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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment Number 1 to Form 10-K Filed March 31, 1997)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
[ ] 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 545-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
- ------------------------------- ----------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
(INCLUDING ASSOCIATED PREFERRED
STOCK PURCHASE RIGHTS)
8 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 1999 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 14, 1997, was approximately $870,503,000.
The number of outstanding shares of common stock as of March 14, 1997
was 34,320,429.
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List hereunder the following documents if incorporated by reference and the part
of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is
incorporated: ICN Pharmaceuticals, Inc.'s definitive Proxy Statement for the
1997 Annual Meeting of Stockholders, to be filed not later than 120 days after
the end of the fiscal year covered by this report, is incorporated by reference
into Part III.
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25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 1996
Report of independent accountants ........................................ 26
Financial statements:
Consolidated balance sheets at December 31, 1996 and 1995.............. 27
For the years ended December 31, 1996, 1995 and 1994:
Consolidated statements of income...................................... 28
Consolidated statements of stockholders' equity........................ 29
Consolidated statements of cash flows.................................. 30
Notes to consolidated financial statements............................. 31
Schedule supporting the consolidated financial statements for the
years ended December 31, 1996, 1995 and 1994:
II.-- Valuation and qualifying accounts................................ 60
The other schedules have not been submitted because they are not
applicable.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders
of ICN Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of ICN Pharmaceuticals, Inc. (a Delaware corporation,
formerly SPI Pharmaceuticals, Inc.) and Subsidiaries listed in the index on page
25 of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 13 to the financial statements, as of December 31,
1996, the Company has net monetary assets of $134,000,000 at ICN Yugoslavia
which would be subject to foreign exchange loss if a devaluation of the
Yugoslavian dinar were to occur.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ICN Pharmaceuticals, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 4, 1997
27
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
1996 1995
---- ----
Current Assets:
Cash and cash equivalents $ 39,366 $ 24,094
Restricted cash 552 538
Marketable securities -- 27,536
Receivables, net 258,531 68,513
Inventories, net 120,973 138,756
Prepaid expenses and other current assets 24,979 24,179
------------ -----------
Total current assets 444,401 283,616
Property, plant and equipment (at cost), net 234,209 172,487
Deferred taxes, net 34,334 34,692
Other assets 32,230 21,828
Goodwill and intangibles, net 33,477 5,675
------------ -----------
$ 778,651 $ 518,298
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 62,049 $ 33,402
Accrued liabilities 55,383 39,031
Notes payable 13,231 4,426
Current portion of long-term debt 5,961 7,650
Income taxes payable 1,013 8,305
------------ -----------
Total current liabilities 137,637 92,814
Long-term debt, less current portion:
Convertible into common stock 130,941 140,951
Other long-term debt 45,548 13,242
Deferred license and royalty income 13,850 15,139
Other liabilities 15,622 31,444
Minority interest 96,583 62,536
Common stock subject to Put Agreement,
1,065 shares 23,120 --
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares
authorized; 50 shares of Series B issued and
outstanding at December 31, 1996 ($50,000
liquidation preference) 1 --
Common stock, $.01 par value; 100,000 shares
authorized; 33,422 and 30,420 shares issued
and outstanding at December 31, 1996 and 1995,
respectively (including shares subject to
Put Agreement) 324 304
Additional capital 368,187 290,106
Retained deficit (25,915) (105,844)
Foreign currency translation adjustment (27,247) (22,624)
Unrealized gain on marketable securities -- 230
------------ -----------
Total stockholders' equity 315,350 162,172
------------ -----------
$778,651 $ 518,298
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The accompanying notes are an integral part of these consolidated statements.
28
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
---- ---- ----
Net sales $ 614,080 $ 507,905 $ 366,851
Cost of sales 291,807 206,049 182,946
----------- ----------- -----------
Gross profit 322,273 301,856 183,905
Selling, general and administrative expenses 192,441 191,459 112,919
Royalties to affiliates, net -- -- 7,468
Research and development costs 15,719 17,231 7,690
Write-off of purchased research
and development -- -- 221,000
----------- ----------- -----------
Income (loss) from operations 114,113 93,166 (165,172)
Translation and exchange (gain) loss, net 2,282 (9,484) 191
Interest income (3,001) (6,488) (4,728)
Interest expense 15,780 22,889 9,317
----------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes and minority interest 99,052 86,249 (169,952)
Provision (benefit) for income taxes (6,815) 2,997 10,360
Minority interest 18,939 15,915 3,269
----------- ----------- -----------
Net income (loss) $ 86,928 $ 67,337 $ (183,581)
=========== =========== ===========
Primary:
Net income (loss) per share $ 2.40 $ 2.20 $ (7.93)
=========== =========== ===========
Common shares used in computation 34,919 30,623 23,138
=========== =========== ===========
Fully Diluted:
Net income per share $ 2.27 $ 2.19
=========== ===========
Common shares used in computation 40,138 37,981
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
29
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS), EXCEPT PER SHARE DATA)
FOREIGN UNREALIZED GAIN
RETAINED CURRENCY (LOSS) ON
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS TRANSLATION MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS SECURITIES TOTAL
------ ------ ------ ------ ------- --------- ----------- ----------- -----
BALANCE AT DECEMBER 31, 1993 -- $ -- 20,101 $ 202 $ 91,449 $ 70,973 $ (6,745) $ -- $ 155,879
Exercise of stock options -- -- 80 1 587 -- -- -- 588
Translation adjustments -- -- -- -- -- -- (9,964) -- (9,964)
Tax benefit of stock options
exercised -- -- -- -- 134 -- -- -- 134
Stock issued in Merger -- -- 6,477 65 134,328 -- -- -- 134,393
Net unrealized loss on
marketable securities -- -- -- -- -- -- -- (3,432) (3,432)
Shares issued as employee
compensation -- -- 70 1 1,090 -- -- -- 1,091
Cash dividend ($.26 per share) -- -- -- -- -- (6,181) -- -- (6,181)
Effect of 1994 quarterly stock
dividends and distributions -- -- 832 8 17,410 (17,437) -- -- (19)
Effect of stock distribution
declared in March 1995 -- -- 468 5 6,715 (6,720) -- -- --
Net loss -- -- -- -- -- (183,581) -- -- (183,581)
---------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 -- -- 28,028 282 251,713 (142,946) (16,709) (3,432) 88,908
Exercise of stock options -- -- 503 4 3,698 -- -- -- 3,702
Translation adjustments -- -- -- -- -- -- (5,915) -- (5,915)
Issuance of common stock in
connection with acquisitions -- -- 715 7 11,073 -- -- -- 11,080
Net unrealized gain on
marketable securities -- -- -- -- -- -- -- 3,662 3,662
Tax benefit of stock options
exercised -- -- -- -- 1,300 -- -- -- 1,300
Cash dividends ($.28 per share) -- -- -- -- -- (7,902) -- -- (7,902)
Effect of 1995 quarterly stock
distributions -- -- 1,174 11 22,322 (22,333) -- -- --
Net income -- -- -- -- -- 67,337 -- -- 67,337
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 -- -- 30,420 304 290,106 (105,844) (22,624) 230 162,172
Exercise of stock options -- -- 868 9 10,158 -- -- -- 10,167
Translation adjustments -- -- -- -- -- -- (4,623) -- (4,623)
Issuance of preferred stock 50 1 -- -- 47,391 -- -- 47,392
Issuance of common stock in
connection with acquisitions -- -- 357 4 6,841 -- -- -- 6,845
Issuance of common stock -- -- 712 7 12,091 -- -- 12,098
Net unrealized gain on
marketable securities -- -- -- -- -- -- -- (230) (230)
Tax benefit of stock options
exercised -- -- -- -- 1,600 -- -- -- 1,600
Cash dividends ($.23 per share) -- -- -- -- -- (6,999) -- -- (6,999)
Net income -- -- -- -- -- 86,928 -- -- 86,928
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 50 $ 1 32,357 $ 324 $ 368,187 $ (25,915) $(27,247) -- $315,350
==============================================================================================
The accompanying notes are an integral part of these consolidated statements.
30
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 86,928 $ 67,337 $ (183,581)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,292 13,814 9,248
(Decrease) increase in allowance for losses on
accounts receivable 4,345 (1,262) 1,410
Write-off of purchased research and development -- -- 221,000
Foreign exchange (gains) losses, net 2,282 (9,484) 191
Loss (gain) on sale of fixed assets 982 10 (294)
(Decrease) increase in inventory allowances 106 (2,310) 3,835
Other non-cash gains (387) (331) --
Minority interest 18,939 15,915 3,451
Change in assets and liabilities, net of effects of
acquired companies:
Receivables (181,726) 524 (30,270)
Inventories 43,306 (33,950) 25,823
Prepaid expenses and other assets (11,618) (11,461) (20,137)
Proceeds from license and royalty fees -- 23,000 --
Other liabilities and deferred income taxes (10,795) 19,120 699
Trade payables and accrued liabilities 13,683 5,410 6,795
Income taxes payable (7,885) (7,006) 4,387
---------- ---------- ---------
Net cash (used in) provided by operating activities (25,548) 79,326 42,557
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (26,216) (49,693) (20,205)
Proceeds from sale of fixed assets 6,954 64 164
Sale of marketable securities 27,663 6,204 --
Decrease in restricted cash -- 887 --
Cash acquired in connection with acquisitions
(including $1,425 of restricted cash in 1994) 859 -- 9,921
Acquisition of foreign license rights,
product lines and businesses (51,222) (4,495) --
Other, net -- 8 (1,270)
---------- ---------- ---------
Net cash used in investing activities (41,962) (47,025) (11,390)
---------- ---------- ---------
Cash flows from financing activities:
Net increase (decrease) in notes payable (10,908) 268 (9,174)
Proceeds from issuance of long-term debt 20,975 284 117,008
Payments on long-term debt (13,984) (52,623) (82,409)
Payments to former affiliates -- -- (23,718)
Proceeds from issuance of preferred stock 47,392 -- --
Proceeds from stock issuance 32,842 5,753 --
Proceeds from issuance of stock put right 3,195 0 0
Proceeds from exercise of stock options 10,167 3,702 588
Dividends paid (6,999) (7,902) (5,214)
---------- ----------- ---------
Net cash (used in) provided by financing activities 82,680 (50,518) (2,919)
---------- ---------- ---------
Effect of exchange rate changes on cash 102 (65) (649)
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents 15,272 (18,282) 27,599
Cash and cash equivalents at beginning of year 24,094 42,376 14,777
---------- ---------- ---------
Cash and cash equivalents at end of year $ 39,366 $ 24,094 $ 42,376
========== ========== =========
The accompanying notes are an integral part of these consolidated statements.
31
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BACKGROUND:
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"). Effective
November 1, 1994, SPI, ICN and Viratek merged into ICN Merger Corp. and
Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of ICN
Merger Corp. In conjunction with the Merger, ICN Merger Corp. was renamed ICN
Pharmaceuticals, Inc. ("the Company").
The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring company
and, as a result, the Company has reported the historical financial data of SPI
in its financial results and includes the results of ICN, Viratek and
Biomedicals since the effective date of the Merger.
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 financial
statements for 1996 and 1995 include the accounts of the Company and all of its
majority owned subsidiaries. The consolidated financial statements for 1994
include the full year financial results of SPI and majority owned subsidiaries
and the financial results of ICN, Viratek and Biomedicals from the effective
date of the Merger. 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. The accompanying consolidated financial
statements reflect the elimination of all significant intercompany account
balances and transactions.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents at December 31, 1996
and 1995 includes $28,687,000 and $1,017,000, respectively, of certificates of
deposit which have maturities of three months or less. For purposes of the
statements of cash flows, the Company considers highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. The
carrying amount of these assets approximates fair value due to the short-term
maturity of these instruments.
MARKETABLE SECURITIES: In 1995, the Company classified its investment in
corporate bond securities, with maturities ranging from 1999 to 2003, as
available for sale. Changes in market values were reflected as unrealized gains
and losses, calculated on the specific identification method, in stockholders'
equity. The contractual maturity value of these securities was $26,700,000. In
January 1996, the Company sold $26,663,000 of corporate bond securities for a
total of $26,952,000 resulting in a realized gain of $289,000.
INVENTORIES: Inventories, which include material, direct labor and factory
overhead, are stated at the lower of cost or market. Cost is determined on a
first-in, first-out ("FIFO") basis.
PROPERTY, PLANT AND EQUIPMENT: The Company primarily uses the straight-line
method for depreciating property, plant and equipment over their estimated
useful lives. Buildings and related improvements are depreciated from 7-50
years, machinery and equipment from 3-30 years, furniture and fixtures from 3-15
years and leasehold improvements and capital leases are amortized over their
useful lives, limited to the life of the related lease.
32
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company follows the policy of capitalizing expenditures that materially
increase the lives of the related assets and charges maintenance and repairs to
expense. Upon sale or retirement, the costs and related accumulated depreciation
or amortization are eliminated from the respective accounts and the resulting
gain or loss is included in income.
The Company capitalizes interest on borrowed funds during construction
periods. Capitalized interest is charged to Property, Plant and Equipment and
amortized over the lives of the related assets.
GOODWILL AND INTANGIBLES: The difference between the purchase price and the
fair value of net assets acquired at the date of acquisition is included in the
accompanying consolidated balance sheets as goodwill and intangibles. Goodwill
and intangibles amortization periods range from 5 to 23 years depending upon the
nature of the business or products acquired. The Company periodically evaluates
the carrying value of goodwill and intangibles including the related
amortization periods. The Company determines whether there has been impairment
by comparing the anticipated undiscounted future operating income of the
acquired entity or product line with the carrying value of the goodwill. Based
on its review, the Company does not believe that an impairment of its goodwill
and intangibles has occurred.
NOTES PAYABLE: The Company classifies various borrowings with initial terms
of one year or less as notes payable. The weighted average interest rate on
short-term borrowings outstanding at December 31, 1996 and 1995 was 17% and 58%,
respectively. The December 31, 1995 weighted average interest rate reflects a
hyperinflationary 66% rate at ICN Yugoslavia.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's
foreign operations, except those in highly inflationary economies, are
translated at the end of period exchange rates. Revenues and expenses are
translated at the average exchange rates prevailing during the period. The
effects of unrealized exchange rate fluctuations on translating foreign currency
assets and liabilities into U.S. dollars are accumulated in stockholders'
equity. The monetary assets and liabilities of foreign subsidiaries in highly
inflationary economies are remeasured into U.S. dollars at the end of period
exchange rates and non-monetary assets and liabilities at historical exchange
rates. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Translation", the Company has included in earnings all
foreign exchange gains and losses arising from foreign currency transactions and
the effects of foreign exchange rate fluctuations on subsidiaries operating in
highly inflationary economies. The recorded (gains) losses from foreign exchange
translation and transactions for 1996, 1995 and 1994, were $2,282,000,
$(9,484,000) and $191,000 respectively.
INCOME TAXES: Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS No. 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequence of
events that have been recognized in the Company's financial statements or tax
returns. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, SFAS No. 109 generally considers all expected future events
other than an enactment of changes in the tax law or rates.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
PER SHARE INFORMATION: Net income (loss) per share is based on net income
(loss) after preferred stock dividend requirements, the weighted average number
of common shares outstanding, including shares issued subject to put option, and
33
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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 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 meet
certain criteria at the time of issuance and have a dilutive effect, if
converted.
During 1996, the Company's Board of Directors declared quarterly cash
distributions for the first, second and third quarters totaling $.23 per share.
On January 31, 1997, the Company's Board of Directors declared a fourth quarter
cash distribution of $.077 per share, payable to stockholders of record on
February 13, 1997. In 1995, the Company issued quarterly stock distributions
which totaled 5.6%. In 1994, the Company issued stock dividends and
distributions which totaled 4.8%. All share and per share amounts used in
computing earnings per share have been restated to reflect these stock dividends
and distributions.
STOCK BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 defines a fair value based method of accounting for an employee stock
option. Fair value of the stock option is determined considering factors such as
the exercise price, the expected life of the option, the current price of the
underlying stock and its volatility, expected dividends on the stock, and the
risk-free interest rate for the expected term of the option. Under the fair
value based method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period. Pro forma
disclosures for entities that elect to continue to measure compensation cost
under the intrinsic method provided by Accounting Principles Board No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
RECLASSIFICATIONS: Certain prior year items have been reclassified to
conform with the current year presentation.
3. ACQUISITION OF THE PREDECESSOR COMPANIES:
As part of the Merger, the Company issued approximately 6,476,770 common
shares valued on November 10, 1994 at $20.75 per share, which was the publicly
traded price of SPI's common shares at that date. Accordingly, the purchase
price, including direct acquisition costs of $3,654,000, has been allocated to
the estimated fair value of the net assets, including amounts ascribed to
purchased research and development costs which were charged to operations
immediately following the consummation of the Merger.
The purchase price allocation, as of the effective date of the Merger, is
summarized as follows (in thousands):
Current assets (including cash of $9,921 of which $1,425 was restricted)... $ 37,711
Property, plant and equipment.............................................. 44,335
Acquired intangibles and goodwill.......................................... 35,000
Other non-current assets................................................... 8,724
Current liabilities........................................................ (52,931)
Long-term liabilities...................................................... (155,792)
Purchased research and development......................................... 221,000
---------
Total purchase price................................................... $ 138,047
=========
34
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company obtained independent third party appraisals for the acquired
in-process research and development costs and certain other intangible costs,
primarily patents and trademarks. The $221,000,000 which represents the
valuation of acquired in-process research and development for which no
alternative use exists, has been charged to operations immediately upon
consummation of the Merger in accordance with generally accepted accounting
principles. In the fourth quarter of 1995, the purchase price allocation was
finalized by recording a liability for a pre-acquisition contingency, in an
amount that the Company considers adequate.
4. RELATED PARTY TRANSACTIONS:
GENERAL: Prior to the Merger, ICN controlled Biomedicals and Viratek
through stock ownership and board representation and was affiliated with SPI.
Certain officers of ICN occupied similar positions with SPI, Biomedicals, and
Viratek. Prior to the Merger, ICN, SPI, Biomedicals, and Viratek engaged in
certain transactions with each other.
ROYALTY AGREEMENTS: Effective December 1, 1990, SPI entered into a royalty
agreement with Viratek whereby a royalty of 20% of all sales of Virazole(R) was
paid to Viratek. Sales of Virazole(R), for purposes of determining royalties to
Viratek for 1994 were $35,855,000, which generated royalties to Viratek for 1994
of $7,171,000. As a result of the Merger, the Company is no longer required to
pay this royalty on Virazole(R).
The Company, under an agreement amended in 1993 between the Company and the
employer of a former director, is required to pay $20.00 for each new aerosol
drug delivery device manufactured and a 2% royalty on all sales of Virazole(R)
in aerosolized form. Such royalties for 1995 and 1994 were $905,000 and
$741,000, respectively.
COST ALLOCATIONS: Prior to the Merger, the affiliated corporations occupied
ICN's facility in Costa Mesa, California. The accompanying consolidated
statements of income include a charge for rent from ICN of $230,000 in 1994. In
addition, the costs of common services such as maintenance, purchasing and
personnel were incurred by SPI and allocated to ICN, Viratek and Biomedicals
based on services utilized. The total of such costs was $2,207,000 for 1994 of
which $1,579,000 was allocated to affiliated corporations. It is management's
belief that the methods used and amounts allocated for facility costs and common
services were reasonable based upon the usage by the respective companies. As a
result of the Merger, such cost allocations are no longer required.
OTHER: Following is a summary of transactions incurred prior to the Merger,
as described above, between the Company and the former affiliated corporations
for 1994 (in thousands) :
1994
----
Cash payments to former affiliates, net........................ $ 23,718
Royalties to affiliates, net.................................... (7,469)
Allocation of common service costs to ICN and its subsidiaries.. 1,579
Rent charged by ICN............................................. (230)
Interest expense with affiliates, net........................... (359)
Dividends payable to ICN........................................ (967)
Other, net ................................................... 2,041
------------
$ 18,313
===========
35
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
In July 1995, the Company loaned the Chief Operating Officer $93,000 for
the exercise of stock options which was repaid in March 1996.
In August 1996, the Company loaned the Chairman and CEO $428,000 in regards
to tax matters relating to the exercise of stock options. This loan along with
accrued interest was repaid in November 1996.
In June 1996, the Company made a short-term loan to the Chairman and CEO in
the amount of $3,500,000 for certain personal obligations. During August 1996,
this amount was repaid to the Company. In connection with this transaction, the
Company guaranteed $3,600,000 of debt of the Chairman with a third party bank.
In addition to the guarantee, the Company deposited $3,600,000 with this bank as
collateral to the Chairman's debt. This deposit is recorded as a long-term asset
on the balance sheet. The Chairman has provided collateral to the Company's
guarantee in the form of a right to the proceeds of the exercise of stock
options in the amount of 100,000 options with an exercise price of $22.75 and
the rights to a $4,000,000 life insurance policy provided by the Company. In the
event of any default on the debt to the bank, the Company has recourse that is
limited to the collateral described above. Both the transaction and the
sufficiency of the collateral for the guarantee were approved by the Board of
Directors.
5. INCOME TAXES:
Pretax income (loss) from continuing operations before minority interest
for each of the years ended December 31, consists of the following (in
thousands):
1996 1995 1994
---- ---- ----
Domestic..................... $ 5,039 $ 7,145 $ (194,756)
Foreign...................... 94,013 79,104 24,804
----------- ----------- ----------
$ 99,052 $ 86,249 $ (169,952)
=========== =========== ==========
The income tax (benefit) provision for each of the years ended December 31,
consist of the following (in thousands):
1996 1995 1994
---- ---- ----
Current
Federal................... $ (9,469) $ -- $ 5,829
State..................... 68 425 100
Foreign................... 2,228 4,392 4,931
---------- ---------- ----------
(7,173) 4,817 10,860
Deferred
Federal................... -- (1,820) --
Foreign................... 358 -- (500)
---------- ---------- ----------
358 (1,820) (500)
---------- ---------- ----------
Total $ (6,815) $ 2,997 $ 10,360
========== ========== ==========
The current federal tax provision has not been reduced for the tax benefit
associated with the exercise of employee stock options of $1,600,000,
$1,300,000, and $134,000 in 1996, 1995 and 1994, respectively, which were
credited directly to additional capital.
36
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
In connection with the Merger, the Company acquired approximately
$226,000,000 of net operating loss carryforwards ("NOLs"). Included in the total
acquired NOLs were $191,000,000 of domestic NOLs and $35,000,000 of foreign
NOLs. Internal Revenue Service Code Section 382 imposes an annual limitation on
the availability of NOLs that can be used to reduce taxable income after certain
substantial ownership changes of a corporation. Consequently, the Company's
annual limitation on utilization of the acquired domestic NOLs is approximately
$33,000,000 per year.
In accordance with SFAS No. 109, any realization of acquired tax benefits
must be used to first, reduce goodwill, secondly, reduce acquired noncurrent
intangible assets and lastly, reduce income tax expense. During 1995, the
Company utilized $27,000,000 of acquired domestic NOLs having a tax benefit of
$9,400,000 for which a valuation allowance had been established as of the
effective date of the Merger. The corresponding reduction in the valuation
allowance of $9,400,000 resulted in a reduction of goodwill and intangibles
acquired in connection with the Merger.
In addition to the utilization of the NOLs described above, the Company
recognized during 1995 a $27,000,000 tax benefit of an additional $76,000,000 of
acquired NOLs and other deferred tax assets through a reduction in the Company's
deferred tax asset valuation allowance. This reduction resulted in a $24,000,000
reduction in goodwill and intangibles acquired in connection with the Merger and
a $3,000,000 reduction in deferred income tax expense. Realization of the
deferred tax assets is dependent upon generating sufficient taxable income prior
to expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that the remaining net deferred
tax assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced.
At December 31, 1996, the Company's domestic NOLs were approximately
$160,000,000. These domestic NOLs expire in varying amounts from 1998 to 2008.
37
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The primary components of the Company's net deferred tax asset at December
31, 1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Deferred tax assets:
NOL carryforward $ 71,019 $ 69,260
Inventory and other reserves 11,011 13,229
Tax credit carryover 554 554
Deferred income 4,848 7,776
Long-term debt 4,745 3,921
Other 855 --
Valuation allowance (55,769) (54,181)
----------- -----------
Total deferred tax asset 37,263 40,559
Deferred tax liabilities:
Property, plant and equipment (223) (3,886)
Inventory (1,770) (1,249)
Other (936) (732)
----------- -----------
Total deferred tax liability (2,929) (5,867)
----------- -----------
Net deferred tax asset $ 34,334 $ 34,692
=========== ===========
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
1996 1995 1994
------ ------ ------
Statutory rate (benefit) 35% 35% (35%)
Write-off of purchased research and development -- -- 46
Foreign source income taxed at
lower effective rates (31) (24) (3)
Utilization of foreign NOL -- (1) --
Recognition of fully reserved deferred tax debits -- (4) (1)
Utilization of foreign tax/AMT credits -- -- (1)
Favorable audit settlement (5) (2) (1)
State Income taxes, net of federal income taxes benefit -- (1) --
Domestic NOL loss carryback (5) -- --
Other, net (1) -- 1
------- ------ ------
Effective rate (7)% 3% 6%
======= ====== ======
During 1996, no U.S. income or foreign withholding taxes were provided on
the undistributed earnings of the Company's foreign subsidiaries with the
exception of the Company's Panamanian subsidiary, Alpha Pharmaceuticals, since
management intends to reinvest those undistributed earnings in the foreign
operations. Included in consolidated retained deficit at December 31, 1996, is
approximately $192,000,000 of accumulated earnings of foreign operations that
would be subject to U.S. income or foreign withholding taxes, if and when
repatriated.
38
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company is under examination by the Internal Revenue Service for the
tax years ended November 30, 1991 and 1990. Currently, the proposed adjustments,
if upheld, would not result in a significant additional tax liability or a
significant reduction in NOLs available to the Company in the future. During
1995, the Company settled audits for tax years 1989 and 1988 which resulted in a
reduction in net operating loss carryforwards of $5,000,000 (pretax) and a
corresponding decrease in the pretax valuation allowance.
6. DEBT:
Long-term debt consists of the following (in thousands):
1996 1995
---- ----
Convertible debt:
8.5% Convertible Subordinated Notes due 1999 $ 114,980 $ 115,000
Swiss Franc Subordinated Bonds due 1988-2001 with effective
interest rate of 8.5% (net of unamortized discount of $542
and $890 in 1996 and 1995, respectively) 11,149 14,965
Zero Coupon Guaranteed Swiss Franc Bonds with an effective interest rate of
8.5%, maturing in 2002 (net of unamortized discount of $261 and $495 in
1996 and 1995,
respectively) 7,536 9,751
3-1/4% Subordinated Double Convertible Swiss Franc Bonds
due 1997 (net of unamortized discount of $53
in 1995) -- 4,240
Zero Coupon ECU Subordinated Bonds due 1987-1996 with an
effective interest rate of 8.5% -- 1,396
---------- ----------
133,665 145,352
Other Debt:
Hungarian mortgages with interest rates ranging from
LIBOR + 1.5% to LIBOR + 2% due in various
installments through 2001 assumed in connection
with the acquisition of Alkaloida 6,625 --
U.S. mortgages with variable interest rates ranging from 7.1% to 8.9%
interest and principal payable monthly through 2022 13,098 11,318
U.S. capital leases with interest rates ranging from 4.91%
to 6.12% payable monthly through 1999 2,589 --
Loans from various Hungarian banks collateralized by property, plant
and equipment and inventory having a net book value of $23,599 at
December 31, 1996, with interest rates ranging from LIBOR +0.75% to
25.5% maturing at various dates through 2001 assumed in connection with
the acquisition
of Alkaloida 24,328 --
Other long-term debt due in U.S. dollars and
various foreign currencies with interest rates ranging
from 5.75% to 9.4% 2,145 5,173
---------- ----------
182,450 161,843
Less current portion 5,961 7,650
---------- ----------
Total long-term debt $ 176,489 $ 154,193
========== ==========
39
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
On November 17, 1994, the Company completed an underwritten public offering
in the principal amount of $115,000,000 of 8.5% Subordinated Convertible Notes
(the "Convertible Notes"), due in November 1999. These notes are convertible at
the option of the holder either in whole or in part, at any time prior to
maturity, into the Company's stock at a current conversion price of $22.117 per
share, subject to adjustment in certain events. The Convertible Notes are also
redeemable, in whole or in part, at the option of the Company at any time on or
after November 15, 1997 at the specified redemption prices, plus accrued
interest. During 1996, $20,000 of the Convertible Notes were converted into 904
shares of common stock of the Company. The fair value of the Convertible Notes
was approximately $125,903,000 at December 31, 1996.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust established by
ICN, completed an underwritten public offering in Switzerland of Swiss francs
100,000,000 principal amount of 5-5/8% Swiss Franc Exchangeable Certificates
(the "Xr Certificates") of which SFr. 66,510,000 remain outstanding at December
31, 1996. Currently and as a result of the Merger, the face value of the
outstanding Xr Capital are convertible into 1,501,172 shares of the Company's
common stock at the exchange price of $43.62 per share using a fixed exchange
rate of SFr. 1.66 to U.S. $1.00. The net proceeds of the offering were used by
Xr Capital to purchase from ICN 14 series of Swiss Franc Subordinated Bonds due
1988-2001 (the "ICN-Swiss Franc Xr Bonds") for approximately $27,944,000 and
SFr. 45,700,000 principal amount of cumulative coupon 5.4% Italian Electrical
Agency Bonds due 2001 for approximately $27,202,000. The Company has no
obligation with respect to the payment of the face amount of the Xr Certificates
since these are to be paid upon maturity by the Italian Bonds, except for
payment of certain additional amounts, in the event of the imposition of U.S.
withholding taxes on either the Xr Certificates or ICN Swiss Franc Xr Bonds, for
redemption of the Xr Certificates in the event the Company exercises its
optional right to redeem. The fair value of the ICN-Swiss Franc Xr Bonds was
approximately $11,691,000 at December 31, 1996.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN
and Biomedicals, completed a public offering in Switzerland of SFr. 70,000,000
principal amount of 5-1/2% Swiss Franc Exchangeable Certificates ("Old
Certificates"). The Bio Capital debt is senior, uncollateralized indebtedness of
the Company. At the option of the certificate holder, the Old Certificates are
exchangeable into shares of the Company's common stock. Net proceeds were used
by Bio Capital to purchase SFr. 70,000,000 face amount of zero coupon Swiss
Franc Debt Notes due 2002 of the Kingdom of Denmark (the "Danish Bonds") for
SFr. 33,772,000 and 15 series of zero coupon Swiss Franc Guaranteed Bonds of the
Company (the "Zero Coupon Guaranteed Bonds") for SFr. 32,440,000 which are
guaranteed by the Company. Each series of the Zero Coupon Guaranteed Bonds are
in an aggregate principal amount of SFr. 3,850,000 maturing February of each
year through 2002. The Company has no obligation with respect to the payment of
the principal amount of the Old Certificates since they will be paid upon
maturity by the Danish bonds. During 1990, Biomedicals offered to exchange, to
all certificate holders, the Old Certificates for newly issued certificates
("New Certificates"), the terms of which remain the same except that 71 shares
per SFr. 5,000 principal certificate can be exchanged at $47.15 using a fixed
exchange rate of SFr. 1.49 to U.S. $1.00. Substantially all of the outstanding
Old Certificates were exchanged for New Certificates (together referred to as
"Bio Certificates"). Currently, the face value of the outstanding Bio Capital,
SFr. 39,615,000, is convertible into 552,992 shares of the Company's common
stock at the exchange prices of $47.15 and $81.26 using fixed exchange rates of
SFr. 1.49 and SFr. 1.54 to U.S. $1.00 for New and Old Certificates,
respectively. The fair value of the Zero Coupon Guaranteed Bonds was
approximately $7,611,000 at December 31, 1996.
During 1996, SFr. 4,952,000 of the 3-1/4% Subordinated Double Convertible
Bonds due 1997 were converted into 6,190 shares of Ciba Geigy Ltd. Common stock.
The Company has the option to redeem the ICN-Swiss Franc Xr Bonds and Bio
Certificates in the event that the market price of the Company's common stock
meets certain conditions.
40
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Company has mortgage notes payable totaling $20,842,000, payable in
U.S. dollars, Deutsche marks, Dutch guilders and Hungarian forints,
collateralized by certain real property of the Company, having a net book value
of $30,828,000 at December 31, 1996.
Annual aggregate maturities of long-term debt subsequent to December 31,
1996 are as follows (in thousands):
1997 $ 5,961
1998 21,104
1999 126,973
2000 11,602
2001 8,580
Thereafter 8,230
-------------
Total $ 182,450
=============
The fair value of the Company's debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying amount of all
short-term and variable interest rate borrowings approximates fair value.
Subsidiaries of the Company have short and long-term lines of credit,
classified in notes payable, aggregating $18,901,000 of which $10,857,000 was
outstanding at December 31, 1996.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
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 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.
41
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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.
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. Plaintiffs alleged that the ICN Defendants made, or
aided and abetted PaineWebber, Inc. 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. In October, 1996, the Company entered into a settlement agreement
with the plaintiffs. Under the terms of the settlement, the Company agreed to
pay $4,500,000 in cash and $10,000,000 in common stock of the Company, based
upon the fair market value of the stock on the date of settlement. On January 6,
1997, the court approved the settlement and signed the order and judgment
dismissing the amended complaint with prejudice.
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
42
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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.
PRODUCT LIABILITY INSURANCE: The Company could be exposed to possible
claims for personal injury resulting from allegedly defective products. While to
date no material adverse claim for personal injury resulting from allegedly
defective products has been successfully maintained against the Company, a
substantial claim, if successful, could have a material adverse effect on the
Company.
BENEFITS PLANS: The Company has a defined contribution plan that provides
all U.S. employees the opportunity to defer a portion of their compensation for
payout at a subsequent date. The Company can voluntarily make matching
contributions on behalf of participating and eligible employees. The Company's
expense related to such defined contribution plan was not material in 1996, 1995
and 1994.
In connection with the Merger, the Company assumed deferred compensation
agreements with certain officers and certain key employees of the Predecessor
Companies, with benefits commencing at death or retirement. As of December 31,
1996, the present value of the deferred compensation benefits to be paid has
been accrued in the amount of $2,914,000. Interest accrues on the outstanding
balance at rates ranging from 9.5% to 12.6%. No new contributions are being
made; however, interest continues to accrue on the present value of the benefits
expected to be paid.
ENVIRONMENTAL ISSUES IN HUNGARY: In connection with the acquisition of
Alkaloida from the government of Hungary, an environmental remediation fund (the
"Fund") of approximately $7,200,000 was established by the government from the
proceeds that the Company tendered. This Fund will be used to remediate a waste
disposal site adjacent to Alkaloida, contaminated by past plant operations, by
1998. If the cash from this Fund is insufficient to fully remediate the waste
disposal site, the Company is liable for the shortfall. The Company believes,
based upon current third party studies and estimates, that the cash in the Fund
is adequate to remediate the waste disposal site.
43
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
OTHER: Milan Panic, the Company's Chairman of the Board and Chief Executive
Officer, is employed under a contract expiring December 31, 1998 that provides
for, among other things, certain health and retirement benefits. The contract is
automatically extended at the end of each year for successive one year periods
unless either the Company or Mr. Panic terminates the contract upon six months
prior written notice. Mr. Panic, at his option, may provide consulting services
upon his retirement for $120,000 per year for life, subject to annual
cost-of-living adjustments from the base year of 1967, and will be entitled when
serving as a consultant to participate in the Company's medical and dental
plans. Including such cost-of-living adjustments, the annual cost of such
consulting services is currently estimated to be in excess of $535,000. The
consulting fee shall not at any time exceed the annual compensation as adjusted,
paid to Mr. Panic. Upon Mr. Panic's retirement, the consulting fee shall not be
subject to further cost of living adjustments.
The Company has employment agreements with six key executives which contain
"change in control" benefits. Upon a "change in control" of the Company as
defined in the contract, the employee shall receive severance benefits equal to
three times salary and other benefits.
8. COMMON STOCK:
Prior to the Merger, each of the Predecessor Companies had their own stock
option plans. Upon consummation of the Merger, the Company assumed all options
outstanding under the existing stock option plans. The existing stock option
plans were exchanged for shares of the Company. Each option of SPI common stock,
ICN common stock, Viratek common stock and Biomedicals common stock was
exchanged for 1.0, 0.512, 0.499 and 0.197 options of the Company common stock,
respectively. Subsequent to the Merger, no new grants are being issued under
these plans.
The 1994 Stock Option Plan was adopted on January 26, 1995 and subsequently
approved by stockholders. This plan provides for the granting of a maximum of
3,236,000 stock options. Under the plan each nonemployee director is granted
15,000 options on the day following the annual meeting of stockholders.
44
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Under the terms of all stock option plans, the option price may not be less
than the fair market value at the date of the grant and may not have a term
exceeding 10 years. Option grants vest ratably over a four year period from the
date of the grant. The options granted are reserved for issuance to officers,
directors, key employees, scientific advisors and consultants. The Company has
adopted the disclosure only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1996 and 1995 consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
1996 1995
--------- ---------
Net income as reported $ 86,928 $ 67,337
pro forma 82,835 63,856
Primary earnings per share as reported 2.40 2.20
pro forma 2.28 2.09
Fully diluted earnings per share as reported 2.27 2.19
pro forma 2.17 2.09
The schedule below reflects the number of outstanding and exercisable
shares as of December 31, 1996 segregated by price range:
OUTSTANDING EXERCISABLE
-------------------- --------------------
Number Average Number Average
of Exercise of Exercise
Dollar Range Shares Price Shares Price
- ------------ ------ ----- ------ -----
$3.80 to $12.76 1,272,925 9.48 1,007,029 9.43
$13.38 to $22.88 3,548,935 17.93 1,882,234 17.95
$23.00 to $43.63 988,140 29.32 883,737 29.77
--------- ---------
5,810,000 3,773,000
========= =========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: Dividend yield of 1.4%, expected
volatility of 60.42%; risk-free interest rate of 6.25%; and expected lives of
6.5 years.
Because the determination of the fair value of all options granted includes
the factors described in the preceding paragraph and, because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects of reported net income for future years.
45
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following table sets forth information relating to stock option plans
during the years ended December 31, 1996, 1995 and 1994 (in thousands, except
per share data):
AVERAGE
OPTION
TOTAL PRICE
-------- -----
Shares under option, December 31, 1993 3,212 $ 15.67
Granted 1,277
Exercised (84) $ 6.95
Canceled (159)
Effect of Merger 2,086
--------
Shares under option, December 31, 1994 6,332 $ 17.66
Granted 621
Exercised (515) $ 8.02
Canceled (192)
--------
Shares under option, December 31, 1995 6,246 $ 16.86
Granted 532
Exercised (868) $ 12.01
Canceled (100)
--------
Shares under option, December 31, 1996 5,810 $ 18.13
========
Exercisable at December 31, 1996 3,773
========
Options available to grant at December 31, 1995 2,149
========
Options available to grant at December 31, 1996 1,717
========
46
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
In January 1996, the Company sold approximately 400,000 shares of its
common stock to a foreign bank for net proceeds of $6,000,000. The proceeds were
used by the Company for the acquisition of GlyDerm, a Michigan based skin care
company, and several smaller acquisitions.
In conjunction with and conditioned upon the consummation of the sale of
the Siemens Shares (See Note 15), the Company entered into an agreement (the
"Put Agreement") with the Purchasers pursuant to which the Company sold 100,000
additional shares of common stock for $1,950,000 (together with the Siemens
shares, the "Purchaser Shares") and sold the Purchaser the right to put (the
"Put Right") 1,064,833 shares of common stock, valued at $23,120,000 at December
31, 1996, to the Company at $30 per share on January 10, 2000 for $3,200,000.
The exercisability of the Put Right is subject to acceleration under certain
circumstances as described in the Put Agreement. If an acceleration event
occurs, the exercise price of the put would be $22.50 per share plus an
incremental increase at the annual rate of 10% for the period from the closing
date to the date of exercise of the Put Right. Additionally, the number of
shares subject to the Put Right would be reduced by one third during each of the
three years after the closing date if certain closing price thresholds and
conditions as specified in the Put Agreement are achieved. The number of shares
subject to the Put Right may also be reduced if the Purchaser sells any
Purchaser Shares in excess of certain specified prices during each of the years
after the closing date and until the Put Right expires.
In connection with the Merger, the Company adopted a Stockholder Rights
Plan to protect stockholders' rights in the event of a proposed or actual
acquisition of 15% or more of the outstanding shares of the Company's common
stock. As part of this plan, each share of the Company's common stock carries a
right to purchase one one-hundredth (1/100) of a share of Series A Preferred
Stock (the "Right"), par value $.01 per share, of the Company at a price of $125
per one one-hundredth of a share, subject to adjustment, which becomes
exercisable only upon the occurence of certain events. The Rights are subject to
redemption at the option of the Board of Directors at a price of $.01 per right
until the occurrence of certain events. The Rights expire on November 1, 2004.
In 1995, the Company issued quarterly stock distributions which totaled
5.6%. In 1994, the Company issued quarterly stock dividends and distributions
which totaled 4.8%. Accordingly, all relevant stock option data and per share
data have been restated to reflect these dividends and distributions.
In 1994, the Company issued common stock for certain bonuses accrued in
1993. The number of shares issued was based upon the fair value of the shares at
the date of issuance and a fixed amount related to the bonuses paid.
9. PREFERRED STOCK
In October, 1996, the Company issued 50,000 shares of Series B preferred
stock for net proceeds of $47,392,000 with a liquidation preference of $1,000
per share. The preferred stock is convertible at the option of the holder into
common stock based on a conversion price calculated using the average daily low
for the five trading days preceding the conversion date and applying a discount
ranging from 3% to 13%. The preferred stock has a 6% annual dividend that is
cumulative and payable quarterly. The Company has the option to pay the dividend
in either cash or common stock of the Company. The aggregate amount of preferred
stock that can be converted within the first two six-month periods following the
issuance of the preferred stock is restricted. The preferred stock is also
mandatorily convertible into common stock on the fifth anniversary of its
issuance. However, this provision is subject to extension under certain
circumstances. Dividends paid in common stock are based on the fair value of
common stock at the time of declaration. Net income attributable to common stock
reflects for purposes of computing earnings per share adjustments for cumulative
preferred dividends and an embedded dividend arising from discounted conversion
terms of the Series B preferred stock. The preferred stock was issued as a
private placement.
47
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10 . DETAIL OF CERTAIN ACCOUNTS (IN THOUSANDS):
1996 1995
---- ----
RECEIVABLES, NET:
Trade accounts receivable............... $ 257,619 $ 71,539
Other receivables....................... 9,782 5,044
--------- ---------
267,401 76,583
Allowance for doubtful accounts (8,870) (8,070)
--------- ---------
$ 258,531 $ 68,513
========= =========
INVENTORIES, NET:
Raw materials and supplies.............. $ 48,656 $ 56,227
Work-in-process......................... 14,625 14,865
Finished goods.......................... 67,845 80,373
--------- ---------
131,126 151,465
Allowance for inventory obsolescence (10,153) (12,709)
--------- ---------
$ 120,973 $ 138,756
========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Advances to inventory suppliers........ $ 14,335 $ 14,088
Tax receivable......................... 6,100 --
Prepaid expenses and other current assets.. 4,544 10,091
--------- ---------
$ 24,979 $ 24,179
========= =========
48
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
PROPERTY, PLANT AND EQUIPMENT:
Land................................... $ 17,708 $ 18,173
Buildings.............................. 84,054 62,967
Machinery and equipment................ 91,602 62,965
Furniture and fixtures................. 18,819 12,418
Leasehold improvements................. 3,019 2,603
---------- ---------
215,202 159,126
Accumulated depreciation and amortization.. (46,420) (37,358)
Construction in progress................... 65,427 50,719
---------- ---------
$ 234,209 $ 172,487
========== =========
During the third quarter of 1994, ICN Yugoslavia commenced a construction
and modernization program at its pharmaceutical complex outside Belgrade,
Yugoslavia. At December 31, 1996 and 1995, construction in progress primarily
relates to costs incurred to date for these facilities and includes capitalized
interest of $3,770,000 in 1996 and $1,978,000 in 1995.
1996 1995
---- ----
ACCRUED LIABILITIES:
Payroll and related items.............. $ 18,149 $ 11,579
Interest............................... 3,687 3,739
Legal Settlement....................... 10,000 --
Other.................................. 23,547 23,713
---------- ---------
$ 55,383 $ 39,031
========== =========
49
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. BUSINESS SEGMENTS AND GEOGRAPHIC DATA:
The Company is a multinational pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical, research chemical and
diagnostic products. The principal markets for its products are Yugoslavia and
the United States. For 1996, approximately 44% of the Company's sales are from
Yugoslavia while sales in the United States represent 20% of total Company
sales. Operations in Yugoslavia are subject to business risks described in Note
13.
The Company's largest selling product, Virazole(R), accounts for
approximately 5% of total Company sales for 1996 and is sold principally in the
United States for the treatment of respiratory syncytial virus ("RSV") in young
infants. In July 1995, the Company entered into a licensing agreement with a
subsidiary of Schering-Plough Corporation ("Schering") to license Virazole(R) as
a treatment for chronic hepatitis C in combination with alpha interferon. Under
an agreement, Schering is responsible for all clinical developments worldwide.
The Company operates in two business segments: pharmaceutical (the
"Pharmaceutical group") and, since the effective date of the Merger, biomedical
(the "Biomedical group"). The Pharmaceutical group produces and markets
pharmaceutical products principally in the United States, Mexico, Canada and
Europe. The Biomedical group markets research products and related services,
immunodiagnostic reagents and instrumentation, and provides radiation monitoring
services.
The following tables set forth the amount of net sales, operating income
(loss), identifiable assets of the Company by business segment and geographical
areas for 1996, 1995 and 1994 (in thousands):
BUSINESS SEGMENTS
1996 1995 1994
---- ---- ----
NET SALES
Pharmaceutical ........ $ 549,753 $ 446,566 $ 357,821
Biomedical............. 64,327 61,339 9,030
------------ ----------- -----------
Total.................. $ 614,080 $ 507,905 $ 366,851
============ =========== ===========
OPERATING INCOME (LOSS):
Pharmaceutical......... $ 155,344 $ 129,753 $ (152,092)(1)
Biomedical............. 4,985 5,707 410
Corporate.............. (46,216) (42,294) (13,490)
------------ ----------- ------------
Total.................. $ 114,113 $ 93,166 $ (165,172)
============ =========== ============
(1) Includes a write-off of purchased research and development for which no
alternative use exists of $221,000,000 as a result of the Merger.
IDENTIFIABLE ASSETS:
Pharmaceutical........ $ 600,019 $ 373,027 $ 314,517
Biomedical............ 78,095 51,407 49,769
Corporate............. 100,537 93,864 77,187
------------ ----------- -----------
Total................. $ 778,651 $ 518,298 $ 441,473
============ =========== ===========
50
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
DEPRECIATION AND AMORTIZATION:
1996 1995 1994
---- ---- ----
Pharmaceutical.................... $ 11,305 $ 9,549 $ 8,303
Biomedical........................ 2,718 2,221 524
Corporate......................... 2,269 2,044 421
---------- ---------- --------
Total............................. $ 16,292 $ 13,814 $ 9,248
========== ========== ========
CAPITAL EXPENDITURES:
Pharmaceutical..................... $ 15,785 $ 56,363 $ 19,745
Biomedical......................... 5,230 2,680 299
Corporate.......................... 8,317 450 161
---------- ---------- --------
Total.............................. $ 29,332 $ 59,493 $ 20,205
========== ========== ========
GEOGRAPHIC DATA
SALES:
United States....................... $ 121,782 $ 124,865 $ 81,563
Canada.............................. 18,953 18,765 15,973
---------- --------- ---------
North America ................... 140,735 143,630 97,536
Latin America (principally Mexico).. 49,444 43,684 56,737
Western Europe...................... 59,294 58,170 31,789
Yugoslavia.......................... 267,166 234,661 172,124
Russia.............................. 66,788 20,300 --
Hungary............................. 21,461 -- --
---------- --------- ---------
Eastern Europe................... 355,415 254,961 172,124
Asia, Africa, and Australia ..... 9,192 7,460 8,665
---------- --------- ---------
Total............................ $ 614,080 $ 507,905 $ 366,851
========== ========= =========
OPERATING INCOME (LOSS):
United States.................... $ 52,461 $ 64,810 $(183,681)(1)
Canada........................... 1,399 4,501 3,771
----------- --------- ---------
North America................ 53,860 69,311 (179,910)
Latin America (principally Mexico 11,246 8,757 9,318
Western Europe................... 607 4,712 1,496
Yugoslavia....................... 70,616 46,296 15,505
Russia........................... 22,021 6,179 --
Hungary.......................... 1,964 -- --
----------- --------- ---------
Eastern Europe............... 94,601 52,475 15,505
Asia, Africa, and Australia ..... 15 205 1,909
Corporate........................ (46,216) (42,294) (13,490)
----------- --------- ---------
Total............................ $ 114,113 $ 93,166 $(165,172)
=========== ========= =========
(1) Includes a write-off of purchased research and development for which no
alternative use exists of $221,000,000 as a result of the Merger.
51
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
IDENTIFIABLE ASSETS:
United States.................... $ 105,670 $ 57,070 $ 66,942
Canada........................... 7,433 8,865 8,858
---------- --------- ---------
North America................. 113,103 65,935 75,800
Latin America (principally Mexico) 30,691 23,823 26,787
Western Europe................... 56,578 57,950 52,469
Yugoslavia....................... 342,983 262,272 203,357
Russia........................... 54,990 12,668 --
Hungary.......................... 77,245 -- --
---------- ---------- ---------
Eastern Europe............... 475,218 274,940 203,357
Asia, Africa, and Australia ..... 2,524 1,786 3,773
Corporate........................ 100,537 93,864 79,287
---------- ---------- ---------
Total............................ $ 778,651 $ 518,298 $ 441,473
========== ========== =========
52
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
NON-CASH TRANSACTIONS:
- ----------------------
During 1996, a principal amount of SFr. 4,952,000 of the 3-1/4%
Subordinated Double Convertible Bonds due 1997 were converted into 6,190 shares
of Ciba-Geigy Ltd. common stock. The effect of the conversion was to reduce long
term debt by $4,240,000 and other assets by $3,988,000.
On March 29, 1996, the Company sold its instrument business division to
Titertek Instruments, Inc. ("Titertek"), an Alabama corporation, 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. As of
December 31, 1996, approximately $500,000 has been recognized into income.
During 1996, the Company issued 964,833 shares of common stock for the
acquisition of the Siemens dosimetry business, 213,385 shares for the Cappel
acquisition and 144,000 shares for the GlyDerm acquisition (See Note 15). The
increase in goodwill and intangibles from the beginning of the year is
principally due to these acquisitions.
During 1996, the Company entered into capital leases of approximately
$2,973,000 for the purchase of computer equipment.
In November 1995, ICN Yugoslavia exchanged, in a non-recourse transaction,
accounts receivable for $10,900,000 of inventories and $9,800,000 for
construction materials for its plant expansion.
During 1995 and 1994, the Company issued common stock dividends and
distributions of $29,187,000 and $24,157,000, respectively. There were none
issued in 1996.
Cash and non-cash financing activities consisted of the following (in
thousands):
MERGER OF PREDECESSOR COMPANIES:
1994
----
Fair value of assets acquired (other than cash)....... $ 336,849
Fair value of liabilities assumed..................... (208,723)
-----------
128,126
Stock issued in connection with Merger................ (134,393)
Direct acquisition costs........................... (3,654)
-----------
Cash received......................................... $ (9,921)
===========
In the fourth quarter of 1995 the purchase price allocation was finalized
by recording a liability for a pre-acquisition contingency, in an amount that
the Company considers adequate.
53
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following table sets forth the amounts of interest and income taxes
paid during 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Interest paid (including amounts capitalized
in 1996 and 1995 of $3,770
and $1,978, respectively)............... $ 24,247 $ 23,308 $ 5,237
========= ========= =========
Income taxes paid......................... $ 6,845 $ 6,915 $ 2,062
========= ========= =========
13. ICN YUGOSLAVIA:
The summary balance sheets of ICN Yugoslavia as of December 31, 1996 and
1995, and the summary statements of income before provision for income taxes and
minority interest for the years ended December 31, 1996, 1995 and 1994, are
presented below.
ICN YUGOSLAVIA SUMMARY BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
---- ----
Cash............................... $ 27,074 $ 2,696
Marketable securities.............. -- 27,374
Receivables, net................... 158,292 21,721
Inventories, net................... 53,016 103,511
Other current assets............... 11,452 14,267
Other long-term assets............. 104,983 104,112
---------- ----------
$ 354,817 $ 273,681
========== ==========
Current liabilities................ $ 38,386 $ 22,424
Minority interest and
long term liabilities........... 76,344 59,680
Stockholders' equity............... 240,087 191,577
---------- ----------
$ 354,817 $ 273,681
========== ==========
54
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
ICN YUGOSLAVIA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
Sales....................................... $ 267,166 $ 234,661 $ 172,124
Cost of sales............................... 157,981 116,748 121,701
--------- ---------- ---------
Gross profit................................ 109,185 117,913 50,423
Operating expenses.......................... 38,569 71,617 34,918
--------- ---------- ---------
Income from operations...................... 70,616 46,296 15,505
Interest income............................. (2,132) (4,087) (2,049)
Interest expense............................ 1,478 3,610 933
Translation and exchange losses (gains), net 4,290 (12,063) 1,417
--------- ---------- ---------
Income before provision for income
taxes and minority interest............ $ 66,980 $ 58,836 $ 15,204
========== ========== =========
BUSINESS ENVIRONMENT: ICN Yugoslavia, a 75% owned subsidiary, operates in a
business environment that is subject to significant economic volatility and
political instability. The current trend in Yugoslavia is toward unfavorable
economic conditions that include continuing liquidity problems, inflationary
pressures, 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.
LIQUIDITY PROBLEMS: In an effort by the Central Bank of Yugoslavia to
control inflation through tight monetary controls, Yugoslavia is now
experiencing severe liquidity problems. This has resulted in longer collection
periods on ICN Yugoslavia's receivables. Most of ICN Yugoslavia's customers are
slow to pay due to delays of health care payments by the government. This has
also resulted in ICN Yugoslavia being unable to make timely payments on its
payables. In 1997, ICN Yugoslavia will attempt to reduce its receivables and
improve its cash flow by restricting future sales; however, these actions may
result in sales and earnings in 1997 that are lower than 1996. ICN Yugoslavia
holds approximately $26,000,000 of cash in a bank outside of Yugoslavia
originally intended to be used for future plant expansion in Yugoslavia. These
funds may be available for working capital purposes if necessary.
INFLATION AND MONETARY EXPOSURE: ICN Yugoslavia 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 Yugoslavia began experiencing a decline in the availability of hard
currency and inflation levels accelerated to an approximate annual rate of 90%
by the end of the year. In expectation of a devaluation late in 1995, ICN
Yugoslavia took action early in the fourth quarter of 1995 to reduce its
monetary exposure by shortening the payment terms on its receivables, reducing
sales levels, accelerating the purchase of inventory and accelerating the
purchase of building materials for its plant expansion. 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. On this date, ICN Yugoslavia had a net monetary liability position
that resulted in a gain of $8,724,000.
55
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Throughout 1996, the level of inflation in Yugoslavia has been relatively
stable with a Yugoslavian government reported inflation rate of 60%. During this
time the government has exercised restraint on the amount of dinars in
circulation. The net monetary asset position of ICN Yugoslavia has increased due
to rising accounts receivable balances resulting from higher sales and a
lengthening of the collection period of receivables. From a beginning balance of
$7,396,000 at December 31, 1995, the net monetary asset position of ICN
Yugoslavia has risen to $134,000,000 at December 31, 1996 which is subject to
foreign exchange loss if a devaluation of the dinar were to occur.
As required by generally accepted accounting principles ("GAAP"), the
Company translates ICN Yugoslavia financial results at the dividend payment rate
established by the National Bank of Yugoslavia. To the extent that changes in
this rate lag behind the level of inflation, sales and expenses will, at times,
tend to be inflated. Future sales and expenses can increase substantially if the
timing of future devaluations falls significantly behind the level of inflation.
POTENTIAL DEVALUATION: The potential loss arising from a devaluation will
depend on the size of the devaluation and the magnitude of the net monetary
asset position at the time of the devaluation. The timing and the size of a
devaluation are strongly influenced by the amount of inflation and length of
time from the last devaluation. Since the last devaluation on November 24, 1995,
the overall level of inflation has been at an approximate annual rate of 60%.
The risk of devaluation increases as time passes and inflation continues. The
Company is unable to predict when a devaluation will occur.
GOVERNMENT SPENDING LIMITATIONS: The government has expressed its intention
to limit total 1997 health care spending on pharmaceuticals. Currently, ICN
Yugoslavia maintains a 50% market share for pharmaceutical products in
Yugoslavia. With approximately 80% of ICN Yugoslavia sales arising from
government or government funded entities, ICN Yugoslavia is economically
dependent on the government. If the government continues to follow this course
of action it could result in a significant decrease in 1997 domestic sales. ICN
Yugoslavia plans to partially mitigate the effects of decreased domestic
spending by placing more emphasis on its export business and by promoting sales
to privately funded pharmacies. The extent that these actions will mitigate the
decreases in government spending is uncertain. The government decision to reduce
health care spending could have a material adverse affect on the financial
results of the Company.
CREDIT RISK: ICN Yugoslavia is subject to credit risk in that 80% or
$196,873,000 of 1996 Yugoslavian domestic sales are to the government or
government funded entities of which $123,706,000 is included in accounts
receivable at December 31, 1996. Included in Yugoslavian domestic sales and
accounts receivable to government funded entities are $82,001,000 and
$88,069,000, respectively, to three major customers.
56
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
SANCTIONS: In December 1995, the United Nations Security Council adopted a
resolution that suspended economic sanctions that had been imposed on the
Federal Republic of Yugoslavia since May 1992. A substantial majority of ICN
Yugoslavia's business is conducted in the Federal Republic of Yugoslavia.
Sanctions had contributed to an overall deteriorating business environment
in which ICN Yugoslavia operated and denied ICN Yugoslavia access to export
sales which previously totaled approximately $30,000,000 a year. Sanctions also
created restrictions on ICN Yugoslavia's overseas investments and imposed
administrative burdens in obtaining raw materials outside of Yugoslavia.
The Company believes the suspension of sanctions continues to provide a
more favorable business environment; however, the beneficial effects of the
suspension will not take place immediately as the economy needs to adjust to new
opportunities. If Yugoslavia does not fully comply with the Dayton Accords,
there is a risk that sanctions could be reinstated.
PRICE CONTROLS: ICN Yugoslavia is subject to price controls in Yugoslavia.
The size and frequency of government approved price increases is influenced by
local inflation, devaluations, cost of imported raw materials and demand for ICN
Yugoslavia products. During 1996 and 1995, ICN Yugoslavia received fewer price
increases than in the past due to relatively lower levels of inflation. As
inflation rises, the size and frequency of price increases are expected to
increase. During the third quarter of 1995, ICN Yugoslavia received a 30% price
increase on its pharmaceutical products. This was the first price increase the
government had allowed since the start of the Stabilization Program. Subsequent
to the devaluation on November 24, 1995, ICN Yugoslavia received an 80% price
increase on its pharmaceutical products. Price increases obtained by ICN
Yugoslavia are based on economic events preceding the price increase and not on
expectations of ongoing inflation. This lag in permitted price increases creates
downward pressure on the gross margins that ICN Yugoslavia receives on its
products. When necessary, ICN Yugoslavia will limit sales of products that have
poor margins until an acceptable price increase is received. The impact of an
inability to obtain adequate price increases in the future could have an adverse
impact on the Company as a result of declining gross profit margins or declining
sales in an effort to maintain existing gross margin levels.
DIVIDENDS: In 1992, ICN Yugoslavia paid a $10,000,000 dividend of which the
Company received 75% or $7,500,000. Yugoslavian law allows free distribution of
earnings whether to domestic (Yugoslavian) or international investors. Under
this law a dividend must be declared and paid immediately after year end.
Earnings that are not immediately paid as a dividend cannot be used for future
dividends. Additionally, ICN Yugoslavia is allowed to pay dividends out of
earnings calculated under local statutory tax basis rules, not earnings
calculated under GAAP. ICN Yugoslavia dividends are payable in dinars which must
be exchanged for dollars before the dividend is repatriated. During high levels
of inflation the dinar denominated dividend could devalue substantially by the
time the dividend is exchanged for dollars. Under GAAP, ICN Yugoslavia had
accumulated earnings, which are not available for distributions, of
approximately $165,521,000 at December 31, 1996. However, additional
repatriation of cash could be declared from contributed capital for Yugoslavian
purposes of $360,000,000 at December 31, 1996, as provided for in the original
purchase agreement. In 1992, the Company made the decision to no longer
repatriate the earnings of ICN Yugoslavia and instead will use these earnings
for local operations, plant expansion, reduction of debt and additional
investment in Eastern Europe.
57
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of cash deposits
and marketable securities. The Company places its cash and cash equivalents with
respected financial institutions and limits the amount of credit exposure to any
one financial institution. (See also Note 13.)
15. ACQUISITIONS:
In September 1996, the Company acquired a majority interest in Alkaloida, a
pharmaceutical company in Hungary. The Company is investing $22,115,000 for a
60% interest in Alkaloida. An initial payment of $9,115,000 was made in
September 1996 and the final payment of $13,000,000 for this acquisition was
paid in January 1997. Alkaloida is a major producer of medicinal opiates and
morphine, as well as raw materials used in pharmaceutical manufacturing. The
purchase price allocation is preliminary pending the outcome of environmental
remediation studies expected to be completed in 1997. (See also Note 7.)
In September 1996, the Company acquired the assets and liabilities of the
Cappel Division ("Cappel") of Organon Teknika Corporation. Cappel manufactures
and sells immunochemical reagents used in biotechnology and biomedical
laboratories around the world. The Company acquired the assets and liabilities
of Cappel, with a net book value of $2,078,000, for 213,385 shares of the
Company's common stock valued at approximately $4,327,000 based upon the market
price of the stock at the time the shares were issued.
In July 1996, the Company acquired the assets and liabilities of the
Dosimetry Service Division ("Dosimetry") of Siemens Medical Systems, Inc.
("Siemens") with a net book value of approximately $3,882,000, for $23,668,000,
for 964,833 shares of the Company's common stock, valued at approximately
$22,616,000, based upon the market price of the stock at the time the shares
were issued and a $982,000 cash payment. Under the terms of the purchase
agreement, Siemens had the right, exercisable on or before December 23, 1996, to
require the Company to repurchase the 964,833 shares of common stock owned by
Siemens (the "Siemens Shares") for $23.51 per share in cash. On December 23,
1996, Siemens sold 964,833 shares of the Company's common stock to certain
accounts over which an investment company exercises investment authority
(collectively the "Purchasers") for $19.50 per share. Upon the consummation of
the sale of the Company's shares to the Purchasers, the Company paid Siemens
$4,378,000, which represented the excess of $23.51 above $19.50 for the 964,833
shares ($3,869,000), plus interest, as specified in the purchase agreement. (See
also Note 8.)
During July 1996, the Company acquired a 49% interest in Polypharm, a
Russian pharmaceutical company located in Chelyabinsk. The Company paid
approximately $1,100,000 in exchange for shares of Polypharm. During the third
quarter of 1996, the Company acquired an additional 16% interest in Polypharm
for approximately $500,000, raising its ownership to 65%. During the fourth
quarter, the Company acquired an additional 19% interest, raising its ownership
to 84%. Polypharm produces analgesics, antibiotics and antihistamines.
In June 1996, the Company acquired a 73% interest in Leksredstva, a Russian
pharmaceutical company, headquartered in Kursk, for approximately $5,700,000 in
cash. During the third quarter of 1996, the Company acquired an additional 22%
interest in Leksredstva for $500,000, from existing stockholders, increasing its
interest in Leksredstva to 95%. Leksredstva manufactures chemical products,
pharmaceutical raw materials and finished form drugs that include
cardiovasculars, anticancer drugs, analgesics and iodine preparations.
58
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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 $7,670,000, consisting
of a $2,250,000 cash payment, 144,000 shares of the Company's common stock
valued at approximately $3,000,000 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.
To fund the acquisition of GlyDerm and several other small acquisitions in
January 1996, the Company sold approximately 400,000 common shares to a foreign
bank for net proceeds of $6,000,000.
The following table presents unaudited consolidated pro forma financial
information for the twelve months ended December 31, 1996 and 1995, as though
the acquisitions made in 1996 had occurred on January 1, 1995.
(Unaudited)
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---- ----
Net sales $ 677,324 $ 618,669
Income before provision for income taxes
and minority interest $ 92,602 $ 91,086
Net income $ 83,708 $ 71,120
Net income per share $ 2.40 $ 2.08
The unaudited pro forma financial information is presented for information
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions taken place on January 1, 1995. In
addition, the pro forma results are not intended to be a projection of the
future results and do not reflect any synergies that might be achieved from the
combined operations.
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The excess of the purchase price over the fair value of net assets acquired is
included in goodwill and is being amortized on a straight-line basis over 5 to
23 years based upon the nature of the business or products acquired. These
acquisitions do not, in the aggregate, constitute the acquisition of a
significant business as defined by Regulation S-K promulgated by the Securities
and Exchange Commission.
A summary of the purchase price allocation of the above mentioned 1996
acquisitions is a follows (in thousands):
TOTAL
-----
Current assets (excluding cash of $1,214) $ 62,798
Property, plant and equipment 52,044
Goodwill and intangibles 28,687
Other non-current assets 640
Current liabilities (48,261)
Long-term liabilities (15,037)
Minority interest (16,505)
----------
Total purchase price $ 64,366
==========
59
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
In March 1996, the Company purchased an additional 15% interest in the
Russian pharmaceutical company, ICN Oktyabr, thereby raising the Company's
ownership from 75% to 90%.
On October 1, 1996, ICN China, Inc. ("ICN China"), a wholly-owned
subsidiary of the Company, entered into a joint venture agreement with Wuxi
Pharmaceutical Corporation ("Wuxi"), a Chinese state-owned company, to establish
a limited liability company (the "Chinese Joint Venture Entity") 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 will contribute 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 terms and conditions of the
joint venture were finalized in the first quarter of 1997.
16. AGREEMENT WITH SCHERING-PLOUGH CORPORATION:
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement (the "Agreement") and a Stock Purchase Agreement with a subsidiary of
Schering to license the Company's proprietary anti-viral drug ribavirin as a
treatment for chronic hepatitis C in combination with Schering's alpha
interferon. The Agreement provided the Company an initial non-refundable payment
by Schering of $23,000,000 and future royalty payments to the Company for
marketing of the drug, including certain minimum royalty rates. Schering will
have exclusive marketing rights for ribavirin for hepatitis C worldwide, except
that the Company will retain the right to co-market in the countries of the
European Economic Community. In addition, Schering will purchase up to
$42,000,000 in common stock of the Company upon the achievement of certain
regulatory milestones. Under the Agreement, Schering is responsible for all
clinical developments worldwide.
The $23,000,000 non-refundable payment has been recorded by the Company as
prepaid royalty income of $10,000,000, a license fee of $8,000,000 and a
liability to Schering for certain cost sharing agreements of $5,000,000. The
prepaid royalty will be amortized to income based upon future sales of the
product and the license fee will be amortized on a straight line basis to income
over the fifteen year exclusive period of the Agreement.
60
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE
BEGINNING COSTS AND TO OTHER FROM AT END
OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
--------- -------- -------- -------- ---------
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful receivables $ 8,070 $ 4,345 $ 557 $ (4,102) $ 8,870
======== ======== ======== ======== ========
Reserve for inventory obsolescence $ 12,709 $ 106 $ -- $ (2,662) $ 10,153
======== ======== ======== ======== ========
Deferred tax asset valuation allowance $ 54,181 $ -- 1,588 $ -- $ 55,769
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful receivables $ 10,036 $ (1,262) $ (197) $ (507) $ 8,070
======== ======== ======== ======== ========
Reserve for inventory obsolescence $ 15,390 $ (2,310) $ 550 $ (921) $ 12,709
======== ======== ======== ======== ========
Deferred tax asset valuation allowance $ 86,492 $ -- $(29,123)(1) $ (3,188) $ 54,181
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful receivables $ 7,633 $ 1,410 $ 1,507 $ (514) $ 10,036
======== ======== ======== ======== ========
Reserve for inventory obsolescence $ 1,317 $ 3,835 $ 11,431(2) $ (1,193) $ 15,390
======== ======== ========= ======== ========
Deferred tax asset valuation allowance $ 2,307 $ -- $ 84,643(2) $ (458) $ 86,492
======== ======== ========= ======== ========
(1) The credit to other accounts represents the reduction of goodwill and
intangibles assets for the utilization and reevaluation of the ultimate
realization of acquired net operating losses and other deferred tax assets,
as a result of the Merger, and the settlement of an IRS examination for
1989 and 1988 (see Note 5 of Notes to the Consolidated Financial
Statements).
(2) These amounts relate to acquired net operating losses and reserves for
inventory obsolescence as a result of the Merger (see Note 1 and 5 of the
Notes to the Consolidated Financial Statements).
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 24, 1997
By /S/ MILAN PANIC
---------------------------------------
Milan Panic,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ MILAN PANIC Date: July 24, 1997
- ----------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
/S/ JOHN E. GIORDANI Date: July 24, 1997
- ----------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
/S/ NORMAN BARKER, JR. Date: July 24, 1997
- ----------------------------------------------
Norman Barker, Jr., Director
/S/ BIRCH BAYH Date: July 24, 1997
- ----------------------------------------------
Senator Birch Bayh, Director
/S/ ALAN F. CHARLES Date: July 24, 1997
- ----------------------------------------------
Alan F. Charles, Director
/S/ ROGER GUILLEMIN Date: July 24, 1997
- ----------------------------------------------
Roger Guillemin, M.D., Ph.D., Director
/S/ ADAM JERNEY Date: July 24, 1997
- ----------------------------------------------
Adam Jerney, President, Director
/S/ DALE M. HANSON Date: July 24, 1997
- ---------------------------------------------
Dale M. Hanson, Director
68
SIGNATURES - CONTINUED
/S/ WELDON B. JOLLEY Date: July 24, 1997
- ---------------------------------------------
Weldon B. Jolley, Ph. D., Director
/S/ JEAN-FRANCOIS KURZ Date: July 24, 1997
- ---------------------------------------------
Jean-Francois Kurz, Director
/S/ THOMAS LENAGH Date: July 24, 1997
- ---------------------------------------------
Thomas Lenagh, Director
/S/ CHARLES T. MANATT Date: July 24, 1997
- ---------------------------------------------
Charles T. Manatt, Director
/S/ STEPHEN MOSES Date: July 24, 1997
- ---------------------------------------------
Stephen Moses, Director
/S/ MICHAEL SMITH Date: July 24, 1997
- ---------------------------------------------
Michael Smith, Ph.D., Director
/S/ ROBERTS A. SMITH Date: July 24, 1997
- ----------------------------------------------
Roberts A. Smith, Ph.D., Director
/S/ RICHARD W. STARR Date: July 24, 1997
- ----------------------------------------------
Richard W. Starr, Director