- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 12, 1998 was 76,514,277.
- - --------------------------------------------------------------------------------
2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income - Three months and nine months
ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and nine months ended September 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows - Nine months ended September 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 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 29
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(unaudited, in thousands, except per share data)
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 255,439 $ 209,896
Receivables, net 212,968 260,495
Notes receivable, net 25,000 145,431
Inventories, net 171,171 146,988
Prepaid expenses and other current assets 42,563 23,941
-------------- --------------
Total current assets 707,141 786,751
Property, plant and equipment, net 415,469 360,713
Deferred income taxes, net 70,907 69,710
Other assets 80,093 47,978
Goodwill and intangibles, net 286,808 226,593
-------------- --------------
$ 1,560,418 $ 1,491,745
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 92,358 $ 96,437
Accrued liabilities 78,878 67,883
Notes payable 20,225 13,759
Current portion of long-term debt 12,380 19,359
Income taxes payable 2,605 3,707
-------------- --------------
Total current liabilities 206,446 201,145
Long-term debt, less current portion 522,294 315,088
Deferred license and royalty income 9,789 12,449
Other liabilities 23,737 24,658
Minority interest 83,094 142,077
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 September 30, 1998 and December 31, 1997, respectively ($22,988
liquidation preference at September 30, 1998) 1 1
Common stock, $.01 par value; 200,000 shares authorized;
73,624 and 71,432 shares outstanding at September 30, 1998
and December 31, 1997, respectively 735 714
Additional capital 838,388 766,868
Retained earnings (deficit) (71,840) 70,129
Accumulated other comprehensive income (52,226) (41,384)
-------------- --------------
Total stockholders' equity 715,058 796,328
-------------- --------------
$ 1,560,418 $ 1,491,745
============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months and nine months
ended September 30, 1998 and 1997
(unaudited, in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Revenues:
Product sales $ 156,360 $ 177,397 $ 610,047 $ 496,594
Royalties 6,631 -- 26,683 --
------------ ------------ ------------ -------------
Total revenues 162,991 177,397 636,730 496,594
Costs and expenses:
Cost of product sales 70,972 77,309 278,585 228,070
Selling, general and administrative expenses 81,373 54,187 228,999 165,369
Research and development costs 5,139 4,290 16,640 13,210
Provision for losses related to Eastern Europe (Note 2) 39,884 -- 205,530 --
------------ ------------ ------------ -------------
Total expenses 197,368 135,786 729,754 406,649
------------ ------------ ------------ -------------
Income (loss) from operations (34,377) 41,611 (93,024) 89,945
Translation and exchange losses, net 35,259 1,494 59,983 7,204
Interest income (2,353) (6,392) (9,576) (9,855)
Interest expense 12,890 5,950 24,698 13,332
------------ ------------ ------------ -------------
Income (loss) before income
taxes and minority interest (80,173) 40,559 (168,129) 79,264
Provision (benefit) for income taxes (4,840) (521) 5,147 (12,311)
Minority interest (10,110) 6,523 (44,503) 13,438
------------ ------------ ------------ -------------
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
============ ============ ============ =============
Basic earnings (loss) per common share $ (0.89) $ 0.61 $ (1.77) $ 1.38
============ ============ ============ =============
Shares used in per share computation 73,478 55,460 72,680 52,488
============ ============ ============ =============
Diluted earnings (loss) per common share $ (0.89) $ 0.50 $ (1.77) $ 1.17
============ ============ ============ =============
Shares used in per share computation 73,478 72,450 72,680 66,434
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
For the three months and
nine months ended September 30, 1998 and 1997
(unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
Other comprehensive income:
Foreign currency translation adjustments (4,213) (2,890) (10,842) (11,947)
Unrealized gains on marketable securities:
Unrealized holding gains arising during period -- -- 1,993 --
Reclassification adjustment for gains
included in net income -- -- (1,993) --
------------ ------------ ------------ -------------
Net unrealized gains -- -- -- --
------------ ------------ ------------ -------------
Other comprehensive income (4,213) (2,890) (10,842) (11,947)
------------ ------------ ------------ -------------
Comprehensive income (loss) $ (69,436) $ 31,667 $ (139,615) $ 66,190
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(unaudited, in thousands)
Nine Months Ended
September 30,
------------------------------------
1998 1997
---------------- --------------
Cash flows from operating activities:
Net income (loss) $ (128,773) $ 78,137
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 36,080 18,370
Provision for losses related to Eastern Europe (Note 2) 215,729 --
Provision for losses on accounts receivable 6,105 2,235
Provision for inventory obsolescence 2,831 1,224
Translation and exchange losses, net 59,983 7,204
Other noncash items (249) --
Deferred income (5,778) 2,684
Loss (gain) on sale of fixed assets 270 (483)
Deferred income taxes (1,197) (25,854)
Minority interest (44,503) 13,438
Change in assets and liabilities, net of effects of acquired companies:
Accounts and notes receivable (111,265) (74,327)
Inventories (29,817) (3,447)
Prepaid expenses and other assets (35,219) 419
Trade payables and accrued liabilities 20,791 (9,374)
Income taxes payable (578) 2,185
Other liabilities 1,764 2,963
---------------- --------------
Net cash provided by (used in) operating activities (13,826) 15,374
---------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 22,958 --
Proceeds from sale of fixed assets 938 1,527
Capital expenditures (84,908) (27,634)
Acquisition of product rights and businesses (69,411) (24,137)
---------------- --------------
Net cash used in investing activities (130,423) (50,244)
---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 215,573 267,000
Proceeds from exercise of stock options 6,707 16,534
Proceeds from issuance of stock 4,299 --
Net increase (decrease) in notes payable 1,188 (8,958)
Payments on long-term debt (22,192) (256)
Dividends paid (12,629) (8,414)
---------------- --------------
Net cash provided by financing activities 192,946 265,906
---------------- --------------
Effect of exchange rate changes on cash and cash equivalents (3,154) (541)
---------------- --------------
Net increase in cash and cash equivalents 45,543 230,495
Cash and cash equivalents at beginning of period 209,896 39,366
---------------- --------------
Cash and cash equivalents at end of period $ 255,439 $ 269,861
================ ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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 a provision for losses related to
Eastern Europe) 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.
8
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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.
During 1998, the Company's Board of Directors declared a quarterly cash dividend
of $0.06 per share for each of its first, second and third fiscal quarters. The
third quarter dividend is payable on October 28, 1998 to stockholders of record
as of October 14, 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. PROVISION FOR LOSSES RELATED TO EASTERN EUROPE
The Company's operations in Eastern Europe have been adversely affected by
recent economic and political developments in the region, including the
increasingly volatile Russian economic situation. During the quarter ended
September 30, 1998, the Russian ruble declined from a rate of approximately 6.1
rubles to $1 to approximately 16.1 rubles to $1. As a result of the exchange
rate change, the Company recorded a foreign currency translation loss of
$31,708,000 related to its Russian operations in the quarter ended September 30,
1998.
The economic crisis in Russia has adversely affected the pharmaceutical industry
in the region. Many Russian companies, including many of the Company's
customers, continue to experience severe liquidity shortages as rubles are in
short supply, and as Russian companies' hard-currency assets remain frozen in
Russian banks. This liquidity crisis has diminished many Russian companies'
ability to pay their debts, and is likely to lead to a number of business
failures in the region.
At ICN Yugoslavia, the Company's operations continue to be affected by the April
1998 devaluation of the dinar, and by the Company's previously-announced
suspension of sales to the Yugoslavian government. In addition, ICN Yugoslavia's
export sales for the quarter ended September 30, 1998 have been and will
continue to be affected by the economic crisis in Russia. In the second and
third quarters of 1998, the Yugoslavian government defaulted on its obligations
to the Company of $176,204,000 of accounts and notes receivable--see Note 11.
As a result of these factors, the Company has recorded provisions for losses
related to Eastern Europe totaling $42,289,000 and $215,729,000 in the three
months and nine months ended September 30, 1998. The third quarter charge
consists of reserves for accounts receivable of $37,873,000, the write-off of
certain investments of $2,011,000, and a reduction in the value of certain
inventories of $2,405,000. The provision for losses related to Eastern Europe
for the nine months ended September 30, 1998 also includes a provision of
$173,440,000 in Yugoslavia, offset by minority interest of $43,360,000,
representing a reserve for notes and accounts receivable due from the
Yugoslavian government and government-sponsored entities of $165,646,000,
charges to cost of sales of $3,667,000 and a charge against interest of
$4,127,000.
9
3. 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. Based upon the September 30, 1998 market price of the Company's
common stock of $17.50, the aggregate guaranteed value of the SKB Shares exceeds
their market value by approximately $17,549,000, and the Company may be required
to issue approximately 1,003,000 additional common shares in satisfaction of
this agreement.
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.
Vyzkumny Ustav Antibiotic a Biotransformacii - In July 1998, the Company
acquired Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a pharmaceutical
manufacturing and research facility located in a suburb of Prague in the Czech
Republic, for approximately $17,600,000 in cash. VUAB produces and sells
pharmaceutical products in finished forms, principally injectable antibiotics
and infusion solutions, and pharmaceutical raw materials. The acquisition was
accounted for as a purchase and is not material to the financial position or
results of operations of the Company.
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 September 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.
10
5. 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 Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
Income:
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
Dividends and accretion on preferred stock -- (659) (34) (5,618)
------------- -------------- ------------- -------------
Numerator for basic earnings per share--
income available to common stockholders (65,223) 33,898 (128,807) 72,519
Effect of dilutive securities:
Convertible debt -- 2,022 -- 5,505
------------- ------------- ------------- -------------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ (65,223) $ 35,920 $ (128,807) $ 78,024
============= ============= ============= =============
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 73,478 55,460 72,680 52,488
Effect of dilutive securities:
Employee stock options -- 3,323 -- 2,267
Convertible debt -- 10,667 -- 10,668
Other dilutive securities -- 3,000 -- 1,011
------------- ------------- ------------- -------------
Dilutive potential common shares -- 16,990 -- 13,946
------------- ------------- ------------- -------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 73,478 72,450 72,680 66,434
============= ============= ============= =============
Basic earnings (loss) per common share $ (0.89) $ 0.61 $ (1.77) $ 1.38
============= ============= ============= =============
Diluted earnings (loss) per common share $ (0.89) $ 0.50 $ (1.77) $ 1.17
============= ============= ============= =============
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 nine months ended
September 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.
11
6. DETAIL OF CERTAIN ACCOUNTS
September 30, December 31,
(in thousands) 1998 1997
--------------- ---------------
Receivables, net:
Trade accounts receivable $ 263,106 $ 254,376
Other receivables 17,185 18,118
--------------- ---------------
280,291 272,494
Allowance for doubtful accounts (67,323) (11,999)
--------------- ---------------
$ 212,968 $ 260,495
=============== ===============
Inventories, net:
Raw materials and supplies $ 59,415 $ 65,937
Work-in-process 21,413 16,745
Finished goods 109,588 75,782
--------------- ---------------
190,416 158,464
Allowance for inventory obsolescence ( 19,245) (11,476)
--------------- ---------------
$ 171,171 $ 146,988
=============== ===============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 482,818 $ 413,825
Accumulated depreciation and amortization (67,349) (53,112)
--------------- ---------------
$ 415,469 $ 360,713
=============== ===============
7. LONG-TERM DEBT
In August 1998, the Company completed a private placement of $200,000,000 of its
8-3/4% Senior Notes due 2008 (the "8-3/4% Senior Notes"). The 8-3/4% Senior
Notes are unsecured senior obligations of the Company which rank pari passu with
other senior indebtedness of the Company, including its 9-1/4% Senior Notes due
2005. The 8-3/4% Senior Notes mature on November 15, 2008. Interest is payable
semiannually on May 15 and November 15 of each year, commencing in November
1998. The 8-3/4% Senior Notes are subject in limited circumstances to optional
redemption (at the Company's option) at any time prior to November 15, 2001, at
108.75% of their principal amount, plus accrued and unpaid interest. Upon a
change in control (as defined in the related indenture) the Company may be
required to repurchase the 8-3/4% Senior Notes from the holders at 101% of their
principal amount, plus accrued and unpaid interest. The indenture governing the
8-3/4% Senior Notes contains certain covenants which may restrict, among other
things, the incurrence of additional indebtedness, the payment of dividends or
other restricted payments, the creation of certain liens, the sale of assets, or
the Company's ability to consolidate or merge, subject to certain qualifications
and exceptions. The Company also gave the purchasers of the 8-3/4% Senior Notes
certain registration rights.
8. STOCK REPURCHASE PROGRAM
In September and October 1998, the Company's Board of Directors authorized two
stock repurchase programs. The first repurchase program authorizes the Company
to repurchase up to $10,000,000 of its outstanding common stock. The second
authorized the Company to initiate a long-term repurchase program that allows
the Company to repurchase up to 3,000,000 shares of its common stock. In
executing the repurchase programs, the Company is limited by certain covenants
contained in the indentures relating to the Company's 9-1/4% Senior Notes due
2005 and its 8-3/4% Senior Notes. In the indentures, the Company is permitted to
12
repurchase up to $10,000,000 of its common stock under the first program;
however, repurchases under the second program will only be permitted as the
Company generates cumulative net income as provided for in the indentures. As of
September 30, 1998, no shares had been repurchased under this program.
9. COMMITMENTS AND CONTINGENCIES
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 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; (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 10b-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. On August 27, 1998, the Company's counsel was informed by the
District Office that (i) the District Office had withdrawn its request for
authorization to commence an enforcement action against Mr. Panic with respect
to allegations of illegal insider trading and the remedies of disgorgement,
interest, and monetary penalties attendant thereto; and (ii) the Commission had
granted the District Office's request for authorization to commence an
enforcement action against the Company and Mr. Panic alleging false or
misleading statements or omissions with respect to the status and disposition of
the 1994 Hepatitis C NDA, including the remedies of injunctive relief and a
civil penalty not to exceed $500,000 against the Company, and injunctive relief
and a director and officer bar against Mr. Panic.
The Company has received 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. The
Company understands that the Company, Mr. Panic, a current senior executive
officer, a former senior officer, and a current employee of the Company are
targets of the investigation. The Company also understands that a senior
executive officer, a former officer, a current employee, and a former employee
are subjects of the investigation. The United States Attorney's office has
13
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
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. The United States Attorney's office has
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 other pending lawsuits or subject to a number of
threatened lawsuits. In the opinion of management, the ultimate resolution will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity. However, there can be no assurance that any
unfavorable outcome of any such matter would not have a material adverse effect
on the Company.
10. 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 nine months ended
September 30, 1998 and 1997 and the identifiable assets of the Company by
geographic area as of September 30, 1998 and December 31, 1997 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues:
United States $ 39,653 $ 29,089 $ 139,814 $ 88,328
Canada 4,907 4,840 14,377 14,970
-------------- -------------- -------------- --------------
North America 44,560 33,929 154,191 103,298
Latin America (principally Mexico) 19,799 17,057 60,880 44,898
Western Europe 18,413 18,229 56,029 47,039
Yugoslavia 11,133 58,660 125,860 156,768
Russia 34,329 28,806 131,282 83,014
Hungary 6,345 11,498 34,493 41,147
Poland 7,548 -- 25,079 --
Czech Republic 5,541 -- 5,541 --
-------------- -------------- -------------- --------------
Eastern Europe 64,896 98,964 322,255 280,929
Asia, Africa, and Australia 15,323 9,218 43,375 20,430
-------------- -------------- -------------- --------------
Total $ 162,991 $ 177,397 $ 636,730 $ 496,594
============== ============== ============== ==============
14
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Operating income (loss):
United States $ 13,959 $ 8,897 $ 64,881 $ 29,489
Canada 2,030 1,740 5,161 5,153
-------------- -------------- -------------- --------------
North America 15,989 10,637 70,042 34,642
Latin America (principally Mexico) 6,505 5,233 19,012 11,322
Western Europe 4,420 3,968 12,666 6,163
Yugoslavia (7,647) 21,273 (143,520) 53,855
Russia (17,533) 5,097 (4,998) 15,789
Hungary (12,376) 1,485 (6,142) 6,271
Poland (115) -- 4,094 --
Czech Republic (121) -- (121) --
--------------- -------------- -------------- --------------
Eastern Europe (37,792) 27,855 (150,687) 75,915
Asia, Africa, and Australia 2,404 2,054 8,520 2,169
Corporate (25,903) (8,136) (52,577) (40,266)
-------------- -------------- -------------- --------------
Total $ (34,377) $ 41,611 $ (93,024) $ 89,945
============== ============== ============== ==============
September 30, December 31,
1998 1997
---------------- --------------
Identifiable assets:
United States $ 359,193 $ 377,315
Canada 8,848 11,282
---------------- --------------
North America 368,041 388,597
Latin America (principally Mexico) 56,067 30,191
Western Europe 59,322 48,086
Yugoslavia 290,811 421,731
Russia 160,973 145,162
Hungary 75,548 79,632
Poland 86,568 68,066
Czech Republic 27,708 --
---------------- --------------
Eastern Europe 641,608 714,591
Asia, Africa, and Australia 81,612 26,812
Corporate 353,768 283,468
---------------- --------------
Total $ 1,560,418 $ 1,491,745
================ ==============
15
11. 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 economic conditions in Yugoslavia include continuing
liquidity problems, inflationary pressures, recent and potential future currency
devaluations, unemployment, price controls, government spending limitations, a
weakened banking system, a high trade deficit, 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 to
the Yugoslavian government continued through the third 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 September
30, 1998, the Yugoslavian government had defaulted on the outstanding balance of
the notes receivable of approximately $176,204,000. In negotiations with the
Company subsequent to the default, 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 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.
16
12. 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 nine months ended September 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 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. As of September 30,
1998, the Company remains obligated for up to 52,300,000 dinars under this
guarantee. 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 nine months ended September 30, 1997, the Company accrued a
third quarter common stock dividend of $3,085,000. The Company also issued
approximately 131,000 shares of common stock as payment of preferred stock
dividends of $1,875,000.
Cash paid for income taxes for the nine months ended September 30, 1998 and 1997
was $8,286,000 and $2,629,000, respectively. Cash paid for interest, net of
amounts capitalized, for the nine months ended September 30, 1998 and 1997 was
$27,448,000 and $3,888,000, respectively.
13. SUBSEQUENT EVENTS
In November, 1998 the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product; Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. Under the
terms of the Company's agreement with Roche, the Company has guaranteed to Roche
a per share price initially at $31.00, increasing at a rate of 6% per annum
through December 31, 2000. Should Roche sell any of the shares prior to December
31, 2000, the Company is entitled to one-half of any proceeds realized by Roche
in excess of the guaranteed price. Should the market price of the Company's
common stock be below the guaranteed price at the end of the guarantee period,
the Company will be required to satisfy the aggregate guarantee amount by
payment to Roche in cash or, in certain circumstances, in additional shares of
the Company's common stock.
Also effective October 1, the Company acquired from SKB the rights within Latin
America to three ethical pharmaceutical products, including Breacol, Cynoplus
and Cytomel for $2,800,000.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company's operations in Eastern Europe have been adversely affected by
recent economic and political developments in the region, including the
increasingly volatile Russian economic situation. In response to worsening
liquidity and declining currency reserves, the Russian government has continued
to seek international financial assistance. The Russian Central Bank has used
recent financial assistance from the International Monetary Fund, along with its
existing monetary reserves, in an effort to support the value of the ruble.
However, in August 1998, the Central Bank announced that it was no longer able
to support the ruble at its then-current exchange rate of approximately 6.3
rubles to $1, and that it would allow the ruble to fall as far as 9.5 rubles to
$1. Subsequently, the ruble fell sharply and the Russian Central Bank was unable
to support the ruble, even at the previously-announced level. In September 1998,
there have been large fluctuations in exchange rates for the ruble and the value
of the ruble has continued to decline in relation to the dollar, at times
exceeding 20 rubles to $1, a decline of more than 68% from the ruble's
mid-August 1998 level. As of September 30, 1998, the exchange rate was
approximately 16.1 rubles to $1. As a result of the decline in the ruble
exchange rate, the Company recorded a foreign currency translation loss of
$31,708,000 related to its Russian operations in the quarter ended September 30,
1998.
The Company believes the economic crisis in Russia has adversely affected the
pharmaceutical industry in the region. Many Russian companies, including many of
the Company's customers, continue to experience severe liquidity shortages as
rubles are in short supply, and as Russian companies' hard-currency assets
remain frozen in Russian banks. This liquidity crisis has diminished many
Russian companies' ability to pay their debts, and is likely to lead to a number
of business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, increasing pressure on the
Company and other producers to limit price increases (in hard currency terms).
These factors have and may continue to adversely affect sales and gross margins
in the Company's Russian operations.
At ICN Yugoslavia, the Company's operations continue to be affected by the April
1998 devaluation of the dinar, and by the Company's previously-announced
suspension of sales to the Yugoslavian government. In addition, ICN Yugoslavia's
export sales for the quarter ended September 30, 1998 have been and will
continue to be affected by the economic crisis in Russia. In the second and
third quarters of 1998, the Yugoslavia government defaulted on its obligations
to the Company under $176,204,000 of accounts and notes receivable--see "ICN
Yugoslavia".
As a result of these factors, the Company has recorded provisions for losses
related to Eastern Europe totaling $42,289,000 and $215,729,000 in the three
months and nine months ended September 30, 1998. The third quarter charge
consists of reserves for accounts receivable of $37,873,000, the write-off of
certain investments of $2,011,000, and a reduction in the value of certain
inventories of $2,405,000. The provision for losses related to Eastern Europe
for the nine months ended September 30, 1998 also includes a provision of
$173,440,000 in Yugoslavia, offset by minority interest of $43,360,000,
representing a reserve for notes and accounts receivable due from the
Yugoslavian government and government-sponsored entities of $165,646,000,
charges to cost of sales of $3,667,000 and a charge against interest of
$4,127,000.
The Company continues to pursue strategic acquisitions that balance its Eastern
European operations with an enhanced Western presence. In November 1998, the
Company completed the acquisition of the worldwide rights (except India) to four
products from Roche for $178,800,000 in cash and common stock. The products
include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology product;
Librax, a treatment for gastrointestinal disorders; and Mogadon, a sleep
disorder drug also used to treat epilepsy. In addition, the Company recently
entered into agreements with Senetek plc under which it obtained the worldwide
marketing rights to AdrenaJect(R), a device which automatically delivers
epinephrine to treat anaphylactic shock, and the United States marketing rights
to Kinetin(R), a skin cream to inhibit signs of aging. The Company will market
these products primarily through its existing North American and Western Europe
operations. In Latin America, the Company has recently acquired the rights to
market three products from SKB, and has acquired a pharmaceutical distributor in
Brazil. The Company believes these acquisitions complement its existing product
lines and increase its Latin America market presence.
18
RESULTS OF OPERATIONS
Certain financial information for the Company is set forth below.
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Pharmaceutical
North America $ 32,250 $ 22,663 $ 105,435 $ 70,750
Latin America 19,380 16,443 59,882 42,898
Western Europe 12,535 13,547 37,969 31,352
Eastern Europe 64,896 98,964 322,255 280,929
Asia, Africa, Australia 12,445 7,301 37,255 15,133
--------------- --------------- --------------- ---------------
Total Pharmaceutical 141,506 158,918 562,796 441,062
Biomedical 14,854 18,479 47,251 55,532
--------------- --------------- --------------- ---------------
Product sales 156,360 177,397 610,047 496,594
Royalties 6,631 -- 26,683 --
--------------- --------------- --------------- ---------------
Total revenues $ 162,991 $ 177,397 $ 636,730 $ 496,594
=============== =============== =============== ===============
Cost of product sales $ 70,972 $ 77,309 $ 278,585 $ 228,070
Gross profit margin 55% 56% 54% 54%
Product sales: The decline in pharmaceutical net sales of $17,412,000 (11%) for
the three months ended September 30, 1998 primarily reflects the continued
suspension of sales to the Yugoslavian government and the impact of the Russian
economic crisis on our Eastern European business. Pharmaceutical sales in North
America increased $9,587,000 or 42% due primarily to the acquisition of products
from Roche.
The increase in pharmaceutical net sales of $121,734,000 (28%) for the nine
months ended September 30, 1998 reflects double-digit growth in each of the
Company's operating regions. Sales in Eastern Europe increased $41,326,000 (15%)
due to additional sales from acquisitions in Russia, Poland and the Czech
Republic, which offset a $30,908,000 decline in sales in Yugoslavia. The
acquisition of products from Roche contributed to sales increases in North
America and Western Europe. In Latin America, sales reflect continued growth in
the Company's base business and sales of the products acquired from Cassara. The
acquisition of products from SKB contributed to the sales increase in the Asia,
Africa, and Australia region.
Pharmaceutical net sales in Eastern Europe were $64,896,000 and $322,255,000 for
the three and nine months ended September 30, 1998, compared to $98,964,000 and
$280,929,000 for the same periods in 1997. For the quarter, sales at ICN
Yugoslavia decreased $47,527,000 due primarily to lower domestic sales resulting
from the effects of the April 1998 devaluation of the dinar and the continued
suspension of sales to the Yugoslavian government, and decreased export sales,
principally to customers in Russia (see "ICN Yugoslavia"). The sales decrease in
Yugoslavia was partially offset by $26,678,000 additional sales from the
Company's acquisitions of Polfa Rzeszow, S.A. in Poland, VUAB in the Czech
Republic, and Marbiopharm and AO Tomsk Chemical Pharmaceutical Plant in Russia,
each subsequent to the quarter ended September 30, 1997. Excluding the sales
contribution of acquisitions, the Company experienced an overall sales decline
of approximately 28% in its Russian base business.
Sales in Eastern Europe for the nine months ended September 30, 1998 increased
$41,326,000, reflecting increased sales from the aforementioned acquisitions of
$75,424,000, which were partially offset by a net $30,908,000 decrease in sales
at ICN Yugoslavia and a $6,654,000 decrease in sales at ICN Hungary. In Russia,
sales increased by $3,464,000 (4%), excluding growth from the 1997 acquisitions,
due to increased volume and price increases in the first and second quarters of
1998.
19
Pharmaceutical net sales in North America were $32,250,000 and $105,435,000 for
the three and nine months ended September 30, 1998, compared to $22,663,000 and
$70,750,000 for the same periods in 1997. The $9,587,000 (42%) 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 additional sales of $11,837,000 in the third quarter of
1998. This was partially offset by lower sales of certain dermatological and
hormone replacement products. For the nine months ended September 30, 1998, the
$34,685,000 (49%) increase in net sales is primarily the result of the
acquisition of the rights to the Roche products, which generated additional
sales of $47,028,000. Increased sales of the acquired products were partially
offset by lower sales of certain dermatological products.
Pharmaceutical net sales in Latin America were $19,380,000 and $59,882,000 for
the three and nine months ended September 30, 1998, compared to $16,443,000 and
$42,898,000 for the same periods in 1997. For the quarter and nine months ended
September 30, 1998, the increase in net sales of $2,937,000 (18%) and
$16,984,000 (40%), respectively, is primarily due to price increases and higher
unit volume, partially offset by unfavorable currency exchange fluctuations. The
increase also reflects third quarter 1998 sales of $1,362,000 and nine month
sales of $7,237,000 generated by the products which the Company acquired from
Cassara and Roche subsequent to September 30, 1997. Excluding the effect of the
acquired products, product sales for Latin America for the nine months ended
September 30, 1998 increased 23% over the same period of 1997.
Pharmaceutical net sales in Western Europe were $12,535,000 and $37,969,000 for
the three and nine months ended September 30, 1998, compared to $13,547,000 and
$31,352,000 for the same periods in 1997. The increase in net sales for the nine
months ended September 30, 1998 of $6,617,000 (21%) is primarily due to the
Company's acquisition of the rights to certain products from Roche in the third
and fourth quarters of 1997, which generated additional sales of $11,101,000.
Pharmaceutical net sales in Asia, Africa and Australia were $12,445,000 and
$37,255,000 for the three and nine months ended September 30, 1998, compared to
$7,301,000 and $15,133,000 for the same periods in 1997. The increase for the
three and nine months ended September 30, 1998 of $5,144,000 (70%) and
$22,122,000 (146%) 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 $7,876,000 and $18,394,000 for the three and nine months
ended September 30, 1998, respectively.
Biomedical segment net sales for the three and nine months ended September 30,
1998 were $14,854,000 and $47,251,000 compared to $18,479,000 and $55,532,000
for the same periods of 1997. The decrease for the three months and nine months
ended September 30, 1998 of $3,625,000 (20%) and $8,281,000 (15%) is primarily
due to lower unit sales volume in certain diagnostics product lines. The
decrease for the nine 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") with Schering-Plough
Corporation ("Schering-Plough"). 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. Schering-Plough
has 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
and in June 1998 Schering-Plough began selling the Combination Therapy in the
United States. Also in June 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. Schering-Plough
has also 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.
Royalty revenues for the three and nine months ended September 30, 1998 include
amounts earned from United States commercial sales made by Schering-Plough
subsequent to receipt of FDA approval, as well as royalties on compassionate use
sales outside the United States, primarily in Western Europe. Royalty revenues
for the nine months ended September 30, 1998 also include a one-time payment of
$16,500,000 which the Company received from Schering-Plough in consideration for
the sale to Schering-Plough of additional marketing rights in the European
20
Union, in settlement of past royalties, and as reimbursement for expenses
incurred by the Company in preparation for the launch of ribavirin capsules in
the European Union.
Gross Profit: Gross profit as a percentage of product sales decreased to 55% for
the three months ended September 30, 1998, compared to 56% for the same period
in 1997. The decrease for the third quarter is primarily attributable to gross
margin declines in Yugoslavia and Russia. Subsequent to the April 1998
devaluation of the Yugoslavian dinar, gross profit margins at ICN Yugoslavia
suffered as sales are translated at higher exchange rates, while 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." The
margins in Russia were adversely impacted by the weakening of the ruble. While
the Company is generally able to set its prices for Russian markets without
government approval, the severe liquidity crisis in Russia and the reduced
purchasing power of Russian consumers after the devaluation of the ruble
restricted price increases to a level which does not fully offset the impact of
the devaluation. Gross profit margins at ICN Russia were further impacted as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. The overall gross margins for Eastern
Europe were 38% for the third quarter of 1998, compared to 46% for the same
period in 1997. The effects of recent events in Eastern Europe were partially
offset by improved margins in North America, Western Europe and Latin America
resulting from the sales of the products acquired from Roche and Cassara, which
generally yield relatively high gross profit margins.
For the nine months ended September 30, 1998, gross profit as a percentage of
product sales was 54% compared to 54% for the same period in 1997. The gross
margins in Eastern Europe for the nine months ended September 30, 1998 were 43%
compared to 44% for the same period in 1997. This decrease resulted from the
impact of devaluations and economic problems in Yugoslavia and Russia.
Offsetting the declines in Eastern Europe are improved margins in most of the
Company's operating regions primarily due to product acquisitions.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $81,373,000 (50% of revenues) and $228,999,000 (36%
of revenues) for the three and nine months ended September 30, 1998, compared to
$54,187,000 (31% of revenues) and $165,369,000 (33% of revenues) for the same
periods in 1997. The Company's acquisition of four pharmaceutical companies in
Eastern Europe and the acquisition of product rights from Roche and SKB (all
subsequent to September 30, 1997) generated additional expenses of $22,867,000
and $48,680,000 for the three months and nine months ended September 30, 1998,
of which approximately $2,995,000 and $9,112,000 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 $7,509,000 and $15,106,000 for the three months and nine months
ended September 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 $5,139,000
and $16,640,000 for the three and nine months ended September 30, 1998, compared
to $4,290,000 and $13,210,000 for the same periods in 1997. The increase
reflects the Company's continued investment in the development of products,
primarily at its facilities in the United States and Eastern Europe.
Translation and Exchange Gains and Losses, Net: Foreign exchange losses, net,
were $35,259,000 for the three months ended September 30, 1998, compared to
$1,494,000 for the same period in 1997. In the third quarter of 1998, the
Company's Russian operations recorded a translation loss of $31,708,000
representing the effect of the approximately 65% devaluation of the ruble during
the quarter. Additionally, the Company's operations in Poland and Hungary
recorded transaction losses of $1,554,000 and $2,240,000 during the quarter,
principally related to foreign-denominated debt. In the third quarter of 1997
the Company recorded net foreign exchange losses of $1,494,000, consisting of
$2,849,000 of translation losses, primarily related to ICN Yugoslavia's net
monetary asset position, partially offset by $1,363,000 of translation gains
related to the Company's foreign-denominated debt.
21
Foreign exchange losses, net, were $59,983,000 for the nine months ended
September 30, 1998, compared to $7,204,000 for the same period in 1997. The
foreign exchange losses for the nine months ended September 30, 1998 include
losses of $34,955,000 at the Company's Russian operations, principally due to
the third quarter devaluation of the ruble. ICN Yugoslavia recorded losses of
$20,993,000 in 1998, including the effect of the April 1998 devaluation of the
dinar. Additionally, the Company recorded foreign currency transaction losses of
$3,122,000 in Hungary and $1,523,000 in Poland. For the nine months ended
September 30, 1997, net translation losses include $10,403,000 of translation
losses, primarily related to ICN Yugoslavia's net monetary asset position,
partially offset by $3,095,000 of translation gains related to the Company's
foreign-denominated debt.
Interest Income and Expense: Interest expense during the three months ended
September 30, 1998 increased $6,940,000 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 and interest on the Company's $200,000,000
8-3/4% Series B Senior Notes due 2008, issued in August 1998 (collectively
referred to as "Senior Notes"). Interest on the Senior Notes was partially
offset by interest savings resulting from the conversion of certain long-term
debt to common stock. Interest income decreased to $2,353,000 in 1998 from
$6,392,000 in 1997 as the Company has ceased recognizing interest income on its
notes receivable from the Yugoslavian government, partially offset by increased
earnings from the investment of a significant portion of the proceeds of the
Senior Notes.
For the nine months ended September 30, 1998, interest expense increased
$11,366,000 compared to the same period in 1997, primarily due to interest
expense on the Company's Senior Notes. Interest on the Senior Notes was
partially offset by interest savings resulting from the conversion of certain
long-term debt to common stock and capitalization of interest costs related to
plant construction at ICN Yugoslavia. Interest income for the nine months ended
September 30, 1998 decreased to $9,576,000 in 1998 from $9,855,000 in the
comparable 1997 period due to not recognizing 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
Income Taxes: The Company's benefit for income taxes for the three months ended
September 30, 1998 was $4,840,000 compared to $521,000 the same period of 1997.
The benefit recorded in 1998 primarily represents the tax benefits resulting
from United States-based pretax losses.
For the nine months ended September 30, 1998, the Company recorded a provision
for taxes of $5,147,000 compared to a tax benefit of $12,311,000 for the same
period in 1997. In 1998, the Company recorded tax provisions in North America of
$2,929,000 and Latin America of $4,238,000, partially offset by a tax benefit
recorded in Eastern Europe. Income taxes for the 1997 period include a deferred
tax benefit of $25,854,000 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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, cash used in operating
activities totaled $13,826,000. Operating cash flows reflected the Company's net
loss of $128,773,000 and working capital increases (after the effect of business
acquisitions and currency translation adjustments) totaling approximately
$154,324,000, offset by net noncash charges (including the $215,729,000 of
provisions for losses related to Eastern Europe, along with depreciation,
minority interest, and foreign exchange gains and losses) of $269,271,000. 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. In the third quarter, the collection period of receivables from the
Company's Russian customers has been adversely affected by the current Russian
economic crisis, which has dramatically reduced the availability of cash among
Russian companies. The collection period of receivables at ICN Yugoslavia
continues to be affected by the lack of availability of dinars in
Yugoslavia--see "ICN Yugoslavia". The Company's inventories increased by
approximately $29,817,000, 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 $35,219,000, primarily due to vendor prepayments made in
Yugoslavia and Russia to reduce the Company's exposure to exchange rate
22
fluctuations. These amounts were partially offset by an increase in trade
payables and accrued liabilities of $20,791,000 and other working capital
changes.
Cash used in investing activities of $130,423,000 for the nine months ended
September 1998 includes $69,411,000 paid for the acquisition of the rights to
certain products from SKB and Cassara. The Company also purchased VUAB, and
acquired a portion of the minority interests in five of its subsidiaries. In
addition, the Company made capital expenditures of $84,908,000, principally
representing the continuation of 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 $938,000.
Cash provided by financing activities totaled $192,946,000 during the nine
months ended September 30, 1998, including proceeds of long-term borrowings
totaling $215,573,000. In August 1998, the Company completed a private placement
of $200,000,000 of its 8-3/4% Senior Notes due 2008 for net proceeds of
approximately $190,821,000. Other sources of cash from financing activities
included proceeds of $6,707,000 from the exercise of employee stock options and
a net increase in short-term borrowings of $1,188,000. The Company also received
proceeds of $4,299,000 related to shares of its common stock 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.
These amounts were partially offset by principal payments on long-term debt of
$22,192,000, and cash dividends paid on common stock of $12,629,000. 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.
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 September 1998, the Company's Board of Directors declared a third quarter
cash dividend of $.06 per share payable on October 28, 1998 to shareholders of
record on October 14, 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 September 30, 1998 totaled $255,439,000, compared to
$209,896,000 at December 31, 1997. Working capital at September 30, 1998 was
$500,695,000 compared to $585,606,000 at December 31, 1997. The decrease in
working capital is primarily due to the provisions for losses related to Eastern
Europe (principally on accounts and notes receivable) of $215,729,000 and cash
payments of approximately $69,411,000 for the acquisition of product rights and
businesses, partially offset by the proceeds of the Company's recently-completed
offering of its 8-3/4% Senior Notes due 2008. 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, along with its
existing cash reserves, will be sufficient to meet its normal operating
requirements.
In November 1998, the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product; Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. The
Company also has several preliminary acquisition prospects that may require
significant funds in 1998.
The August 1998 devaluation of the Russian ruble decreased the Company's working
capital by approximately $32,000,000. In addition, the current economic crisis
in Russia continues to adversely affect the Company's operating cash flows in
that region, as its Russian customers continue to experience severe liquidity
shortages. The Company may need to invest additional working capital in Eastern
Europe to sustain its operations, to provide increasing levels of working
23
capital necessary to support renewed growth, and to fund the purchase or
upgrading of 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 52,300,000 dinars in the event that any
such accounts are ultimately uncollectible.
Management believes that the Company's existing cash and cash equivalents and
funds generated from operations will be sufficient to meet its liquidity
requirements and to fund anticipated acquisitions and capital expenditures. 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.
INFLATION AND CHANGING PRICES
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, fluctuations in the
relative values of currencies, political instability and restrictive
governmental actions. Changes in the relative values of currencies which occur
from time to time have, and may in the future, materially affect the Company's
results of operations. The effect of these risks remains difficult to predict.
As of September 30, 1998, the Company had a net monetary asset position in
Russia of approximately $20,340,000 which is subject to loss in the event of
further decline in the value of the ruble. Due to the extremely large
fluctuation in the ruble exchange rate, the ultimate amount of any future
foreign exchange loss the Company may incur cannot presently be determined and
such loss may have a material adverse effect on the Company's financial position
and results of operations. The Company's management continues to work to reduce
its net monetary exposure, including the tightening of credit policies and
increased accounts receivable collection efforts including, in some cases,
discounts for early payment from customers. However, there can be no assurance
that such efforts will be successful.
The Company and its subsidiaries are also subject to foreign currency risk on
its foreign-denominated debt of approximately $38,722,000 at September 30, 1998,
which is primarily denominated in Swiss francs and German marks and, at
Alkaloida and Polfa Rzeszow, in U.S. dollars.
The effects of inflation are experienced by the Company through increases in the
costs of labor, services and raw materials. The Company is subject to price
control restrictions on its pharmaceutical products in the majority of countries
in which it operates. While the Company attempts to raise selling prices in
anticipation of inflation, the Company has been affected by the lag in allowed
price increases in Yugoslavia and Mexico, which has created lower sales in U.S.
dollars and reductions in gross profit. Future sales and gross profit could be
materially affected if the Company is unable to obtain price increases
commensurate with the levels of inflation. Pharmaceutical prices in the United
States and the Russian pharmaceutical markets are not heavily regulated by the
government. However, the recent economic crisis in Russia has limited the
Company's ability to increase prices in the Russian market.
ICN YUGOSLAVIA
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
economic conditions in Yugoslavia include continuing liquidity problems,
inflationary pressures, unemployment, a weakened banking system and a high trade
deficit. Between May 1992 and December 1995, ICN Yugoslavia operated under
United Nations' sanctions that severely limited its ability to import raw
materials and prohibited all exports. While most of these sanctions were
subsequently suspended, in June 1998, the European Union and the United States
imposed additional economic sanctions on Yugoslavia in response to the continued
violence by government forces against the Albanian population in Kosovo. On June
24
8, 1998, the United States announced a ban on new American investments in
Yugoslavia and a freeze on the assets of that country in the United States. 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.
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 in April 1998 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 third 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 and
as of September 30 1998, the Yugoslavian government had defaulted on its
obligations under the notes. In negotiations with the Company subsequent to the
default, 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 payments required under the original credit agreements.
As a result of the government's default and the suspension of sales to the
government, the Company 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 continues to work 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,
or that revenues from such new business will be adequate to sustain operations
at ICN Yugoslavia. The Company has taken actions to reduce operating costs at
ICN Yugoslavia by placing approximately 1,000 employees on paid leave, which
allows the Company to pay 60% of an employee's salary rather than a full salary.
Yugoslavian law requires the payment of a two-year severance benefit to
terminated employees. The Company may consider employee terminations in the
future to reduce its operating costs. 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.
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
25
state of Montenegro has been active in seeking greater autonomy from Serbia.
Additionally, in 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.
THE YEAR 2000 ISSUE
The Company is pursuing an action plan to be Year 2000 compliant in all
locations by the third quarter of 1999. The Company does not have heavy reliance
on custom, internally generated software; the Company principally uses third
party software that is, in most cases, already Year 2000 compliant. The Company
has completed an assessment of its worldwide computer systems and has determined
that it will be required to perform some modification or replacement of software
so that all systems will properly utilize dates beyond December 31, 1999. As of
September 30, 1998, the Company has spent approximately $3,800,000 to upgrade
its systems to be Year 2000 compliant, and considers its information systems to
be 85% Year 2000 compliant. The Company recently converted its Russian
operations to Year 2000 compliant software.
The remaining projects that must be completed for full Year 2000 compliance are
software upgrades at the Company's plants in Hungary and Puerto Rico. The
purchase of replacement software is necessary to maintain the existing "Good
Manufacturing Practices" status of these plants. The company has identified
appropriate replacement software for these facilities and prepared
implementation plans. Installation is expected to begin early in 1999. The
estimated cost to complete the conversion to full Year 2000 compliance is
estimated to be approximately $4,500,000 which will be spent primarily in 1999
and funded with cash from operations. The Company does not consider itself
particularly vulnerable to third parties' failure to remediate those third
parties' own Year 2000 issues, and continues to monitor the issue.
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.
26
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.
27
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 9 of Notes to Consolidated Condensed Financial Statements
Item 5. OTHER INFORMATION
ACQUISITION OR DISPOSITION OF ASSETS
In November, 1998 the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product: Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. Under the
terms of the Company's agreement with Roche, the Company has guaranteed to Roche
a per share price initially at $31.00, increasing at a rate of 6% per annum
through December 31, 2000. Should Roche sell any of the shares prior to December
31, 2000, the Company is entitled to one-half of any proceeds realized by Roche
in excess of the guaranteed price. Should the market price of the Company's
common stock be below the guaranteed price at the end of the guarantee period,
the Company will be required to satisfy the aggregate guarantee amount by
payment to Roche in cash or, in certain circumstances, in additional shares of
the Company's common stock. The cash portion of the purchase price was paid
using the Company's existing cash, including a portion of the proceeds of the
August 1998 private placement of $200,000,000 of its 8-3/4% Senior Notes due
2008.
Roche marketed the pharmaceutical products internationally. The Company intends
to use the acquired assets for the same purposes.
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The Company intends to file the required financial statements within 60 days of
the date that this report is required to be filed.
PRO FORMA FINANCIAL INFORMATION
The Company intends to file the required pro forma financial information within
60 days of the date that this report is required to be filed.
EXHIBITS
The Asset Purchase Agreement dated October 2, 1998 by and between F. Hoffmann -
LaRoche Ltd. and ICN Puerto Rico, Inc. is filed as an exhibit to this Form 10-Q
Quarterly Report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated October 2, 1998 by and
between F. Hoffmann - LaRoche Ltd. and ICN Puerto Rico,
Inc.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27 Financial Data Schedule
28
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
September 30, 1998:
Form 8-K dated July 19, 1998, reporting the Company's intent to provide
a reserve for notes receivable from the Yugoslavian government, and
reporting the sale to Schering-Plough Corporation of the rights to
co-market oral ribavirin for the treatment of hepatitis C in the
European Union.
Form 8-K dated July 24, 1998, reporting the Company's intent to issue
$200,000,000 of Senior Notes in a private placement transaction.
Form 8-K dated September 16, 1998 reporting recent developments
relating to the United States Securities and Exchange Commission's
Order Directing Private Investigation and Designating Officers to Take
Testimony, entitled In the Matter of ICN Pharmaceuticals, Inc. (P-177).
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: November 13, 1998 /s/ MILAN PANIC
----------------------------------------------
Milan Panic
Chairman of the Board and Chief
Executive Officer
Date: November 13, 1998 /s/ JOHN E. GIORDANI
----------------------------------------------
John E. Giordani
Executive Vice President, Chief
Financial Officer and Corporate Controller
30
EXHIBIT INDEX
Exhibit
10.1 Asset Purchase Agreement dated October 2, 1998 by and between
F. Hoffmann - LaRoche Ltd. and ICN Puerto Rico, Inc.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27 Financial Data Schedule