- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11397
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, $.01 par
value, as of May 12, 1999 was 77,719,501.
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2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Comprehensive Income -
Three months ended March 31, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 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 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(unaudited, in thousands, except per share data)
March 31, December 31,
1999 1998
-------------- --------------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 110,847 $ 104,921
Restricted cash 15,567 15,558
Accounts receivable, net 183,939 180,001
Inventories, net 123,141 126,545
Prepaid expenses and other current assets 11,969 13,723
-------------- --------------
Total current assets 445,463 440,748
Property, plant and equipment, net 324,802 327,756
Deferred income taxes, net 81,436 77,933
Other assets 45,880 45,706
Goodwill and intangibles, net 457,536 464,253
-------------- --------------
$ 1,355,117 $ 1,356,396
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade payables $ 68,658 $ 92,287
Accrued liabilities 66,213 60,644
Notes payable 20,635 17,584
Current portion of long-term debt 25,710 28,097
Income taxes payable 3,534 5,142
-------------- --------------
Total current liabilities 184,750 203,754
Long-term debt, less current portion 509,256 510,808
Deferred license and royalty income 2,110 6,061
Other liabilities 22,556 22,160
Minority interest 27,452 27,449
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized;
1 shares Series D issued and outstanding
($22,988 liquidation preference at March 31, 1999) 1 1
Common stock, $.01 par value; 100,000 shares authorized;
77,384 (March 31, 1999) and 76,411 (December 31, 1998)
shares outstanding (after deducting shares in treasury of
424 and 200, respectively) 774 764
Additional capital 953,347 928,956
Accumulated deficit (282,633) (295,211)
Accumulated other comprehensive income (62,496) (48,346)
-------------- --------------
Total stockholders' equity 608,993 586,164
-------------- --------------
$ 1,355,117 $ 1,356,396
============== ==============
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 ended March 31, 1999 and 1998
(unaudited, in thousands, except per share data)
Three Months Ended
March 31,
------------------------------------
1999 1998
---------------- --------------
Revenues:
Product sales $ 160,246 $ 239,796
Royalties 15,828 1,000
---------------- --------------
Total revenues 176,074 240,796
Costs and expenses:
Cost of product sales 66,396 107,969
Selling, general and administrative expenses 62,662 75,137
Research and development costs 2,242 5,504
---------------- --------------
Total expenses 131,300 188,610
---------------- --------------
Income from operations 44,774 52,186
Translation and exchange losses, net 7,259 5,428
Interest income (1,644) (4,973)
Interest expense 13,100 6,614
---------------- --------------
Income before income taxes
and minority interest 26,059 45,117
Provision for income taxes 4,780 3,384
Minority interest (1,340) 7,785
---------------- --------------
Net income $ 22,619 $ 33,948
================ ==============
Basic earnings per share $ 0.29 $ 0.47
================ ==============
Shares used in per share computation 76,853 71,730
================ ==============
Diluted earnings per share $ 0.28 $ 0.44
================ ==============
Shares used in per share computation 81,865 76,903
================ ==============
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 ended March 31, 1999 and 1998
(unaudited, in thousands)
Three Months Ended
March 31,
------------------------------------
1999 1998
---------------- --------------
Net income $ 22,619 $ 33,948
Other comprehensive income:
Foreign currency translation adjustments (14,150) (4,608)
Unrealized gains on marketable securities -- 755
---------------- --------------
Other comprehensive income (14,150) (3,853)
---------------- --------------
Comprehensive income $ 8,469 $ 30,095
================ ==============
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 three months ended March 31, 1999 and 1998
(unaudited, in thousands)
Three Months Ended
March 31,
------------------------------------
1999 1998
---------------- --------------
Cash flows from operating activities:
Net income $ 22,619 $ 33,948
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 15,460 11,602
Provision for losses on accounts receivable (616) 1,694
Provision for inventory obsolescence 1,211 (22)
Translation and exchange losses, net 7,259 5,428
Deferred income (4,516) (390)
Loss (gain) on sale of assets (3) (61)
Other non-cash losses 988 --
Deferred income taxes (3,526) (163)
Minority interest (1,340) 7,785
Change in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable (10,935) (34,685)
Inventories 4,337 (9,608)
Prepaid expenses and other assets (1,145) (24,000)
Trade payables and accrued liabilities (27,147) (9,120)
Income taxes payable (2,101) (2,084)
Other liabilities 3,183 2,634
---------------- --------------
Net cash provided by (used in) operating activities 3,728 (17,042)
---------------- --------------
Cash flows from investing activities:
Capital expenditures (12,085) (19,303)
Proceeds from sale of assets 129 259
Increase in restricted cash (9) --
Acquisition of product rights and businesses (1,948) (44,979)
---------------- --------------
Net cash used in investing activities (13,913) (64,023)
---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 26,155 1,596
Payments on long-term debt (27,473) (3,494)
Net increase (decrease) in notes payable (39) 66
Proceeds from exercise of stock options 1,332 822
Proceeds from issuance of stock 27,000 4,299
Purchase of treasury stock (5,550) --
Dividends paid (4,637) (3,806)
---------------- --------------
Net cash provided by (used in) financing activities 16,788 (517)
---------------- --------------
Effect of exchange rate changes on cash and cash equivalents (677) (787)
---------------- --------------
Net increase (decrease) in cash and cash equivalents 5,926 (82,369)
Cash and cash equivalents at beginning of period 104,921 209,896
---------------- --------------
Cash and cash equivalents at end of period $ 110,847 $ 127,527
================ ==============
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) 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, 1998.
8
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated condensed financial
statements include the accounts of ICN Pharmaceuticals, Inc. and Subsidiaries
(the "Company") and all of its majority-owned subsidiaries. Investments in 20%
through 50% owned affiliated companies are included under the equity method
where the Company exercises significant influence over operating and financial
affairs. Investments in less than 20% owned companies are recorded at the lower
of cost or realizable value. All significant intercompany account balances and
transactions have been eliminated.
Effective November 26, 1998, the Company's equity ownership in ICN Yugoslavia
was effectively reduced from 75% to 35% based upon a decision by the Yugoslavian
Ministry of Economic and Property Transformation. Additionally, representatives
of the Company and ICN Yugoslavia's management have been denied access to the
premises and any representation as to the management of ICN Yugoslavia. As a
result, the Company is no longer able to influence the operating and financial
affairs of ICN Yugoslavia. Accordingly, the Company has deconsolidated the
financial statements of ICN Yugoslavia as of November 26, 1998, and reduced the
carrying value of its investment to fair value, currently estimated to be zero.
The Company will account for its ongoing investment in ICN Yugoslavia under the
cost method. The Company did not recognize any revenues or expenses related to
its investment in ICN Yugoslavia in the quarter ended March 31, 1999.
Comprehensive Income: The balance of accumulated other comprehensive income at
March 31, 1999 and December 31, 1998 consists of accumulated foreign currency
translation adjustments. None of the components of other comprehensive income
have been recorded net of any tax provision or benefit as the Company does not
expect to realize any significant tax benefit or expense from these items.
Per Share Information: In January 1999, the Company's Board of Directors
declared a fourth quarter 1998 cash dividend of $0.06 per share, which was paid
in February 1999. In March 1999, the Company's Board of Directors declared a
first quarter cash dividend of $0.07 per share, payable on April 28, 1999, to
stockholders of record on April 14, 1999.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current period presentation, with no effect on previously reported net
income or stockholders' equity.
2. ACQUISITIONS
Effective January 1, 1999, the Company acquired 97% ownership of Fuzio-Pharma
Rt., a Hungarian distributor of pharmaceutical products with both wholesale
distribution and retail pharmacy operations. Aggregate consideration for the
acquisition was approximately $2,230,000. The acquisition was accounted for as a
purchase and is not material to the financial position or results of operations
of the Company.
9
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
----------------------------
1999 1998
--------- ----------
Income:
Net income $ 22,619 $ 33,948
Dividends and accretion on preferred stock -- (34)
--------- ----------
Numerator for basic earnings per share--
income available to common stockholders 22,619 33,914
Effect of dilutive securities:
Convertible debt -- (73)
--------- ----------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 22,619 $ 33,841
========= ==========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 76,853 71,730
Effect of dilutive securities:
Employee stock options 2,711 4,151
Series D Preferred Stock 616 246
Convertible debt 21 776
Other dilutive securities 1,664 --
--------- ----------
Dilutive potential common shares 5,012 5,173
--------- ----------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 81,865 76,903
========= ==========
Basic earnings per share $ 0.29 $ 0.47
========= ==========
Diluted earnings per share $ 0.28 $ 0.44
========= ==========
Other dilutive securities represent shares contingently issuable in satisfaction
of guarantees made in connection with the issuance of shares for the acquisition
of the rights to certain products from SmithKline Beecham plc ("SKB") and from
F. Hoffmann - La Roche Ltd. ("Roche") during 1998. Under the terms of the
agreements, in the event that the market value of the Company's common stock at
the respective guarantee dates does not meet the specified guarantee prices, the
Company will be obligated to satisfy the aggregate guarantee amounts in cash or,
in certain circumstances, in additional shares of its common stock. Based upon
the market price of the Company's common stock at March 31, 1999, the aggregate
guaranteed value of the shares subject to such guarantees exceeds their market
value by approximately $38,793,000, and the Company may be required to issue an
aggregate of 1,664,000 shares of its common stock to Roche and SKB in
satisfaction of the guarantees.
10
4. DETAIL OF CERTAIN ACCOUNTS
March 31, December 31,
(in thousands) 1999 1998
---------------- --------------
Accounts receivable, net:
Trade accounts receivable $ 213,237 $ 209,444
Other receivables 17,480 19,305
---------------- --------------
230,717 228,749
Allowance for doubtful accounts (46,778) (48,748)
----------------- --------------
$ 183,939 $ 180,001
================ ==============
Inventories, net:
Raw materials and supplies $ 29,986 $ 33,915
Work-in-process 13,870 13,372
Finished goods 91,046 90,846
---------------- --------------
134,902 138,133
Allowance for inventory obsolescence (11,761) (11,588)
----------------- --------------
$ 123,141 $ 126,545
================ ==============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 384,297 $ 385,211
Accumulated depreciation and amortization (59,495) (57,455)
----------------- --------------
$ 324,802 $ 327,756
================ ==============
5. COMMON STOCK
In February 1999, the Company sold 1,141,498 shares of its common stock to
Schering-Plough Corporation ("Schering-Plough") for $27,000,000. The sale was
pursuant to the terms of the Stock Purchase Agreement made between the Company
and Schering-Plough in 1995, in connection with the licensing to Schering-Plough
of all oral forms of ribavirin for the treatment of chronic hepatitis C ("HCV")
in combination with Schering-Plough's alpha interferon. Although the shares are
initially unregistered, under the terms of the agreement Schering-Plough is
entitled to certain registration rights.
In March 1999, the Company repurchased 223,967 shares of its common stock for
$5,550,000, completing the initial $10,000,000 portion of the Stock Repurchase
Program authorized by the Company's Board of Directors in 1998. The Company's
Board of Directors has also authorized a long-term stock 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 Senior Notes. Repurchases
under the second program will only be permitted as the Company generates
cumulative net income, as provided for in the indentures.
6. COMMITMENTS AND CONTINGENCIES
Investigations: Pursuant to an Order Directing Private Investigation and
Designating Officers to Take Testimony, entitled In the Matter of ICN
Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is being
conducted by the United States Securities and Exchange Commission (the
"Commission") with respect to certain matters pertaining to the status and
disposition of the 1994 Hepatitis C NDA. As set forth in the Order, the
investigation concerns whether, during the period from June 1994 through
February 1995, the Company, persons or entities associated with it and others,
in the offer and sale or in connection with the purchase and sale of Company
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
11
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, the Company 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 sought
the authority to commence a civil action to enjoin the Company from future
violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to
impose a civil penalty of up to $500,000 on the Company. In regard to Mr. Panic,
the District Office sought 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 and thereafter, 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, Mr. Panic, a senior executive officer, and a former senior
executive officer of the Company 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, two current senior executive
officers, 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
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 Company 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.
On or about February 9, 1999, the Company commenced an action in the United
States District Court of the District of Columbia against the Federal Republic
of Yugoslavia ("FRY"), the Republic of Serbia (the "Republic") and the State
Health Fund of Serbia (the "State Fund") seeking damages in the amount of at
least $500,000,000 and declaratory relief arising out of the FRY's recent
seizure of the Company's majority ownership interest in ICN Yugoslavia and the
failure of the State Fund to pay ICN Yugoslavia for goods sold and delivered. On
or about March 9, 1999, the State Fund commenced an arbitration against the
Company before the International Chamber of Commerce (the "ICC") for
unquantified damages due to alleged breaches of the agreement pursuant to which
the Company acquired its majority ownership interest in ICN Yugoslavia, and for
unspecified injunctive relief. The Company, in turn, counterclaimed against the
Health Fund, and commenced an arbitration against the FRY and the Republic in
the ICC arising out of the seizure of ICN Yugoslavia and the failure to pay for
goods sold and delivered, seeking damages and other relief. The Company intends
to prosecute vigorously its claims against the FRY, the Republic, and the Health
Fund, and to defend against the State Fund's claims against the Company, which
the Company believes to be meritless and filed solely as a response to the
Company's earlier-filed action in the United States District Court.
12
The Company is party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Commission and Grand Jury investigations cannot be predicted
with certainty, and an unfavorable outcome could have a material adverse effect
on the Company, at this time in the opinion of management, the ultimate
resolution of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or liquidity.
7. BUSINESS SEGMENTS
The following table sets forth the amounts of segment revenues and operating
income of the Company for the three months ended March 31, 1999 and 1998 (in
thousands):
Revenues Operating Income
----------------------- ----------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
Pharmaceuticals
North America $ 54,256 $ 33,560 $ 37,927 $ 15,739
Western Europe 22,341 14,198 4,558 3,848
Latin America 22,611 18,692 7,796 5,092
Russia 23,008 52,628 (2,449) 6,942
Yugoslavia -- 73,164 -- 25,683
Other Eastern Europe 23,932 22,182 533 4,682
Asia, Africa, Australia 13,940 9,880 4,059 2,315
----------- ----------- ---------- ----------
Total Pharmaceuticals 160,088 224,304 52,424 64,301
Biomedicals 15,986 16,492 2,088 2,040
----------- ----------- ---------- ----------
Consolidated revenues and
segment operating income $ 176,074 $ 240,796 54,512 66,341
=========== ===========
Corporate expenses 9,738 14,155
Interest income (1,644) (4,973)
Interest expense 13,100 6,614
Translation and exchange losses, net 7,259 5,428
---------- ----------
Income before income
taxes and minority interest $ 26,059 $ 45,117
========== ==========
The following table sets forth the segment total assets of the Company as of
March 31, 1999 and December 31, 1998 (in thousands):
Assets
-----------------------------------
March 31, December 31,
1999 1998
---------------- -----------------
Pharmaceuticals
North America $ 500,541 $ 520,017
Western Europe 41,698 34,816
Latin America 71,566 66,486
Russia 152,004 155,368
Other Eastern Europe 185,190 190,675
Asia, Africa, Australia 82,416 79,274
----------------- -----------------
Total Pharmaceuticals 1,033,415 1,046,636
Biomedicals 71,833 76,671
Corporate 249,869 233,089
----------------- -----------------
$ 1,355,117 $ 1,356,396
================= =================
13
8. ICN RUSSIA
The Company's Russian operations consist of five pharmaceutical factories and
related distribution operations. In addition, the Company operates 28 retail
pharmacies in Russia. The Company's Russian operations represented 13% and 22%
of the Company's total revenues for the three months ended March 31, 1999 and
1998, respectively.
The Company's Russian operations have been adversely affected by the recent
economic events in the region. In August 1998, the Russian Central Bank became
unable to support the value of the ruble and by the end of 1998, the value of
the ruble had fallen from its mid-August level of approximately 6.3 rubles to $1
to approximately 20.7 rubles to $1. In 1999, the value of the ruble has
continued to fall in relation to the dollar and as of March 31, 1999 the
exchange rate was approximately 24.2 rubles to $1, a decline of more than 75%
from the ruble's March 1998 level. As a result of the continued decline in the
ruble exchange rate, the Company recorded foreign exchange losses of $4,742,000
related to its Russian operations during the quarter ended March 31, 1999.
Foreign exchange risk: ICN Russia operates in a highly inflationary economy and
uses the dollar as the functional currency rather than the Russian ruble. During
the three year period ended December 31, 1998, the cumulative rate of inflation
was approximately 180%. All foreign exchange gains and losses arising from
foreign currency transactions and the effects of foreign exchange rate
fluctuations are included in income. As of March 31, 1999, ICN Russia had a net
monetary asset position of approximately $11,814,000 which would be subject to
foreign exchange loss if a further decline in the value of the ruble in relation
to the United States dollar were to occur.
Credit Risk: The Company believes that 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.
9. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and during
the first quarter of 1998 SFr 14,390,000 principal amount of the New
Certificates were exchanged for an aggregate of approximately 306,000 shares of
the Company's common stock. Upon the exchange of the New Certificates,
marketable securities held in trust for the payment of the New Certificates,
having a market value of approximately $11,937,000 at March 31, 1998, became
available to the Company. The exchange increased stockholders' equity by
$13,734,000 and reduced long-term debt and accrued interest by $1,797,000.
Cash paid for income taxes for the three months ended March 31, 1999 and 1998
was $3,380,000 and $4,518,000, respectively. Cash paid for interest, net of
amounts capitalized, for the three months ended March 31, 1999 and 1998 was
$14,301,000 and $13,807,000 respectively.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
During 1998, the Company completed several product acquisitions which
contributed to the growth in revenues for the three months ended March 31, 1999
compared to 1998. 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(R), a sleep disorder drug;
Fluoro-Uracil(R), an oncology product; Librax(R), a treatment for
gastrointestinal disorders; and Mogadon(R), a sleep disorder drug also used to
treat epilepsy. The Company principally markets these products in its North
America, Latin America, Western Europe, and Asia, African and Australia
Pharmaceuticals segments. In February 1998, the Company acquired from SKB the
Asian, African and Australian rights to 39 prescription and over-the-counter
pharmaceutical products including Actal(R), Breacol(R), Coracten(R),
Eskornade(R), Fefol(R), Gyno-Pevaryl(R), Maxolan(R), Nyal(R), Pevaryl(R),
Ulcerin(R) and Vylcim(R). In addition, the Company recently entered into an
agreement with Senetek plc under which it obtained worldwide rights to market
Kinetin(R) (marketed by the Company as Kinerase(TM)), a skin cream to help
reduce signs of aging, through physicians and pharmacies. The Company will
market these products primarily through its existing North American and Western
European operations. In Latin America, the Company recently acquired the rights
to market three products--Breacol(R), Cynoplus(R) and Cytomel(R)--from SKB,
which the Company believes complement its existing product line and increase its
market presence in the region.
ROYALTY REVENUES
Royalty revenues earned under the Company's Exclusive License and Supply
Agreement (the "License Agreement") with Schering-Plough were also a major
contributor to the Company's revenue growth. 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. In 1998, Schering-Plough received approval from the FDA to market
Rebetron(TM) Combination Therapy, containing Rebetol(R) (ribavirin) Capsules and
Intron(R)A (interferon alfa-2b, recombinant) Injection, for the treatment of HCV
and began selling Rebetron(TM) in the United States.
In May 1999, the Company was informed that the European Union's (EU) Commission
of the European Communities had granted marketing authorization to Rebetol(R)
(ribavirin) Capsules for use in combination with interferon alfa-2b injection
(marketed as Intron(R) A in certain countries) for the treatment of both
relapsed and previously untreated (naive) HCV patients. Commission approval of
the centralized application for Rebetol(R) results in a single Marketing
Authorization with unified labeling that is immediately valid in all 15 European
Union-Member States. The Commission's decision follows the product's unanimous
recommendation for approval in February by the EU's Committee for Proprietary
Medicinal Products (CPMP) of the European Agency for the Evaluation of Medicinal
Products (EMEA). The Company anticipates that Schering-Plough will introduce
Rebetol(R) in the EU markets upon receiving pricing approvals, where necessary,
from individual EU countries.
Royalty revenues for the three months ended March 31, 1999 were $15,828,000
compared to $1,000,000 for the same period of 1998, reflecting the commencement
of United States commercial sales of Rebetron(TM) by Schering-Plough subsequent
to receipt of initial FDA approval in June 1998, as well as royalties on
compassionate use sales outside the United States, primarily in Western Europe.
RUSSIA
The Company's operations in Eastern Europe continue to be affected by the
Russian economic crisis. In August 1998, the Russian government and the Russian
Central Bank were no longer able to support the ruble at its then-current
exchange rate of approximately 6.3 rubles to $1. Subsequently, the ruble fell
sharply and through the quarter ended March 31, 1999, the exchange rate was
approximately 24.2 rubles to $1, a decline of approximately 75% from the ruble's
March 1998 level. As a result of the continued decline in the ruble exchange
rate, the Company recorded foreign exchange losses of $4,742,000 related to its
Russian operations during the three months ended March 31, 1999.
The Company believes that 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 Russian companies' hard-currency
assets remain frozen in Russian banks. This liquidity crisis has diminished many
15
Russian companies' ability to pay their debts and has led to a number of
business failures in the region. In addition, the devaluation of the ruble has
reduced the purchasing power of Russian companies and consumers, thus increasing
pressure on the Company and other producers to limit price increases in hard
currency terms. These factors have adversely affected, and may continue to
adversely affect, sales and gross margins in the Company's Russian operations.
In addition, the Company's Hungarian and Polish operations have been, and may
continue to be, adversely affected by lower export sales to Russia.
YUGOSLAVIA
In the fourth quarter of 1998, the Company wrote off its investment in ICN
Yugoslavia (a 75%-owned subsidiary), following the Yugoslavian government's
seizure of those operations. The Company has not recognized any revenues or
expenses related to its investment in ICN Yugoslavia in the quarter ended March
31, 1999. Excluding the 1998 contribution from ICN Yugoslavia, revenues for the
1999 first quarter rose five percent to $176,074,000 from $167,632,000 in the
same period of 1998, and income from operations for the 1999 first quarter
increased 69% to $44,774,000 from $26,503,000 in the 1998 first quarter. Net
income excluding the results of ICN Yugoslavia rose 45% to $22,619,000 from
$15,597,000.
RESULTS OF OPERATIONS
Certain financial information for the Company's business segments is set forth
below. This discussion should be read in conjunction with the consolidated
condensed financial statements of the Company included elsewhere in this
document. For additional financial information by business segment, see Note 7
of Notes to Consolidated Condensed Financial Statements for the three months
ended March 31, 1999 included elsewhere in this Quarterly Report.
Revenues: Three Months Ended
March 31,
------------------------------------
(in thousands) 1999 1998
---------------- --------------
Pharmaceuticals
North America $ 54,256 $ 33,560
Western Europe 22,341 14,198
Latin America 22,611 18,692
Russia 23,008 52,628
Yugoslavia -- 73,164
Other Eastern Europe 23,932 22,182
Asia, Africa, Australia 13,940 9,880
---------------- --------------
Total Pharmaceuticals 160,088 224,304
Biomedicals 15,986 16,492
---------------- --------------
Total revenues $ 176,074 $ 240,796
================ ==============
Product sales $ 160,246 $ 239,796
Royalty revenues 15,828 1,000
---------------- --------------
Total revenues $ 176,074 $ 240,796
================ ==============
Cost of product sales $ 66,396 $ 107,969
Gross profit margin on product sales 59% 55%
Gross profit margin on product sales, excluding the Russia,
Yugoslavia, and Other Eastern Europe Pharmaceuticals segments 71% 68%
16
Revenues: In the North America Pharmaceuticals segment, revenues were
$54,256,000, compared to $33,560,000 for the same period of 1998. The
$20,696,000 (62%) increase primarily reflects a $14,828,000 increase in royalty
revenues from sales of ribavirin by Schering-Plough. The increase also reflects
additional product sales resulting from the Company's October 1998 acquisitions
of the rights to four products--Dalmadorm(R), Fluoro-Uracil(R), Librax(R), and
Mogadon (R)--from Roche and the rights to Kinerase(R), a skin cream to inhibit
signs of aging, from Senetek plc. The acquired products generated revenues of
$5,386,000 in the North America Pharmaceuticals segment in the 1999 first
quarter. The Company also continued to experience growth in sales of its
anti-cancer product Efudex, which increased $2,124,000 (25%) over the 1998 first
quarter.
In the Western Europe Pharmaceuticals segment, revenues for the three months
ended March 31, 1999 were $22,341,000 compared to $14,198,000 in the same period
of 1998. The increase in revenues of $8,143,000 (57%) is primarily due to the
Company's acquisition of the rights to certain products from Roche in October
1998, which generated additional sales of $6,756,000 in 1999. In addition, sales
of the Company's product for the treatment of myasthenia gravis increased
$956,000 over the 1998 first quarter.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended March 31, 1999 were $22,611,000, compared to $18,692,000 for the same
period of 1998. The increase of $3,919,000 (21%) primarily reflects sales of
products acquired during or subsequent to the quarter ended March 31, 1998.
Principal acquisitions in the Latin America Pharmaceuticals segment include a
portfolio of 32 dermatology products acquired from Laboratorios Pablo Cassara
("Cassara") effective March 1, 1998, which generated additional sales of
$2,370,000 over the 1998 period. In addition, sales of the products acquired
from Roche in October 1998 and other acquisitions subsequent to March 31, 1998
generated additional sales of $1,438,000.
In the Russia Pharmaceuticals segment, revenues for the three months ended March
31, 1999 were $23,008,000, compared with $52,628,000 for the same period of
1998, a decrease of $29,620,000 (56%). The Company's Russian operations continue
to be adversely impacted by the Russian economic crisis, which the Company
believes has adversely affected the liquidity and the purchasing power of many
of its customers. In addition, the Company's Russian revenues are generally
denominated in rubles and the 75% decline in the value of the Russian ruble in
relation to the dollar from March 1998 through March 1999 has reduced the dollar
amount of the Company's Russian revenues.
In the Other Eastern Europe Pharmaceuticals segment, revenues for the three
months ended March 31, 1999 were $23,932,000, compared with $22,182,000 for the
same period of 1998, an increase of $1,750,000 (8%). The increase is the result
the June 1998 acquisition of VUAB in the Czech Republic, which generated
revenues of $4,311,000. The effect of the VUAB acquisition was partially offset
by lower revenues at Alkaloida in Hungary ($998,000) and at Polfa Rzeszow, S.A.
in Poland ($1,563,000), principally resulting from lower export sales to Russia
due to the Russian economic crisis. Domestic sales have also been, and may
continue to be, adversely affected by the overall political and economic events
transpiring in this region of the world.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended March 31, 1999 were $13,940,000 compared to $9,880,000 for
the same period of 1998, an increase of $4,060,000 (41%). The increase is
primarily due to sales of the products acquired from Roche in October 1998,
which contributed $2,872,000 to revenues for the three months ended March 31,
1999, and the February 1998 acquisition of the rights to 39 prescription and
over-the-counter pharmaceutical products from SKB, which generated additional
sales of $3,150,000 in this segment over the 1998 period. The effect of these
acquisitions was partially offset by lower revenues at Wuxi ICN Pharmaceuticals
in China.
In the Company's Biomedicals segment, revenues for the three months ended March
31, 1999 were $15,986,000 compared to $16,492,000 for the same period of 1998, a
decrease of $506,000 (3%). The decrease is primarily due to lower unit sales
volume in the Company's diagnostics and radiochemicals product lines, partially
offset by increased revenues from dosimetry services.
17
Gross Profit: Gross profit margin on product sales increased to 59% for the
three months ended March 31, 1999, compared to 55% for 1998. The improvement in
gross profit margin is primarily due to increased sales of the products acquired
from Roche and SKB in 1998, which generally yield higher gross profit margins
than were previously achieved by the Company's base business. The Company's
gross profit margin for 1999 was also affected by the loss of the Company's
Yugoslavian operations, which achieved a 49% gross profit margin for the three
months ended March 31, 1998. Gross profit margins in the North America
Pharmaceuticals segment increased to 91% for the three months ended March 31,
1999 from 81% in the 1998 first quarter, reflecting the effect of the acquired
products. The overall gross margins for the Company's Russia Pharmaceuticals
segment were 27% for 1999, compared to 41% for the 1998 first quarter. In 1999,
gross profit margins in the Company's Russian operations continue to be affected
by the decline in sales volume resulting from the Russian economic crisis and
the impact of the weakening of the ruble. While the Company has historically
been able to set its prices for Russian markets without government approval, the
liquidity crisis in Russia has reduced the purchasing power of Russian
consumers, effectively restricting price increases to a level that 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 were
charged to cost of product sales at the higher historical exchange rate. In the
Other Eastern Europe Pharmaceuticals segment, the gross profit margin for the
three months ended March 31, 1999 was 29% compared with 54% for 1998. In
response to lower export sales to the Russian market, the Company's operations
in Poland and Hungary have reduced production levels, resulting in lower
operating efficiency during the 1999 first quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $62,662,000 (36% of revenues) for the three months
ended March 31, 1999, compared to $75,137,000 (31% of revenues) for the same
period in 1998, a decrease of $12,475,000. The decrease primarily reflects the
loss of the Company's Yugoslavian operations, which incurred expenses of
$8,443,000 in the 1998 first quarter. In the Company's Russian operations,
selling, general and administrative expenses decreased by $6,383,000,
principally due to the 75% decline in the value of the ruble and the Company's
cost-control efforts. The decrease in selling, general and administrative
expenses also reflects a $3,738,000 decline in corporate expenses. These amounts
were partially offset by additional costs resulting from acquisitions of
business and product rights subsequent to March 31, 1998, which totaled
$10,186,000 (including amortization of goodwill and intangibles of $3,492,000),
and other changes.
Research and Development: Research and development expenditures for the 1999
first quarter were $2,242,000, compared to $5,504,000 for the same period in
1998. The decrease primarily resulted from the loss of the Company's Yugoslavian
operations, and from lower costs incurred at the Company's facilities in the
United States and Hungary.
Translation and Exchange Losses, Net: Foreign exchange losses, net, were
$7,259,000 for the three months ended March 31, 1999 compared to $5,428,000 for
the same period in 1998. In the first quarter of 1999, translation losses
principally consisted of losses of $4,742,000 related to the net monetary asset
position of the Company's Russian subsidiaries and losses of $1,929,000 in
Hungary resulting from foreign-denominated debt. In the first quarter of 1998,
the Company's foreign exchange losses were primarily related to ICN Yugoslavia's
net monetary asset position.
Interest Income and Expense: Interest expense during the three months ended
March 31, 1999 increased $6,486,000 compared to the same period in 1998,
primarily due to the additional interest expense resulting from the Company's
$200,000,000 8-3/4% Senior Notes due 2008, issued in August 1998. The increase
in interest expense also reflects a decrease in the amount of interest cost
capitalized. During the three months ended March 31, 1998, the Company
capitalized interest of $1,718,000; no interest cost was capitalized in the 1999
first quarter. Interest income decreased to $1,644,000 in 1999 from $4,973,000
in 1998; the 1998 first quarter included $3,072,000 earned by ICN Yugoslavia on
notes and accounts receivable from the Yugoslavian government.
Income Taxes: The Company's effective income tax rate was 18% for 1999 compared
to 8% for 1998. The Company operates in many regions where the tax rate is lower
than the U.S. Federal statutory rate or where it benefits from tax relief. The
increase in the Company's provision for income taxes for the three months ended
March 31, 1999 over the same period of 1998 reflects lower 1999 taxable losses
in the United States and higher 1999 taxable income in Canada and Latin America,
where tax rates are relatively higher or no such tax relief is available. The
provision for income taxes for 1998 reflects the effect of higher taxable income
in Russia, Yugoslavia and other jurisdictions taxed at rates lower than the U.S.
Federal statutory rate of 35%. In addition, the Company received no tax benefit
for the foreign currency translation losses included in the Company's 1999 and
1998 net loss.
18
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1999, cash provided by operating
activities totaled $3,728,000, compared to cash used in operations of
$17,042,000 in 1998. Operating cash flows reflect the Company's net income of
$22,619,000 and net noncash charges (including depreciation, minority interest,
and foreign exchange gains and losses) of $14,917,000, partially offset by
working capital increases (after the effect of business acquisitions and
currency translation adjustments) totaling approximately $33,808,000. The
working capital increases principally consist of a $27,147,000 decrease in trade
accounts payable resulting from the timing of payments to certain vendors, and a
$10,935,000 increase in accounts receivable, mainly resulting from higher sales
volumes in the Western Europe and Asia, Africa and Australia regions.
Cash used in investing activities was $13,913,000 for the three months ended
March 31, 1999 compared to $64,023,000 for the same period of 1998. In 1999, the
Company made capital expenditures of $12,085,000, principally representing the
continuation of its plant expansion efforts and investment in information
systems. In addition, the Company used cash of $1,948,000 for the acquisition of
a 97% interest in Fuzio-Pharma, a pharmaceutical distributor in Hungary (net of
cash acquired of $72,000). These amounts were partially offset by proceeds of
$129,000 from the sale of assets and other items. In 1998, net cash used in
investing activities of $64,023,000 principally consisted of payments for
acquisitions totaling $44,979,000 and capital expenditures of $19,303,000, which
were partially offset by proceeds from the sale of assets of $259,000.
Cash provided by financing activities totaled $16,788,000 for the three months
ended March 31, 1999, including proceeds of long-term borrowings totaling
$26,155,000. In addition, as provided for under the terms of a Stock Purchase
Agreement entered into with Schering-Plough in 1995, the Company sold to
Schering-Plough 1,141,498 shares of its common stock for $27,000,000. Proceeds
from the exercise of employee stock options provided an additional $1,332,000.
These amounts were partially offset by principal payments on long-term debt of
$27,473,000, cash dividends paid on common stock of $4,637,000, and a net
reduction of short-term borrowings of $39,000. Also during the quarter ended
March 31, 1999, the Company repurchased 223,967 shares of its common stock for
$5,550,000, completing the initial $10,000,000 portion of the Stock Repurchase
Program authorized by the Company's Board of Directors in 1998. During the first
quarter of 1998, cash used in financing activities of $517,000 principally
consisted of principal payments on long-term debt of $3,494,000 and dividend
payments of $3,806,000, partially offset by proceeds of $4,299,000 from the
issuance of common stock, long-term borrowings of $1,596,000, proceeds of
$822,000 from the exercise of employee stock options, and net short-term
borrowings of $66,000.
The Company's principal sources of liquidity are its existing cash and cash
equivalents and cash provided by operations. Cash and cash equivalents at March
31, 1999 totaled $110,847,000 compared to $104,921,000 at December 31, 1998.
Working capital at March 31, 1999 was $260,713,000, compared to $236,994,000 at
December 31, 1998. The $23,719,000 increase in working capital is primarily due
to cash and working capital generated by operating activities during the quarter
ended March 31, 1999. Certain of the Company's lines of credit and long term
borrowings include covenants restricting payment of dividends, issuance of new
indebtedness, and repurchase of the Company's common stock and requiring the
maintenance of certain financial ratios.
The current economic crisis in Russia continues to adversely affect the
Company's operating cash flows in Russia and Eastern Europe, as its Russian
customers continue to experience severe liquidity shortages. The Company may
need to invest additional working capital in Eastern Europe (including Russia)
to sustain its operations, to provide increasing levels of working capital
necessary to support renewed growth, and to fund the purchase or upgrading of
facilities. The Company also has several preliminary acquisition prospects that
may require significant funds in 1999. However, there can be no assurance that
any such acquisitions will be consummated. In March 1999, the Company
repurchased an additional 223,967 shares of its common stock for $5,550,000,
completing the first part of its stock repurchase program. Under the terms of
the indentures related to the Company's Senior Notes, the Company is not
currently permitted to repurchase additional shares of its common stock.
19
Management believes that the Company's existing cash and cash equivalents and
funds generated from operations will be sufficient to meet its operating
requirements in 1999 and to fund anticipated acquisitions and capital
expenditures, including the continued development of its network of retail
pharmacies in Russia. The Company may also seek additional debt financing or
issue additional equity securities to finance future acquisitions.
The Company evaluates the carrying value of its inventories at least quarterly,
taking into account such factors as historical and anticipated future sales
compared with quantities on hand, the price the Company expects to obtain for
its products in their respective markets compared with historical cost, and the
remaining shelf life of goods on hand. The Company also evaluates the
collectibility of its receivables at least quarterly, based upon various factors
including the financial condition and payment history of major customers, an
overall review of collections experience on other accounts, and economic factors
or events expected to affect the Company's future collections experience. As of
March 31, 1999, the Company believes that adequate provision has been made for
inventory obsolescence and for anticipated losses on uncollectible accounts
receivable.
The Company is currently self-insured with respect to product liability claims.
While to date no material adverse claim for personal injury resulting from
allegedly defective products has been successfully maintained against the
Company, a substantial claim, if successful, could have a material adverse
effect on the Company's liquidity and financial performance.
FOREIGN OPERATIONS
Approximately 67% and 84% of the Company's revenues for the three months ended
March 31, 1999 and 1998, respectively, were generated from operations outside
the United States. All of the Company's 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 occur from time to time and may, in certain
instances, materially affect the Company's results of operations. The effect of
these risks remains difficult to predict.
The Russian political situation has been increasingly unstable. The recent
turmoil in the Russian government may delay or prevent further financial
assistance from the International Monetary Fund or the World Bank and the
greater uncertainty in the Russian political and economic situation may
contribute to further declines in the value of the ruble. The Russian government
has recently instituted a process for establishing prices for pharmaceutical
products which may lead to price controls in the Russian market in the future.
Currently, this process requires the Company to register the prices for certain
of its products included on the government's list of "products important for
health". The next procedure for registration includes the negotiation and
approval of such prices between the Company and the relevant state bodies. The
Company is currently working with all relevant state bodies to approve its
prices and the Company is not presently able to determine the effect, if any,
that this process may have on its results of operations. However, such
developments could have a material adverse effect on the Company's results of
operations in Russia.
The Company's collections on accounts receivable in Eastern Europe (including
Russia) have been adversely affected by the Russian economic crisis. Prior to
the August 1998 devaluation of the Russian ruble, the Company had favorable
experience with the collection of receivables from its customers in the region.
Subsequently, the Company has taken additional steps to ensure the
creditworthiness of its customers and the collectibility of accounts receivable
by tightening its credit policies in the region. These steps include a
shortening of credit periods, suspension of sales to customers with past-due
balances, and discounts for cash sales. The adoption of these more restrictive
credit policies has contributed to the decline in sales in Russia for the three
months ended March 31, 1999 compared with the same period of 1998.
ICN Russia operates in a highly inflationary economy and uses the dollar as the
functional currency rather than the Russian ruble. During the three year period
ended December 31, 1998, the cumulative rate of inflation in Russia was
approximately 180%. All foreign exchange gains and losses arising from foreign
currency transactions and the effects of foreign exchange rate fluctuations are
included in income. As of March 31, 1999, ICN Russia had a net monetary asset
position of approximately $11,814,000 which would be subject to foreign exchange
loss if a further decline in the value of the ruble in relation to the dollar
were to occur. 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 does not currently provide any hedges on its foreign currency
exposure and, in certain countries in which the Company operates, no effective
hedging programs are available. The Company and its subsidiaries are also
subject to foreign currency risk on its foreign-denominated debt of
approximately $46,251,000 at March 31, 1999, which is primarily denominated in
Swiss francs and German marks and, at Hungary and Poland, in U.S. dollars.
INFLATION AND CHANGING PRICES
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 Mexico and other regions, which has created lower sales in
U.S. dollars and reductions in gross profit. The Company's operations in Russia
and other regions may be subject to price controls in the future. Future sales
and gross profit could be materially affected if the Company is unable to obtain
price increases commensurate with the levels of inflation.
20
THE YEAR 2000 ISSUE
Many computer systems and equipment and instruments with embedded
microprocessors were designed to recognize only the last two digits of a
calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. Systems that are not
"Year 2000 compliant" could malfunction, potentially resulting in an adverse
impact on the Company's business.
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 significant
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 information 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. The Company has spent approximately $7,200,000 to upgrade its information
systems to be Year 2000 compliant, and currently considers its information
systems to be over 90% 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 acquired
appropriate replacement software for these facilities and installation began
early in 1999. The estimated additional cost to complete the conversion to full
Year 2000 compliance is estimated to be approximately $1,100,000 which will be
spent primarily in 1999 and funded with cash from operations. There can be no
assurance that the conversion will be completed within internal or external
deadlines.
The Company's operations may also be impacted in the event that computer
disruption is encountered by third parties with whom the Company conducts
significant business. These third parties include suppliers and service
providers on whom the Company relies, and the wholesalers, distributors, health
care providers, and others from whom the Company derives its revenues. The
Company has identified the most critical of these third parties and the Company
intends to communicate with these third parties concerning their state of
readiness. However, the Company can provide no assurance that these third
parties will not experience business disruption. If a number of these third
parties experience business disruption due to a Year 2000 computer problem, the
Company's results of operations and cash flows could be materially adversely
affected.
The Company is evaluating the need for contingency plans to address potential
business disruptions at these third parties. Contingency planning may include
increasing inventory levels, establishing secondary sources of supply and
manufacturing, modifying production schedules, and maintaining backup lines of
communications with our customers. Should the Company determine that important
third parties may experience business interruption, appropriate contingency
plans will be developed. However, it is unlikely that any contingency plan can
fully mitigate the impact of significant business disruptions among these third
parties.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced a new currency called the "Euro". The conversion rates between the
Euro and the participating nations' existing legacy currencies were fixed
irrevocably as of January 1, 1999. Prior to full implementation of the new
currency on January 1, 2002, there will be a transition period during which
parties may, at their discretion, use either the legacy currencies or the Euro
for financial transactions.
The Company expects its affected subsidiaries to continue to operate primarily
in their respective legacy currencies through December, 2000. The majority of
the Company's affected subsidiaries currently can accommodate transactions for
customers or suppliers operating in either the legacy currency or the Euro.
Action plans are currently being implemented which are expected to result in
full compliance with all laws and regulations relating to the Euro conversion.
Such plans include the adaptation of information technology and
21
other systems to accommodate Euro-denominated transactions as well as the
requirements of the transition period. The Company is also addressing the impact
of the Euro on its currency exchange-rate risk, taxation, contracts, competition
and pricing. While it is not possible to accurately predict the impact the Euro
will have on the Company's business or on the economy in general, management
currently does not anticipate that the Euro conversion will have a material
adverse impact on the Company's market risk with respect to foreign exchange,
its results of operations, or its financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by fluctuations in
world financial markets. The Company evaluates its exposure to such risks on an
ongoing basis, and reviews its risk management policy to manage these risks to
an acceptable level, based on management's judgment of the appropriate trade-off
between risk, opportunity and costs. The Company does not hold any significant
amount of market risk sensitive instruments whose value is subject to market
price risk.
Interest Rate Risk: The Company does not hold financial instruments for trading
or speculative purposes. The financial assets of the Company are not subject to
significant interest rate risk due to their short duration. The financial
liabilities of the Company that are subject to interest rate risk are its
fixed-rate long-term debt (principally its 8-3/4% Senior Notes and its 9-1/4%
Senior Notes). The Company does not use any derivatives or similar instruments
to manage its interest rate risk. A 90 basis-point increase in interest rates
(approximately 10% of the Company's weighted-average interest rate on fixed-rate
debt) affecting the Company's financial instruments would have an immaterial
effect on the Company's pretax earnings for the three months ended March 31,
1999 and 1998. However, such a change would reduce the fair value of the
Company's fixed-rate debt instruments (principally its 8-3/4% and 9-1/4% Senior
Notes) by approximately $13,800,000 as of March 31, 1999.
22
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Quarterly Report on 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
Quarterly Report on Form 10-Q and include statements regarding, among other
matters, the Company's growth opportunities, the Company's acquisition strategy,
regulatory matters pertaining to governmental approval of the marketing or
manufacturing of certain of the Company's products and other factors affecting
the Company's financial condition or results of operations. 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 Quarterly Report on 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, restrictions on the
exchange of currencies, limitations on foreign participation in local
enterprises, health-care regulations, price controls, and other restrictive
governmental conditions); the risk of operations in Eastern Europe, Russia,
Latin America, and China in light of the unstable economic, political and
regulatory conditions in such regions; the risk of potential claims against
certain of the Company's research compounds; 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
potential impact of the Year 2000 issue; the potential impact of the Euro
currency; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; the Company's ability to maintain adequate
supply of products to meet customer demand; the Company's dependence on key
members of management; the results of lawsuits or the outcome of investigations
pending against the Company; 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.
23
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements
Item 2. CHANGES IN SECURITIES
In February 1999, the Company sold 1,141,498 shares of its common stock to
Schering-Plough for $27,000,000 in cash. The sale was pursuant to the terms of
the Stock Purchase Agreement made between the Company and Schering-Plough in
1995, in connection with the licensing to Schering-Plough of all oral forms of
ribavirin for the treatment of chronic hepatitis C in combination with
Schering-Plough's alpha interferon. Although the shares are initially
unregistered, under the terms of the agreement Schering-Plough is entitled to
certain registration rights.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of Asset Purchase Agreement by and between Hoffmann-La
Roche Inc., a New Jersey corporation, and ICN Pharmaceuticals,
Inc., a Delaware corporation, dated as of October 30, 1997
(supersedes Exhibit 10.1 to the Company's Form 10-Q Quarterly
Report for the period ended September 30, 1997).
10.2 Form of Asset Purchase Agreement by and between Roche Products
Inc., a Panamanian corporation, and ICN Pharmaceuticals, Inc.,
a Delaware corporation, dated as of October 30, 1997
(supersedes Exhibit 10.2 to the Company's Form 10-Q Quarterly
Report for the period ended September 30, 1997).
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1999:
Form 8-K dated March 18, 1999, reporting the Yugoslavian government's
seizure of the Company's 75% owned subsidiary, ICN Yugoslavia.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: May 14, 1999 /s/ Milan Panic
-------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: May 14, 1999 /s/ John E. Giordani
-------------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
25
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
10.1 Form of Asset Purchase Agreement by and between Hoffmann-La Roche
Inc., a New Jersey corporation, and ICN Pharmaceuticals, Inc., a
Delaware corporation, dated as of October 30, 1997.
10.2 Form of Asset Purchase Agreement by and between Roche Products
Inc., a Panamanian corporation, and ICN Pharmaceuticals, Inc., a
Delaware corporation, dated as of October 30, 1997.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule