UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11397,
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of outstanding shares of the registrant's Common Stock,
$.01 par value, as of November 6, 1997 was 40,320,725.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page ii
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 ............................... 3
Consolidated Condensed Statements of Income -
Three and nine months ended September 30, 1997 and 1996 ............... 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 .......................... 5
Management's Statement Regarding Unaudited Financial
Statements ............................................................ 6
Notes to Consolidated Condensed Financial Statements .................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 22
Item 6. Exhibits and Reports on Form 8-K ................................. 22
SIGNATURES ................................................................ 23
ii
Page 3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(Unaudited - 000's omitted, except per share data)
September 30, December 31,
1997 1996
---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 269,861 $ 39,366
Restricted cash 552 552
Marketable securities 4,327 --
Receivables, net 202,694 258,531
Notes receivable 130,000 --
Inventories, net 123,471 120,973
Prepaid expenses and other current assets 21,238 24,979
------------- ------------
Total current assets 752,143 444,401
Property, plant and equipment, net 300,902 234,209
Deferred taxes, net 60,188 34,334
Other assets 56,565 32,230
Goodwill and intangibles, net 122,954 33,477
------------- ------------
Total assets $ 1,292,752 $ 778,651
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 52,552 $ 62,049
Accrued liabilities 55,136 55,383
Notes payable 9,745 13,231
Current portion of long-term debt 176,674 5,961
Income taxes payable 3,926 1,013
------------- ------------
Total current liabilities 298,033 137,637
Long-term debt, less current portion:
Convertible into common stock 5,381 130,941
Other long-term debt 320,321 45,548
Deferred license and royalty income 12,885 13,850
Other liabilities 22,174 15,622
Minority interest 119,742 96,583
Common stock subject to Put Agreement,
1,065 shares at December 31, 1996 -- 23,120
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
shares authorized; 4 and 50 shares of Series B
issued and outstanding at September 30, 1997
and December 31, 1996, respectively ($4,000
liquidation preference) 1 1
Common stock, $.01 par value; 100,000 shares
authorized; 38,734 and 33,422 shares outstanding
at September 30, 1997 and December 31, 1996,
respectively (including shares
subject to put agreement) 387 324
Additional capital 514,745 368,187
Retained earnings (deficit) 38,277 (25,915)
Foreign currency translation adjustments (39,194) (27,247)
------------- -----------
Total stockholders' equity 514,216 315,350
------------- -----------
Total liabilities and stockholders' equity $ 1,292,752 $ 778,651
============= ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three and nine months ended September 30, 1997 and 1996
(Unaudited - 000's omitted, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ----------- ---------- -----------
Net sales $ 177,397 $ 157,917 $ 496,594 $ 439,825
Cost of sales 77,309 70,515 228,070 210,850
---------- ---------- ---------- ----------
Gross profit 100,088 87,402 268,524 228,975
Selling, general and administrative expenses 54,187 51,366 165,369 136,532
Research and development costs 4,290 4,130 13,210 11,040
---------- ---------- ---------- ----------
Income from operations 41,611 31,906 89,945 81,403
Translation and exchange (gains) losses, net 1,494 (903) 7,204 (215)
Interest income (6,392) (187) (9,855) (1,706)
Interest expense 5,950 3,653 13,332 9,245
---------- ---------- ---------- ----------
Income before provision (benefit) for income taxes
and minority interest 40,559 29,343 79,264 74,079
Provision (benefit) for income taxes (521) 2,345 (12,311) 3,385
Minority interest 6,523 6,163 13,438 12,963
---------- ---------- ---------- ----------
Net income $ 34,557 $ 20,835 $ 78,137 $ 57,731
========== ========== ========== ==========
Per Share Information:
Primary:
Earnings per share $ .79 $ .60 $1.79 $ 1.67
========= ========== ========== ==========
Shares used in per share computation 43,088 35,353 40,403 34,322
========= ========== ========== ==========
Fully diluted:
Earnings per share $ .73 $ .59 $1.66 $ 1.65
========= ========== ========== ==========
Shares used in per share computation 48,944 40,565 46,864 39,546
========= ========== ========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(Unaudited - 000's omitted)
Nine Months Ended
September 30,
---------------------------
1997 1996
----------- ----------
Cash flows from operating activities:
Net income $ 78,137 $ 57,731
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,370 10,123
Increase in allowance for losses
on accounts receivable 2,235 389
Translation and exchange (gains) losses, net 7,204 (215)
Minority interest 13,438 12,963
Decrease (increase) in deferred taxes (25,854) 2,679
Changes in:
Accounts and notes receivable (74,327) (131,510)
Inventories (2,223) 38,847
Prepaid expenses and other current assets 4,069 13,037
Other operating assets and liabilities, net (5,675) (15,838)
----------- ----------
Net cash provided by (used in) operating activities 15,374 (11,794)
----------- ----------
Cash flows from investing activities:
Capital expenditures (27,634) (12,286)
Proceeds from sale of property, plant and equipment 1,527 --
Sale of marketable securities -- 27,667
Acquisitions and other (24,137) (24,472)
----------- ----------
Net cash used in investing activities (50,244) (9,091)
----------- ----------
Cash flows from financing activities:
Net (payments) borrowings of notes payable (8,958) 20,688
Proceeds from issuance of long term debt (net of fees of $8,000) 267,000 --
Net payments of long-term debt (256) (6,934)
Proceeds from exercise of stock options 16,534 10,279
Proceeds from issuance of stock -- 12,101
Dividends paid (8,414) (4,741)
----------- ----------
Net cash provided by financing activities 265,906 31,393
----------- ----------
Effect of exchange rate changes on cash and cash equivalents (541) (378)
----------- ----------
Net increase in cash and cash equivalents 230,495 10,130
Cash and cash equivalents at beginning of period 39,366 24,094
----------- ----------
Cash and cash equivalents at end of period $ 269,861 $ 34,224
=========== ==========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 6
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by ICN Pharmaceuticals, Inc. ("the Company" or "ICN"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
results of operations presented herein are not necessarily indicative of the
results to be expected for a full year. Although the Company believes that all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the interim period presented are included and that the
disclosures are adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
Form 10-K/A filed on July 24, 1997.
Page 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Principles of Consolidation
The accompanying consolidated condensed financial statements include the
accounts of the Company and all of its subsidiaries. Investments in 20%
through 50% owned affiliated companies are included under the equity method
where the Company exercises significant influence over operating and
financial affairs. Investments in less than 20% owned companies are
recorded at cost. All significant intercompany account balances and
transactions have been eliminated in consolidation.
Per Share Information
Earnings per share is based on net income after preferred stock dividend
requirements, the weighted average number of common shares outstanding,
including shares issued subject to put option, and the dilutive effect of
common share equivalents. Common share equivalents represent shares
issuable for outstanding options, on the assumption that the proceeds would
be used to repurchase shares in the open market, and the shares issuable
related to certain of the Company's convertible preferred stock and to
certain of the Company's convertible debentures. Such convertible preferred
stock and convertible debentures are considered common stock equivalents if
they met certain criteria at the time of issuance and have a dilutive
effect, if converted.
On March 25, 1997, the Company's Board of Directors declared a first
quarter cash dividend ("distribution") of $.08 per share, payable on April
23, 1997, to stockholders of record on April 9, 1997.
On June 26, 1997, the Company's Board of Directors declared a second
quarter cash dividend of $.08 per share, payable July 23, 1997, to
stockholders of record on July 9, 1997.
On September 24, 1997, the Company's Board of Directors declared a third
quarter cash dividend of $.08 per share, payable on October 22, 1997, to
stockholders of record on October 8, 1997.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," on the computation and presentation of earnings per share ("EPS").
SFAS No. 128 simplifies the computation for and replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement.
The statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior period earnings per share data presented. Earlier
application is not permitted. The Company will implement the accounting
standard beginning with its annual financial statements for the year ended
December 31, 1997. The Company expects that basic EPS will be greater than
the currently reported primary EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year
ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized holding gains and
losses on available for sale securities that are currently being presented
by the Company as a component of stockholders' equity (deficit). The impact
of adopting SFAS No. 130 has not been determined by the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes
Page 8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
The new standard becomes effective for the Company for the year ending
December 31, 1998, and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. The
Company does not expect this pronouncement to materially change the
Company's current reporting and disclosures.
2. RELATED PARTY TRANSACTIONS -
During the second quarter of 1997, the Company made a short-term advance to
the Chairman and CEO of approximately $327,000. The advance along with
accrued interest was repaid in August 1997.
3. SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for income taxes for the nine months ended September 30, 1997 and
1996 was $2,629,000 and $4,084,000, respectively.
Cash paid for interest for the nine months ended September 30, 1997 and
1996 was $7,759,000 and $8,723,000, respectively.
In January 1997, the Company issued approximately 541,000 shares of common
stock as payment of its $10,000,000 obligation under the 1987 class action
settlement.
During the third quarter of 1997, the Company accrued a common stock
dividend of $3,085,000.
During the nine months ended September 30, 1997, the Company issued
approximately 87,000 shares of common stock as payment of a fourth quarter
1996, first quarter 1997 and second quarter 1997 preferred stock dividend
of $1,875,000.
Page 9
Notes To Consolidated Condensed Financial Statements (Continued)
September 30, 1997
(Unaudited)
4. GEOGRAPHIC DATA -
The following table sets forth the amount of net sales and operating income
(loss) of the Company by geographical areas (includes pharmaceuticals and
biomedical operations) for the three and nine months ended September 30,
1997 and 1996 and the identifiable assets of the Company by geographical
areas as of September 30, 1997 and December 31, 1996 (in thousands):
Three Months Ended Nine Months Ended
--------------------- ----------------------
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- --------- -------- ---------
Net Sales:
United States .................... $ 41,693 $ 37,106 $ 100,932 $ 95,080
Canada ........................... 4,840 4,514 14,970 14,060
-------- --------- -------- ---------
North America ............... 46,533 41,620 115,902 109,140
Latin America (principally Mexico) 14,912 12,546 42,753 35,128
Western Europe ................... 11,959 12,511 40,769 44,707
Yugoslavia ....................... 58,660 69,242 156,768 199,234
Russia ........................... 28,806 19,593 83,014 44,473
Hungary .......................... 11,498 -- 41,147 --
-------- --------- --------- ---------
Eastern Europe .............. 98,964 88,835 280,929 243,707
Asia, Africa, and Australia ...... 5,029 2,405 16,241 7,143
--------- --------- --------- ---------
Total ............................ $ 177,397 $ 157,917 $ 496,594 $ 439,825
========= ========= ========= =========
Operating Income (Loss):
United States .................... $ 15,008 $ 16,401 $ 34,894 $ 41,176
Canada ........................... 1,740 1,457 5,153 687(2)
-------- --------- --------- ---------
North America ............... 16,748 17,858 40,047 41,863
Latin America (principally Mexico) 4,220 2,416 10,309 7,613
Western Europe ................... 612 (1,166) 2,807 1,890
Yugoslavia ....................... 21,273 19,179 53,855 46,271
Russia ........................... 6,536 5,266 18,906 13,404
Hungary .......................... 1,485 -- 6,271 --
Eastern European Headquarters .... (1,439) -- (3,117) --
-------- --------- --------- ---------
Eastern Europe .............. 27,855 24,445 75,915 59,675
Asia, Africa, and Australia ...... 24 59 139 166
Corporate ........................ (7,848) (11,706) (39,272)(1) (29,804)
-------- --------- --------- ---------
Total ............................ $ 41,611 $ 31,906 $ 89,945 $ 81,403
========= ========= ========= =========
<FN>
(1) Includes $12,000,000 of expenses related to a charge in connection with the
settlement of the Company's class action lawsuit. (See Note 6.)
(2) Includes $3,500,000 of expenses related to one-time charge in connection
with a resolution of a commercial dispute and a penalty from the Canadian Patent
Price Review Board.
</FN>
Page 10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
Identifiable assets:
September 30, December 31,
1997 1996
------------ ------------
United States .................... $ 250,232 $ 105,670
Canada ........................... 10,468 7,433
---------- ----------
North America .................... 260,700 113,103
Latin America (principally Mexico) 32,491 30,691
Western Europe ................... 50,202 56,578
Yugoslavia ....................... 395,921 342,983
Russia ........................... 80,520 54,990
Hungary .......................... 75,693 77,245
Eastern European Headquarters .... 6,809 --
---------- ----------
Eastern Europe ................... 558,943 475,218
Asia, Africa, and Australia ...... 26,228 2,524
Corporate ........................ 364,188 100,537
----------- ----------
Total ............................ $ 1,292,752 $ 778,651
=========== ==========
5. ICN YUGOSLAVIA -
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment
that is subject to significant economic volatility and political
instability. The economic conditions in Yugoslavia include continuing
liquidity problems, a history of high inflation, unemployment, a weakened
banking system and a high trade deficit. The future of the economic and
political environment of Yugoslavia is uncertain and could deteriorate to
the point that a material adverse impact on the Company's financial
position and results of operations could occur.
ICN Yugoslavia began the year with a net monetary asset exposure of
$134,000,000 which was subject to foreign exchange loss if a devaluation of
the dinar were to occur. During the first nine months of 1997, the Company
reduced its monetary exposure by converting dinar denominated accounts
receivable into notes receivable payable in dinars, but fixed in dollar
amounts. The first conversion was made early in the first quarter with
$50,000,000 accounts receivable converted into a one year note bearing
interest at LIBOR plus one percent. A second conversion was arranged at the
end of the first quarter through an agreement with the Yugoslavian
government to purchase $50,000,000 of drugs. The sales under this agreement
were converted into a note receivable bearing interest at LIBOR plus one
percent on the outstanding balance and has special payment guarantees with
the payment fixed in dollar amounts. The second agreement also allows the
Company to offset certain payroll tax obligations against outstanding
accounts receivable balances. Subsequent to these two agreements, the
Company negotiated an arrangement with the government of Yugoslavia under
which ICN Yugoslavia would commit to continue to provide products, in
dollar denominated sales, in an amount up to $50,000,000 per calendar
quarter for one year, and the government would pay a minimum of $9,500,000
per month towards outstanding receivables. However, at no point in time can
the amount due to ICN Yugoslavia from the government exceed $200,000,000,
including both accounts and notes receivable. Receivables that arise from
this agreement are interest bearing with interest at the LIBOR rate plus
one percent. As of September 30, 1997, ICN Yugoslavia had a net monetary
asset position of $48,000,000 which would be subject to foreign exchange
loss if a devaluation of the dinar were to occur.
The Company reduced its overall accounts receivable balance from the
beginning of the year through collections and the conversion of
$130,000,000 of accounts receivable into notes receivable discussed above.
As of September 30, 1997, the accounts receivable balance was $74,471,000.
The willingness of the Yugoslavian government to provide the Company
Page 11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
protection against devaluation on its receivables in exchange for longer
payment terms is a reflection of the strict adherence to government policy
on controlling inflation by limiting the amount of hard currency in
circulation. This policy was initially established with the start of the
stabilization program in 1994.
6. COMMITMENTS AND CONTINGENCIES -
Litigation: In a Consolidated Amended Class Action Complaint for Violations
of Federal Securities Laws (the "Securities Complaint") (the "1995
Actions"), plaintiffs allege that Defendants made various deceptive and
untrue statements of material fact and omitted material facts regarding its
hepatitis C NDA in connection with: (i) the Merger of the Company, SPI,
Viratek and Biomedicals in November 1994 and the issuance of convertible
debentures in connection therewith; and (ii) information provided to the
public. Plaintiffs also allege that the Chairman of the Company traded on
inside information relating to the hepatitis C NDA. The Securities
Complaint asserts claims for alleged violations of Sections 11 and 15 of
the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. 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. On July 23, 1997, plaintiffs and defendants entered
into a Memorandum of Agreement to Settle Action (the "Agreement"), whereby
the parties agreed to settle the 1995 Actions for $15,000,000. This
settlement, funded in part by the Company's insurance policy, resulted in a
$12,000,000 charge to the Company which is included in the consolidated
condensed statements of income for the nine months ended September 30,
1997. The full settlement documentation has been filed with the Court and a
preliminary hearing is scheduled for November 17, 1997. The settlement is
subject to final approval of the Court. The Company intends to urge the
Court to approve the settlement. If the settlement is not approved and the
matter proceeds to trial, the ultimate outcome of any such trial cannot be
predicted with certainty and an unfavorable outcome could have a material
adverse effect on the Company.
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, if the matters are
not settled, the Company will continue to defend the litigations
vigorously. While the ultimate outcome of the 1995 Actions, should the
Court not approve the settlement, 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.
Page 12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
Investigations: Pursuant to an Order Directing Private Investigation and
Designating Officers to Take Testimony, entitled In the Matter of ICN
Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is
being conducted by the SEC with respect to certain matters pertaining to
the status and disposition of the hepatitis C NDA. As set forth in the
Order, the investigation concerns whether, during the period June 1994
through February 1995, the Company, persons or entities associated with it
and others, in the offer and sale or in connection with the purchase and
sale of ICN common stock, engaged in possible violations of Section 17(a)
of the Securities Act of 1933 and Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder, by having possibly: (i) made false
or misleading statements or omitted material facts with respect to the
status and disposition of the hepatitis C NDA; or (ii) purchased or sold
ICN common stock while in possession of material, non-public information
concerning the status and disposition of the hepatitis C NDA; or (iii)
conveyed material, non-public information concerning the status and
disposition of the hepatitis C NDA, to other persons who may have purchased
or sold ICN stock. The Company is cooperating with the SEC in its
investigation. The Company has and continues to produce documents to the
SEC pursuant to its request and the SEC has taken the depositions of
certain current and former officers, directors, and employees of the
Company.
In addition, the Company has received Subpoenas 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 Subpoenas. A number of current and former
employees of the Company have been interviewed by the government in
connection with the investigation.
The Company is a party to a number of other pending or threatened lawsuits.
In the opinion of management, the ultimate resolution of these other
matters will not have a material effect on the Company's consolidated
financial position or results of operations.
Commitments: In January 1997, ICN Yugoslavia entered into a forward
exchange contract with a Yugoslavian bank to purchase $16,935,000 in hard
currency at a fixed exchange rate of 5.25 dinars to one U.S. dollar. The
dinars shall be paid to the bank two days after the receipt of the hard
currency. Should the bank fail to provide the hard currency, ICN Yugoslavia
is under no obligation to pay the dinars. Additionally, this contract is
automatically canceled should there be an official devaluation of the
dinar.
Page 13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
7. DETAIL OF CERTAIN ACCOUNTS - (000's omitted)
Receivables, Net:
September 30, December 31,
1997 1996
------------ ------------
Trade accounts receivable ...................... $ 198,076 $ 257,619
Other .......................................... 12,201 9,782
------------ ------------
210,277 267,401
Allowance for doubtful accounts ............... (7,583) (8,870)
------------ ------------
$ 202,694 $ 258,531
============ ============
Inventories, Net:
September 30, December 31,
1997 1996
------------ ------------
Raw materials and supplies .................... $ 57,898 $ 48,656
Work-in-process ............................... 12,875 14,625
Finished goods ................................ 63,454 67,845
------------ ------------
134,227 131,126
Allowance for inventory obsolescence .......... (10,756) (10,153)
------------ ------------
$ 123,471 $ 120,973
============ ============
Property, Plant and Equipment, Net:
September 30, December 31,
1997 1996
------------ ------------
Property, plant and equipment, at cost ........ $ 369,167 $ 280,629
Accumulated depreciation ...................... (68,265) (46,420)
------------ ------------
$ 300,902 $ 234,209
============ ============
8. DEBT -
In August 1997, the Company completed its offering of $275,000,000
principal amount of 9.25% Senior Notes due 2005 (the "Notes") for net
proceeds of approximately $267,000,000. Interest on the Notes is payable
semi-annually on February 15 and August 15 of each year, commencing
February 15, 1998. The Notes mature on August 15, 2005, unless previously
redeemed. The Notes are redeemable in cash at the option of the Company, in
whole or in part, on or after August 15, 2001. The Notes are general
unsecured obligations of the Company. The Notes rank pari passu in right of
payment with all unsecured senior indebtedness and senior to all
subordinated indebtedness of the Company, including the Company's 8.5%
Convertible Subordinated Notes due 1999. The indenture governing the Notes
permits the Company and its subsidiaries to incur additional indebtedness,
subject to certain limitations, and contains certain covenants with respect
to payment of dividends, creation of liens, and sales of assets.
Page 14
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
9. ACQUISITIONS -
In August 1997, the Company completed its purchase of the worldwide rights
to seven products, the non-U.S. rights to two other products, with an
option to purchase the U.S. rights to these products, and the purchase of a
GMP-standard manufacturing plant in Humacao, Puerto Rico (the "Plant") from
F. Hoffmann-La Roche, Ltd. ("Roche"). The purchase price of the Plant was
$55,000,000 payable in cash. Additionally, the purchase of the Plant is
under a sale/leaseback arrangement whereby Roche will lease the Plant from
the Company under a two year lease with lease payments totaling $8,000,000
annually.
Under the agreement, effective July 1, 1997, the Company received the
product rights in exchange for $90,000,000 payable in a combination of
1,600,000 shares of the Company's common stock valued at $40,000,000 and
2,000 shares of the Company's convertible preferred stock valued at
$50,000,000. Each share of the Company's convertible preferred stock is
convertible into 1,000 shares of the Company's common stock at a conversion
price equivalent to $25 per share. In conjunction with the issuance of the
common and preferred stock, the Company guaranteed a price initially at
$25.75 per common share increasing at a rate of 6% per year for three
years. Should Roche sell the shares issued at any time during the guarantee
period, the Company is entitled to any of the proceeds realized by Roche in
excess of the guaranteed price.
Effective October 1, 1997, as a result of the rise in the per share market
price of the Company's common stock since the initial acquisition from
Roche, the Company exercised its option to acquire the U.S. rights to the
two products noted above plus two other U.S. product rights in exchange for
an obligation of $82,073,000. Five days prior to the Closing date of
December 1, 1997, the parties will determine the form of consideration used
to settle the obligation. Consideration is likely to be in the form of cash
owed to the Company from the sale of common stock by Roche in excess of the
guarantee price and further stock price guarantees or a combination
thereof.
This acquisition will be accounted for using the purchase method of
accounting. The purchase price allocation is preliminary pending
appraisals, evaluations and other studies of fair value of the assets
acquired. At this time it is impractical to provide the required financial
statements related to the acquisition and the pro forma financial
information that are required to be furnished under cover of Form 8-K. The
Company anticipates filing this information under cover of Form 8-K as soon
as practicable within 75 days from the closing date.
10. SUBSEQUENT EVENTS -
On October 1, 1997, the Company acquired a 72% interest in Marbiopharm, a
pharmaceutical company located in Yoshkar-Ola, Russia, for approximately
$3,000,000 in cash. Marbiopharm manufactures, sells and distributes
pharmaceutical products in Russia.
On October 13, 1997, the Company acquired an 80% interest in Polfa Rzeszow,
S.A., ("Polfa") a pharmaceutical company located in Rzeszow, Poland, for
approximately $33,700,000 in cash and approximately 32,000 shares of common
stock of the Company valued at $1,709,000. Polfa makes and distributes a
wide range of pharmaceuticals, including anti-depressants, anti-fungals,
anti-infectives, pain relievers, anti-allergy, cardiovasculars and
nutritionals. Under the terms of the agreement, the Company will invest
approximately $20,000,000 over the next two years, primarily for the
construction of a new pharmaceutical production plant, at which time the
Company will own approximately 90% of Polfa.
On October 21, 1997, the Company acquired a 75% interest in AO Tomsk
Chemical Pharmaceutical Plant ("Tomsk"), a pharmaceutical company located
in Tomsk, Russia, for approximately $3,000,000 in cash. Tomsk makes and
distributes a wide range of pharmaceuticals, including antiseptics,
analgesics, antibiotics and herbal liquids and extracts. Under the terms of
the agreement, the Company will invest approximately $8,000,000 over the
next two years. The terms and conditions of the acquisition are subject to
the approval of the Anti-monopoly Committee of the Russian Federation and
are expected to be finalized in the fourth quarter of 1997.
Page 15
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
September 30, 1997
(Unaudited)
On October 27, 1997, the Company acquired a 42.6% interest in Velefarm, a
distributor located in Belgrade, Yugoslavia, for 54,000,000 dinars
(approximately $9,000,000). Under the terms of the agreement, the Company
exchanged accounts receivable due from Velefarm for the 42.6% interest. ICN
Yugoslavia recorded sales to Velefarm of $61,057,000 and $86,383,000 for
the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively. Accounts receivable due from Velefarm as of December
31, 1996 were $32,224,000. The Company's investment in Velefarm will be
recorded under the equity method of accounting.
Each of the above acquisitions will be accounted for using the purchase
method of accounting. The purchase price allocations are preliminary
pending appraisals, evaluations and other studies of the fair value of the
assets and liabilities acquired. Each of the acquisitions individually or
in the aggregate is not material to the financial position or results of
operations of the Company.
On October 14, 1997, the Company announced that it elected to redeem its 8-
1/2% Convertible Subordinated Notes due 1999 on November 16, 1997, and the
5-5/8% Xr Capital Holding Exchangeable Certificates due 2001, issued by a
trust established by ICN in 1986, on November 7, 1997. As of October 10,
1997, there was outstanding principal amount of $114,900,000 of the 8-1/2%
Convertible Subordinated Notes. These bonds were issued in November 1994
and are convertible into shares of ICN common stock at a conversion price
of $22.117, or 45.21 shares per $1,000 principal amount. Bondholders will
have the right to convert the bonds into ICN common stock on or before
November 14, 1997. Holders of record at the close of business on November
1, 1997 and who convert after that date will be entitled to receive the
semi-annual interest payment payable on November 15, 1997. If not
converted, bondholders will receive 102.125% of the principal amount plus
accrued interest. As of November 13, 1997, approximately $64,597,000 of the
Convertible Subordinated Notes have been converted into 2,920,694 shares of
common stock.
As of October 10, 1997, there was outstanding principal amount of
approximately Sfr 59,000,000 of the 5-5/8% Xr Capital Holding Exchangeable
Certificates. These certificates were issued in 1986 in the international
market and are convertible into ICN common stock at U.S. $26.695 (using a
fixed exchange rate of Sfr 1.66 per U.S. $1.00). Holders of the
certificates will have the right to convert the bonds into ICN common stock
on or before October 24, 1997, ten business days before the redemption
date, November 7, 1997. The redemption price is 100% of the principal
amount plus accrued interest. At the redemption date, all Xr Capital
Holding Exchangeable certificates converted into 1,342,000 shares of the
common stock except Sfr 180,000 principal amount which was redeemed for
cash.
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For financial reporting purposes the Company's operations are divided into two
industry segments, the Pharmaceutical segment and the Biomedical segment.
Certain financial information for these two segments is set forth below (in
thousands).
Net Sales
Three Months Ended Nine Months Ended
----------------------- -----------------------
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
Pharmaceutical $ 158,918 $ 142,123 $ 441,062 $ 391,653
Biomedical 18,479 15,794 55,532 48,172
--------- ---------- --------- ----------
Total Company $ 177,397 $ 157,917 $ 496,594 $ 439,825
========= ========== ========= ==========
Pharmaceutical sales for the three and nine months ended September 30, 1997
increased $16,795,000 or 12% and $49,409,000 or 13%, respectively, compared to
the same periods in 1996. The major increases occurred in the Eastern European
region reflecting internal growth in Russian and additional sales from
acquisitions. This region experienced growth despite declining sales in
Yugoslavia resulting from government controls on healthcare spending.
Pharmaceutical net sales in Eastern Europe were $98,964,000 and $280,929,000 for
the three and nine months ended September 30, 1997, respectively, compared to
$88,835,000 and $243,707,000 for the same periods in 1996. Sales in Russia were
$28,806,000 and $83,014,000 for the three and nine months ended September 30,
1997, respectively, compared to $19,593,000 and $44,473,000 for the same periods
in 1996. The increase in sales in Russia is due to the inclusion of a full nine
months of operations of Polypharm and Leksredstva in 1997 and price increases
and higher unit sales. The Company's acquisition of Alkaloida in Hungary in
October 1996 contributed $11,498,000 and $41,147,000 for the three and nine
months ended September 30, 1997, respectively. Sales in Yugoslavia were
$58,660,000 and $156,768,000 for the three and nine months ended September 30,
1997, respectively, compared to $69,242,000 and $199,234,000 for the same
periods in 1996. Sales in Yugoslavia were lower due to decreased unit sales and
unfavorable exchange rates and have been adversely affected by liquidity
problems in that country and by government actions to reduce health care
spending.
Pharmaceutical net sales in North America were $35,268,000 and $83,355,000 for
the three and nine months ended September 30, 1997, respectively, compared to
$33,030,000 and $84,769,000 for the same periods in 1996. Net sales in the third
quarter of 1997 for the North American region increased $2,238,000 or 7%
compared to the previous year primarily due to the additional sales contributed
by the acquisition of the F. Hoffmann-La Roche Ltd. ("Roche") products,
described below, partially offset by a decrease in unit sales of Virazole(R) of
$12,508,000. Net sales for the nine months ended September 30, 1997 decreased
$1,414,000 or 2% primarily due to a decrease in unit sales of Virazole(R) in the
amount of $20,076,000 partially offset by the additional $15,420,000 in sales
contributed by the acquisition of the Roche products and unit sales increases in
the myasthenia gravis product lines. Virazole(R) is used in the United States to
treat respiratory syncytial virus ("RSV"), a seasonal illness which occurs
primarily in late fall through early spring. Sales of Virazole(R) during the
first nine months of 1997 have been adversely impacted by increased wholesale
inventory levels that developed early in the 1995/1996 season along with
continuing trends in the industry toward cost containment.
On July 1, 1997, the Company completed its purchase from Roche of worldwide
rights to seven products and non-U.S. rights to two other products having
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
aggregate annual sales in 1996 of $53,800,000. The sales from these products are
included in the North American sales from the effective date of the acquisition,
July 1, 1997, and annualized sales may be slightly lower than the annualized
1996 sales levels.
Pharmaceutical net sales in Latin America were $14,298,000 and $40,753,000 for
the three and nine months ended September 30, 1997, respectively, compared to
$12,071,000 and $33,544,000 for the same periods in 1996. Net sales in the third
quarter and nine months ended September 30, 1997 increased $2,227,000 or 18% and
$7,209,000 or 21%, respectively, compared to the same periods in 1996. Such
increases in net sales were primarily due to price increases, and, to a lesser
extent, volume increases.
Pharmaceutical net sales in Western Europe were $7,285,000 and $25,090,000 for
the three and nine months ended September 30, 1997, respectively, compared to
$6,934,000 and $25,985,000 for the same periods in 1996. Net sales in the third
quarter of 1997 increased $351,000 or 5%, primarily due to an increase in
Virazole(R) sales. Net sales for the nine months ended September 30, 1997
decreased $895,000 or 3% primarily due to a decrease in Calcitonina(R) and
antibiotic unit sales in Spain and changes in translation rates partially offset
by an increase in Virazole(R) sales of $1,615,000. Since the beginning of the
year the exchange rate of the Spanish peseta has declined in value against the
dollar by 15%.
Pharmaceutical net sales in Asia, Africa and Australia were $3,103,000 and
$10,935,000 for the three and nine months ended September 30, 1997,
respectively, compared to $1,253,000 and $3,648,000 for the same periods in
1996. These increases of $1,850,000 and $7,287,000 for the three and nine months
ended September 30, 1997, respectively, compared to the same periods in 1996 are
primarily due to the additional sales contributed by the Company's acquisition
of Wuxi Pharmaceutical Corporation ("Wuxi") in China, which the Company acquired
in the first quarter of 1997.
Biomedicals segment net sales for the three and nine months ended September 30,
1997 were $18,479,000 and $55,532,000, respectively, compared to $15,794,000 and
$48,172,000 for the same periods of 1996. Net sales in the third quarter and
nine months ended September 30, 1997 increased $2,685,000 or 17% and $7,360,000
or 15%, respectively. The increase in net sales for the three months ended
September 30, 1997 is primarily due to the effect of the additional Dosimetry
sales resulting from the acquisition of the former Siemens Dosimetry Service in
July of 1996. The increase in net sales for the nine months ended September 30,
1997 is primarily due to the additional Dosimetry sales of $8,612,000 resulting
from the acquisition mentioned above, partially offset by a decrease in
instrument sales of $1,260,000 resulting from the sale of the Company's
instrument business in March 1996.
Gross Profit
Gross profit as a percentage of sales was 55% and 53% for the three and nine
months ended September 30, 1997, respectively, compared to 55% and 52% for the
same periods in 1996, respectively. Gross profit margins improved primarily at
ICN Yugoslavia, where gross profit margins increased to 50% and 49% for the
three and nine months ended September 30, 1997, respectively, from 43% and 37%
during the same periods in 1996. ICN Yugoslavia margins were lower in the prior
year due to the impact of the devaluation of the dinar in November 1995 which
carried over into 1996 as the higher priced inventory was sold. The improvement
at ICN Yugoslavia was partially offset by the gross profit margins resulting
from the acquisitions in Eastern Europe of Alkaloida in Hungary and Leksredstva
and Polypharm in Russia where sales carry gross profit margins of approximately
35%, and by lower gross profit margins in the North America region. Lower
Virazole(R) sales, which carry gross profit margins close to 90% and the effect
of additional sales from the acquisitions of the Roche products, which carry
gross profit margins of 66% affected gross profits in the North America region,
where gross profits were 74% and 78% for the three and nine months ended
September 30, 1997, respectively, compared to 88% and 86% for the same periods
in 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $54,187,000 or 31% of sales
and $165,369,000 or 33% of sales for the three and nine months ended September
30, 1997, respectively, compared to $51,366,000 or 33% of sales and $136,532,000
or 31% of sales for the three and nine months ended September 30, 1996,
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
respectively. The increase compared to the same periods in 1996 is primarily due
to additional expenses as a result of the acquisitions of Alkaloida in Hungary,
Leksredstva and Polypharm in Russia, and the former Siemens Dosimetry Service in
the United States. In the nine month period ended September 30, 1997, the
Company recorded a non-recurring $12,000,000 charge for the settlement of the
1995 class action suit related to the Company's filing of its hepatitis C new
drug application with the Food and Drug Administration.
Research and Development
Research and development expenditures increased $160,000 or 4% and $2,170,000 or
20% for the three and nine months ended September 30, 1997, respectively,
compared to the same periods in 1996. Such increases were primarily due to the
acquisition of personnel and modern research facilities at Alkaloida in Hungary
and increased expenditures at ICN Yugoslavia.
Translation and Exchange (Gains) Losses, Net
Translation and exchange (gains) losses, net, were $1,494,000 and $7,204,000 for
the three and nine months ended September 30, 1997, respectively, compared to
($903,000) and ($215,000) for the same periods in 1996. In the third quarter of
1997, translation (gains), losses, net include $2,849,000 of translation losses,
primarily related to ICN Yugoslavia's net monetary asset position, partially
offset by $1,363,000 of translation gains related to the Company's foreign
denominated debt. For the nine months ended September 30, 1997, translation
(gains), losses, net include $10,403,000 of translation losses, primarily
related to ICN Yugoslavia's net monetary asset position, partially offset by
$3,095,000 of translation gains related to the Company's foreign denominated
debt.
Interest Income
Interest income during the three and nine months ended September 30, 1997
increased $6,205,000 and $8,149,000, respectively. This increase is primarily
due to interest income on notes receivable from the Yugoslavian government, and
the interest income from the investment of the proceeds resulting from the
Company's issuance of $275,000,000 of senior notes.
Interest Expense
Interest expense during the three months and nine months ended September 30,
1997 increased $2,297,000 and $4,087,000, respectively, compared to the same
periods in 1996. This increase resulted primarily from the increase in short and
long term debt of the Company, primarily due to the effect of the debt assumed
with the acquisition of Alkaloida in Hungary and the issuance in August of 1997
of $275,000,000 of senior notes.
Taxes
Provision (benefit) for income taxes was ($521,000) and ($12,311,000) for the
three and nine months ended September 30, 1997, respectively, compared to
$2,345,000 and $3,385,000 for the same periods in 1996. As a result of the
acquisition of product rights from Roche, the Company reassessed the carrying
value of its deferred tax assets resulting in an increase in its deferred tax
asset and a corresponding deferred tax benefit of $25,854,000. Offsetting this
benefit were increases in taxes at ICN Yugoslavia of $10,163,000 resulting from
the expiration of tax benefits which originated when ICN Yugoslavia was acquired
in 1991. However, future taxes may be partially offset by tax credits allowed in
Yugoslavia for plant construction. The current statutory tax rate in Yugoslavia
is 25%.
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Computation of Per Share Earnings
In the Company's calculation of per share earnings, certain adjustments are made
to reported net income to arrive at an adjusted net income that is divided by
the number of shares for the period. Last year these adjustments related to the
impact of the Company's convertible debt, while in the three and nine months
ended September 30, 1997 there are additional adjustments related to preferred
dividends. In October of 1996, the Company issued $50,000,000 of preferred stock
having a 6% annual dividend and a convertibility feature that allows conversion
into common stock at a discount from the current market price at the time of the
exercise. This discount represents an embedded dividend and is treated similar
to the 6% stated preferred dividend in the calculation of earnings per share.
In the three and nine months ended September 30, 1997, the preferred stock is
not assumed to be converted because to do so would be anti-dilutive.
Accordingly, the earnings per share calculation includes an adjustment to net
income for the three and nine months ended September 30, 1997 of $659,000 and
$5,085,000, respectively, related to the stated preferred and embedded dividends
compared to no preferred dividend deduction last year. The embedded dividend is
deducted from earnings in the per share calculation based on when the
convertible feature of the preferred becomes exercisable, which occurs over a
year with most of the discount amortized in the first two quarters subsequent to
the issuance. Since March 31, 1997, approximately 48,000 shares of the initial
50,000 share preferred stock offering have been converted into common stock.
ICN YUGOSLAVIA
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
economic conditions in Yugoslavia include continuing liquidity problems, a
history of high inflation, unemployment, a weakened banking system and a high
trade deficit. The future of the economic and political environment of
Yugoslavia is uncertain and could deteriorate to the point that a material
adverse impact on the Company's financial position and results of operations
could occur.
ICN Yugoslavia began the year with a net monetary asset exposure of $134,000,000
which was subject to foreign exchange loss if a devaluation of the dinar were to
occur. During the first nine months of 1997, the Company reduced its monetary
exposure by converting dinar denominated accounts receivable into notes
receivable payable in dinars, but fixed in dollar amounts. The first conversion
was made early in the first quarter with $50,000,000 accounts receivable
converted into a one year note bearing interest at LIBOR plus one percent. A
second conversion was arranged at the end of the first quarter through an
agreement with the Yugoslavian government to purchase $50,000,000 of drugs. The
sales under this agreement were converted into a note receivable bearing
interest at LIBOR plus one percent on the outstanding balance and has special
payment guarantees with the payment fixed in dollar amounts. The second
agreement also allows the Company to offset certain payroll tax obligations
against outstanding accounts receivable balances. Subsequent to these two
agreements, the Company negotiated an arrangement with the government of
Yugoslavia under which ICN Yugoslavia would commit to continue to provide
products, in dollar denominated sales, in an amount up to $50,000,000 per
calendar quarter for one year, and the government would pay a minimum of
$9,500,000 per month towards outstanding receivables. However, at no point in
time can the amount due to ICN Yugoslavia from the government exceed
$200,000,000, including both accounts and notes receivable. Receivables that
arise from this agreement are interest bearing with interest at the LIBOR rate
plus one percent. As of September 30, 1997, ICN Yugoslavia had a net monetary
asset position of $48,000,000 which would be subject to foreign exchange loss if
a devaluation of the dinar were to occur.
The Company reduced its overall accounts receivable balance from the beginning
of the year through collections and the conversion of $130,000,000 of accounts
receivable into notes receivable discussed above. As of September 30, 1997, the
accounts receivable balance was $74,471,000. The willingness of the Yugoslavian
government to provide the Company protection against devaluation on its
receivables in exchange for longer payment terms is a reflection of the strict
adherence to government policy on controlling inflation by limiting the amount
of hard currency in circulation. This policy was initially established with the
start of the stabilization program in 1994.
Page 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In spite of a decrease in sales for the nine months ended September 30, 1997 of
$42,466,000 compared to the same period last year, the operating income of ICN
Yugoslavia increased to $53,855,000 for the nine months ended September 30, 1997
from $46,271,000 the same period of last year, an increase of 16%. The increase
is primarily due to improved gross margins of 49% in the nine months ended
September 30, 1997 compared to 37% last year. Last year's quarterly margins
reflected the impact of the devaluation of the dinar in November of 1995. This
improvement over last year should not be viewed as an indication of improvement
to be expected in future quarters. The Yugoslavian economy is weak and liquidity
continues to be a problem. The improvement in operating income over last year is
offset by increased levels of tax expense due to the expiration of tax benefits
in Yugoslavia. Net income from ICN Yugoslavia for the nine months ended
September 30, 1997, was $31,553,000 compared to $34,687,000 last year.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1997, cash provided by operating
activities totaled $15,374,000. The level of accounts and notes receivable
increased $74,327,000, primarily at ICN Yugoslavia resulting from the
lengthening of the collection period of receivables, the conversion of accounts
receivables into one-year notes receivables and general liquidity problems in
Yugoslavia. Cash from operating activities includes an adjustment to reverse the
non-cash impact of a $25,854,000 tax benefit from the revaluation of the
Company's deferred tax asset.
Cash used in investing activities of $50,244,000 for the nine months ended
September 30, 1997 include $24,137,000 of cash paid for acquisitions that were
initially acquired in 1996 and $27,634,000 of capital expenditures primarily in
the North America and Eastern European regions, related to production facility
improvements.
Cash provided by financing activities of $265,906,000 for the nine months ended
September 30, 1997 primarily includes $16,534,000 of proceeds from the exercise
of stock options and $267,000,000 of net proceeds from the issuance of senior
notes partially offset by net payments of notes payable of $8,958,000 and
$8,414,000 of dividends paid. The increase in 1997 dividend payments is
primarily due to the timing of quarterly cash payments in 1997 compared to 1996.
On March 25, 1997, the Company's Board of Directors declared a first quarter
cash dividend ("distribution") of $.08 per share payable on April 23, 1997 to
stockholders of record on April 9, 1997.
On June 26, 1997, the Company's Board of Directors declared a second quarter
cash dividend of $.08 per share, payable July 23, 1997 to stockholders of record
on July 9, 1997.
On September 24, 1997, the Company's Board of Directors declared a third quarter
cash dividend of $.08 per share, payable on October 22, 1997 to stockholders of
record on October 8, 1997.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $25,615,000 at September 30, 1997, which is primarily
denominated in Swiss francs.
In April 1997, the Company obtained a $15,000,000 revolving credit facility.
Funds borrowed under this facility will be used for general operating
requirements at a rate of LIBOR plus one percent. This credit facility contains
covenants that include restrictions on redemption or repurchase of stock,
limitation on dividend payments and on acquiring new debt and the maintenance of
certain financial ratios.
The Company and certain subsidiaries do not maintain product liability
insurance. While the Company has never experienced a material adverse claim for
personal injury resulting from allegedly defective products, a successful claim
could have a material adverse effect on the Company's liquidity and financial
performance.
Page 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
DEMANDS ON LIQUIDITY
Management believes that funds generated from operations will be sufficient to
meet its normal operating requirements during the coming year. If the historic
rate of growth in Eastern Europe continues, these operations will require
increasing levels of working capital and funds for additional facilities or
upgrading of existing facilities. Additionally, the Company has several
preliminary acquisition prospects that may require significant funds in 1997. In
August 1997, the Company completed its offering of $275,000,000 principle amount
of 9.25% Senior Notes due 2005 (the "Notes"). Interest on the Notes will be
payable semi-annually on February 15 and August 15 of each year, commencing
February 15, 1998. The Notes will mature on August 15, 2005, unless previously
redeemed. The Notes will be redeemable in cash at the option of the Company, in
whole or in part, on or after August 15, 2001. The Company intends to use the
proceeds from this offering for expansion in Eastern Europe, product
acquisitions in the North America, and for general purposes.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Form 10-Q contains statements that constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Form 10-Q and include
statements regarding, among other matters, the factors affecting the Company's
financial condition or results of operations, liquidity in Yugoslavia,
management of monetary exposure, economic conditions in Yugoslavia, credit
policies in Yugoslavia, and trends in financial results. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements. Such factors are discussed in this Form 10-Q and also
include, without limitation, the Company's dependence on foreign operations
(which are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and exchange control,
limitations on foreign participation in local enterprises, health-care
regulations and other restrictive governmental conditions); the risk of
operations in Yugoslavia; Eastern Europe, Russia and China in light of the
unstable economies, political and regulatory conditions in such countries; the
Company's ability to successfully develop and commercialize future products; the
limited protection afforded by the patents relating to Virazole(R), and possibly
on future drugs, techniques, processes or products the Company may develop or
acquire; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; the results of lawsuits pending against the
Company; the Company's dependence on its management, including Milan Panic, its
Chairman and Chief Executive Officer; the Company's potential product liability
exposure and lack of any insurance coverage thereof; government regulation of
the pharmaceutical industry (including review and approval for new
pharmaceutical products by the FDA in the United States and comparable agencies
in other countries) and competition.
Page 22
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1: Form of Asset Purchase Agreement by and between
Hoffmann-La Roche Inc., a New Jersey corporation, and ICN
Pharmaceuticals, Inc., a Delaware corporation, dated as of October 30,
1997.
Exhibit 10.2: Form of Asset Purchase Agreement by and between Roche
Products Inc., a Panamanian corporation, and ICN Pharmaceuticals,
Inc., a Delaware corporation, dated as of October 30, 1997.
Exhibit 10.3: Form of Asset Purchase Agreement by and between Syntex
(F.P.) Inc., a Delaware corporation, Syntex (U.S.A.) Inc., a Delaware
corporation, ICN Puerto Rico, Inc., a Puerto Rico corporation, and ICN
Pharmaceuticals, Inc., a Delaware corporation, dated as of June 13,
1997.
Exhibit 11: Computation of Per Share Earnings
Exhibit 15.1: Review Report of Independent Accountants
Exhibit 15.2: Awareness Letter of Independent Accountants
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
Page 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: November 12, 1997 /s/ Milan Panic
------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: November 12, 1997 /s/ John E. Giordani
------------------------------------
John E. Giordani
Executive Vice President and Chief Financial Officer