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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, 2003
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
------- -------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes X No
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The number of outstanding shares of the registrant's Common Stock, $.01 par
value, as of May 12, 2003 was 83,895,945.
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19
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - March 31, 2003 and December 31, 2002 3
Consolidated Condensed Statements of Income - Three months ended March 31, 2003 and 2002 4
Consolidated Condensed Statements of Comprehensive Income -
Three months ended March 31, 2003 and 2002 5
Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 2003 and 2002 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 18
Item 3. Quantatative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES AND CERTIFICATIONS 27
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2003 and December 31, 2002
(unaudited, in thousands, except per share data)
March 31, December 31,
2003 2002
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 309,304 $ 245,184
Accounts receivable, net 168,313 215,776
Inventories, net 89,280 88,862
Income taxes receivable -- 12,779
Prepaid expenses and other current assets 16,119 13,972
-------------- --------------
Total current assets 583,016 576,573
Property, plant and equipment, net 236,852 242,888
Deferred income taxes 37,181 39,180
Intangibles, net 376,665 384,286
Other assets 42,506 43,792
-------------- --------------
Total non-current assets 693,204 710,146
Assets of discontinued operations 186,647 201,830
-------------- --------------
$ 1,462,867 $ 1,488,549
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 24,068 $ 33,487
Accrued liabilities 128,253 142,093
Notes payable and current portion of long-term debt 4,220 3,923
Income taxes payable 4,845 --
-------------- --------------
Total current liabilities 161,386 179,503
Long-term debt, less current portion 478,859 481,548
Deferred income taxes and other liabilities 48,397 52,288
Minority interest 30,445 23,452
---------------- --------------
Total non-current liabilities 557,701 557,288
Liabilities of discontinued operations 38,840 48,068
---------------- --------------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized; 84,108 (March 31, 2003)
and 84,066 (December 31, 2002)shares outstanding 841 841
Additional capital 1,027,819 1,027,335
Accumulated deficit (249,639) (256,809)
Accumulated other comprehensive loss (74,081) (67,677)
-------------- --------------
Total stockholders' equity 704,940 703,690
-------------- --------------
$ 1,462,867 $ 1,488,549
============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months ended March 31, 2003 and 2002
(unaudited, in thousands, except per share data)
Three Months Ended
March 31,
2003 2002
---------------- --------------
Revenues:
Product sales $ 110,134 $ 128,005
Royalties 48,583 57,001
---------------- --------------
Total revenues 158,717 185,006
---------------- --------------
Costs and expenses:
Cost of goods sold 40,870 36,236
Selling expenses 37,278 39,918
General and administrative expenses 30,446 27,207
Research and development costs 9,159 9,088
Amortization expense 8,583 7,856
---------------- --------------
Total costs and expenses 126,336 120,305
---------------- --------------
Operating income 32,381 64,701
Other income (expense), net, including translation and exchange 4,091 (1,313)
Interest income 982 1,310
Interest expense (8,292) (14,393)
---------------- --------------
Income from continuing operations before income taxes, minority
interest and cumulative effect of change in accounting principle 29,162 50,305
Provision for income taxes 11,082 19,159
Minority interest 4,859 34
---------------- --------------
Income from continuing operations before cumulative effect of change
in accounting principle 13,221 31,112
Income (loss) from discontinued operations, net 449 (956)
Cumulative effect of change in accounting principle -- (21,791)
---------------- --------------
Net income $ 13,670 $ 8,365
================ ==============
Basic earnings per common share
Income from continuing operations $ 0.16 $ 0.38
Discontinued operations, net of taxes -- (0.01)
Cumulative effect of change in accounting principle -- (0.27)
---------------- --------------
Net income per share $ 0.16 $ 0.10
================ ==============
Diluted earnings per common share
Income from continuing operations $ 0.16 $ 0.37
Discontinued operations, net of taxes -- (0.01)
Cumulative effect of change in accounting principle -- (0.26)
---------------- --------------
Net income per share $ 0.16 $ 0.10
================ ==============
Shares used in per share computation:
Basic 84,104 82,274
================ ==============
Diluted 84,307 84,331
================ ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002
(unaudited, in thousands)
Three Months Ended
March 31,
2003 2002
---------------- --------------
Net income $ 13,670 $ 8,365
Other comprehensive income:
Foreign currency translation adjustments (6,052) (9,859)
Unrealized loss on marketable equity securities (352) --
---------------- --------------
Comprehensive income (loss) $ 7,266 $ (1,494)
================ ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2003 and 2002
(unaudited, in thousands)
Three Months Ended
March 31,
2003 2002
---------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 13,221 $ 31,112
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,779 13,722
Provision for losses on accounts receivable and
inventory obsolescence 2,036 1,965
Translation and exchange (gains) losses, net (4,091) 1,313
Other non-cash items 497 3,777
Deferred income taxes 2,013 (3,909)
Minority interest 4,859 34
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable 47,452 6,251
Inventories (996) (500)
Prepaid expenses and other assets (838) (8,860)
Trade payables and accrued liabilities (23,414) (2,423)
Income taxes payable 17,442 14,959
Other liabilities (3,810) 653
---------------- ---------------
Cash flow from operating activities in continuing operations 69,150 58,094
Cash flow from operating activities in discontinued operations 9,725 4,034
---------------- ---------------
Net cash provided by operating activities 78,875 62,128
---------------- ---------------
Cash flows from investing activities:
Capital expenditures (2,510) (3,928)
Proceeds from sale of assets 67 33
(Increase) decrease in restricted cash (3) 324
Acquisition of license rights, product lines and businesses (150) (3,733)
---------------- ---------------
Cash flow from investing activities in continuing operations (2,596) (7,304)
Cash flow from investing activities in discontinued operations (1,936) (2,092)
---------------- ---------------
Net cash used in investing activities (4,532) (9,396)
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 320
Payments on long-term debt (24) (66)
Payments on notes payable (3,015) --
Proceeds from exercise of stock options -- 6,819
Dividends paid (6,500) (6,136)
Funds received from discontinued operations 7,936 1,037
---------------- ---------------
Cash flow from financing activities in continuing operations (1,603) 1,974
Cash flow from financing activities in discontinued operations (8,203) (1,077)
---------------- ---------------
Net cash (used in) provided by financing activities (9,806) 897
----------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (553) (387)
---------------- ---------------
Net increase in cash and cash equivalents 63,984 53,242
Cash and cash equivalents at beginning of period 253,664 325,253
---------------- ---------------
Cash and cash equivalents at end of period 317,648 378,495
Cash and cash equivalents classified as part of discontinued operations (8,344) (9,098)
---------------- ---------------
Cash and cash equivalents of continuing operations $ 309,304 $ 369,397
================ ===============
The accompanying notes are an integral part of these consolidated condensed financial statements.
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 on the basis of
accounting principles generally accepted in the United States of America 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, 2002.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated condensed
financial statements include the accounts of ICN Pharmaceuticals, Inc. and all
of its majority-owned subsidiaries (the "Company"). Minority interest in results
of operations of consolidated subsidiaries, including Ribapharm Inc.
("Ribapharm"), represents the minority shareholders' share of the income or loss
of various consolidated subsidiaries. The minority interest in the consolidated
balance sheets reflect the original investment by the minority shareholders in
these subsidiaries, along with their proportional share of the earnings or
losses of these subsidiaries adjusted for any dividends, as appropriate.
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 or 20%
through 50% owned companies where the Company does not exercise significant
influence over operating and financial affairs are recorded at the lower of cost
or fair value. All significant intercompany account balances and transactions
have been eliminated.
Comprehensive Income: Accumulated other comprehensive loss consists of
accumulated foreign currency translation adjustments, unrealized losses on
marketable equity securities and minimum pension liability. Other comprehensive
loss has not 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 March 2003, the Company's Board of Directors
declared a first quarter cash distribution of $.0775 per share, payable on April
23, 2003, to stockholders of record on April 9, 2003.
Dividends: While the Company has historically paid quarterly cash dividends,
there can be no assurance that the Company will continue to do so.
Goodwill and Intangibles: In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142 goodwill will no longer be amortized but will be
subject to annual impairment tests in accordance with the statement. Other
intangible assets will continue to be amortized over their useful lives. During
2002, the Company completed the transitional impairment test required by SFAS
142. The first step of this test required the Company to compare the carrying
amount of the reporting unit to the fair value of the reporting unit. The fair
value of the reporting unit was determined using a discounted cash flow
analysis, which was reviewed by an independent professional advisor. Where the
carrying amount of the reporting unit exceeded the fair value of the reporting
unit, the Company was required to perform an analysis to measure the impairment
loss. The second step of the transitional impairment test required the Company
to ascribe the fair value calculated in step one to the individual assets and
liabilities of the reporting unit. To the extent the carrying value of the
goodwill exceeded the excess of the fair value over the amounts ascribed to the
assets and liabilities, an impairment loss was recognized. As a result of step
two, the Company recorded an impairment loss of $25,332,000 which was offset by
a benefit of $3,541,000 for the write-off of negative goodwill. The net amount
of $21,791,000 has been recorded as a cumulative effect of change in accounting
principle in the three months ended March 31, 2002.
At March 31, 2003 and December 31, 2002, amortizable intangible assets were
as follows (in thousands):
March 31, 2003 December 31, 2002
------------------------------ ------------------------------
Accumulated Accumulated
Gross Amount Amortization Gross Amount Amortization
Intangible assets:
Product rights $ 511,573 $ (134,908)$ 511,556 $ (127,270)
============== =============== ============== ===============
Estimated amortization expense for the years ending December 31, 2003, 2004,
2005, 2006 and 2007 is $30,000,000 for all periods.
Stock-Based Compensation: The Company has adopted the disclosure only
provisions of SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Compensation cost for stock-based
compensation issued to employees has been measured using the intrinsic value
method provided by Accounting Principles Board Opinion No. 25. Accordingly, no
compensation cost has been recognized for options granted under the stock option
plan as all options granted under the Company's stock option plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in the three
months ended March 31, 2003 and 2002 consistent with the provisions of SFAS No.
123, the Company's net income and earnings per share would have been the
unaudited pro forma amounts indicated below (in thousands, except per share
data):
Three Months Ended
March 31,
2003 2002
--------- ----------
Net income as reported $ 13,670 $ 8,365
Stock based employee compensation expense determined under fair
value based method, net of related tax effects 471 2,268
--------- ----------
Pro forma net income $ 13,199 $ 6,097
========= ==========
Earnings per share:
Basic-as reported $ 0.16 $ 0.10
========= ==========
Basic-pro forma $ 0.16 $ 0.07
========= ==========
Diluted-as reported $ 0.16 $ 0.10
========= ==========
Diluted-pro forma $ 0.16 $ 0.07
========= ==========
The fair value of options granted in the three months ended March 31, 2003
and 2002 were estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2003 2002
------- -------
Weighted-average life (years) 4.2 4.2
Volatility 96% 94%
Expected dividend per share $ 0.31 $ 0.36
Risk-free interest rate 2.50% 2.55%
Weighted-average fair value of options granted $7.44 $18.72
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. Discontinued Operations
In June 2002, the Company initiated a strategic review which included
retaining investment bankers and a consulting firm. As a result of this
strategic review, in the second half of 2002 the Company made the decision to
divest its Russian Pharmaceuticals segment, Biomedicals segment, Photonics
business (included in the North America Pharmaceuticals segment), raw materials
businesses and manufacturing capability in Central Europe (included in the
Europe Pharmaceuticals segment) and Circe unit (included in the North America
Pharmaceuticals segment).
The results of the Discontinued Businesses have been reflected as
discontinued operations in the consolidated condensed financial statements in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The consolidated condensed financial statements have been
restated to conform to discontinued operations presentation for all historical
periods presented.
The Company is actively marketing for sale the Russian Pharmaceuticals
segment, the Biomedicals segment and the raw materials businesses and
manufacturing capability in Hungary and the Czech Republic. The Company expects
all of the remaining discontinued operations will be sold by the end of 2003.
The Company disposed of the Circe unit in the fourth quarter of 2002 for a
nominal sales price.
The Company disposed of its Photonics business in two stages. First, it
discontinued the medical services business in September 2002. Second, the
Company sold the laser device business in March 2003 for approximately $505,000.
Summarized selected financial information for discontinued operations for
the three months ended March 31, 2003 and 2002 is as follows (in thousands):
2003 2002
----------- ----------
Revenue $ 52,345 $ 60,656
=========== ==========
Income before income taxes $ 1,886 $ 223
Income taxes 1,437 1,179
----------- ----------
Income (loss) from discontinued operations, net $ 449 $ (956)
=========== ==========
The assets and liabilities of discontinued operations are stated separately
as of March 31, 2003 and December 31, 2002 on accompanying consolidated
condensed balance sheets. The major asset and liability categories are as
follows:
March 31, December 31,
2003 2002
---------- ---------
Cash $ 8,344 $ 9,098
Accounts receivable, net 37,375 46,601
Inventories, net 48,618 54,306
Property, plant and equipment, net 29,693 29,481
Other assets 62,617 62,344
---------- ---------
Assets of discontinued operations $ 186,647 $201,830
========== =========
Accounts payable $ 13,732 $ 20,010
Accrued liabilities 23,401 26,372
Other liabilities 1,707 1,686
---------- ---------
Liabilities of discontinued operations $ 38,840 $ 48,068
========== =========
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,
2003 2002
--------- ----------
Income:
Numerator for basic and dilutive earnings per share--
income available to common stockholders $ 13,670 $ 8,365
========= ==========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 84,104 82,274
--------- ----------
Effect of dilutive securities:
Employee stock options 203 2,053
Other dilutive securities -- 4
--------- ----------
Dilutive potential common shares 203 2,057
--------- ----------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed conversions 84,307 84,331
========= ==========
Basic earnings per common share
Income from continuing operations $ 0.16 $ 0.38
Discontinued operations, net of taxes -- (0.01)
Cumulative effect of change in accounting principle -- (0.27)
--------- ----------
Net income per share $ 0.16 $ 0.10
========= ==========
Shares used in per share computation 84,104 82,274
========= ==========
Diluted earnings per common share
Income from continuing operations $ 0.16 $ 0.37
Discontinued operations, net of taxes -- (0.01)
Cumulative effect of change in accounting principle -- (0.26)
--------- ----------
Net income per share $ 0.16 $ 0.10
========= ==========
Shares used in per share computation 84,307 84,331
========= ==========
For the three months ended March 31, 2003 and 2002, 3,778,000 and 1,764,000
weighted average stock options, respectively, and 13,591,690 shares from the
effect of convertible debt are not included in the computation of earnings per
share as such securities are anti-dilutive.
4. Detail of Certain Accounts
March 31, December 31,
2003 2002
---------------- --------------
(in thousands)
Accounts receivable, net:
Trade accounts receivable $ 94,932 $ 100,724
Royalties receivable 64,811 105,496
Other receivables 15,597 17,202
---------------- --------------
175,340 223,422
Allowance for doubtful accounts (7,027) (7,646)
---------------- --------------
$ 168,313 $ 215,776
================ ==============
Inventories, net:
Raw materials and supplies $ 47,481 $ 53,217
Work-in-process 31,590 29,290
Finished goods 22,240 17,415
----------------- --------------
101,311 99,922
Allowance for inventory obsolescence (12,031) (11,060)
---------------- --------------
$ 89,280 $ 88,862
================ ==============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 361,611 $ 361,357
Accumulated depreciation and amortization (124,759) (118,469)
---------------- --------------
$ 236,852 $ 242,888
================ ==============
5. Related Party Transactions
In April 2001, the Company made a loan to Mr. Panic, its former Chairman
and Chief Executive Officer, of $2,731,519 as part of a program adopted by the
Board of Directors of the Company to encourage directors and officers of the
Company to exercise stock options. The loan is collateralized by 286,879 shares
of the Company's Common Stock (fair market value of $2,556,000 as of March 31,
2003) held by Mr. Panic and is due in April 2004. This loan bears interest at a
rate of 4.63% per annum, payable annually. The loan is non-recourse with respect
to principal and full recourse to Mr. Panic with respect to interest. The loan
is included in the accompanying consolidated condensed balance sheets as a
reduction of stockholders' equity.
Ribapharm
At the time of the Ribapharm initial public offering ("the Ribapharm
Offering"), Ribapharm and the Company entered into an affiliation and
distribution agreement, which places restrictions on Ribapharm's ability to
issue capital stock to ensure that Ribapharm remains part of the Company's
consolidated group for income tax purposes; a management services and facilities
agreement, which details the Company's agreement to provide Ribapharm with
interim administrative and corporate services; a lease agreement, which provides
Ribapharm a long-term lease in the Company's Costa Mesa facility; a
confidentiality agreement, which provides that Ribapharm and the Company will
not disclose to third parties confidential and proprietary information
concerning each other; a registration rights agreement, which grants the Company
rights to require Ribapharm to register shares of Ribapharm common stock owned
by the Company; and a tax sharing agreement, which allocates liability for taxes
between the Company and Ribapharm.
6. Commitments and Contingencies
SEC Litigation: On August 11, 1999, the United States Securities and
Exchange Commission (the "SEC") filed a civil 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 alleged 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 SEC Complaint concerned
public disclosures made by the Company with respect to the status and
disposition of the Company's 1994 New Drug Application for ribavirin as a
monotherapy treatment for chronic hepatitis C (the "NDA"). The United States
Food and Drug Administration (the "FDA") did not approve this NDA. The SEC
Complaint sought injunctive relief, unspecified civil penalties, and an order
barring Mr. Panic from acting as an officer or director of any publicly-traded
company, which would include the Company.
In the Fall of 2002, counsel for the defendants and the SEC reached an
agreement to settle the SEC Complaint as against all defendants. On October 28,
2002, the Commissioners of the SEC voted to approve the settlement and on
November 27, 2002, the Court issued final judgments embodying the terms of the
settlement with the Company and Mr. Panic. (Settlements with the other
defendants were documented separately.)
The material terms of the Company's settlement with the SEC are as follows:
The Company, without admitting or denying liability, consented to the entry of a
consent judgment permanently enjoining the Company from violating Section 10(b)
of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder.
The Company agreed to pay a civil penalty in the amount of $1,000,000 (which has
been paid). The Company (and its successors and assigns) consented to various
corporate governance undertakings regarding FDA-related press releases (the
"Undertakings"). Because the settlement documents explicitly acknowledged that a
"change of control" of the Company occurred as of May 29, 2002, the Company can
make an application for termination of the Undertakings (upon a showing of "good
cause") eighteen months after entry of the judgment.
The Undertakings are as follows: The Company's Board shall appoint a
three-member committee (the "Committee") with responsibility to establish
policies and procedures regarding issuance of FDA-related press releases in
general and to approve the specific contents of each FDA-related press release;
the Company shall retain a recognized securities lawyer (the "Expert") to review
the Company's policies and procedures regarding FDA-related press releases,
train the Committee, make written recommendations to the Board and the
Committee, and make yearly reviews of the Company's FDA-related disclosure
polices. The Expert shall furnish reports to the Committee and the Company's
internal "Disclosure Compliance Officer," with copies to the SEC; the Company,
upon approval of the Board, shall prepare a written policy and/or procedure
document regarding FDA-related press releases, with copy to the SEC; the Company
shall pre-clear all FDA-related press releases with the FDA; the Disclosure
Compliance Officer shall ensure that pre-clearance takes place; the Company
shall provide copies of all FDA-related press releases to the Expert. Any
comments by the Expert shall be submitted to the Disclosure Compliance Officer,
with copies to the SEC; each Board member and Board-appointed officer shall
attend a course concerning disclosure obligations of public companies, with a
refresher course once per year; and Mr. Panic will not be involved in drafting
or approving FDA-related press releases. The Company is complying with the
Undertakings.
With respect to Mr. Panic, the settlement provides for an injunction
(without admitting or denying liability), a civil penalty of $500,000, and a
prohibition against drafting or approving FDA-related press releases for a
period of five years. The Company agreed to indemnify Mr. Panic with respect to
this penalty.
U.S. Attorney Litigation: On December 17, 2001, the Company pleaded guilty
in the United States District Court for the Central District of California ("the
District Court") to a single felony count for securities fraud for omitting to
disclose until February 17, 1995, the existence and content of a letter received
from the FDA in late 1994 regarding the not approvable status of the Company's
1994 NDA. This guilty plea was entered pursuant to a plea agreement with the
office of the United States Attorney for the Central District of California (the
"Office") to settle a six-year investigation. The Company paid a fine of
$5,600,000 and became subject to a three-year term of probation. The plea
agreement provides that the Office will not further prosecute the Company and
will not bring any further criminal charges against the Company or any
individuals relating to any matters that have been the subject of the
investigation and will close its investigation of these matters, except that the
plea agreement provides that the Office has not closed its investigation with
respect to one former employee of the Company. The Company applied to the
District Court in April 2003 for early termination of the probation and the
District Court granted the application and entered an order terminating the
probation effective April 23, 2003.
Biomedicals: On June 21, 2002, the Company executed a plea agreement with
the Office of the U.S. Attorney for the Southern District of Florida. Pursuant
to that agreement, the Company pleaded guilty to a single count of its
Biomedical unit failing to certify a shipment of hazardous material and agreed
to implement a corporate program to enhance the Company's continued compliance
with laws and regulations and, in particular, the transportation of hazardous
materials shipped from its facilities. The Company paid a fine of approximately
$40,000. The 1998 shipment giving rise to the plea arrived safely at its
destination and did not result in harm to any persons or property, and,
furthermore, did not result in any environmental release. In May 2003, the
Company accepted an offer by the U.S. Department of State to settle a civil
investigation relating to the same facts without imposition of any fine or
disciplinary action.
Russia: The Company is involved in various legal proceedings relating to
its distribution company in Russia. These proceedings arise out of a claim
relating to non-payment under a contract entered into in January 1995, prior to
the Company's acquisition of the Russian distribution company. The claimant,
Minnex Trading Corporation ("Minnex") in July 2001 initiated bankruptcy
proceedings against OAO Pharmsnabsbyt ("PSS"), the Company's Russian
distribution company, in the Arbitration Court of Moscow Region, and seeks to
recover $6,200,000 in damages, plus expenses. Certain other ICN affiliates are
also creditors of PSS, and have asserted claims in bankruptcy in excess of
$12,000,000. Claims have also been made that the Company is responsible for
PSS's bankruptcy. Under certain circumstances, Russian law imposes liability on
a company whose actions create liabilities or cause bankruptcy for its Russian
subsidiary. The Company intends to vigorously assert its interests in this
matter; however, an adverse decision could have a material effect on the
operations of the Company.
Derivative and Class Actions: The Company is a nominal defendant in a
shareholder derivative lawsuit pending in state court in Orange County,
California. This lawsuit, which was filed on June 6, 2002, purports to assert
derivative claims on behalf of the Company against certain current and/or former
officers and directors of the Company. The lawsuit asserts claims for breach of
fiduciary duties, abuse of control, gross mismanagement and waste of corporate
assets. The plaintiff seeks, among other things, damages and a constructive
trust over cash bonuses paid to the officer and director defendants in
connection with the Ribapharm Offering ("the Ribapharm Bonuses"). Because it is
a derivative lawsuit, the plaintiff does not seek recovery from the Company but
rather on behalf of the Company.
Since July 25, 2002, multiple class actions have been filed in the United
States District Courts for the Eastern District of New York, the District of New
Jersey and the Central District of California against the Company and some of
our current and former executive officers. The lawsuits allege that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, by issuing false and misleading
financial results to the market during different class periods ranging from May
3, 2001 to July 10, 2002, thereby artificially inflating the price of the
Company's stock. The lawsuits generally claim that the defendants improperly
inflated the Company's sales volume and revenues through excess shipment of
products to the Company's distributors and improper recognition of revenue from
certain royalty payments. The plaintiffs generally seek to recover compensatory
damages, including interest.
On October 1, 2002, several former and current directors of the Company, as
individuals, as well as the Company, as a nominal defendant, were named as
defendants in a second shareholder's derivative complaint filed in Delaware
Chancery Court. The complaint purports to state causes of action for violation
of Delaware General Corporate Law Section 144, breach of fiduciary duties and
waste of corporate assets in connection with the defendants' management of the
Company. Because it is a derivative lawsuit, the complaint does not seek
recovery from the Company but rather on behalf or the Company. The allegations
largely duplicate those contained in the derivative lawsuit filed in Orange
County, California, but add a disclosure-based claim relating to the allegations
of federal securities law violations made in the class actions.
The Company established a Special Litigation Committee to evaluate the
plaintiffs' claims in both derivative actions. The Special Litigation Committee
concluded that it would not be in the best interests of the Company's
shareholders to pursue many of the claims in these two lawsuits, but decided to
pursue, through litigation or settlement, claims arising from the April 2002
decision of the Board to approve the payment of approximately $50,000,000 in
bonuses to various members of the Board and management arising from the initial
public offering of Ribapharm. On April 25, 2003, the Company filed a motion to
stay or dismiss the California plaintiff's complaint in favor of the Company
amending the existing Delaware derivative action to substitute the Company as
the plaintiff. The hearing on the Company's motion in the California action is
scheduled for June.
Schering Dispute: Schering has informed the Company and Ribapharm that it
believes royalties paid under the License and Supply Agreement (the "License
Agreement") should not include royalties on products distributed as part of its
indigent patient marketing program. Schering claims that because it receives no
revenue from products given to indigent patients, it should not have to pay
royalties on these products under the License Agreement. In August 2001,
Schering withheld approximately $11,628,000 from its royalty payment relating to
the second quarter of 2001. The amount withheld was purportedly intended by
Schering to be a retroactive adjustment of royalties previously paid to the
Company and Ribapharm through the third quarter of 2000 on products distributed
as part of this indigent patient marketing program. Since the fourth quarter of
2000, Schering has withheld on a current basis all royalty payments purportedly
related to this indigent patient marketing program. The Company and Ribapharm
recognized the $11,628,000 of withheld royalty payments for the retroactive
adjustment and $3,050,000 of royalty payments withheld for the fourth quarter of
2000 and the first quarter of 2001 as revenue. These amounts are included on the
Company's consolidated balance sheet as a receivable. The Company and Ribapharm
have not established a reserve for these amounts, because, in the opinion of
Ribapharm's management, collectibility is reasonably assured. Since the second
quarter of 2001, the Company and Ribapharm no longer recognize any of these
withheld royalty payments as revenue, as such amounts can no longer be
determined due to a lack of information provided by Schering. The Company and
Ribapharm have commenced arbitration with Schering to collect these royalties
and prevent Schering from withholding royalty payments on future sales. The
parties selected an arbitrator, discovery has commenced and arbitration hearings
are currently expected to begin in July 2003. If the Company and Ribapharm do
not succeed in this arbitration, Ribapharm may have to write off all or a
portion of this receivable. If the Company and Ribapharm do succeed, Ribapharm
will be entitled to receive the royalty payments on these indigent sales
withheld by Schering.
Generic Litigation: Three generic pharmaceutical companies, Geneva
Pharmaceuticals Technology Corporation which was subsequently merged into its
parent, Geneva Pharmaceuticals, Inc. ("Geneva") an indirect subsidiary of
Novartis, Three Rivers Pharmaceuticals, LLC ("Three Rivers") and Teva
Pharmaceuticals USA, Inc. ("Teva"), have filed abbreviated new drug applications
with the FDA to market generic forms of ribavirin for use as part of a
combination therapy for the treatment of hepatitis C. The Company and Ribapharm
have sued all three of these pharmaceutical companies to prevent them from
marketing a generic form of ribavirin. The cases are all before the same judge,
and have been coordinated with respect to a common trial date, which is
currently set for June 24, 2003. Summary judgement motions were filed by the
defendants. The Company and Ribapharm filed oppositions to those motions, and
the court heard oral argument on March 31, 2003. The Company is expecting a
decision in due course prior to the start of trial. The Federal Food, Drug and
Cosmetic Act, as amended by the Drug Price Competition and Patent Term
Restoration Act of 1984, also known as the Hatch-Waxman Act, generally prohibits
the FDA from giving final marketing approval to these abbreviated new drug
applications for 30 months after the applicants notify the Company and Ribapharm
of their intent to seek approval from the FDA. However, the FDA could grant
marketing approval prior to expiration of this 30-month stay if a court rules
that Ribapharm's patents are invalid or unenforceable or that a generic
manufacturer of ribavirin would not infringe Ribapharm's patents, or if a court
determines that a party has unreasonably delayed the progress of the patent
litigation.
Schering-Plough Ltd. ("Schering"), which has licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C in combination with
Schering's interferon alpha-2b, also sued all three companies to prevent them
from marketing a generic form of ribavirin. On February 7, 2003, Schering
announced that it had entered into a licensing agreement with Three Rivers and
on March 26, 2003 announced it had entered into licensing agreements with Geneva
and Teva, which will settle all patent litigation between Schering and the three
generic companies regarding Schering's U.S. patents relating to ribavirin and
its use in treating hepatitis C. According to the announcements, under terms of
the agreement, Schering granted to each of Three Rivers, Geneva and Teva a
non-exclusive, non-sublicensable license to its U.S. ribavirin patents. Each of
the companies will pay to Schering a royalty on its ribavirin sales. The
agreement is subject to the courts' dismissal of the relevant lawsuits. The
Company and Ribapharm believe their patent position to be unchanged by
Schering's settlements with the three generic pharmaceutical companies and
intend to vigorously defend their own position in court. Schering's settlement
is only relevant to the United States market.
Ribapharm Patents: Various parties are opposing Ribapharm's ribavirin
patents in actions before the European Patent Office, and Ribapharm is
responding to these oppositions. Regardless of the outcome of these oppositions,
the Company believes the combination therapies marketed by Schering and Roche
will continue to benefit from a period of data and marketing protection in the
major markets of the European Union until 2009 for Schering and 2012 for Roche.
Yugoslavia: In March 1999, arbitration was initiated in the following
matters before the International Chamber of Commerce International Court of
Arbitration: (a) State Health Fund of Serbia v. ICN Pharmaceuticals, Inc., Case
No. 10 373/AMW/BDW, and (b) ICN Pharmaceuticals, Inc. v. Federal Republic of
Yugoslavia and Republic of Serbia, Case No. 10 439/BWD. At issue in these
matters is the parties' respective ownership percentages in ICN Yugoslavia, a
joint venture formed by the parties' purported predecessors-in-interest in 1990.
In these proceedings, the Company has asserted claims and counterclaims
against the Federal Republic of Yugoslavia and the Republic of Serbia for
unlawful expropriation of its majority interest in the joint venture, failure to
pay obligations in excess of $176,000,000, violation of a contractual right of
first refusal regarding the minority owners' sale of its interest, and failure
to return the Company's contributed intangible assets (including two compounds,
Tiazole(TM) and Andenazole(TM), that the Company subsequently assigned to
Ribapharm, subject to the rights of the State Health Fund of Serbia) following
partial appropriation of the Company's majority interest. The State Health Fund
of Serbia has asserted a claim against the Company for breach of the joint
venture agreement based on the Company's alleged failure to contribute certain
intangible assets and alleged mismanagement.
The arbitration hearings in this matter began in November 2002 and
continued in April 2003. The Tribunal has requested supplemental briefing and
may order one or more rounds of additional hearings. Depending upon the outcome
of this matter, Ribapharm's interest in Tiazole(TM) and Andenazole(TM) may be
extinguished.
Other: The Company is a party to other pending lawsuits or subject to a
number of threatened lawsuits. The Company has also identified potential
violations of U.S. export regulations. While the ultimate outcome of pending and
threatened lawsuits or pending violations cannot be predicted with certainty,
and an unfavorable outcome could have a negative impact 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 Company has four reportable pharmaceutical segments comprising the
Company's pharmaceutical operations in North America, Latin America, Europe and
Asia, Africa and Australia. In addition, the Company has its majority-owned
subsidiary, Ribapharm. The segment reporting has been restated to conform to
discontinued operations presentation for all periods presented. See Note 2 for
the discussion of discontinued operations.
The following table sets forth the amounts of segment revenues and
operating income of the Company for the three months ended March 31, 2003 and
2002 (in thousands):
Revenues 2003 2002
------------ -----------
Pharmaceuticals
North America $ 15,371 $ 41,924
Latin America 26,371 29,487
Europe 55,576 44,774
Asia, Africa and Australia 12,816 11,820
------------ -----------
Total pharmaceuticals 110,134 128,005
Ribapharm royalty revenue 48,583 57,001
------------ -----------
Consolidated revenues $ 158,717 $ 185,006
============ ===========
Operating Income (Loss)
Pharmaceuticals
North America $ (2,931) $ 18,878
Latin America 6,779 9,047
Europe 7,138 6,171
Asia, Africa and Australia 1,650 1,416
------------ -----------
Total pharmaceuticals 12,636 35,512
Ribapharm 33,543 48,806
------------ -----------
Consolidated segment operating income 46,179 84,318
Corporate expenses (13,798) (19,617)
Interest income 982 1,310
Interest expense (8,292) (14,393)
Other income (loss), net, including translation
and exchange 4,091 (1,313)
------------ -----------
Income from continuing operations before income
taxes, minority interest and cumulative effect of
change in accounting principle $ 29,162 $ 50,305
============ ===========
The following table sets forth the segment total assets of the Company as of
March 31, 2003 and December 31, 2002 (in thousands):
Total Assets
2003 2002
----------------- ------------------
Pharmaceuticals
North America $ 429,638 $ 435,506
Latin America 159,236 162,877
Europe 302,643 292,047
Asia, Africa and Australia 15,420 19,658
----------------- ------------------
Total pharmaceuticals 906,937 910,088
Corporate 195,424 177,556
Ribapharm 173,859 199,075
Discontinued operations 186,647 201,830
----------------- ------------------
$ 1,462,867 $ 1,488,549
================= ==================
8. Subsequent Events
On May 9, 2003, a bondholder filed a class action lawsuit in Orange County
Superior Court against the Company and some of its current and former directors
and executive officers. The lawsuit alleges that defendants violated Sections 11
and 15 of the Securities Act of 1933 by making false and misleading statements
in connection with an offering of Convertible Subordinated Notes in November
2001, thereby artificially inflating the market price of the Notes. The
plaintiffs generally seek to recover compensatory damages, including interest.
The Company intends to vigorously defend itself.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Condition
The following discussion relates to the information presented in the
Financial Statements included in this Quarterly Report. With respect to certain
items set forth in such Financial Statements, management has sought, in
connection with its discussion of the material changes in the Company's
financial condition and results of operations between the periods for which
information is presented in the Financial Statements, to identify and, in some
cases, quantify, the material factors which contributed to such material
changes. However, the quantification of such factors may result in the
presentation of numerical measures that exclude amounts that are included in the
most directly comparable measure calculated and presented in accordance with
generally accepted accounting principles in the United States ("GAAP").
Management is providing this information because it believes that it is useful
to enable readers to assess material changes in the Company's financial
condition and results of operations between the periods for which information is
presented in the Financial Statements. In each instance, such information is
presented immediately following (and in connection with an explanation of) the
most directly comparable financial measure calculated in accordance with GAAP,
and includes other material information necessary to reconcile the information
with the comparable GAAP financial measure.
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
Quarterly Report. For additional financial information by business segment, see
Note 7 of Notes to Consolidated Condensed Financial Statements included
elsewhere in this Quarterly Report.
The Company has four reportable pharmaceutical segments comprising the
Company's pharmaceutical operations in North America, Latin America, Europe and
Asia, Africa and Australia. In addition, the Company has its majority-owned
subsidiary, Ribapharm. The segment reporting has been restated to conform to
discontinued operations presentation for all periods presented. See Note 2 of
Notes to Consolidated Condensed Financial Statements for the discussion of
discontinued operations.
Three Months Ended
March 31,
2003 2002
---------------- --------------
(in thousands)
Revenues:
Pharmaceuticals
North America $ 15,371 $ 41,924
Latin America 26,371 29,487
Europe 55,576 44,774
Asia, Africa, Australia 12,816 11,820
---------------- --------------
Total pharmaceuticals 110,134 128,005
Ribapharm royalty revenue 48,583 57,001
---------------- --------------
$ 158,717 $ 185,006
================ ==============
Cost of goods sold $ 40,870 $ 36,236
Gross profit margin on product sales 63% 72%
Revenues:
Ribapharm Royalty Revenues: Royalty revenues represent amounts earned by
the Company's Ribapharm subsidiary under the License and Supply Agreement with
Schering (the "License Agreement") and for the three months ended March 31,
2003, with F. Hoffman-LaRoche Ltd. ("Roche"). Under the License Agreement,
Schering licensed all oral forms of ribavirin for the treatment of chronic
hepatitis C ("HCV") in combination with Schering's alpha interferon (the
"Combination Therapy"). Royalties from Schering do not include amounts
attributable to products distributed as part of Schering's indigent patient
marketing program. See Note 6 of Notes to Consolidated Condensed Financial
Statements - "Commitments and Contingencies - Schering Dispute."
Schering recently entered into license agreements with three generic
pharmaceutical companies, which granted to the three companies non-exclusive,
non-sublicensable licenses to Schering's U.S. ribavirin patents. See Note 6 of
Notes to Consolidated Condensed Financial Statements - "Commitments and
Contingencies - Generic Litigation." The outcome of the dispute regarding
royalties from the indigent marketing program and Schering's licenses to the
three generic pharmaceutical companies could have a material negative impact on
Ribapharm's future royalty revenues.
On January 6, 2003, the Company, Ribapharm and Roche reached agreement on a
settlement regarding pending patent disputes over Roche's combination anti-viral
product containing Roche's version of ribavirin, known as Copegus. Under the
agreement, Roche may continue to register and commercialize Copegus globally.
The financial terms of this settlement agreement includes a license by Ribapharm
of ribavirin to Roche. The license authorizes Roche to make or have made and to
sell Copegus under Ribapharm's patents. Roche will pay royalty fees to Ribapharm
on all sales of Copegus for use in combination with interferon alfa or pegylated
interferon alfa. During the first quarter of 2003, Ribapharm began earning
royalties under this agreement.
Royalties for the three months ended March 31, 2003 were $48,583,000
compared to $57,001,000 for the same period of 2002, a decrease of $8,418,000
(15%). The Company and Ribapharm believe that the decrease in royalties during
the three months ended March 31, 2003, were affected by competitive efforts on
the part of Schering in anticipation of Roche's Copegus entry into the market,
which began during the fourth quarter of 2002 and continued, on a consistent
basis, during the first quarter of 2003. For the three months ended March 31,
2002, all royalties were derived from Schering; whereas, for the three months
ended March 31, 2003, royalties are derived from both Schering and Roche.
Pharmaceutical Revenues: In the North America Pharmaceuticals segment,
revenues for the three months ended March 31, 2003 were $15,371,000, compared to
$41,924,000 for the same period of 2002, a decrease of $26,553,000 (63%). The
decrease in sales primarily reflects the Company's continuing reduction of
inventories of the Company's products at wholesalers. The Company completed its
inventory reduction program in April 2003, earlier than previously anticipated.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended March 31, 2003 were $26,371,000, compared to $29,487,000 for the same
period of 2002, a decrease of $3,116,000 (11%). The decrease is primarily due to
the negative impact in the amount of $5,497,000 due to currency devaluations in
the region, partially off-set by price increases in Mexico.
In the Europe Pharmaceuticals segment, revenue for the three months ended
March 31, 2003 were $55,576,000 compared to $44,774,000 for the same period of
2002, an increase of $10,802,000 (24%). The increase is primarily due to an
increase in the value of the Euro relative to the U.S. Dollar, which resulted in
an increase in revenues of $4,303,000 and an increase in revenues in Poland of
$2,647,000 due to higher volume. Additionally, excluding the effect of currency,
sales in Spain and Italy increased $3,363,000 due to higher volume.
In the Asia, Africa and Australia ("AAA") Pharmaceuticals segment, revenues
for the three months ended March 31, 2003 were $12,816,000 compared to
$11,820,000 for the same period of 2002, an increase of $996,000 (8%). Revenues
in the first quarter of 2003 were benefited by increased sales of Virazole(R).
Gross Profit: Gross profit margin on product sales decreased to 63% for the
three months ended March 31, 2003, compared to 72% for 2002. The decrease in
gross profit margin is primarily due to reduced sales of higher margin products
in the North America Pharmaceuticals segment, which lowered the Company's
overall gross profit margin and excess manufacturing capacity. Excluding North
America Pharmaceuticals, gross profit margin was 63% in the first three months
of 2003 compared to 65% in the same period of 2002.
Selling expenses: Selling expenses were $37,278,000 for the three months
ended March 31, 2003, compared to $39,918,000 for the same period in 2002, a
decrease of $2,640,000 (7%). The decrease is primarily due to a reduction in
marketing and promotional costs in the North America Pharmaceuticals segment.
General and Administrative Expenses: General and administrative expenses
were $30,446,000 for the three months ended March 31, 2003, compared to
$27,207,000 for the same period in 2002, an increase of $3,239,000 (12%). The
increase reflects increased general and administrative expenses at Ribapharm of
$3,523,000 due to expenses incurred to establish and support administrative
departments that did not exist in the first quarter of 2002 and increased legal
fees to defend patents and other matters.
Research and Development: Research and development expenses for the 2003
first quarter were $9,159,000, compared to $9,088,000 for the same period in
2002. Research and development expenses primarily reflect Ribapharm's research
and development efforts, primarily to support product development programs for
Viramidine, Hepavir B and IL-12.
Other Income (Expense), Net, Including Translation and Exchange: Other
income was $4,091,000 for the three months ended March 31, 2003 compared to a
loss of $(1,313,000) for the same period in 2002. In the first quarter of 2003,
the Company recorded translation and exchange gains related to the Company's
dollar denominated net assets in Latin America of $3,368,000 and translation and
exchange gains in Europe of $3,156,000 related to the strengthening of
currencies in this region. The translation and exchange gains were partially
offset by losses of $2,272,000 related to dollar denominated net assets in
Canada. In the first quarter of 2002, translation losses primarily consisted of
$1,618,000 of losses related the devaluation of the Argentine peso.
Interest Income and Expense: Interest expense during the three months ended
March 31, 2003 decreased $6,101,000 compared to the same period in 2002 due to
the repurchases and redemption of the Company's 8 3/4% Senior Notes in April
2002 and the repurchase of $59,410,000 principal amount of the Company's 6 1/2%
Convertible Subordinated Notes due in 2008 in July and August 2002. Interest
income decreased to $982,000 in 2003 from $1,310,000 in 2002 due to lower yields
on investments.
Income Taxes: The Company's effective income tax rate was 38% for 2003 and
2002.
Income (loss) from Discontinued Operations, Net of Taxes: Income (loss)
from discontinued operations relates to the Company's Russian Pharmaceuticals
segment, Biomedicals segment, Photonics business and raw materials businesses
and manufacturing capabilities in Hungary and the Czech Republic and was income
of $449,000 for the three months ended March 31, 2003 compared to a loss of
$956,000 for the same period in 2002.
Liquidity and Capital Resources
Cash and cash equivalents totaled $309,304,000 at March 31, 2003 compared
to $245,184,000 at December 31, 2002. Working capital was $421,630,000 at March
31, 2003 compared to $397,070,000 at December 31, 2002. The change in working
capital of $24,560,000 is primarily due to an increase of $64,120,000 in cash
and cash equivalents offset by a decrease in accounts payable and accrued
liabilities of $23,259,000. The increase in working capital also reflect a
decrease in accounts receivable of $47,463,000 related to the collection of the
fourth quarter 2002 Schering royalty payment and a decrease in taxes receivable
of $12,779,000 due to a tax refund received.
During the three months ended March 31, 2003, cash provided by operating
activities totaled $78,875,000, compared to $62,128,000 in 2002. The increase in
operating cash flows reflect the change in accounts receivable of $47,452,000
due to the collection of the fourth quarter 2002 Schering royalty payment
partially offset by a $17,891,000 decrease in income from continuing operations
and a ($23,414,000) change in accounts payable and accrued liabilities primarily
due to severances paid in the first quarter of 2003.
Cash used in investing activities was $4,532,000 for the three months ended
March 31, 2003 compared to $9,396,000 for the same period of 2002. In 2003, net
cash used in investing activities consisted of payments for capital expenditures
of $2,510,000 and cash used in investing activities in discontinued operations
of $1,936,000. In 2002, net cash used in investing activities consisted of
acquisition of license rights, product lines and businesses of $3,733,000 and
payments for capital expenditures of $3,928,000.
Cash used in financing activities totaled $9,806,000 for the three months
ended March 31, 2003, including cash dividends paid on common stock of
$6,500,000 and payments on notes payable of $3,015,000. In 2002, cash provided
by financing activities totaled $897,000, including proceeds from the exercise
of employee stock options of $6,819,000 partially offset by cash dividends paid
on common stock of $6,136,000.
Management believes that the Company's existing cash and cash equivalents
and funds generated from operations will be sufficient to meet its operating
requirements at least through March 31, 2004 to fund anticipated acquisitions
and capital expenditures, including the continued development of its research
and development program. The Company may also seek additional debt financing or
issue additional equity securities to finance future acquisitions. The Company
funds its cash requirements primarily from cash provided by its operating
activities. The Company's sources of liquidity are its cash and cash equivalent
balances and its cash flow from operations.
In February and March 2003, Schering announced that it has entered into
license agreements with three generic pharmaceutical companies, which granted to
each company a non-exclusive, non-sublicensable license to Schering's U.S.
ribavirin patents. The outcome of the dispute regarding royalties from the
indigent patient marketing program and Schering's licenses to the three generic
pharmaceutical companies could have a material negative impact on Ribapharm's
future royalty revenue. See Note 6 of Notes to Financial Statements regarding
"Commitments and Contingencies - Generic Litigation." In addition, at least
during 2003, Ribapharm could experience a decline in royalty revenue from
Schering due to Roche's entry into the market and it is uncertain if royalty
revenues from Roche will offset the effect of any such decline.
In view of the completion of the Ribapharm public offering, the Company's
consideration of its structural and strategic initiatives and other factors,
there can be no assurance that the Company will continue its current cash
dividend policy and may determine to reduce or eliminate its cash dividend.
As of March 31, 2003, Ribapharm has a payable to the Company of
$14,936,000. As of March 31, 2003, $94,975,000 of cash and cash equivalents was
retained by Ribapharm. These funds may not be readily available to the Company
unless Ribapharm declares a dividend or loans funds to the Company. The Company
provides Ribapharm a line of credit facility, which Ribapharm could draw upon
until August 31, 2002. The borrowings were initially repayable on or before
December 31, 2003. On March 28, 2003, the Company entered into an amended
agreement, which allows Ribapharm to borrow up to $35,000,000 until December 30,
2005 or the date the Company ceases to be the beneficial owner of at least 80%
of the issued and outstanding common stock of Ribapharm ("the Expiration Date").
All amounts outstanding under the line of credit are due on the Expiration Date.
On May 6, 2003, the Company's Board of Directors approved the amendment to the
line of credit facility. There are no amounts outstanding under this line of
credit as of March 31, 2003.
The Company contributed to Ribapharm the License Agreement with Schering
and Ribapharm will receive all royalty payments which will reduce cash available
to the Company and its other operations. The Company and Ribapharm are jointly
and severally liable for the principal and interest obligations under the
$525,000,000 Subordinated Convertible Notes due 2008 issued in July 2001. Under
terms contained in an inter-debtor agreement between the Company and Ribapharm,
the Company has agreed to make all interest and principal payments on the
convertible notes.
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. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. The Company also evaluates the collectibility of its
receivables at least quarterly. The Company's methodology for establishing the
allowance for bad debts varies with the regions in which it operates. The
allowance for bad debts is based upon specific identification of customer
accounts and the Company's best estimate of the likelihood of potential loss,
taking into account such factors as the financial condition and payment history
of major customers. As of March 31, 2003, 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 negative impact on the
Company's liquidity and financial performance.
Restructuring
During 2002, the Company conducted a strategic review of its operations. As
a result of that review, the Company now intends to emphasize its specialty
pharmaceuticals business, to divest itself of those businesses that do not fit
the Company's strategic growth plans and to exert efforts to bring its overall
cost structure in line with industry averages.
As a result of this strategic review, the Company made the decision to
divest its Russian Pharmaceuticals segment, Biomedicals segment, Photonics
business, raw materials business and manufacturing capability in Hungary and the
Czech Republic and Circe unit. The results of these operations and the related
financial position have been reflected as discontinued operations in the
Company's consolidated condensed financial statements in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The consolidated condensed
financial statements have been restated to conform to the discontinued
operations presentation for all historical periods presented.
At the time of the Ribapharm initial public offering, the Company stated
that it intended to pursue a tax-free distribution of its remaining interest in
Ribapharm to the Company's stockholders (a "Spin-Off"), although there was no
obligation to do so. Following the Company's 2002 annual meeting of
stockholders, which led to significant changes in the composition of the board
of directors and leadership of the Company, the Company announced that it was
re-evaluating its past restructuring plans, including whether to pursue a
potential Spin-Off. The Company continues to evaluate its options with respect
to Ribapharm.
Foreign Operations
Approximately 64% and 49% of the Company's revenues for the three months
ended March 31, 2003 and 2002, respectively, were generated from operations
outside the United States. All of the Company's foreign operations are subject
to risks inherent in conducting business abroad, including possible
nationalization or expropriation, 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 some instances, materially affect the
Company's results of operations. The effect of these risks remains difficult to
predict.
Russia
While the Russian economy continues to show improvement since the financial
crisis that began in 1998, the economy continues to experience difficulties. In
1998, the ruble fell sharply from a rate of 6.3 to $1 to a rate of 27.5 rubles
to $1 by the end of 1999. At March 31, 2003, the ruble exchange rate was 31.4
rubles to $1 as compared with a rate of 31.8 rubles to $1 at December 31, 2002.
ICN Russia had a net monetary asset position of approximately $14,766,000, which
is subject to foreign exchange loss as further declines in the value of the
ruble in relation to the dollar occur. Due to the fluctuation in the ruble
exchange rate, the ultimate amount of any future translation and exchange loss
the Company may incur cannot presently be determined and such loss may have a
negative impact on the Company's results of discontinued operations. To date
there is continued volatility in Russia's debt and equity markets, high
inflation persists, confidence in the banking sector has yet to be restored and
there continues to be general lack of liquidity in the economy. In addition,
laws and regulations affecting businesses operating with Russia continue to
evolve. Russia's return to economic stability is dependent to a large extent on
the effectiveness of the measures taken by the government, decisions of
international lending organizations, and other actions, including regulatory and
political developments, which are beyond the Company's control.
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 operates in some markets which
have price controls that may limit its ability to raise prices in a timely
fashion. Future sales and gross profit will be reduced if the Company is unable
to obtain price increases commensurate with the levels of inflation.
Item 3. 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. The Company seeks to manage its foreign currency exposure
by maintaining the majority of cash balances at foreign subsidiaries in the U.S.
dollar and through operational means by managing local currency revenues in
relation to local currency costs. The Company does not currently provide any
hedges on its foreign currency exposure.
In the normal course of business, the Company also faces risks that are
either non-financial or non-quantifiable. Such risks principally include country
risk, credit risk, and legal risk and are not discussed or quantified in the
following analysis.
Interest Rate Risk: The Company currently 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. At March 31, 2003, the Company had $12,761,000 of foreign denominated
debt that would subject it to both interest and currency risk. The principal
financial liabilities of the Company that are subject to interest rate risk are
its fixed-rate long-term debt (principally its 6 1/2% Subordinated Convertible
Notes due 2008) totaling approximately $465,590,000. The Company does not use
any derivatives or similar instruments to manage its interest rate risk. A 100
basis-point increase in interest rates (approximately 15% 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 first
quarter 2003 pretax earnings. However, such a change would reduce the fair value
of the Company's fixed-rate debt instruments by approximately $15,700,000 as of
March 31, 2003.
Item 4. Controls and Procedures.
Commencing with the fiscal quarter ended June 30, 2002, and continuing
quarterly since then, the Company has instituted a program of questionnaires
sent to, certifications provided by, and telephonic interviews conducted with
individual officers or employees responsible for oversight and management of
parts of the Company's different business operations. The questionnaires,
certifications and interviews are intended to reinforce the Company's existing
system of internal controls, and are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Such controls and procedures are also designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under that Act is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. The Company's Chief Executive Officer and Chief Financial Officer
have conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures within 90 days of the filing of this report. Based on
this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the evaluation referred to in the preceding paragraph, including any corrective
actions with regard to significant deficiencies and material weaknesses.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that constitute
forward looking statements. Those statements appear in a number of places in
this Quarterly Report on Form 10-Q. Examples of forward-looking statements
include statements regarding, among other matters, the Company's strategic
review and repositioning, the Company's acquisition strategy, the Company's
reorganization plans, the Company's expectations regarding sales of products by
the North America Pharmaceutical segment, expectations regarding research and
development costs and other factors affecting the Company's financial condition
or results of operations. In some cases, forward looking statements may be
identified by terminology such as "may," "will," "intends," "should," "would,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those terms or comparable
terminology. Similarly, statements that describe the Company's plans,
strategies, intentions, expectations, objectives, goals or prospects are forward
looking.
The forward looking statements in this and other reports generally assume a
stable economic climate in the United States and other countries in which the
Company operates and assumes that losses will not result from any risks to which
the Company is subject, including the following:
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 Russia and Latin America 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 ribavirin,
and possibly on future drugs, techniques, processes or products the
Company may develop or acquire;
the potential impact of the foreign currency translation and exchange;
the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies;
costs of defending and 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);
business trends within the pharmaceutical industry and in other
segments of the healthcare industry, including consolidations and
mergers; and competition generally;
the Company modifying or abandoning its restructuring plan in light of
its on-going strategic review and the successful adoption and
execution of the Company's strategic repositioning;
the fact that, beginning with the third quarter of 2002, Ribapharm was
entitled to receive the payments by Schering and Ribapharm does not
expect to pay any dividends in the foreseeable future.
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.
3.1 Amended and Restated Certificate of Incorporation of
Registrant, previously filed as Exhibit 3.1 to Registration
Statement 33-84534 on Form S-4, which is incorporated herein
by reference, as amended by the Certificate of Merger, dated
November 10, 1994, of ICN Pharmaceuticals, Inc., SPI
Pharmaceuticals, Inc. and Viratek, Inc. with and into ICN
Merger Corp. previously filed as Exhibit 4.1 to Registration
Statement No. 333-08179 on Form S-3, which is incorporated
herein by reference.
3.2 Bylaws of the Registrant previously filed as Exhibit 3.2 to
Registration Statement No. 33-84534 on Form S-4, which is
incorporated herein by reference.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, the following reports on Form
8-K were filed by the Registrant:
1. Current report on Form 8-K dated January 22, 2003 (the date of the
earliest event reported), filed on January 28, 2003, for the purpose of
reporting certain information, under Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: May 15, 2003 /s/ Robert W. O'Leary
--------------------------------------------------------
Robert W. O'Leary
Chairman of the Board and Chief Executive Officer
Date: May 15, 2003 /s/ Bary G. Bailey
--------------------------------------------------------
Bary G. Bailey
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATIONS
I, Robert W, O'Leary, certify that:
1. I have reviewed this annual report on Form 10-Q of ICN Pharmaceuticals,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 3 annual report, fairly present in all
material respect the financial condition, results of operations and cash
flows of the registrant as of,and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining 4 disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to a the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, 5 to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls, and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and;
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ ROBERT W. O'LEARY
--------------------------------------------------------------
Robert W. O'Leary
Chairman of the Board and Chief Executive Officer
I, Bary Bailey, certify that:
1. I have reviewed this annual report on Form 10-Q of ICN Pharmaceuticals,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 3 annual report, fairly present in all
material respect the financial condition, results of operations and cash
flows of the registrant as of,and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining 4 disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to a the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, 5 to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls, and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and;
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ BARY G. BAILEY
-------------------------------------------------------------
Bary G. Bailey
Executive Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit Page No
-------
3.1 Amended and Restated Certificate of Incorporation of Registrant, previously filed as
Exhibit 3.1 to Registration Statement 33-84534 on Form S-4, which is incorporated
herein by reference, as amended by the Certificate of Merger, dated November 10,
1994, of ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Viratek, Inc. with
and into ICN Merger Corp. previously filed as Exhibit 4.1 to Registration Statement
No. 333-08179 on Form S-3, which is incorporated herein by reference. N/A
3.2 Bylaws of the Registrant previously filed as Exhibit 3.2 to Registration Statement
No. 33-84534 on Form S-4, which is incorporated herein by reference. N/A
15.1 Review Report of Independent Accountants 31
15.2 Awareness Letter of Independent Accountants 32
Exhibit 15.1
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of ICN
Pharmaceuticals, Inc. and its subsidiaries as of March 31, 2003 and the related
consolidated condensed statements of income, of comprehensive income and of cash
flows for each of the three-month periods ended March 31, 2003 and 2002. These
consolidated condensed interim financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of income, of stockholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated March 6, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/S/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
May 5, 2003
Exhibit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
May 15, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 5, 2003 on our review of interim
financial information of ICN Pharmaceuticals, Inc. (the "Company") as of and for
the period ended March 31, 2003 and included in the Company's quarterly report
on Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-8 (File Nos. 33-56971, 333-81383, 333-73098
and 333-85572) and Form S-3 (File Nos. 333-10661, 333-67376, 333-88040 and
333-88042).
Very truly yours,
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California