- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11397
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
--------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock,
$.01 par value, as of May 11, 1998 was 72,863,133.
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Page 2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - March 31, 1998 and
December 31, 1997 3
Consolidated Condensed Statements of Income - Three months
ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Comprehensive Income -
Three months ended March 31, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows - Three months
ended March 31, 1998 and 1997 6
Management's Statement Regarding Unaudited Financial Statements 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Page 3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(unaudited, in thousands, except per share data)
March 31, December 31,
1998 1997
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 127,527 $ 209,896
Marketable securities 12,692 --
Receivables, net 231,138 260,495
Notes receivable 177,097 145,431
Inventories, net 155,750 146,988
Prepaid expenses and other current assets 40,972 23,941
----------- -----------
Total current assets 745,176 786,751
Property, plant and equipment, net 362,576 360,713
Deferred income taxes, net 69,873 69,710
Other assets 78,383 47,978
Goodwill and intangibles, net 297,689 226,593
----------- -----------
$ 1,553,697 $ 1,491,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 87,331 $ 96,437
Accrued liabilities 66,604 67,883
Notes payable 13,947 13,759
Current portion of long-term debt 15,597 19,359
Income taxes payable 865 3,707
----------- -----------
Total current liabilities 184,344 201,145
Long-term debt, less current portion 316,870 315,088
Deferred license and royalty income 12,148 12,449
Other liabilities 26,646 24,658
Minority interest 149,803 142,077
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares
authorized; 2 and 2 shares Series
B and 1 and -0- shares Series D issued
and outstanding at March 31, 1998 and
December 31, 1997, respectively ($25,237
liquidation preference at March 31, 1998) 1 1
Common stock, $.01 par value; 100,000 shares
authorized; 71,805 and 71,432 shares
outstanding at March 31, 1998 and
December 31, 1997, respectively 718 714
Additional capital 808,631 766,868
Retained earnings 99,773 70,129
Accumulated other comprehensive income (45,237) (41,384)
----------- -----------
Total stockholders' equity 863,886 796,328
----------- -----------
$ 1,553,697 $ 1,491,745
=========== ===========
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 months ended March 31, 1998 and 1997
(unaudited, in thousands, except per share data)
Three Months Ended
March 31,
-------------------------
1998 1997
----------- ----------
Net sales $ 239,796 $ 158,968
Cost of sales 107,969 74,804
----------- ----------
Gross profit 131,827 84,164
Selling, general and administrative expenses 74,137 45,435
Research and development costs 5,504 4,310
----------- ----------
Income from operations 52,186 34,419
Translation and exchange losses, net 5,428 3,995
Interest income (4,973) (539)
Interest expense 6,614 3,959
----------- ----------
Income before provision (benefit) for income taxes
and minority interest 45,117 27,004
Provision (benefit) for income taxes 3,384 (196)
Minority interest 7,785 4,888
----------- ----------
Net income $ 33,948 $ 22,312
=========== ==========
Basic earnings per common share $ .47 $ .37
=========== ==========
Shares used in per share computation 71,730 51,099
=========== ==========
Diluted earnings per common share $ .44 $ .32
=========== ==========
Shares used in per share computation 76,903 62,835
=========== ==========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 1998 and 1997
(unaudited, in thousands)
Three Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
Net income $ 33,948 $ 22,312
Other comprehensive income:
Foreign currency translation adjustments (4,608) (4,206)
Unrealized gains on marketable securities 755 -
------------ ----------
Other comprehensive income (3,853) (4,206)
------------ ----------
Comprehensive income $ 30,095 $ 18,106
============ ==========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 6
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(unaudited, in thousands)
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net income $ 33,948 $ 22,312
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,602 5,365
Provision for losses on accounts receivable 1,694 (440)
Provision for inventory obsolescence (22) 619
Translation and exchange (gains) losses, net 5,428 3,995
Deferred income (390) (478)
Loss (gain) on sale of fixed assets (61) 19
Deferred income taxes (163) (168)
Minority interest 7,785 4,888
Change in assets and liabilities, net of effects of acquired companies:
Accounts and notes receivable (34,685) (34,606)
Inventories (9,608) 14,207
Prepaid expenses and other assets (24,000) (5,599)
Trade payables and accrued liabilities (9,120) 2,889
Income taxes payable (2,084) (115)
Other liabilities 2,634 3,517
----------- ----------
Net cash provided by (used in) operating activities (17,042) 16,405
----------- ----------
Cash flows from investing activities:
Capital expenditures (19,303) (2,986)
Proceeds from sale of fixed assets 259 36
Acquisition of product rights and businesses (44,979) (11,334)
----------- ----------
Net cash used in investing activities (64,023) (14,284)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,596 10,360
Payments on long-term debt (3,494) (13,145)
Net increase in notes payable 66 3,989
Proceeds from exercise of stock options 822 3,237
Proceeds from issuance of stock 4,299 --
Dividends paid (3,806) (2,645)
------------ ----------
Net cash provided by (used in) financing activities (517) 1,796
------------ ----------
Effect of exchange rate changes on cash and cash equivalents (787) (289)
------------ ----------
Net increase (decrease) in cash and cash equivalents (82,369) 3,628
Cash and cash equivalents at beginning of period 209,896 39,366
------------ ----------
Cash and cash equivalents at end of period $ 127,527 $ 42,994
============ ==========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 7
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results to be expected
for a full year. Although the Company believes that all adjustments (consisting
only of normal, recurring adjustments) necessary for a fair presentation of the
interim periods 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, 1997.
Page 8
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated condensed financial
statements include the accounts of ICN Pharmaceuticals, Inc. and Subsidiaries
(the "Company") and all of its majority-owned subsidiaries. Investments in 20%
through 50% owned affiliated companies are included under the equity method
where the Company exercises significant influence over operating and financial
affairs. Investments in less than 20% owned companies are recorded at cost. All
significant intercompany account balances and transactions have been eliminated.
Per Share Information: Earnings per share have been restated to reflect the
fourth quarter 1997 adoption of Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE. Common share and per common share amounts
for all periods presented have also been restated to reflect the three-for-two
stock split (in the form of a dividend), which became effective March 16, 1998.
In March 1998, the Company's Board of Directors declared a first quarter cash
dividend of $.06 per share, payable on April 22, 1998, to stockholders of record
on April 8, 1998.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current period presentation, with no effect on previously reported net
income or stockholders' equity.
2. Acquisitions
In February 1998, the Company acquired from SmithKline Beecham plc ("SKB") the
Asian, Australian and African rights to 39 prescription and over-the-counter
pharmaceutical products, including Actal, Breacol, Coracten, Eskornade, Fefol,
Gyno-Pevaryl, Maxolan, Nyal, Pevaryl, Ulcerin and Vylcim. The Company received
the product rights in exchange for $45,500,000 payable in a combination of
$22,500,000 in cash and 821 shares of the Company's Series D Convertible
Preferred Stock. Each share of the Series D Convertible Preferred Stock is
initially convertible into 750 shares of the Company's common stock (together,
the "SKB Shares"), subject to certain antidilution adjustments. Except under
certain circumstances, SKB has agreed not to sell the SKB Shares until November
4, 1999. The Company has agreed to pay SKB an additional amount in cash (or,
under certain circumstances, in shares of common stock) to the extent proceeds
received by SKB from the sale of the SKB Shares during a specified period ending
in December, 1999 and the then market value of the unsold SKB Shares do not
provide SKB with an average value of $46.00 per common share (including any
dividend paid on the SKB Shares). Alternatively, SKB is required to pay the
Company an amount, in cash or shares of the Company's common stock, to the
extent that such proceeds and market value provide SKB with an average per share
value in excess of $46.00 per common share (including any dividend paid on the
SKB Shares). The Company has also granted SKB certain registration rights
covering the common shares issuable upon conversion of the Series D Preferred
Stock.
In March 1998, the Company acquired the rights to a portfolio of 32 dermatology
products from Laboratorio Pablo Cassara for $22,450,000 in cash. The Company
will market the products through its subsidiary, ICN Argentina.
Page 9
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
Income:
Net income $ 33,948 $ 22,312
Dividends and accretion on preferred stock (34) (3,309)
--------- ---------
Numerator for basic earnings per share--
income available to common stockholders 33,914 19,003
Effect of dilutive securities:
Convertible debt (73) 1,163
--------- ---------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 33,841 20,166
========= =========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 71,730 51,099
Effect of dilutive securities:
Employee stock options 4,151 1,652
Series D Preferred Stock 246 --
Convertible debt 776 10,025
Other dilutive securities -- 59
--------- ---------
Dilutive potential common shares 5,173 11,736
--------- ---------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 76,903 62,835
--------- ---------
Basic earnings per common share $ .47 $ .37
========= =========
Diluted earnings per common share $ .44 $ .32
========= =========
Income available to common stockholders, for purposes of computing basic
earnings per common share, reflects adjustments for cumulative preferred
dividends and, in 1997, an embedded dividend arising from the discounted
conversion terms of the Series B Convertible Preferred Stock. The Company's
Series B Convertible Preferred Stock is not reflected in the computation of
diluted earnings per common share as such securities are antidilutive. In April
1998, all of the remaining outstanding shares of the Company's Series B
Preferred Stock were converted into approximately 57,000 shares of the Company's
common stock.
Page 10
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, REPORTING COMPREHENSIVE INCOME, which established standards for the
reporting and display of comprehensive income. The Company has adopted SFAS No.
130 effective January 1, 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. SFAS No. 130 does not affect
current principles of measurement of revenues and expenses and accordingly the
adoption of SFAS No. 130 had no effect on the Company's results of operations or
financial position.
There were no reclassification adjustments included in other comprehensive
income for the quarters ended March 31, 1998 or 1997. None of the components of
other comprehensive income have been recorded net of any tax provision or
benefit as the Company does not expect to realize any significant tax benefit or
expense from these items.
Accumulated other comprehensive income consists of the following (in thousands):
March 31, December 31,
1998 1997
------------- ------------
Foreign currency translation adjustments $ (45,992) $ (41,384)
Unrealized gains on securities, net 755 -
------------- ------------
Accumulated other comprehensive income $ (45,237) $ (41,384)
============= ============
5. Detail of Certain Accounts
March 31, December 31,
(in thousands) 1998 1997
------------- ------------
Receivables, net:
Trade accounts receivable $ 241,284 $ 254,376
Other receivables 4,312 18,118
------------- ------------
245,596 272,494
Allowance for doubtful accounts (14,458) (11,999)
------------- ------------
$ 231,138 $ 260,495
============= ============
Inventories, net:
Raw materials and supplies $ 60,657 $ 65,937
Work-in-process 19,211 16,745
Finished goods 86,357 75,782
------------- ------------
166,225 158,464
Allowance for inventory obsolescence (10,475) (11,476)
------------- ------------
$ 155,750 $ 146,988
============= ============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 420,546 $ 413,825
Accumulated depreciation and amortization (57,970) (53,112)
------------- ------------
$ 362,576 $ 360,713
============= ============
Page 11
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
6. Commitments and Contingencies
Litigation: 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 dormant since
their commencement and it is expected that they will be dismissed.
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 1994 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 Company
securities, 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 1994
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
1994 hepatitis C NDA; or (iii) conveyed material, non-public information
concerning the status and disposition of the 1994 hepatitis C NDA, to other
persons who may have purchased or sold ICN stock. The Company has cooperated
with the Commission in its investigation. On January 13, 1998, the Company
received a letter from the SEC's Philadelphia Office (the "District Office")
stating the District Office's intention to recommend to the Commission that it
authorize the institution of a civil action against the Company and Milan Panic.
As set forth in the letter, the District Office seeks the authority to commence
a civil action to enjoin the Company from future violations of Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder and to impose a civil penalty of up
to $500,000 on the Company. In regard to Mr. Panic, the District Office seeks
the authority to begin a civil action (i) to enjoin Mr. Panic from future
violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange
Act and Rule 10b-5 thereunder; (ii) for disgorgement of approximately $390,000;
(iii) for prejudgment interest; (iv) for a civil penalty pursuant to Section 21A
of the Exchange Act that cannot exceed three times any amount disgorged and (v)
for an officer and director bar pursuant to Section 21 of the Exchange Act. On
January 30, 1998, the Company and Mr. Panic filed submissions with the
Commission urging that it reject the District Office's request.
The Company has received Subpoenas (the "Subpoenas") from a Grand Jury in the
United States District Court, Central District of California requesting the
production of documents covering a broad range of matters over various time
periods. In March 1998, the Company was advised that the office of the United
States Attorney for the Central District of California, is considering the
Company, Mr. Panic and a former officer of the Company targets of the
investigation. The Company was also advised that certain current and former
officers of the Company are considered subjects of the investigation. The
Company has and continues to cooperate in the Grand Jury investigation. 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,
results of operations, or liquidity.
PAGE 12
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
7. Geographic Data
The following table sets forth the amount of net sales and operating income of
the Company by geographical areas (includes pharmaceuticals and biomedical
operations) for the three months ended March 31, 1998 and 1997 and the
identifiable assets of the Company by geographical areas as of March 31, 1998
and December 31, 1997 (in thousands):
Three Months Ended
March 31,
------------------------------
1998 1997
------------ -----------
Net sales:
United States $ 47,638 $ 28,484
Canada 5,011 4,996
------------ -----------
North America 52,649 33,480
Latin America (principally Mexico) 17,210 13,441
Western Europe 13,499 14,269
Yugoslavia 73,164 51,022
Russia 52,628 26,129
Hungary 13,427 15,129
Poland 8,755 --
------------ -----------
Eastern Europe 147,974 92,280
Asia, Africa, and Australia 8,464 5,498
------------ -----------
Total $ 239,796 $ 158,968
============ ===========
Operating income:
United States $ 20,183 $ 8,375
Canada 1,930 1,868
------------ -----------
North America 22,113 10,243
Latin America (principally Mexico) 4,335 2,711
Western Europe 1,815 1,184
Yugoslavia 25,683 19,307
Russia 6,942 6,438
Hungary 2,056 3,090
Poland 2,626 --
------------ -----------
Eastern Europe 37,307 28,835
Asia, Africa, and Australia 610 144
Corporate (13,994) (8,698)
------------ -----------
Total $ 52,186 $ 34,419
============ ===========
Page 13
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
March 31, December 31,
1998 1997
------------ ------------
Identifiable assets:
United States $ 379,030 $ 377,315
Canada 9,871 11,282
------------ ------------
North America 388,901 388,597
Latin America (principally Mexico) 32,410 30,191
Western Europe 49,228 48,086
Yugoslavia 464,133 421,731
Russia 164,501 145,162
Hungary 77,650 79,632
Poland 79,915 68,066
------------ ------------
Eastern Europe 786,199 714,591
Asia, Africa, and Australia 76,714 26,812
Corporate 220,245 283,468
------------ ------------
Total $ 1,553,697 $ 1,491,745
============ ============
8. ICN Yugoslavia
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 economic trend in Yugoslavia is toward
unfavorable economic conditions that include continuing liquidity problems,
inflation and monetary exposures, potential currency devaluation, price
controls, government spending limitations, credit risk, political instability,
and potential sanctions. 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.
Devaluation: On April 1, 1998 the Yugoslavian government devalued the dinar from
a rate of 6.0 dinar per U.S. $1 to 10.92 dinar per U.S. $1. At the time of the
devaluation the Company's net monetary asset position in Yugoslavia was
approximately $33,000,000, resulting in a foreign translation loss of
$15,000,000 to be recognized in the second quarter of 1998. In addition to the
foreign translation loss, the devaluation will have an impact on future sales
and gross profit margins. Typically, sales made subsequent to a devaluation are
lower due to higher exchange rates and a lack of immediate price increases.
Gross margins will suffer as the cost of sales for sales of goods manufactured
prior to the devaluation is recognized at the historic exchange rate. Margins
are expected to improve after a devaluation if price increases are obtained and
when older, higher-priced inventory is replaced with inventory manufactured
after the devaluation.
Recovery from the effects of the devaluation will depend on the approval of new
price increases by the Yugoslavian government. Subsequent to the devaluation,
the Yugoslavian government has approved minor price increases of approximately
4%. The Company, along with others in the Yugoslavian pharmaceutical industry,
has applied to the government for additional price increases in an amount
believed to be adequate to make possible a recovery from the effects of the
devaluation. However, the Company is unable to predict the size and timing of
future price increases that may be allowed by the Yugoslavian government, if
any, and the resultant impact on future earnings.
Page 14
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
March 31, 1998
(unaudited)
Credit Risk: The majority of ICN Yugoslavia's domestic sales continue to be to
the Yugoslavian government or government-funded entities. During 1997, the
Company established credit terms with the Yugoslavian government whereby future
receivables are interest-bearing with one year terms and are payable in dinars,
but fixed in dollar amounts. At December 31, 1997 the Company had approximately
$145,431,000 of notes receivable from the Yugoslavian government under such
terms. During 1998, the Company continued to make sales to the Yugoslavian
government and government-sponsored entities under similar terms in order to
reduce the Company's exposure to losses resulting from exchange rate
fluctuations. The outstanding balance of the notes receivable from the
Yugoslavian government increased to approximately $177,097,000 at March 31,
1998.
9. Supplemental Cash Flow Information
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and during
the first quarter of 1998 SFr 14,390,000 principal amount of the New
Certificates were exchanged for an aggregate of approximately 306,000 shares of
the Company's common stock. Upon the exchange of the New Certificates,
marketable securities held in trust for the payment of the New Certificates,
having a market value of approximately $11,937,000 at March 31, 1998, became
available to the Company. The exchange increased stockholders' equity by
$13,734,000 and reduced long-term debt and accrued interest by $1,797,000. In
April 1998, an additional SFr 23,280,000 principal amount of the New
Certificates were exchanged for approximately 496,000 shares of the Company's
common stock and the remainder was redeemed for cash.
In March 1998, ICN Yugoslavia acquired a 33.7% interest in the Dr. Sima
Milosevic Institute A.D., a healthcare center in the Republic of Montenegro,
from the Yugoslavian government in exchange for 147,000,000 dinars ($24,400,000)
of accounts receivable and approximately $1,200,000 in cash. The Company has
guaranteed the collection of the accounts receivable given as consideration for
the health institute. ICN Yugoslavia also acquired a 15% interest in the
financial institution Komercijalna Banka A.D. from the Yugoslavian government in
exchange for 28,600,000 dinars ($4,700,000) of accounts receivable.
In January 1997, the Company issued approximately 811,000 shares of common stock
as payment of its $10,000,000 obligation under the 1987 class action settlement.
Also during the quarter ended March 31, 1997, the Company accrued a first
quarter preferred dividend of $692,000 and a first quarter common stock dividend
of $2,752,000. The Company also issued approximately 58,000 shares of common
stock as payment of a fourth quarter 1996 preferred stock dividend of $750,000.
Cash paid for income taxes for the three months ended March 31, 1998 and 1997
was $4,518,000 and $1,806,000, respectively. Cash paid for interest, net of
amounts capitalized, for the three months ended March 31, 1998 and 1997 was
$13,807,000 and $608,000, respectively.
Page 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For financial reporting purposes the Company's operations are divided
into two industry segments, the Pharmaceutical segment and the Biomedical
segment. Certain financial information for the two industry segments is set
forth below.
Net Sales: Three Months Ended
March 31,
------------------------------------
(in thousands) 1998 1997
--------------- --------------
Pharmaceutical $ 223,304 $ 140,216
Biomedical 16,492 18,752
--------------- --------------
Total Company $ 239,796 $ 158,968
=============== ==============
Net Sales: The growth in pharmaceutical net sales of $83,088,000 or 59% for the
three months ended March 31, 1998 compared to the same period of 1997
principally resulted from the acquisition of the rights to certain products from
F. Hoffmann-La Roche Ltd. ("Roche") and the acquisition of 3 pharmaceutical
companies in Eastern Europe, each subsequent to March 31, 1997, as well as
growth in the Company's Eastern Europe and Latin America base business.
Pharmaceutical net sales in Eastern Europe were $147,974,000 for the three
months ended March 31, 1998 compared to $92,280,000 for the same period in 1997,
an increase of $55,694,000 or 60%. The sales increase reflects $29,030,000 of
growth in the Company's base business, including a $22,142,000 or 43% increase
in net sales in Yugoslavia, principally due to increased volume. In Russia,
sales increased by $8,590,000 or 33%, excluding growth from the 1997
acquisitions, due to increased volume and, to a lesser extent, to price
increases. These amounts were partially offset by lower sales at Alkaloida in
Hungary, where the Company experienced competitive pricing pressures and
unfavorable currency exchange fluctuations. The growth in net sales for Eastern
Europe also reflects additional sales of $26,664,000 resulting from the
Company's acquisition of Polfa Rzeszow, S.A. in Poland and the Company's
acquisition of Marbiopharm and AO Tomsk Chemical Pharmaceutical Plant in Russia,
each subsequent to the quarter ended March 31, 1997.
Pharmaceutical net sales in North America were $43,434,000 for the three months
ended March 31, 1998 compared to $22,276,000 for the same period in 1997. The
$21,158,000 or 95% increase in net sales is primarily the result of the
Company's acquisition of the rights to certain products from Roche in the third
and fourth quarters of 1997. These products generated sales of $25,688,000 in
the first quarter of 1998. This was partially offset by lower sales of certain
dermatological products. Sales of Virazole(R) in North America increased to
$1,262,000 compared to $209,000 in the first quarter of 1997. Virazole(R) is
used in aerosol form to treat infants hospitalized with respiratory infection
caused by respiratory syncytial virus ("RSV") and is the only antiviral
therapeutic for this infection. Sales of Virazole(R) were adversely impacted in
the first quarter of 1997 by increased wholesale inventory levels that developed
early in the 1995/1996 season, along with continuing trends in the industry
toward cost containment.
Sales of Virazole(R) may have been (and may continue to be) affected by a
January 1996 change in the American Academy of Pediatrics guidelines for the use
of Virazole(R) in RSV from "should be used" to "may be considered". Future sales
may also be impacted by a recently-approved product designed to prevent RSV. As
RSV is a seasonal disease, Virazole(R) sales from year to year are subject to
the incidence and severity of the disease, which cannot be predicted with
certainty.
Pharmaceutical net sales in Latin America were $16,956,000 for the three months
ended March 31, 1998 compared to $12,805,000 for the same period in 1997. This
increase in net sales of $4,151,000 or 32% is primarily due to price increases
and increased unit volume, partially offset by unfavorable currency exchange
fluctuations.
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Pharmaceutical net sales in Western Europe were $8,140,000 for the three months
ended March 31, 1998 compared to $8,762,000 for the same period in 1997. This
decrease in net sales of $622,000 or 7% is primarily due to unfavorable currency
exchange fluctuations, partially offset by increased unit volumes in Holland.
Pharmaceutical net sales in Asia, Africa and Australia were $6,800,000 for the
three months ended March 31, 1998 compared to $4,093,000 for the same period in
1997. This increase of $2,707,000 or 66% is primarily due to the 1998
acquisition of the rights to 39 prescription and over-the-counter pharmaceutical
products from SKB, which generated sales of $3,115,000 in 1998, partially offset
by lower sales volume in other products.
Biomedical segment net sales for the three months ended March 31, 1998 were
$16,492,000 compared to $18,752,000 for the same period of 1997. The decrease in
net sales of $2,260,000 or 12% is due to the 1997 net sales including dosimetry
products shipments made to fulfill higher than normal order backlog which
existed at the beginning of the 1997 first quarter. Net sales for 1998 were also
affected by lower unit sales volume in certain diagnostics product lines.
Gross Profit: Gross profit as a percentage of sales was 55% for the three months
ended March 31, 1998 compared to 53% for the same period in 1997. The Company's
Russian operations (exclusive of the 1997 acquisitions) were the largest
contributor to the improvement, achieving a gross profit margin of 47% in the
first quarter of 1998, compared to 41% in the same period of 1997. Alkaloida
also achieved an improved gross profit margin of 47%, compared to 35% in the
first quarter of 1997 and Polfa Rzeszow, S.A., the Company's recently-acquired
subsidiary in Poland, achieved a gross profit margin of 65%. These increases
were partially offset by lower margins on sales at the Company's
recently-acquired subsidiaries AO Tomsk and Marbiopharm in Russia. In North
America, the Company achieved a gross profit margin of 78% compared to 81% in
1997, due to increased sales of the products recently acquired from Roche, which
generally yield a slightly lower gross profit.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $74,137,000 or 31% of sales for the three months
ended March 31, 1998, compared to $45,435,000 or 29% of sales for the same
period in 1997, an increase of $28,702,000. The Company's acquisition of three
pharmaceutical companies in Eastern Europe and the acquisition of product rights
from Roche and SKB (all subsequent to March 31, 1997) generated additional
expenses of $12,210,000, of which approximately $2,844,000 represents increased
amortization of goodwill and purchased intangibles. In addition, the ongoing
development of the sales, marketing, and administrative functions at the
Company's Eastern European headquarters in Moscow, Russia resulted in additional
expenses of $4,141,000. Other increases in selling, general and administrative
costs reflect increased expenditures, primarily in Eastern Europe and at the
United States corporate offices, to support the Company's recent acquisitions
and the increased sales volume in the base business.
Research and Development: Research and development expenditures for the quarter
were $5,504,000, an increase of $1,194,000 or 28%. The increase reflects the
Company's continued investment in the development of new products, primarily at
its facilities in the United States and Eastern Europe.
Translation and Exchange Gains and Losses, Net: Foreign exchange losses, net,
were $5,428,000 for the three months ended March 31, 1998 compared to $3,995,000
for the same period in 1997. In the first quarter of 1998, translation losses
included $3,960,000 of translation losses related to ICN Yugoslavia's net
monetary asset position and $1,588,000 related to the net monetary asset
position of the Company's Russian subsidiaries, partially offset by gains of
$167,000 related to the Company's foreign-denominated debt. In the first quarter
of 1997, the Company's translation losses included $4,635,000 related to ICN
Yugoslavia's net monetary asset position, partially offset by gains of
$1,427,000 related to the Company's foreign-denominated debt.
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Income and Expense: Interest expense during the three months ended
March 31, 1998 increased $2,655,000 compared to the same period in 1997,
primarily due to interest expense on the Company's $275,000,000 9-1/4% Senior
Notes due 2005, issued in August 1997. Interest on the 9-1/4% Senior Notes was
partially offset by interest savings resulting from the 1997 conversion of
certain long-term debt to common stock and increased capitalization of interest
costs related to plant construction at ICN Yugoslavia. During the three months
ended March 31, 1998, the Company capitalized interest of $1,718,000 compared to
$1,225,000 in the same period of 1997. Interest income increased to $4,973,000
in 1998 from $539,000 in 1997 due to the investment of a significant portion of
the proceeds of the $275,000,000 Senior Notes.
Income Taxes: The Company's provision for income taxes was $3,384,000 in the
first quarter of 1998, compared to a tax benefit of $196,000 in the same period
of 1997. The Company operates in many regions where the tax rate is low or where
it benefits from tax exemptions. The increase in the Company's first quarter
1998 provision for income taxes reflects additional income resulting from the
acquisition of Polfa Rzeszow, S.A. in Poland and the Company's acquisition of
Marbiopharm and AO Tomsk Chemical Pharmaceutical Plant in Russia, each
subsequent to the quarter ended March 31, 1997. Additionally, net sales in North
America and Latin America increased in the first quarter of 1998 compared to
1997, resulting in an increased provision for income taxes. In the first quarter
of 1997, the Company benefited from the favorable resolution of a $1,255,000 tax
liability and the recognition of approximately $500,000 of deferred tax assets
in Spain.
Liquidity and Capital Resources
During the three months ended March 31, 1998, cash used in operating activities
totaled $17,042,000. Operating cash flows reflected the Company's net income of
$33,948,000 and net noncash charges (principally depreciation, minority
interest, and foreign exchange gains and losses) of $25,873,000, offset by
working capital increases (after the effect of business acquisitions and
currency translation adjustments) totaling approximately $76,863,000. The
working capital increases are principally related to increases in accounts and
notes receivable, especially at ICN Yugoslavia. The collection period of
receivables for ICN Yugoslavia continues to be affected by the lack of
availability of dinars in Yugoslavia. As of December 31, 1997, the Company had
approximately $145,431,000 of notes receivable from the Yugoslavian government
payable in dinars, but fixed in dollar amounts. During 1998, the Company
continued to make sales to the Yugoslavian government and government-sponsored
entities under similar note receivable terms in order to reduce the Company's
exposure to losses resulting from exchange rate fluctuations. The outstanding
balance of the notes receivable from the Yugoslavian government has increased to
approximately $177,097,000 at March 31, 1998. See expanded discussion below
regarding liquidity at ICN Yugoslavia. The Company's inventories increased by
approximately $9,608,000, primarily to support increased sales volume in the
Company's Eastern European operations and a build-up of inventories of
recently-acquired products. Prepaid expenses and other assets increased
approximately $24,000,000, primarily due to vendor prepayments made in
Yugoslavia to reduce the Company's exposure to exchange rate fluctuations. A
decrease in trade payables and accrued liabilities of $9,120,000 and other
working capital changes also required cash.
Cash used in investing activities of $64,023,000 for the three months ended
March 31, 1998 includes $44,979,000 paid for the acquisition of the rights to
certain products from SKB and from Laboratorios Pablo Cassara. In addition, the
Company made capital expenditures of $19,303,000, continuing its plant expansion
efforts. These amounts were partially offset by proceeds from the sale of fixed
assets of $259,000.
Cash used in financing activities totaled $517,000 during the first quarter of
1998. The Company made principal payments on long-term debt of $3,494,000 and
paid dividends of $3,806,000. The dividend payments reflect higher levels of
shares outstanding and a 12.5% increase in the per share dividend from the same
period in 1997. These amounts were partially offset by proceeds of $4,299,000
related to the shares issued in the Company's acquisition of certain product
rights from Roche in 1997; under the purchase agreement, the Company was
entitled to a portion of the proceeds realized by Roche from the sale of the
shares in excess of a specified price. Other sources of cash included long-term
borrowings of $1,596,000 and net short-term borrowings of $66,000, made for
working capital purposes. The Company also received proceeds of $822,000 from
the exercise of employee stock options.
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and,
through April 1998, SFr 37,670,000 principal amount of the New Certificates was
exchanged for an aggregate of approximately 802,000 shares of the Company's
common stock. The remaining SFr 200,000 principal amount of the New Certificates
was redeemed for cash. Upon the exchange of the New Certificates, marketable
securities held in trust for the payment of the New Certificates, having a
market value of approximately $23,300,000, became available to the Company.
In March 1998, the Company's Board of Directors declared a first quarter cash
dividend of $.06 per share payable on April 22, 1998 to shareholders of record
on April 8, 1998.
Demands on Liquidity: The Company's principal sources of liquidity are its
existing cash and cash equivalents and cash provided by operations. Cash and
cash equivalents and marketable securities at March 31, 1998 totaled
$140,219,000 compared to $209,896,000 at December 31, 1997. Working capital at
March 31, 1998 is $560,832,000 compared to $585,606,000 at December 31, 1997,
primarily due to cash payments of approximately $45,000,000 for the acquisition
of product rights. Certain of the lines of credit and long term borrowings
include covenants restricting the payment of dividends, the issuance of new
indebtedness, and the repurchase of the Company's common stock and requiring the
maintenance of certain financial ratios. Management believes that funds
generated from operations will be sufficient to meet its normal operating
requirements and to fund capital expenditures estimated at $116,300,000 for
1998. Also, if the historic rate of growth in Eastern Europe continues, these
operations will require increasing levels of working capital and funds for
additional facilities or upgrading of existing facilities. In connection with a
recent acquisition, the Company has guaranteed the collection of certain
accounts receivable and could potentially be required to pay up to 147,000,000
dinars in the event that any such accounts are ultimately uncollectible. The
Company also has several preliminary acquisition prospects that may require
significant funds in 1998. Management believes that the Company's existing cash
and cash equivalents and its marketable securities along with funds generated
from operations will be sufficient to meet these liquidity requirements and to
fund anticipated acquisitions. The Company may also seek additional debt
financing or issue additional equity securities to finance future acquisitions.
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.
ICN Yugoslavia
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
current economic trend in Yugoslavia is toward unfavorable economic conditions
including continuing liquidity problems, inflation and monetary exposures,
potential currency devaluation, price controls, government spending limitations,
credit risk, political instability, and potential sanctions. 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.
Yugoslavia is subject to political instability. The elections that took place in
1997 have not resulted in a change of political leadership that would provide a
foundation for significant economic reforms. The Federal Republic of Yugoslavia
is comprised of two states, Serbia and the much smaller state of Montenegro.
Within Yugoslavia there exist political dissension and unrest. The state of
Montenegro has been active in seeking greater autonomy from Serbia.
Additionally, in the Serbian province of Kosovo ethnic Albanians are also
seeking independence from Serbia. Recent armed conflicts in Kosovo between
ethnic Albanians and Serbian forces have contributed to increased instability in
the Balkans.
The international Contact Group of five nations which was created by the Dayton
peace accords to monitor the situation in the Balkans has recommended the
imposition of additional economic sanctions against Yugoslavia if progress is
not made in solving the situation in Kosovo. Imposition of additional sanctions
could worsen the economic conditions in Yugoslavia which may result in a
material adverse impact on the Company's financial position and results of
operations.
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
On April 1, 1998, the Yugoslavian government devalued the dinar from a rate of
6.0 dinar per U.S. $1 to 10.92 dinar per U.S. $1. At the time of the devaluation
the Company's net monetary asset position in Yugoslavia was approximately
$33,000,000, resulting in a foreign translation loss of $15,000,000 to be
recognized in the second quarter of 1998. In addition to the foreign translation
loss, the devaluation will have an impact on future sales and gross profit
margins. Typically, sales made subsequent to a devaluation are lower due to
higher exchange rates and a lack of immediate price increases. Gross margins
will suffer as the cost of sales for sales of goods manufactured prior to the
devaluation is recognized at the historic exchange rate. Margins are expected to
improve after a devaluation if price increases are obtained and when older,
higher-priced inventory is replaced with inventory manufactured after the
devaluation.
Recovery from the effects of the devaluation will depend on the approval of new
price increases by the Yugoslavian government. Subsequent to the devaluation,
the Yugoslavian government has approved minor price increases of approximately
4%. The Company, along with others in the Yugoslavian pharmaceutical industry,
has applied to the government for additional price increases in an amount
believed to be adequate to make possible a recovery from the effects of the
devaluation. However, the Company is unable to predict the size and timing of
future price increases that may be allowed by the Yugoslavian government, if
any, and the resultant impact on future earnings.
NEW ACCOUNTING PRONOUNCEMENTS
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 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.
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 regions; 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 20
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.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
Page 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: May 15, 1998 /s/ Milan Panic
-------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: May 15, 1998 /s/ John E. Giordani
-------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
15.1 Review Report of Independent Accountants 23
15.2 Awareness Letter of Independent Accountants 24
27.1 Financial Data Schedule 25