- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 1999 was 78,235,052.
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2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - June 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income - Three months and six months
ended June 30, 1999 and 1998 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and six months ended June 30, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows - six months
ended June 30, 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 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(unaudited, in thousands, except per share data)
June 30, December 31,
1999 1998
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 82,075 $ 104,921
Restricted cash 15,567 15,558
Accounts receivable, net 189,688 180,001
Inventories, net 129,710 126,545
Prepaid expenses and other current assets 13,368 13,723
-------------- --------------
Total current assets 430,408 440,748
Property, plant and equipment, net 324,566 327,756
Deferred income taxes, net 85,644 77,933
Other assets 36,683 45,706
Goodwill and intangibles, net 451,813 464,253
-------------- --------------
$ 1,329,114 $ 1,356,396
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 53,900 $ 92,287
Accrued liabilities 69,061 60,644
Notes payable 15,153 17,584
Current portion of long-term debt 3,587 28,097
Income taxes payable 2,340 5,142
-------------- --------------
Total current liabilities 144,041 203,754
Long-term debt, less current portion 493,677 510,808
Deferred license and royalty income 2,516 6,061
Other liabilities 22,799 22,160
Minority interest 22,263 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 June 30, 1999) 1 1
Common stock, $.01 par value; 100,000 shares authorized;
78,193 (June 30, 1999) and 76,411 (December 31, 1998) shares
outstanding (after deducting shares in treasury of
424 and 200, respectively) 782 764
Additional capital 968,601 928,956
Accumulated deficit (262,242) (295,211)
Accumulated other comprehensive income (63,324) (48,346)
-------------- --------------
Total stockholders' equity 643,818 586,164
-------------- --------------
$ 1,329,114 $ 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 and six months ended June 30, 1999 and 1998
(unaudited, in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
------------ ------------ ---------- ----------
Revenues:
Product sales $ 150,838 $ 213,891 $ 311,084 $ 453,687
Royalties 26,323 19,052 42,151 20,052
------------ ------------ ---------- ----------
Total revenues 177,161 232,943 353,235 473,739
Costs and expenses:
Cost of product sales 65,649 99,644 132,045 207,613
Selling, general and administrative expenses 69,482 72,489 132,144 147,626
Research and development costs 3,020 5,997 5,262 11,501
Eastern European charges -- 165,646 -- 165,646
------------ ------------ ---------- ----------
Total expenses 138,151 343,776 269,451 532,386
------------ ------------ ---------- ----------
Income (loss) from operations 39,010 (110,833) 83,784 (58,647)
Translation and exchange losses, net 801 19,296 8,060 24,724
Interest income (3,250) (2,250) (4,894) (7,223)
Interest expense 13,774 5,194 26,874 11,808
------------ ------------ ---------- ----------
Income (loss) before income
taxes and minority interest 27,685 (133,073) 53,744 (87,956)
Provision for income taxes 7,120 6,603 11,900 9,987
Minority interest (5,280) (42,178) (6,620) (34,393)
------------ ------------ ---------- ----------
Net income (loss) $ 25,845 $ (97,498) $ 48,464 $ (63,550)
============ ============ ========== ==========
Basic earnings (loss) per common share $ 0.33 $ (1.34) $ 0.63 $ (0.88)
============ ============ ========== ==========
Shares used in per share computation 77,748 72,813 77,303 72,274
============ ============ ========== ==========
Diluted earnings (loss) per common share $ 0.32 $ (1.34) $ 0.59 $ (0.88)
============ ============ ========== ==========
Shares used in per share computation 81,891 72,813 81,846 72,274
============ ============ ========== ==========
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 six months ended June 30, 1999 and 1998
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) $ 25,845 $ (97,498) $ 48,464 $ (63,550)
Other comprehensive income:
Foreign currency translation adjustments (828) (2,021) (14,978) (6,629)
Unrealized gains on marketable securities:
Unrealized holding gains arising during period -- 1,238 -- 1,993
Reclassification adjustment for gains
included in net income -- (1,993) -- (1,993)
------------ ------------ ------------ ------------
Net unrealized gains -- (755) -- --
------------ ------------ ------------ ------------
Other comprehensive income (828) (2,776) (14,978) (6,629)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 25,017 $ (100,274) $ 33,486 $ (70,179)
============ ============ ============ ============
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 six months ended June 30, 1999 and 1998
(unaudited, in thousands)
Six Months Ended
June 30,
----------------------------------
1999 1998
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 48,464 $ (63,550)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 33,325 22,664
Eastern European charges -- 173,440
Provision for losses on accounts receivable 3,929 4,778
Provision for inventory obsolescence 3,104 (840)
Translation and exchange losses, net 8,060 24,724
Deferred income (4,908) (6,246)
(Gain) loss on sale of assets (336) 72
Other non-cash (gains) losses 2,506 (903)
Deferred income taxes (7,711) (905)
Minority interest (6,620) (34,393)
Change in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable (19,296) (108,200)
Inventories (7,260) (15,450)
Prepaid expenses and other assets 2,408 (26,416)
Trade payables and accrued liabilities (40,505) (1,358)
Income taxes payable 2,068 1,714
Other liabilities 3,184 1,404
-------------- --------------
Net cash provided by (used in) operating activities 20,412 (29,465)
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities -- 22,958
Capital expenditures (19,947) (46,983)
Proceeds from sale of assets 710 209
Increase in restricted cash (9) --
Acquisition of product rights and businesses (1,948) (62,589)
-------------- --------------
Net cash used in investing activities (21,194) (86,405)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 26,719 14,945
Payments on long-term debt (65,556) (18,677)
Net decrease in notes payable (5,345) (194)
Proceeds from exercise of stock options 10,957 5,867
Proceeds from issuance of stock 27,000 4,299
Purchase of treasury stock (5,550) --
Dividends paid (10,043) (8,111)
-------------- --------------
Net cash used in financing activities (21,818) (1,871)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (246) (1,172)
-------------- --------------
Net decrease in cash and cash equivalents (22,846) (118,913)
Cash and cash equivalents at beginning of period 104,921 209,896
-------------- --------------
Cash and cash equivalents at end of period $ 82,075 $ 90,983
============== ==============
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
June 30, 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 Yugoslavian Ministry of Economic and Property
Transformation issued a decree reducing the Company's equity ownership in ICN
Yugoslavia from 75% to 35%. Although the Company disputes such action,
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 or six
months ended June 30, 1999.
Comprehensive Income: The balance of accumulated other comprehensive income at
June 30, 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, which was paid in April 1999. In
June 1999, the Company's Board of Directors declared a second quarter cash
dividend of $0.07 per share, payable on July 28, 1999, to stockholders of record
on July 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, for 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Income:
Net income (loss) $ 25,845 $ (97,498) $ 48,464 $ (63,550)
Dividends and accretion on preferred stock -- -- -- (34)
----------- ----------- ----------- ----------
Numerator for basic earnings per share--
income available to common stockholders 25,845 $ (97,498) $ 48,464 $ (63,584)
Effect of dilutive securities (6) -- (6) --
----------- ----------- ----------- -----------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 25,839 $ (97,498) $ 48,458 $ (63,584)
=========== =========== =========== ===========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 77,748 72,813 77,303 72,274
Effect of dilutive securities:
Employee stock options 3,244 -- 2,943 --
Series D Preferred Stock 616 -- 616 --
Convertible debt 21 -- 21 --
Other dilutive securities 262 -- 963 --
----------- ----------- ----------- -----------
Dilutive potential common shares 4,143 -- 4,543 --
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 81,891 72,813 81,846 72,274
=========== =========== =========== ===========
Basic earnings (loss) per common share $ 0.33 $ (1.34) $ 0.63 $ (0.88)
=========== =========== =========== ===========
Diluted earnings (loss) per common share $ 0.32 $ (1.34) $ 0.59 $ (0.88)
=========== =========== =========== ===========
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 June 30, 1999, the aggregate
guaranteed value of the shares subject to such guarantees exceeds their market
value by approximately $8,451,000, and the Company may be required to issue an
aggregate of 262,000 shares of its common stock in satisfaction of the
guarantee.
10
4. Detail of Certain Accounts
June 30, December 31,
(in thousands) 1999 1998
------------- ------------
Accounts receivable, net:
Trade accounts receivable $ 201,521 $ 209,444
Other receivables 16,930 19,305
------------- ------------
218,451 228,749
Allowance for doubtful accounts (28,763) (48,748)
------------- ------------
$ 189,688 $ 180,001
============= ============
Inventories, net:
Raw materials and supplies $ 30,009 $ 33,915
Work-in-process 15,306 13,372
Finished goods 97,437 90,846
------------- ------------
142,752 138,133
Allowance for inventory obsolescence (13,042) (11,588)
------------- ------------
$ 129,710 $ 126,545
============= ============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 391,184 $ 385,211
Accumulated depreciation and amortization (66,618) (57,455)
------------- ------------
$ 324,566 $ 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.
The Company, as part of its previously-authorized stock repurchase program, has
entered into certain option transactions which are intended to provide the
Company with the flexibility to implement its repurchase program when favorable
market conditions exist, without immediately impacting the Company's cash
resources. During the quarter ended June 30, 1999, the Company entered into an
agreement which provided for the sale and purchase of put and call options with
an independent third party, contingent upon the Company's stock price reaching a
predetermined level. In July 1999, the Company's stock price reached the
specified level. As provided in the agreement, the proceeds from the sale of the
put options were used to purchase call options from the same third party, in a
private placement transaction not requiring any net cash outlay at the time.
The put options and the corresponding call options each expire from March 2000
through August 2000 and are exercisable only at the expiration date. The Company
may, at its option, make either a physical settlement, a cash settlement, or a
net share settlement of its positions under the put options and the call
options. The Company has a maximum potential obligation under the put options to
purchase 2,380,953 shares of its common stock for an aggregate price of
approximately $67,500,000. The call options entitle the Company to buy 1,064,085
shares of its common stock for approximately $33,519,000.
11
6. Commitments and Contingencies
On August 11, 1999, the United States Securities and Exchange Commission filed a
complaint in the United States District Court for the Central District of
California captioned Securities and Exchange Commission v. ICN Pharmaceuticals,
Inc., Milan Panic, Nils O. Johannesson, and David C. Watt, Civil Action No. SACV
99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint alleges that the
Company and the individual named defendants made untrue statements of material
fact or omitted to state material facts necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading and engaged in acts, practices, and courses of business which
operated as a fraud and deceit upon other persons in violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The action concerns the status and disposition of the Company's 1994 Hepatitis C
monotherapy NDA. The SEC Complaint seeks injunctive relief, unspecified civil
penalties, and an order barring Mr. Panic from acting as an officer or director
of any publicly-traded company.
The Company has received subpoenas from a Grand Jury in the United States
District Court for the 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, a current employee, and a former employee of
the Company are targets of the investigation. The Company also understands that
a senior executive officer and a director 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 monotherapy 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 monotherapy
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 officers and 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 for the District of Columbia ("District Court") against
the Federal Republic of Yugoslavia ("FRY"), the Republic of Serbia ("ROS"), and
the State Health Fund of Serbia ("State Fund") seeking damages in the amount of
at least $500,000,000 and declaratory relief arising out of the FRY and ROS's
seizure of the Company's majority ownership interest in ICN Yugoslavia and the
failure of the ROS and 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 ("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
State Fund, and commenced an arbitration against the FRY and the ROS 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. By Stipulation and Order
dated August 10, 1999, the District Court stayed the action for 180 days (while
retaining jurisdiction) so that issues of jurisdiction by and among the parties
can be resolved at the ICC. The Company intends to prosecute vigorously its
claims against the FRY, the ROS, and the State 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 action filed earlier by the
Company in the District Court.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation 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.
12
7. Business Segments
The following table sets forth the amounts of segment revenues and operating
income of the Company for the three months and six months ended June 30, 1999
and 1998 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- -----------
Revenues
Pharmaceuticals
North America $ 55,892 $ 56,824 $ 110,148 $ 90,384
Western Europe 21,616 14,089 43,957 28,287
Latin America 24,121 21,810 46,732 40,502
Russia 21,350 44,325 44,358 96,953
Yugoslavia -- 41,564 -- 114,728
Other Eastern Europe 23,348 23,497 47,280 45,679
Asia, Africa, Australia 15,308 14,930 29,248 24,810
------------- ------------ ------------- -----------
Total Pharmaceuticals 161,635 217,039 321,723 441,343
Biomedicals 15,526 15,904 31,512 32,396
------------- ------------ ------------- -----------
Consolidated revenues $ 177,161 $ 232,943 $ 353,235 $ 473,739
============= ============ ============= ===========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
Operating Income (Loss)
Pharmaceuticals
North America $ 34,825 $ 34,433 $ 72,752 $ 50,172
Western Europe 9,054 4,054 13,612 7,902
Latin America 7,888 7,261 15,684 12,353
Russia 3,530 5,593 1,081 12,535
Yugoslavia -- (161,555) -- (135,872)
Other Eastern Europe (13,209) 5,761 (12,676) 10,443
Asia, Africa, Australia 3,853 3,984 7,912 6,299
------------ ------------ ------------ -----------
Total Pharmaceuticals 45,941 (100,469) 98,365 (36,168)
Biomedicals 1,982 2,157 4,070 4,197
------------ ------------ ------------ -----------
Consolidated segment
operating income (loss) 47,923 (98,312) 102,435 (31,971)
Corporate expenses 8,913 12,521 18,651 26,676
Interest income (3,250) (2,250) (4,894) (7,223)
Interest expense 13,774 5,194 26,874 11,808
Translation and exchange losses, net 801 19,296 8,060 24,724
------------ ------------ ------------ -----------
Income (loss) before income
taxes and minority interest $ 27,685 $ (133,073) $ 53,744 $ (87,956)
============ ============ ============ ===========
13
The following table sets forth the segment total assets of the Company as of
June 30, 1999 and December 31, 1998 (in thousands):
Assets
------------------------------------
June 30, December 31,
1999 1998
----------------- ----------------
Pharmaceuticals
North America $ 485,659 $ 520,017
Western Europe 49,167 34,816
Latin America 79,772 66,486
Russia 156,405 155,368
Other Eastern Europe 173,020 190,675
Asia, Africa, Australia 90,513 79,274
----------------- ----------------
Total Pharmaceuticals 1,034,536 1,046,636
Biomedicals 67,374 76,671
Corporate 227,204 233,089
----------------- ----------------
$ 1,329,114 $ 1,356,396
================= ================
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 20%
of the Company's total revenues for the six months ended June 30, 1999 and 1998,
respectively.
The Company's Russian operations continue to be adversely affected by the recent
economic events in the region. While the ruble's value was relatively stable in
the second quarter of 1999, as of June 30, 1999 the exchange rate was
approximately 24.2 rubles to $1--a decline of more than 75% from the ruble's
year-earlier level. Fluctuations in the value of the ruble caused the Company to
record foreign exchange losses of $4,418,000 related to its Russian operations
during the six months ended June 30, 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 translation are included in income. As of June
30, 1999, ICN Russia had a net monetary asset position of approximately
$13,166,000 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. Eastern European Charges
In the second quarter of 1998, the Yugoslavian government defaulted on its
obligations to the Company on $176,204,000 of accounts and notes receivable. As
a result of the government's default and the Company's suspension of sales to
the Yugoslavian government, the Company recorded a $173,440,000 charge against
earnings at ICN Yugoslavia in the second quarter of 1998. The charge is included
in Eastern European charges ($165,646,000), cost of product sales ($3,667,000),
and interest income ($4,127,000) in the accompanying consolidated condensed
statements of income. The charge consists of a $151,204,000 reserve for losses
on notes receivable (including accrued interest), reserves of $7,757,000 for
losses on accounts receivable from government-sponsored entities, and a
$14,479,000 write-down of the value of certain related investments and assets.
14
10. 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, 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 six months ended June 30, 1999 and 1998 was
$9,297,000 and $5,295,000, respectively. Cash paid for interest, net of amounts
capitalized, for the six months ended June 30, 1999 and 1998 was $24,843,000 and
$13,577,000 respectively.
11. Subsequent Event
In July 1999, the Company completed a private placement of $125,000,000
principal amount of its 8-3/4% Senior Notes due 2008. Net proceeds to the
Company, after discounts and costs of issuance, were $117,624,000. These
additional notes are issued under the indenture governing the Company's existing
$200,000,000 8-3/4% Senior Notes, issued in August 1998.
15
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 revenues for the quarter and six months ended June 30, 1999
compared to 1998. Principal acquisitions include the purchase of the worldwide
rights (except India) to four products from Roche (November 1998), the Asian,
African and Australian rights to 39 prescription and over-the-counter
pharmaceutical products from SKB (February 1998), the Latin American rights to
market three products from SKB (October 1998), and the rights to a portfolio of
32 dermatology products sold in the Latin American market from Laboratorios
Pablo Cassara (March 1998). In addition, in 1998 the Company obtained the
worldwide rights to market Kinetin(R) (marketed by the Company as Kinerase(TM))
from Senetek plc. Sales of Kinerase(TM), a skin cream to help reduce signs of
aging, began in March 1999. The acquired products generated additional sales of
$15,598,000 and $37,944,000 for the quarter and six months ended June 30, 1999,
respectively.
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. 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 European Union's (EU) Commission of the European Communities
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. The Commission's approval resulted in a single Marketing
Authorization with unified labeling that is immediately valid in all 15 European
Union-Member States. Schering-Plough has commenced marketing Rebetol(R) in
Germany (in May 1999) and in the United Kingdom (in July 1999), and the Company
anticipates that Schering-Plough will introduce Rebetol(R) in the other EU
markets upon receiving pricing approvals, where necessary, from individual EU
countries.
Royalty revenues for the quarter and six months ended June 30, 1999 were
$26,323,000 and $42,151,000, respectively, compared to $19,052,000 and
$20,052,000 for the comparable 1998 periods. The 1999 royalty amounts reflect
the increasing United States commercial sales of Rebetron(TM) by Schering-Plough
subsequent to receipt of initial FDA approval in June 1998, the inception of
commercial sales in the EU, and an increase in compassionate use sales,
primarily in Western Europe. The 1998 amounts include a one-time payment of
$16,500,000 received from Schering-Plough for past royalties and as
reimbursement of expenses incurred by the Company in preparation for the launch
of ribavirin capsules in the EU.
Russia
The Company's Russian operations continue to be adversely affected by the recent
economic events in the region. While the ruble's value was relatively stable in
the second quarter of 1999, as of June 30, 1999 the exchange rate was
approximately 24.2 rubles to $1--a decline of more than 75% from the ruble's
year-earlier level. The decline in the ruble's value was the principal reason
for the decrease in 1999 sales and operating income in the Company's Russian
operations compared to 1998 levels. In addition, the devaluation of the ruble
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 adversely affected, and may continue to
adversely affect, sales and gross margins in the Company's Russian operations
and export sales to Russia by the Company's Hungarian and Polish operations.
16
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 or six
months ended June 30, 1999. The following table presents certain financial
information for the quarter and six months ended June 30, 1999 compared to 1998,
excluding the 1998 contribution from ICN Yugoslavia.
Excluding ICN Yugoslavia: Quarter Ended Six Months Ended
(in thousands) June 30, June 30,
--------------------- -----------------------
1999 1998 1999 1998
---------- --------- ----------- ----------
Revenues $ 177,161 $ 191,379 $ 353,235 $ 359,011
Operating income 39,010 50,722 83,784 77,225
Net income 25,845 37,034 48,464 52,631
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 included elsewhere in
this Quarterly Report.
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------ ------------ ------------
Revenues
Pharmaceuticals
North America $ 55,892 $ 56,824 $ 110,148 $ 90,384
Western Europe 21,616 14,089 43,957 28,287
Latin America 24,121 21,810 46,732 40,502
Russia 21,350 44,325 44,358 96,953
Yugoslavia -- 41,564 -- 114,728
Other Eastern Europe 23,348 23,497 47,280 45,679
Asia, Africa, Australia 15,308 14,930 29,248 24,810
------------- ------------ ------------- ------------
Total Pharmaceuticals 161,635 217,039 321,723 441,343
Biomedicals 15,526 15,904 31,512 32,396
------------- ------------ ------------ ------------
Consolidated revenues $ 177,161 $ 232,943 $ 353,235 $ 473,739
============= ============ ============= ============
Product sales $ 150,838 $ 213,891 $ 311,084 $ 453,687
Royalty revenues 26,323 19,052 42,151 20,052
------------- ------------ ------------ ------------
Total revenues $ 177,161 $ 232,943 $ 353,235 $ 473,739
============= ============ ============= ============
Cost of product sales $ 65,649 $ 99,644 $ 132,045 $ 207,613
Gross profit margin on product sales 56% 53% 58% 54%
Gross profit margin on product sales, excluding
the Russia, Yugoslavia, and
Other Eastern Europe
Pharmaceuticals segments 69% 67% 70% 68%
17
Quarter ended June 30, 1999 compared to 1998
Revenues: In the North America Pharmaceuticals segment, revenues for the three
months ended June 30, 1999 were $55,892,000, compared to $56,824,000 for the
same period of 1998. Second quarter 1999 revenues reflect a $7,248,000 increase
in royalty revenues from sales of Rebetol(R) (ribavirin) by Schering-Plough,
offset by lower product sales. Product sales for the second quarter of 1999
include sales resulting from the Company's October 1998 acquisition of the
rights to four products from Roche which generated sales of $1,981,000. In
addition, in March 1999 the Company commenced sales of Kinerase(TM), which
generated second quarter sales of $3,720,000. However, these increases were
offset by lower sales in the Company's dermatologicals product line. Second
quarter 1999 sales of Efudex(R) were $3,077,000 lower than the 1998 period,
reflecting higher than usual shipments in the 1998 period to fulfill order
backlog. However, sales of Efudex(R) increased 6% over their first quarter 1999
level. Sales of bleaches for the 1999 second quarter were also lower, primarily
due to increased competition from other products, including generics. The 1999
second quarter also reflects lower sales of Virazole(R) than in the comparable
1998 period. Second quarter 1999 product sales were also affected by backorders
of certain products.
In the Western Europe Pharmaceuticals segment, revenues for the three months
ended June 30, 1999 were $21,616,000 compared to $14,089,000 in the same period
of 1998. The increase in revenues of $7,527,000 (53%) is primarily due to the
Company's acquisition of the rights to certain products from Roche in October
1998, which generated sales of $5,838,000 in 1999. In addition, sales of the
Company's products for the treatment of myasthenia gravis increased $1,107,000
over the 1998 second quarter.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended June 30, 1999 were $24,121,000, compared to $21,810,000 for the same
period of 1998. The increase of $2,311,000 (11%) primarily reflects sales of
products acquired from Roche in October 1998 and other acquisitions subsequent
to June 30, 1998, which generated additional sales of $1,626,000. In addition,
this region benefited from continued strong sales of Bedoyecta(R), an injectable
vitamin B-12 supplement, and other products.
In the Russia Pharmaceuticals segment, revenues for the three months ended June
30, 1999 were $21,350,000, compared with $44,325,000 for the same period of
1998, a decrease of $22,975,000 (52%). 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. Since June 30, 1998, the Russian ruble has declined
approximately 75% in relation to the dollar. The Company's Russian revenues are
generally denominated in rubles and the 75% decline in the ruble's value has
reduced the dollar amount of these revenues.
In the Other Eastern Europe Pharmaceuticals segment, revenues for the three
months ended June 30, 1999 were $23,348,000, compared with $23,497,000 for the
same period of 1998. The second quarter 1999 revenues reflect the acquisition of
VUAB in the Czech Republic, which generated revenues of $4,283,000. The effect
of the VUAB acquisition was offset by lower revenues at Alkaloida in Hungary
($2,250,000) and at Polfa Rzeszow, S.A. in Poland ($2,182,000), 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 June 30, 1999 were $15,308,000 compared to $14,930,000 for
the same period of 1998, an increase of $378,000 (3%). The increase is primarily
due to sales of the products acquired from Roche in October 1998, partially
offset by lower revenues at Wuxi ICN Pharmaceuticals in China.
In the Company's Biomedicals segment, revenues for the three months ended June
30, 1999 were $15,526,000 compared to $15,904,000 for the same period of 1998, a
decrease of $378,000 (2%). The decrease is primarily due to lower sales volume
in the Company's diagnostics product line due to a continuing trend toward the
use of non-isotopic technology, partially offset by increased revenues from
dosimetry services.
18
Gross Profit: Gross profit margin on product sales increased to 56% for the
three months ended June 30, 1999, compared to 53% 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 30% gross profit margin for the 1998
second quarter. Gross profit margins in the North America Pharmaceuticals
segment were 77% for the three months ended June 30, 1999 compared to 78% in the
1998 second quarter, reflecting lower Virazole(R) sales in the current period.
The overall gross margins for the Company's Russia Pharmaceuticals segment were
33% for 1999, compared to 45% for the 1998 second 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
decline in the value 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. The Company has also improved its product mix for
the Russian market to focus on higher-margin products. In the Other Eastern
Europe Pharmaceuticals segment, the gross profit margin for the quarter ended
June 30, 1999 was 22% compared with 50% for 1998. In addition, the Company's
operations in Poland and Hungary have reduced export sales to the Russian
market, temporarily lowering operating efficiency as the Company shifts its
efforts toward European Union markets.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $69,482,000 for the three months ended June 30,
1999, compared to $72,489,000 for the same period in 1998, a decrease of
$3,007,000. The decrease primarily reflects the loss of the Company's
Yugoslavian operations, which incurred expenses of $7,181,000 in the 1998 second
quarter. In the Company's Russian operations, selling, general and
administrative expenses decreased by $10,781,000, principally due to the 75%
decline in the value of the ruble and the Company's ongoing cost-control
efforts. The decrease in selling, general and administrative expenses also
reflects a $1,880,000 decline in corporate expenses. These amounts were
partially offset by additional costs resulting from acquisitions of business and
product rights subsequent to June 30, 1998, which totaled $4,441,000 (including
amortization of goodwill and intangibles of $2,515,000). The Company's selling,
general and administrative expenses also include approximately $11,981,000 of
costs associated with the asset revaluation in the Hungarian business.
Research and Development: Research and development expenditures for the 1999
second quarter were $3,020,000, compared to $5,997,000 for the same period in
1998. The decrease primarily resulted from the loss of the Company's Yugoslavian
operations, and from lower spending at the Company's other facilities. The
Company has slowed its spending as it evaluates its research strategy, including
greater emphasis on clinical development of existing compounds.
Translation and Exchange Losses, Net: Foreign exchange losses, net, were
$801,000 for the three months ended June 30, 1999 compared to $19,296,000 for
the same period in 1998. In the second quarter of 1999, translation losses
principally consisted of losses of $682,000 at the Company's subsidiary in
Poland resulting from foreign-denominated debt. In the second 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 June
30, 1999 increased $8,580,000 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 quarter ended June 30, 1998, the Company capitalized interest of
$1,822,000; no interest cost was capitalized in the 1999 second quarter.
Interest income increased to $3,250,000 in 1999 from $2,250,000 in 1998.
Although the Company held lower invested cash balances in the current year, the
1998 second quarter included a $4,127,000 reduction of interest income at ICN
Yugoslavia resulting from the Yugoslavian government's default on $176,204,000
of accounts and notes receivable.
Income Taxes: The Company's effective income tax rate for the 1999 second
quarter was 26% compared to 16% for the comparable period of 1998 (excluding the
Eastern European charges). 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 provision for income taxes reflects higher 1999 taxable income in
19
the United States, and the effect of the second quarter 1999 net loss in
Hungary, for which no tax benefit was recorded. These increases in the effective
tax rate were partially offset by higher 1999 taxable income in Puerto Rico and
other jurisdictions where tax rates are lower than the U.S. Federal statutory
rate of 35%.
Six months ended June 30, 1999 compared to 1998
Revenues: In the North America Pharmaceuticals segment, revenues for the six
months ended June 30, 1999 were $110,148,000, compared to $90,384,000 for the
same period of 1998. Revenues for the six months ended June 30, 1999 reflect a
$22,076,000 increase in royalty revenues from sales of Rebetol(R) (ribavirin) by
Schering-Plough, offset by lower product sales. Product sales for the six months
ended June 30, 1999 include sales of $5,383,000 resulting from the Company's
October 1998 acquisition of the rights to four products from Roche. In addition,
in March 1999 the Company commenced sales of Kinerase(TM), which generated 1999
sales of $5,704,000. However, these increases were offset by lower sales in
certain of the Company's existing product lines. In the dermatologicals product
line, sales of bleaches and oxsoralens were lower than the 1998 period,
primarily due to increased competition from other products, including generics,
and order backlog. Product sales for 1999 were also affected by lower sales of
Virazole(R) than in the comparable 1998 period, and by backorders of certain
products.
In the Western Europe Pharmaceuticals segment, revenues for the six months ended
June 30, 1999 were $43,957,000 compared to $28,287,000 in the same period of
1998. The increase in revenues of $15,670,000 (55%) is primarily due to the
Company's acquisition of the rights to certain products from Roche in October
1998, which generated additional sales of $12,594,000 in 1999. In addition,
sales of the Company's products for the treatment of myasthenia gravis increased
$2,063,000 over the same period of 1998.
In the Latin America Pharmaceuticals segment, revenues for the six months ended
June 30, 1999 were $46,732,000, compared to $40,502,000 for the same period of
1998. The increase of $6,230,000 (15%) primarily reflects sales of products
acquired during or subsequent to the quarter ended March 31, 1998. Principal
acquisitions contributing to the Latin America Pharmaceuticals segment included
the products acquired from Roche in October 1998 and a portfolio of 32
dermatology products acquired from Laboratorios Pablo Cassara ("Cassara")
effective March 1, 1998, which generated additional sales of $4,736,000 over the
1998 period.
In the Russia Pharmaceuticals segment, revenues for the six months ended June
30, 1999 were $44,358,000, compared with $96,953,000 for the same period of
1998, a decrease of $52,595,000 (54%). 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 subsequent to June 1998 has reduced the dollar amount of
the Company's Russian revenues. The Company has partially offset the effect of
the exchange rate changes through price increases and improvement in its product
mix.
In the Other Eastern Europe Pharmaceuticals segment, revenues for the six months
ended June 30, 1999 were $47,280,000, compared with $45,679,000 for the same
period of 1998, an increase of $1,601,000 (4%). The increase is the result of
the June 1998 acquisition of VUAB in the Czech Republic, which generated
revenues of $8,594,000. The effect of the VUAB acquisition was partially offset
by lower revenues at Alkaloida in Hungary ($3,248,000) and at Polfa Rzeszow,
S.A. in Poland ($3,745,000), 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 six
months ended June 30, 1999 were $29,248,000 compared to $24,810,000 for the same
period of 1998, an increase of $4,438,000 (18%). The increase is primarily due
to sales of the products acquired from Roche and SKB in 1998, partially offset
by lower revenues at Wuxi ICN Pharmaceuticals in China.
In the Company's Biomedicals segment, revenues for the six months ended June 30,
1999 were $31,512,000 compared to $32,396,000 for the same period of 1998, a
decrease of $884,000 (3%). The decrease is primarily due to lower sales volume
in the Company's diagnostics and radiochemicals product lines, partially offset
by increased revenues from dosimetry services.
20
Gross Profit: Gross profit margin on product sales increased to 58% for the six
months ended June 30, 1999, compared to 54% 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 42% gross profit margin for the six
months ended June 30, 1998. Gross profit margins in the North America
Pharmaceuticals segment were 85% for the six months ended June 30, 1999 compared
to 80% in 1998, reflecting the effect of the acquired products. The overall
gross margins for the Company's Russia Pharmaceuticals segment were 30% for
1999, compared to 43% for the six months ended June 30, 1998. 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
decline in the value 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. The Company has also improved its product mix for
the Russian market to focus on higher-margin products. In the Other Eastern
Europe Pharmaceuticals segment, the gross profit margin for the six months ended
June 30, 1999 was 26% compared with 52% for 1998. In addition, the Company's
operations in Poland and Hungary have reduced export sales to the Russian
market, temporarily lowering operating efficiency as the Company shifts its
efforts toward European Union markets.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $132,144,000 for the six months ended June 30,
1999, compared to $147,626,000 for the same period in 1998, a decrease of
$15,482,000. The decrease primarily reflects the loss of the Company's
Yugoslavian operations, which incurred expenses of $15,624,000 during the six
months ended June 30, 1998. In the Company's Russian operations, selling,
general and administrative expenses decreased by $16,637,000, 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 $5,555,000 decline in corporate expenses. These amounts were
partially offset by additional costs resulting from acquisitions of business and
product rights subsequent to June 30, 1998, which totaled $14,627,000 (including
amortization of goodwill and intangibles of $6,007,000). The Company's selling,
general and administrative expenses also include approximately $11,981,000 of
costs associated with the asset revaluation in the Hungarian business.
Research and Development: Research and development expenditures for the six
months ended June 30, 1999 were $5,262,000, compared to $11,501,000 for the same
period in 1998. The decrease primarily resulted from the loss of the Company's
Yugoslavian operations, and from lower spending at the Company's other
facilities. The Company has slowed its spending as it evaluates its research
strategy, including greater emphasis on clinical development of existing
compounds.
Translation and Exchange Losses, Net: Foreign exchange losses, net, were
$8,060,000 for the six months ended June 30, 1999 compared to $24,724,000 for
the same period in 1998. In 1999, translation losses principally consisted of
losses of $4,418,000 related to the net monetary asset position of the Company's
Russian subsidiaries and losses of $2,705,000 in Hungary and Poland resulting
from foreign-denominated debt. In the six months ended June 30, 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 six months ended June
30, 1999 increased $15,066,000 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 six months ended June 30, 1998, the Company capitalized interest of
$3,540,000; no interest cost was capitalized in 1999. Interest income decreased
to $4,894,000 in 1999 from $7,223,000 in 1998, principally due to lower invested
cash balances.
Income Taxes: The Company's effective income tax rate for the six months ended
June 30, 1999 was 22% compared to 12% for 1998 (excluding the Eastern European
charges). 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
provision for income taxes reflects higher 1999 taxable income in the United
States, and the effect of the 1999 net loss in Hungary, for which no tax benefit
was recorded. In addition, no benefit has been recognized in the financial
statements for Russian tax losses resulting from allowances for bad debts or
from currency translation losses. These increases in the effective tax rate were
partially offset by higher 1999 taxable income in Puerto Rico and other
jurisdictions taxed at rates lower than the U.S. Federal statutory rate of 35%.
21
Liquidity and Capital Resources
During the six months ended June 30, 1999, cash provided by operating activities
totaled $20,412,000 compared to cash used in operations of $29,465,000 in 1998.
Operating cash flows reflect the Company's net income of $48,464,000 and net
noncash charges (including depreciation, minority interest, and foreign exchange
gains and losses) of $31,349,000, partially offset by working capital increases
(after the effect of business acquisitions and currency translation adjustments)
totaling approximately $59,401,000. The working capital increases principally
consist of a $40,505,000 decrease in trade accounts payable resulting from the
timing of payments to certain vendors, and a $19,296,000 increase in accounts
receivable, mainly resulting from increased royalties receivable under the
Company's license agreement with Schering-Plough.
Cash used in investing activities was $21,194,000 for the six months ended June
30, 1999 compared to $86,405,000 for the same period of 1998. In 1999, the
Company made capital expenditures of $19,947,000, 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
$710,000 from the sale of assets, and other items. In 1998, net cash used in
investing activities principally consisted of payments for acquisitions totaling
$62,589,000 and capital expenditures of $46,983,000, which were partially offset
by proceeds from the sale of marketable securities of $22,958,000 and proceeds
from sales of other assets of $209,000.
Net cash used in financing activities totaled $21,818,000 for the six months
ended June 30, 1999. Cash was used for principal payments on long-term debt of
$65,556,000, cash dividends paid on common stock of $10,043,000, and a net
reduction of short-term borrowings of $5,345,000. The payments on short-term and
long-term borrowings include the repayment of $40,079,000 of borrowings of the
Company's Hungarian subsidiary, which the Company repaid in order to take
advantage of favorable interest and foreign exchange rates. Also during the six
months ended June 30, 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. These
amounts were partially offset by the proceeds of long-term borrowings totaling
$26,719,000. 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 $10,957,000.
During the six months ended June 30, 1998, cash used in financing activities of
$1,871,000 principally consisted of principal payments on long-term debt of
$18,677,000 and dividend payments of $8,111,000, partially offset by proceeds of
$4,299,000 from the issuance of common stock, long-term borrowings of
$14,945,000, proceeds of $5,867,000 from the exercise of employee stock options,
and a net reduction of short-term borrowings of $194,000.
The Company's principal sources of liquidity are its existing cash and cash
equivalents and cash provided by operations. Cash and cash equivalents at June
30, 1999 totaled $82,075,000 compared to $104,921,000 at December 31, 1998. In
addition, in July 1999 the Company completed a private placement of $125,000,000
principal amount of its 8-3/4% Senior Notes due 2008. Net proceeds to the
Company, after discounts and costs of issuance, were $117,624,000. Working
capital at June 30, 1999 was $286,367,000, compared to $236,994,000 at December
31, 1998. The $49,373,000 increase in working capital is primarily due to cash
and working capital generated by operating activities during the six months
ended June 30, 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.
22
During 1999, the Company entered into certain option transactions which allow
the Company to establish a price range in which the Company has the option to
repurchase its stock at a later date, without any immediate outlay of its cash
resources. The Company entered into these option positions when the Company
believed its stock to be undervalued, and anticipates its stock price will
appreciate. Under this program, the Company sold put options which entitle the
holder to sell the Company's stock to the Company at a specified price. At the
same time, in a cashless transaction, the Company purchased call options which
entitle the Company to purchase its stock at a specified price from the same
party. The put and call positions have essentially established a price range
within which the Company can repurchase its stock. If the stock price rises
above the call option strike price, the repurchase of stock will be at a
favorable price compared to the market price. Conversely, if the stock price
falls below the put option strike price, the repurchase of stock is more costly
than the market price. The Company may, at its option, make either a physical
settlement, a cash settlement, or a net share settlement of its positions under
the put options and call options. The Company has a maximum potential obligation
under the put options to buy back 2,380,953 shares of its common stock for an
aggregate price of approximately $67,500,000. The Company continually
reevaluates the potential impact of these option positions and believes its
capital resources are sufficient to meet the potential obligations of these
option positions.
Management believes that the Company's existing cash and cash equivalents, funds
generated from operations, and the proceeds of the 8-3/4% Senior Notes issued in
July 1999 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
June 30, 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 66% and 79% of the Company's revenues for the six months ended
June 30, 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 continues to be 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.
23
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
Russian companies' ability to pay their debts and has led to a number of
business failures in the region.
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 six
months ended June 30, 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 translation are included in income. As of June 30,
1999, ICN Russia had a net monetary asset position of approximately $13,166,000
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. At June 30, 1999, the Company and its
subsidiaries are also subject to foreign currency risk on its
foreign-denominated debt of approximately $14,836,000, principally U.S.
dollar-denominated obligations of the Company's subsidiaries in Poland and the
Czech Republic.
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 adversely 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.
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.
24
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 $7,700,000 to upgrade its information
systems to be Year 2000 compliant, and currently considers its information
systems to be over 95% Year 2000 compliant. The Company recently completed
conversions to Year 2000-compliant software at its facilities in Russia,
Hungary, the Czech Republic, Poland, and Puerto Rico.
The remaining projects that must be completed for full Year 2000 compliance are
software upgrades at the Company's plant in Mexico and upgrades to certain
automated manufacturing equipment containing embedded microprocessors at the
Company's plant in Puerto Rico. The estimated additional cost to complete the
conversion to full Year 2000 compliance is estimated to be approximately
$600,000 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
is in the process of communicating 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 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.
25
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.
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 six months ended June 30, 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 $22,200,000 as of June 30, 1999.
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 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 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.
26
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Indenture, dated as of August 20, 1998, by and among ICN and
United States Trust Company of New York, relating to the
Company's 8-3/4% Senior Notes due 2008, previously filed as
Exhibit 4.2 to the Company's Registration Statement No.
333-63721 on Form S-4, which is incorporated herein by
reference.
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 no reports on Form 8-K during the quarter ended June
30, 1999.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: August 13, 1999 /s/ Milan Panic
-----------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: August 13, 1999 /s/ John E. Giordani
-----------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
28
EXHIBIT INDEX
Exhibit
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule