugoslavia, and trends in financial results. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements. Such factors are discussed in this Form 10-Q and also
include, without limitation, the Company's dependence on foreign operations
(which are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and exchange control,
limitations on foreign participation in local enterprises, health-care
regulations and other restrictive governmental conditions); the risk of
operations in Yugoslavia; Eastern Europe, Russia and China in light of the
unstable economies, political and regulatory conditions in such countries; the
Company's ability to successfully develop and commercialize future products; the
limited protection afforded by the patents relating to Virazole(R), and possibly
on future drugs, techniques, processes or products the Company may develop or
acquire; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; the results of lawsuits pending against the
Company; the Company's dependence on its management, including Milan Panic, its
Chairman and Chief Executive Officer; the Company's potential product liability
exposure and lack of any insurance coverage thereof; government regulation of
the pharmaceutical industry (including review and approval for new
pharmaceutical products by the FDA in the United States and comparable agencies
in other countries) and competition.
19
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 March 31,
1997.
20
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 14, 1997 /S/ MILAN PANIC
------------------------------------------
Milan Panic
Chairman of the Board and
Chief Operating Officer
Date: May 14, 1997 /S/ JOHN E. GIORDANI
------------------------------------------
John E. Giordani
Executive Vice President and
Chief Financial Officer