- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 1998 was 73,760,104.
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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 - June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income - Three months and six months
ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and six months ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows - Six months ended June 30
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 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
Page 3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(unaudited, in thousands, except per share data)
June 30, December 31,
1998 1997
-------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 90,983 $ 209,896
Receivables, net 293,241 260,495
Notes receivable, net 25,000 145,431
Inventories, net 157,517 146,988
Prepaid expenses and other current assets 34,529 23,941
-------------- -----------
Total current assets 601,270 786,751
Property, plant and equipment, net 370,013 360,713
Deferred income taxes, net 70,615 69,710
Other assets 92,810 47,978
Goodwill and intangibles, net 292,923 226,593
-------------- -----------
$ 1,427,631 $ 1,491,745
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 98,309 $ 96,437
Accrued liabilities 66,886 67,883
Notes payable 13,780 13,759
Current portion of long-term debt 12,000 19,359
Income taxes payable 5,392 3,707
-------------- -----------
Total current liabilities 196,367 201,145
Long-term debt, less current portion 316,254 315,088
Deferred license and royalty income 8,679 12,449
Other liabilities 24,722 24,658
Minority interest 104,620 142,077
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized; -0-
and 2 shares Series B and 1 and -0- shares Series D issued and
outstanding at June 30, 1998 and December 31, 1997, respectively
($22,988 liquidation preference at June 30, 1998) 1 1
Common stock, $.01 par value; 200,000 shares authorized;
73,167 and 71,432 shares outstanding at June 30, 1998
and December 31, 1997, respectively 731 714
Additional capital 826,435 766,868
Retained earnings (deficit) (2,165) 70,129
Accumulated other comprehensive income (48,013) (41,384)
-------------- -----------
Total stockholders' equity 776,989 796,328
-------------- -----------
$ 1,427,631 $ 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 and six months ended
June 30, 1998 and 1997
(unaudited, in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Product sales $ 213,891 $ 160,229 $ 453,687 $ 319,197
Royalties 19,052 -- 20,052 --
---------- ---------- ---------- ----------
Total revenues 232,943 160,229 473,739 319,197
Costs and expenses:
Cost of product sales 99,644 75,957 207,613 150,761
Selling, general and administrative expenses 72,489 65,747 147,626 111,182
Research and development costs 5,997 4,610 11,501 8,920
Provision at ICN Yugoslavia (Note 8) 165,646 -- 165,646 --
---------- ---------- ---------- ----------
Total expenses 343,776 146,314 532,386 270,863
---------- ---------- ---------- ----------
Income (loss) from operations (110,833) 13,915 (58,647) 48,334
Translation and exchange losses, net 19,296 1,715 24,724 5,710
Interest income (2,250) (2,924) (7,223) (3,463)
Interest expense 5,194 3,423 11,808 7,382
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes and minority interest (133,073) 11,701 (87,956) 38,705
Provision (benefit) for income taxes 6,603 (11,594) 9,987 (11,790)
Minority interest (42,178) 2,027 (34,393) 6,915
---------- ---------- ---------- ----------
Net income (loss) $ (97,498) $ 21,268 $ (63,550) $ 43,580
========== ========== ========== ==========
Basic earnings (loss) per common share $ (1.34) $ 0.38 $ (0.88) $ 0.76
========== ========== ========== ==========
Shares used in per share computation 72,813 51,984 72,274 50,985
========== ========== ========== ==========
Diluted earnings (loss) per common share $ (1.34) $ 0.34 $ (0.88) $ 0.66
========== ========== ========== ==========
Shares used in per share computation 72,813 64,361 72,274 63,494
========== ========== ========== ==========
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 and six months ended June
30, 1998 and 1997
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
Net income (loss) $ (97,498) $ 21,268 $ (63,550) $ 43,580
Other comprehensive income:
Foreign currency translation adjustments (2,021) (4,851) (6,629) (9,057)
Unrealized gains on marketable securities:
Unrealized holding gains arising during period 1,238 -- 1,993 --
Reclassification adjustment for gains
included in net income (1,993) -- (1,993) --
----------- ----------- ----------- ----------
Net unrealized gains (755) -- -- --
----------- ----------- ----------- ----------
Other comprehensive income (2,776) (4,851) (6,629) (9,057)
----------- ----------- ----------- ----------
Comprehensive income (loss) $ (100,274) $ 16,417 $ (70,179) $ 34,523
=========== =========== =========== ==========
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 six months ended June 30, 1998 and 1997
(unaudited, in thousands)
Six Months Ended
June 30,
---------------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (63,550) $ 43,580
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 22,664 10,765
Provision at ICN Yugoslavia (Note 8) 173,440 --
Provision for losses on accounts receivable 4,778 1,586
Provision for inventory obsolescence (840) --
Translation and exchange losses, net 24,724 5,710
Other noncash items (903) 12,000
Deferred income (6,246) 666
Loss on sale of fixed assets 72 174
Deferred income taxes (905) (21,515)
Minority interest (34,393) 6,915
Change in assets and liabilities, net of effects of acquired companies:
Accounts and notes receivable (108,200) (61,291)
Inventories (15,450) (1,224)
Prepaid expenses and other assets (26,416) (722)
Trade payables and accrued liabilities (1,358) 10,464
Income taxes payable 1,714 161
Other liabilities 1,404 5,467
----------- ----------
Net cash provided by (used in) operating activities (29,465) 12,736
----------- ----------
Cash flows from investing activities:
Proceeds from sale of marketable securities 22,958 --
Proceeds from sale of fixed assets 209 1,821
Capital expenditures (46,983) (10,861)
Acquisition of product rights and businesses (62,589) (11,334)
----------- ----------
Net cash used in investing activities (86,405) (20,374)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 14,945 24,029
Proceeds from exercise of stock options 5,867 4,930
Proceeds from issuance of stock 4,299 --
Payments on long-term debt (18,677) (10,741)
Net decrease in notes payable (194) (1,988)
Dividends paid (8,111) (5,615)
----------- ----------
Net cash provided by (used in) financing activities (1,871) 10,615
----------- ----------
Effect of exchange rate changes on cash and cash equivalents (1,172) (374)
----------- ----------
Net increase (decrease) in cash and cash equivalents (118,913) 2,603
Cash and cash equivalents at beginning of period 209,896 39,366
----------- ----------
Cash and cash equivalents at end of period $ 90,983 $ 41,969
=========== ==========
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 and, with respect to ICN Yugoslavia, a
provision for anticipated losses) 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
June 30, 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, where the Company exercises significant
influence over operating and financial affairs, are included under the equity
method. 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 a 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 $0.06 per share, payable on April 22, 1998, to stockholders of
record on April 8, 1998. In June 1998, the Company's Board of Directors declared
a second quarter cash dividend of $0.06 per share, payable on July 22, 1998, to
stockholders of record on July 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
Acquired Product Rights - 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 ("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)
June 30, 1998
(unaudited)
Vyzkumny Ustav Antibiotic a Biotransformacii - In June 1998, the Company agreed
to acquire Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a
pharmaceutical manufacturing and research facility located in a suburb of Prague
in the Czech Republic, for approximately $18,600,000 in cash. VUAB produces and
sells pharmaceutical products in finished forms, principally injectable
antibiotics and infusion solutions, and pharmaceutical raw materials. The
acquisition is expected to be completed in the third quarter of 1998 and will be
accounted for as a purchase. The excess of the purchase price over the fair
value of the net assets acquired will be recorded as goodwill and will be
amortized on a straight-line basis over 20 years. The purchase price allocation
is pending appraisals, evaluations, and other studies of the fair value of the
assets and liabilities acquired. The acquisition is not material to the
financial position or results of operations of the Company.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------
1998 1997 1998 1997
---------- ----------- ---------- ---------
Income:
Net income (loss) $ (97,498) $ 21,268 $ (63,550) $ 43,580
Dividends and accretion on preferred stock -- (1,650) (34) (4,959)
---------- ----------- ---------- ---------
Numerator for basic earnings per share--
income available to common stockholders (97,498) 19,618 (63,584) 38,621
Effect of dilutive securities:
Convertible debt -- 2,065 -- 3,226
---------- ----------- ---------- ---------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ (97,498) $ 21,683 $ (63,584) $ 41,847
---------- ----------- ---------- ---------
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 72,813 51,984 72,274 50,985
Effect of dilutive securities:
Employee stock options -- 1,389 -- 1,521
Convertible debt -- 10,901 -- 10,901
Other dilutive securities -- 87 -- 87
---------- ----------- ---------- ---------
Dilutive potential common shares -- 12,377 -- 12,509
---------- ----------- ---------- ---------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 72,813 64,361 72,274 63,494
========== =========== ========== =========
Basic earnings (loss) per common share $ (1.34) $ 0.38 $ (0.88) $ 0.76
========== =========== ========== =========
Diluted earnings (loss) per common share $ (1.34) $ 0.34 $ (0.88) $ 0.66
========== =========== ========== =========
Page 10
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1998
(unaudited)
Income available to common stockholders, for purposes of computing basic
earnings per common share, includes adjustments for preferred dividends and, in
1997, an embedded dividend arising from the discounted conversion terms of the
Series B Convertible Preferred Stock. For the three months and six months ended
June 30, 1998, the Company's stock options, preferred stock, and convertible
debt are not included in the computation of diluted earnings per share as such
securities are antidilutive. For all periods presented, 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.
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.
The balance of accumulated other comprehensive income at June 30, 1998 and
December 31, 1997 consists of accumulated foreign currency translation
adjustments. Such amounts are not 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.
5. Detail of Certain Accounts
June 30, December 31,
(in thousands) 1998 1997
----------- ------------
Receivables, net:
Trade accounts receivable $ 309,505 $ 254,376
Other receivables 11,476 18,118
----------- ------------
320,981 272,494
Allowance for doubtful accounts (27,740) (11,999)
----------- ------------
$ 293,241 $ 260,495
=========== ============
Inventories, net:
Raw materials and supplies $ 62,386 $ 65,937
Work-in-process 18,543 16,745
Finished goods 87,943 75,782
----------- ------------
168,872 158,464
Allowance for inventory obsolescence (11,355) (11,476)
----------- ------------
$ 157,517 $ 146,988
=========== ============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 431,755 $ 413,825
Accumulated depreciation and amortization (61,742) (53,112)
----------- ------------
$ 370,013 $ 360,713
=========== ============
Page 11
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 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. Stipulations of dismissal without
prejudice were recently filed in connection with the 1994 Actions and those
actions are now at an end.
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 United States Securities and Exchange Commission (the
"Commission") 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 from 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
securities, engaged in possible violations of Section 17(a) of the Securities
Act of 1933 (the "Securities Act") and Section 10(b) of the Securities and
Exchange Act of 1934 (the "Exchange Act") and Rule l0b-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; (ii)
purchased or sold 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 common stock. The Company has cooperated and continues to cooperate with
the Commission in its investigation. On January 13, 1998, ICN received a letter
from the Commission's Philadelphia District 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, Milan Panic,
Chairman and Chief Executive Officer of the Company, and a former senior
executive of the Company. 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 l0b-5 thereunder and to
impose a civil penalty of up to $500,000 on ICN. In regard to Mr. Panic, the
District Office seeks the authority to commence 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 order barring Mr. Panic from serving as an
officer or director of a public company pursuant to Section 21 of the Exchange
Act. On January 30, 1998, the Company filed submissions with the Commission
urging that it reject the District Office's request. In the event that the
Commission grants the District Office's request, a civil action could be
commenced at any time.
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 two senior executive officers
of the Company, a former officer of the Company and a current employee of the
Company are considered subjects of the investigation. The United States
Attorney's office has advised counsel for the Company that the areas of its
investigation include disclosures made and not made concerning the 1994
Hepatitis C NDA to the public and other third parties; stock sales for the
benefit of Mr. Panic following receipt on November 28, 1994 of a letter from the
FDA informing the Company that
Page 12
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1998
(unaudited)
the 1994 Hepatitis C NDA had been found not approvable; possible violations of
the economic embargo imposed by the United States upon the Federal Republic of
Yugoslavia, based upon alleged sales by the Company and Mr. Panic of stock
belonging to ICN employees; and, with respect to Mr. Panic, personal disposition
of assets of entities associated with Yugoslavia, including possible
misstatements and/or omissions in federal tax filings. 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. Recently, the United States Attorney's office
issued subpoenas requiring various current and former officers and employees of
the Company to testify before the Grand Jury. Certain current and former
employees testified before the Grand Jury beginning in July 1998.
The ultimate outcome of the Commission and Grand Jury investigations cannot be
predicted and any unfavorable outcome could have a material adverse effect on
the Company.
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.
7. Geographic Data
The following tables set forth the amount of revenues and operating income
(loss) of the Company by geographic area for the three and six months ended June
30, 1998 and 1997 and the identifiable assets of the Company by geographic area
as of June 30, 1998 and December 31, 1997 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
United States $ 73,936 $ 30,755 $ 122,574 $ 59,239
Canada 4,459 5,134 9,470 10,130
---------- ---------- ---------- ----------
North America 78,395 35,889 132,044 69,369
Latin America (principally Mexico) 20,202 14,400 37,412 27,841
Western Europe 12,914 14,541 26,413 28,810
Yugoslavia 41,564 47,086 114,728 98,108
Russia 44,325 28,079 96,953 54,208
Hungary 14,721 14,520 28,148 29,649
Poland 8,776 -- 17,531 --
---------- ---------- ---------- ----------
Eastern Europe 109,386 89,685 257,360 181,965
Asia, Africa, and Australia 12,046 5,714 20,510 11,212
---------- ---------- ---------- ----------
Total $ 232,943 $ 160,229 $ 473,739 $ 319,197
========== ========== ========== ==========
PAGE 13
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1998
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
Operating income (loss):
United States $ 43,062 $ 12,215 $ 64,245 $ 20,217
Canada 1,200 1,546 3,131 3,414
----------- ----------- ----------- ----------
North America 44,262 13,761 67,376 23,631
Latin America (principally Mexico) 6,454 3,378 10,789 6,089
Western Europe 577 1,011 2,388 2,195
Yugoslavia (161,555)(1) 13,275 (135,872)(1) 32,582
Russia 5,593 4,254 12,535 10,692
Hungary 4,178 1,696 6,234 4,786
Poland 1,581 -- 4,209 --
----------- ----------- ----------- ----------
Eastern Europe (150,203) 19,225 (112,894) 48,060
Asia, Africa, and Australia 1,699 (29) 2,309 115
Corporate (13,622) (23,431)(2) (28,615) (31,756)(2)
----------- ----------- ----------- ----------
Total $ (110,833) $ 13,915 $ (58,647) $ 48,334
=========== =========== =========== ==========
(1) Includes $169,313,000 provision at ICN Yugoslavia related to certain notes
and accounts receivable and related investments--see Note 8.
(2) Includes $12,000,000 of expenses related to a charge in connection with the
settlement of a class action lawsuit.
June 30, December 31,
1998 1997
------------ ------------
Identifiable assets:
United States $ 375,787 $ 377,315
Canada 8,724 11,282
------------ ------------
North America 384,511 388,597
Latin America (principally Mexico) 58,090 30,191
Western Europe 51,588 48,086
Yugoslavia 292,152 421,731
Russia 196,981 145,162
Hungary 79,543 79,632
Poland 81,672 68,066
------------ ------------
Eastern Europe 650,348 714,591
Asia, Africa, and Australia 79,214 26,812
Corporate 203,880 283,468
------------ ------------
Total $ 1,427,631 $ 1,491,745
============ ============
Page 14
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1998
(unaudited)
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. Currently the Yugoslavian economy is affected by
continuing liquidity problems, inflation and monetary exposures, recent and
potential future currency devaluations, price controls, government spending
limitations, credit risk, political instability, and international economic
sanctions. The future of the economic and political environment of Yugoslavia is
uncertain and could deteriorate further, resulting in a material adverse impact
on the Company's financial position and results of operations.
Devaluation: On April 1, 1998, the Yugoslavian government devalued the dinar
from a rate of 6.0 dinars per U.S. $1 to 10.92 dinars per U.S. $1. At the time
of the devaluation the Company's net monetary asset position in Yugoslavia was
approximately $38,000,000, resulting in a foreign translation loss of
approximately $17,000,000 which was recognized in the second quarter of 1998. In
addition to the foreign translation loss, the devaluation has and will continue
to adversely affect sales and gross profit margins at ICN Yugoslavia. Subsequent
to the devaluation, sales are lower due to higher exchange rates and a lack of
immediate price increases. Gross profit margins are further affected as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. Margins are expected to improve after a
devaluation if price increases are obtained and, to some extent, 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 Company, along with others in the Yugoslavian pharmaceutical industry,
applied to the government for price increases in an amount believed to be
adequate to make possible a recovery from the effects of the devaluation.
However, the Yugoslavian government did not approve any significant price
increases and the Company, along with many of its competitors, suspended all
direct sales to the Yugoslavian government in an effort to encourage the
Yugoslavian government to approve price increases. The suspension of sales
continued through the second quarter of 1998. The Company is unable to predict
the amount and timing of future price increases that may be allowed by the
Yugoslavian government, if any, and the resultant impact on future earnings.
Credit Risk: Through the first quarter of 1998, the majority of ICN Yugoslavia's
domestic sales were made to the Yugoslavian government or government-funded
entities. During early 1997, the Company established credit terms with the
Yugoslavian government under which future receivables were interest-bearing with
one year terms and 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 the first quarter of 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, but
sales were suspended in April 1998, following the devaluation. As of June 30,
1998, the outstanding balance of the notes receivable from the Yugoslavian
government was approximately $176,204,000. The Yugoslavian government has
defaulted on approximately $39,000,000 of these notes. In negotiations with the
Company subsequent to the default, the Yugoslavian government has notified the
Company that it can no longer honor the terms of the existing credit agreements.
The Yugoslavian government is seeking concessions from the Company, including
the forgiveness of a substantial portion of the amounts owed, and has ceased
making all of the payments required under the original credit agreements. The
Company is currently working to renegotiate the credit terms.
As a result of the government's default and the suspension of sales to the
government, the Company has recorded a $173,440,000 charge against earnings at
ICN Yugoslavia in the second quarter of 1998; a portion of this charge is
included in cost of sales ($3,667,000) and interest income ($4,127,000) in the
accompanying condensed consolidated statements of income. The charge consists of
a $151,204,000 reserve for estimated losses on notes receivable (including
accrued interest), a $7,757,000 reserve for accounts receivable from
government-sponsored entities, and a $14,479,000 write-down of the value of
certain related investments and assets. Pending resolution of the negotiations
and the approval of price increases, ICN Yugoslavia has suspended all direct
credit sales to the Yugoslavian government and/or government-sponsored entities.
Page 15
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 30, 1998
(unaudited)
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 six months ended June 30, 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 and the remainder of the New Certificates were
redeemed for cash. Upon the exchange and redemption of the New Certificates,
marketable securities held in trust for the payment of the New Certificates,
having a market value of approximately $22,958,000, became available to the
Company. The exchange increased stockholders' equity by $25,399,000 and reduced
long-term debt and accrued interest by $4,680,000.
In March 1998, ICN Yugoslavia acquired a 33.7% interest in the Dr. Simo
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 six months ended June 30, 1997, the Company accrued a second
quarter preferred dividend of $434,000 and a second quarter common stock
dividend of $2,833,000. The Company also issued approximately 103,000 shares of
common stock as payment of preferred stock dividends of $1,442,000.
Cash paid for income taxes for the six months ended June 30, 1998 and 1997 was
$5,295,000 and $1,045,000, respectively. Cash paid for interest, net of amounts
capitalized, for the six months ended June 30, 1998 and 1997 was $13,577,000 and
$2,985,000, respectively.
10. Subsequent Event
The Company is in the process of completing a private placement of approximately
$200,000,000 of senior notes due 2008. The notes will bear interest at
approximately 8-3/4% per annum, subject to final pricing, and will be due in
2008. Interest will be payable semiannually on May 15 and November 15 of each
year, commencing in November 1998. The Company anticipates completing the
private placement in August 1998.
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain financial information for the Company is set forth below.
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Pharmaceutical
North America $ 50,224 $ 25,811 $ 93,658 $ 48,087
Latin America 19,877 13,650 36,833 26,455
Western Europe 8,031 9,043 16,171 17,805
Eastern Europe 109,386 89,685 257,360 181,965
Asia, Africa, Australia 10,469 3,739 17,269 7,832
----------- ----------- ----------- -----------
Total Pharmaceutical 197,987 141,928 421,291 282,144
Biomedical 15,904 18,301 32,396 37,053
----------- ----------- ----------- -----------
Product sales 213,891 160,229 453,687 319,197
Royalties 19,052 -- 20,052 --
----------- ----------- ----------- -----------
Total revenues $ 232,943 $ 160,229 $ 473,739 $ 319,197
=========== =========== =========== ===========
Cost of product sales $ 99,644 $ 75,957 $ 207,613 $ 150,761
Gross profit margin 53.4% 52.6% 54.2% 52.8%
Product sales: The growth in pharmaceutical net sales of $56,059,000 (39%) and
$139,147,000 (49%) for the three months and six months ended June 30, 1998,
respectively, compared to the same periods of 1997 principally resulted from the
acquisition of the rights to certain products from F. Hoffmann-La Roche Ltd.
("Roche"), SKB, and Cassara, the purchase of three pharmaceutical companies in
Eastern Europe, each subsequent to June 30, 1997, and growth in the Company's
Latin America base business. Revenues for the six months ended June 30, 1998
also reflect substantial growth in the Company's Eastern European base business.
Pharmaceutical net sales in Eastern Europe were $109,386,000 and $257,360,000
for the three and six months ended June 30, 1998, compared to $89,685,000 and
$181,965,000 for the same periods in 1997. For the quarter, the increase
reflects additional sales of $22,082,000 resulting from the Company's
acquisition of Polfa Rzeszow, S.A. in Poland and Marbiopharm and AO Tomsk
Chemical Pharmaceutical Plant ("Tomsk") in Russia, each subsequent to the
quarter ended June 30, 1997. The Company also achieved overall sales growth of
approximately 10% in its Russian base business, which provided additional sales
of $2,940,000 in the 1998 second quarter. Sales in Russia were affected by
certain distributors' efforts to reduce inventories by delaying new orders in
response to price increases instituted by the Company in the beginning of the
second quarter. The growth in Russia was partially offset by a net $5,522,000
decrease in sales at ICN Yugoslavia. The net decrease consists of a $17,463,000
decrease in domestic sales, due to the effects of the April 1998 devaluation of
the dinar and reduced sales to the Yugoslavian government, and an $11,941,000
increase in export sales, principally to customers in Russia (see "ICN
Yugoslavia"). For the six months ended June 30, 1998, the $75,395,000 (41%)
increase in product sales includes additional sales of $48,746,000 resulting
from the aforementioned acquisitions, along with 15% growth in the Company's
Eastern European base business. The Company achieved a $16,620,000 (17%)
increase in net sales in Yugoslavia, principally due to increased volume in the
first quarter of 1998, prior to the devaluation. In Russia, sales increased by
$11,530,000 (21%), excluding growth from the 1997 acquisitions, due to increased
volume and, to a lesser extent, to price increases.
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Pharmaceutical net sales in North America were $50,224,000 and $93,658,000 for
the three and six months ended June 30, 1998, compared to $25,811,000 and
$48,087,000 for the same periods in 1997. The $24,413,000 (95%) increase in net
sales for the quarter 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, which generated sales of $32,855,000 in the second quarter of 1998. This
was partially offset by lower sales of certain dermatological products. For the
six months ended June 30, 1998, the $45,571,000 (95%) increase in net sales is
primarily the result of the acquisition of the rights to the Roche products,
which generated sales of $58,543,000. Increased sales of the acquired products
were partially offset by lower sales of certain dermatological products.
Pharmaceutical net sales in Latin America were $19,877,000 and $36,833,000 for
the three and six months ended June 30, 1998, compared to $13,650,000 and
$26,455,000 for the same periods in 1997. For the quarter and six months ended
June 30, 1998, the increase in net sales of $6,227,000 (46%) and $10,378,000
(39%), respectively, is primarily due to price increases and higher unit volume,
partially offset by unfavorable currency exchange fluctuations. The increase
also reflects second quarter 1998 sales of $2,265,000 generated by the
dermatological products which the Company acquired from Cassara in April 1998.
Excluding the effect of the acquired products, product sales for Latin America
for the six months ended June 30, 1998 increased 31% over the same period of
1997.
Pharmaceutical net sales in Western Europe were $8,031,000 and $16,171,000 for
the three and six months ended June 30, 1998, compared to $9,043,000 and
$17,805,000 for the same periods in 1997. The decrease in net sales for the
quarter and six months ended June 30, 1998 of $1,012,000 (11%) and $1,634,000
(9%) is primarily due to unfavorable currency exchange fluctuations and to lower
unit volumes in Spain, partially offset by increased unit volumes in Holland.
Pharmaceutical net sales in Asia, Africa and Australia were $10,469,000 and
$17,269,000 for the three and six months ended June 30, 1998, compared to
$3,739,000 and $7,832,000 for the same periods in 1997. The increase for the
quarter and six months ended June 30, 1998 of $6,730,000 (180%) and $9,437,000
(120%) 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
$7,403,000 and $10,518,000 for the three and six months ended June 30, 1998,
respectively, partially offset by lower sales volume in other products.
Biomedical segment net sales for the three and six months ended June 30, 1998
were $15,904,000 and $32,396,000 compared to $18,301,000 and $37,053,000 for the
same periods of 1997. The decrease for the three months and six months ended
June 30, 1998 of $2,397,000 (13%) and $4,657,000 (13%) is primarily due to lower
unit sales volume in certain diagnostics product lines. The decrease for the six
month period is also affected by the 1997 net sales amounts including dosimetry
product shipments made to fulfill higher than normal order backlog which existed
at the beginning of the 1997 first quarter.
Royalties: Royalties represent amounts earned under the Company's Exclusive
License and Supply Agreement (the "License Agreement") entered into with
Schering-Plough Corporation ("Schering-Plough") in 1995, as amended in July
1998. Under the License Agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C (HCV) in combination with
Schering-Plough's alpha interferon. The License Agreement provided the Company
an initial non-refundable payment of $23,000,000 and future royalty payments to
the Company from sales of ribavirin by Schering-Plough, including certain
minimum royalty rates. As part of the initial License Agreement, the Company
retained the right to co-market ribavirin capsules in the European Union (EU)
under its trademark Virazole(R). Schering-Plough is responsible for all clinical
development and regulatory activities.
On June 3, 1998, Schering-Plough received approval from the United States Food
and Drug Administration ("FDA") to market Rebetron(TM) Combination Therapy,
containing Rebetol(TM) (ribavirin) Capsules and Intron(R)A (interferon alfa-2b,
recombinant) Injection (the "Combination Therapy"), for the treatment of HCV in
patients with compensated liver disease who have relapsed following alpha
interferon therapy. On June 8, 1998, Schering-Plough began selling the
Combination Therapy in the United States. On June 9, 1998, Schering-Plough
submitted a Marketing Authorization Application for the Combination Therapy to
the European Medicines Evaluation Agency for the treatment of relapsed HCV
patients. On June 16, 1998, Schering-Plough filed a supplemental New Drug
Application with the FDA for the Combination Therapy for the treatment of HCV in
patients with compensated liver disease previously untreated with alpha
interferon therapy.
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
On July 16, 1998, the Company sold to Schering-Plough its rights to co-market
oral ribavirin for the treatment of HCV in the EU, in exchange for increased
royalty rates on sales of ribavirin not only in the EU but worldwide. The
Company also received a one-time payment of $16,500,000 for past royalties and
reimbursement of expenses incurred by the Company in preparation for the launch
of ribavirin capsules in the EU. Royalty revenues for the quarter and six months
ended June 30, 1998 also include amounts earned for commercial sales made by
Schering-Plough subsequent to the receipt of FDA approval and royalties on other
sales outside the United States.
Gross Profit: Gross profit as a percentage of product sales increased to 53.4%
for the three months ended June 30, 1998, compared to 52.6% for the same period
in 1997. For the six months ended June 30, 1998, gross profit as a percentage of
product sales increased to 54.2% compared to 52.8% for 1997. The increase is
primarily attributable to sales of the products acquired from Roche and Cassara,
which generally yield relatively high gross profit margins, and improved gross
profit margins in the Company's Russian base business (exclusive of the 1997
acquisitions), where the Company achieved an average gross profit margin of 46%
for the three months and six months ended June 30, 1998, compared to 39% and 40%
in the corresponding periods of 1997. Alkaloida also achieved an improved gross
profit margin of 48% and 47% for the three and six months ended June 30, 1998,
compared to 33% and 34% in the first quarter of 1997. These improvements were
partially offset by lower margins at ICN Yugoslavia resulting from the April
1998 devaluation of the dinar. Subsequent to the devaluation, gross profit
margins at ICN Yugoslavia suffered as sales are translated at higher exchange
rates and no significant price increases were received. Gross profit margins at
ICN Yugoslavia were further impacted as inventories manufactured prior to the
devaluation are charged to cost of sales at the higher historical exchange rate.
Gross profit margins for ICN Yugoslavia are likely to continue to be adversely
affected by, among other factors, the lack of price increases--see "ICN
Yugoslavia."
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $72,489,000 (31% of revenues) and $147,626,000 (31%
of revenues) for the three and six months ended June 30, 1998, compared to
$65,747,000 (41% of revenues) and $111,182,000 (35% of revenues) for the same
periods in 1997. The Company's acquisition of three pharmaceutical companies in
Eastern Europe and the acquisition of product rights from Roche and SKB (all
subsequent to June 30, 1997) generated additional expenses of $13,603,000 and
$25,813,000 for the three months and six months ended June 30, 1998, of which
approximately $3,273,000 and $6,117,000, 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 $4,768,000 and
$9,182,000 for the three months and six months ended June 30, 1998. The 1997
periods also include a $12,000,000 charge related to the settlement of
litigation. Other increases in selling, general and administrative costs reflect
increased expenditures, primarily in the Company's Eastern European operations
and at its United States corporate offices, to support the Company's recent
acquisitions and increased sales volume in the base business.
Research and Development: Research and development expenditures were $5,997,000
and $11,501,000 for the three and six months ended June 30, 1998, compared to
$4,610,000 and $8,920,000 for the same periods in 1997. 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 $19,296,000 and $24,724,000 for the three months and six months ended June
30, 1998, compared to $1,715,000 and $5,710,000 for the same period in 1997. In
the second quarter of 1998, ICN Yugoslavia recorded translation losses of
$17,108,000, representing the effect of the April 1998 devaluation of the dinar
on ICN Yugoslavia's net monetary assets of approximately $38,000,000.
Translation losses for the second quarter of 1998 also include losses of
$2,334,000 related to the Company's operations in Russia and Hungary and other
transaction-related gains. Translation losses for the second quarter of 1997
included losses of $2,009,000 related to ICN Yugoslavia's net monetary asset
position, partially offset by gains of $316,000 related to the Company's
foreign-denominated debt.
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
For the six months ended June 30, 1998, translation losses included losses of
$21,068,000 related to ICN Yugoslavia (including the effects of the devaluation)
and $3,247,000 related to the Company's Russian operations, partially offset by
gains of $145,000 related to the company's foreign-denominated debt. Translation
losses for the six months ended June 30, 1997 included losses of $6,644,000
related to ICN Yugoslavia's net monetary asset position, partially offset by
gains of $1,743,000 related to the Company's foreign-denominated debt.
Interest Income and Expense: Interest expense during the three months ended June
30, 1998 increased $1,771,000 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
(the "Senior Notes"), issued in August 1997. Interest on the Senior Notes was
partially offset by interest savings resulting from the conversion of certain
long-term debt to common stock and increased capitalization of interest costs
related to plant construction at ICN Yugoslavia. Interest income decreased to
$2,250,000 in 1998 from $2,924,000 in 1997 due to the Company not recognizing
interest income on notes receivable from the Yugoslavian government, partially
offset by increased earnings on the investment of a significant portion of the
proceeds of the Senior Notes.
For the six months ended June 30, 1998, interest expense increased $4,426,000
compared to the same period in 1997, primarily due to interest expense on the
Company's Senior Notes, issued in August 1997. Interest on the Senior Notes was
partially offset by interest savings resulting from the conversion of certain
long-term debt to common stock and increased capitalization of interest costs
related to plant construction at ICN Yugoslavia. Interest income for the six
months ended June 30, 1998 increased to $7,223,000 in 1998 from $3,463,000 in
the comparable 1997 period due to increased earnings on the investment of a
significant portion of the proceeds of the Senior Notes.
Income Taxes: The Company's provision for income taxes for the three and six
months ended June 30, 1998 was $6,603,000 and $9,987,000 compared to a benefit
of $11,594,000 and $11,790,000 for the same periods of 1997. Income taxes for
the 1997 periods includes a deferred tax benefit of $21,000,000 resulting from
the Company's recognition of a deferred tax asset for net operating losses and
tax benefits expected to be realized in the future. The Company's provision for
income taxes for 1998 also reflects additional income resulting from the
acquisition of Polfa Rzeszow, S.A. in Poland and the Company's acquisition of
Marbiopharm and Tomsk in Russia, each subsequent to June 30, 1997. Additionally,
pretax profits in North America and Latin America increased in the 1998 periods
compared to 1997, resulting in an increased provision for income taxes.
Liquidity and Capital Resources
During the six months ended June 30, 1998, cash used in operating activities
totaled $29,465,000. Operating cash flows reflected the Company's net loss of
$63,550,000 and net noncash charges (including the $173,440,000 provision at ICN
Yugoslavia, in addition to depreciation, minority interest, and foreign exchange
gains and losses) of $182,391,000, offset by working capital increases (after
the effect of business acquisitions and currency translation adjustments)
totaling approximately $148,306,000. The working capital increases are
principally related to increases in accounts and notes receivable, especially at
ICN Yugoslavia and at the Company's Russian operations. The collection period of
receivables for ICN Yugoslavia continues to be affected by the lack of
availability of dinars in Yugoslavia--see expanded discussion below regarding
liquidity at ICN Yugoslavia. The Company's inventories increased by
approximately $15,450,000, 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 $26,416,000, 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 $1,358,000 and other
working capital changes also required cash.
Cash used in investing activities of $86,405,000 for the six months ended June
30, 1998 includes $62,589,000 paid for the acquisition of the rights to certain
products from SKB and Cassara, and for the acquisition of VUAB. In addition, the
Company made capital expenditures of $46,983,000, continuing its plant expansion
efforts. These amounts were partially offset by proceeds from the sale of
marketable securities of $22,958,000 and proceeds from the sale of fixed assets
of $209,000.
Page 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cash used in financing activities totaled $1,871,000 during the six months ended
June 30, 1998. The Company made principal payments on long-term debt of
$18,677,000, reduced short-term borrowings by $194,000, and paid common stock
dividends of $8,111,000. 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. Sources of cash included long-term borrowings of $14,945,000 and
proceeds of $5,867,000 from the exercise of employee stock options. The Company
also received 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.
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and 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 $22,958,000, became available to the Company.
In June 1998, the Company's Board of Directors declared a second quarter cash
dividend of $.06 per share payable on July 22, 1998 to shareholders of record on
July 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 at June 30, 1998 totaled $90,983,000 compared to $209,896,000
at December 31, 1997. Working capital at June 30, 1998 was $404,903,000 compared
to $585,606,000 at December 31, 1997, primarily due to the $173,440,000 charge
recorded at ICN Yugoslavia and cash payments of approximately $45,000,000 for
the acquisition of product rights. Certain of the Company's 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.
The Company also has several preliminary acquisition prospects that may require
significant funds in 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's management is working to complete a private
placement of $200,000,000 of Senior Notes in the third quarter of 1998. However,
there can be no assurance that any such transaction will be consummated.
Management believes that the Company's existing cash and cash equivalents and
funds generated from operations, along with the proceeds of the $200,000,000
Senior Notes, will be sufficient to meet its liquidity requirements and to fund
anticipated acquisitions and capital expenditures estimated at an aggregate of
$75,000,000 for 1998. 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.
The Company and certain of its subsidiaries are subject to foreign exchange risk
and/or potential devaluation losses on their net monetary asset positions. At
June 30, 1998, the Company had a net monetary asset position in Russia of
approximately $59,000,000 which would be subject to a loss if a devaluation, or
significant change in exchange rates against the United States dollar, were to
occur.
Page 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
ICN Yugoslavia
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability.
Currently the Yugoslavian economy is affected by continuing liquidity problems,
inflation and monetary exposures, recent and potential future currency
devaluations, price controls, government spending limitations, credit risk,
political instability, and international economic sanctions. The future of the
economic and political environment of Yugoslavia is uncertain and conditions may
deteriorate further, resulting in a further material adverse impact on the
Company's financial position and results of operations.
On April 1, 1998, the Yugoslavian government devalued the dinar from a rate of
6.0 dinars per U.S. $1 to 10.92 dinars per U.S. $1. At the time of the
devaluation the Company's net monetary asset position in Yugoslavia was
approximately $38,000,000, resulting in a foreign translation loss of
approximately $17,000,000 which was recognized in the second quarter of 1998. In
addition to the foreign translation loss, the devaluation has and will continue
to adversely affect sales and gross profit margins at ICN Yugoslavia. Subsequent
to the devaluation, sales are lower due to higher exchange rates and a lack of
immediate price increases. Gross profit margins are further affected as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. Margins are expected to improve after a
devaluation if price increases are obtained and, to some extent, 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 Company, along with others in the Yugoslavian pharmaceutical industry,
applied to the government for price increases in an amount believed to be
adequate to make possible a recovery from the effects of the devaluation.
However, the Yugoslavian government has not approved any significant price
increases and the Company, along with many of its competitors, has suspended all
direct sales to the Yugoslavian government in an effort to encourage the
Yugoslavian government to approve price increases. The suspension of sales
continued through the second quarter of 1998. The Company is unable to predict
the amount and timing of future price increases that may be allowed by the
Yugoslavian government, if any, and the resultant impact on future earnings.
As of June 30, 1998 the Company had notes receivable, including accrued
interest, of approximately $176,204,000 due from the Yugoslavian government. The
Yugoslavian government has defaulted on approximately $39,000,000 of these
notes. In negotiations with the Company subsequent to the default, the
Yugoslavian government has notified the Company that it can no longer honor the
terms of the existing credit agreements. The Yugoslavian government is seeking
concessions from the Company, including the forgiveness of a portion of the
amounts owed, and has ceased making all payments outlined in the credit
agreements.
As a result of the government's default and the suspension of sales to the
government, the Company has recorded a $173,440,000 charge against earnings
($130,080,000 after minority interests) at ICN Yugoslavia in the second quarter
of 1998. The charge consists of a $151,204,000 reserve for estimated losses on
notes receivable, a $7,757,000 reserve for accounts receivable from
government-sponsored entities, and a $14,479,000 write-down of the value of
certain related investments and assets.
The Company is currently working to renegotiate the credit terms and is hopeful
that an agreement will be reached on the amounts due the Company and future
sales to the government. If an agreement is reached on future sales, it is
likely that the level of these sales will be substantially lower than the level
of sales prior to the default. The Company intends to expand ICN Yugoslavia's
selling efforts toward the private sector and export customers. However, the
outcome of these efforts is uncertain and there can be no assurance that the
Company will be able to generate new business to replace the government sales.
Should the Company be unable to reach an agreement providing for the resumption
of sales to the Yugoslavian government or to generate adequate non-government
sales, there may be a further material adverse impact on the Company's financial
position and results of operations.
Page 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Yugoslavia is also 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 continue to escalate and have contributed to
increased instability in the Balkans.
In June 1998, in response to continued violence by Yugoslavian government forces
against the ethnic Albanian population in Kosovo, the United States government
along with countries of the European Union imposed a ban on new American
investments in Yugoslavia and a freeze on that country's assets in the United
States. These sanctions are likely to worsen economic conditions in Yugoslavia
and may result in further adverse impact on the Company's financial position and
results of operations.
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.
SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for the year ended December 31,
1998, and the adoption of this standard is not expected to have a material
effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. This statement is effective for the Company's financial
statements for all fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). The Company has not yet determined the impact, if any, that
the adoption of SFAS 133 will have on its results of operations or financial
position.
Page 23
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 24
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 27, 1998 in New
York, New York.
Withheld/
For Against Abstentions
---------- ---------- ------------
Election of Directors
Weldon Jolley, Ph.D. 60,023,458 -- 5,359,153
Thomas H. Lenagh 59,971,579 -- 5,411,032
Roberts A. Smith, Ph.D. 60,036,531 -- 5,346,080
Richard W. Starr 59,910,502 -- 5,472,109
Andrei Kozyrev, Ph.D. 60,244,048 -- 5,138,563
Proposal to Approve the Amended and
Restated 1998 Stock Option Plan 52,561,990 12,373,907 446,714
Proposal to Approve the Amended and
Restated Certificate of Incorporation 61,278,668 3,883,242 220,701
Stockholder Proposal to Amend the Company's
Bylaws to provide for a mandatory retirement
policy for directors of the Company 9,296,162 36,134,319 1,435,512
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 ICN Pharmaceuticals, Inc. Long-Term Incentive Plan
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
Page 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: August 13, 1998 /s/ MILAN PANIC
-------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive
Officer
Date: August 13, 1998 /s/ JOHN E. GIORDANI
-------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial
Officer and Corporate Controller
Page 26
Exhibit Page No.
--------
10.1 ICN Pharmaceuticals, Inc. Long-Term Incentive Plan 27
15.1 Review Report of Independent Accountants 34
15.2 Awareness Letter of Independent Accountants 35
27 Financial Data Schedule 36