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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
[ ] 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 545-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
(INCLUDING ASSOCIATED PREFERRED
STOCK PURCHASE RIGHTS)
9- 1/4% SENIOR NOTES DUE 2005 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 20, 1998, was approximately $3,212,481,000.
The number of outstanding shares of common stock as of March 20, 1998
was 71,687,163.
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List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document
is incorporated: ICN Pharmaceuticals, Inc.'s definitive Proxy Statement for the
1998 Annual Meeting of Stockholders, to be filed not later than 120 days after
the end of the fiscal year covered by this report, is incorporated by reference
into Part III.
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TABLE OF CONTENTS
Item Number And Caption
PART I
PAGE NO.
--------
1. Business................................................................................. 2
2. Properties............................................................................... 16
3. Legal Proceedings........................................................................ 17
4. Submission of Matters to a Vote of Security Holders...................................... 17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters............... 18
6. Selected Financial Data................................................................. 19
7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 21
8. Financial Statements and Supplementary Data............................................. 31
9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure....... 63
PART III
10. Directors and Executive Officers of the Registrant...................................... 64
11. Executive Compensation.................................................................. 64
12. Security Ownership of Certain Beneficial Owners and Management.......................... 64
13. Certain Relationships and Related Transactions.......................................... 64
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 65
Page 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
On November 1, 1994, the stockholders of ICN Pharmaceuticals, Inc. ("ICN"), SPI
Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek") and ICN Biomedicals,
Inc. ("Biomedicals") (collectively, the "Predecessor Companies") approved the
Merger of the Predecessor Companies ("the Merger"). On November 10, 1994, SPI,
ICN and Viratek merged into ICN Merger Corp. and Biomedicals merged into ICN
Subsidiary Corp., a wholly-owned subsidiary of ICN Merger Corp. In conjunction
with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("the
Company"). For accounting purposes, SPI was the acquiring company and, as a
result, the Company has reported the historical financial data of SPI in its
financial results for periods prior to the Merger. Subsequent to the Merger, the
results of the newly merged company include the combined operations of all
Predecessor Companies.
The Company is a multinational pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical, research and diagnostic
products and provides radiation monitoring services. The Company pursues a
strategy of international expansion which includes (i) the consolidation of the
Company's leadership position in Eastern Europe and Russia; (ii) the acquisition
of high margin products that complement existing product lines and can be
registered and introduced into additional markets to meet the specific needs of
those markets; and (iii) the creation of a pipeline of new products through
internal research and development, as well as strategic partnerships and
licensing arrangements.
BACKGROUND
As measured by sales, the Company believes it is currently the largest
pharmaceutical company in Eastern Europe, a region with an estimated population
of 425.1 million people with a collective GNP of $838.3 billion. The rate of per
capita spending on pharmaceuticals in Eastern Europe currently is only 13% of
such rate in Western Europe. The Company believes it has also established itself
as the largest pharmaceutical company, as measured by sales, in Russia, a market
that is expected to grow significantly over the next decade. The Company entered
the Hungarian market by acquiring 67% of Alkaloida, one of the largest
pharmaceutical companies in terms of sales in Hungary and a major world producer
of morphine and related compounds. In Yugoslavia, ICN Yugoslavia has an
approximate 50% market share with 1997 sales of $225,530,000. Although ICN
Yugoslavia's sales and profits have been adversely affected by an economic
environment that has included extended periods of hyperinflation and trade
sanctions, it historically has maintained profitability.
For more than ten years, the Company has pursued a strategy of targeted
expansion into regional markets which it considers to have significant potential
for the sale of pharmaceutical products. This strategy has been implemented in
large part through the acquisition of compatible businesses and product lines
and the formation of strategic alliances and joint ventures in targeted markets.
The Company believes that it has developed particular knowledge and skills in
the acquisition, development and conduct of pharmaceutical and related
businesses in Eastern Europe and Russia and it intends to continue its strategy
of seeking acquisition and other growth opportunities in those and other
emerging markets, such as China and Latin America, as well as in North America
and Western Europe.
The Company continues to explore acquisition and expansion opportunities in
Russia and Eastern Europe, and in February 1998, the Company announced that it
would invest $300,000,000 in Russia over the next five years, including
$47,000,000 for the construction of a new pharmaceutical plant as part of its
ongoing modernization of ICN Oktyabr. The Company also announced that it has
pledged to assist the government of Romania with the privatization of Romania's
pharmaceutical industry, and plans to take a stake in a major Romanian
pharmaceutical company to support the process. The Company believes Romania is
one of the largest markets in Eastern Europe, with a population of approximately
26 million. Romania borders Hungary and Yugoslavia, where the Company already
maintains operations.
Page 3
ITEM 1. BUSINESS--continued
The Company believes it is uniquely positioned as being both large enough to
have an effective international distribution network not enjoyed by smaller
pharmaceutical companies and small enough to permit lower sales thresholds that
will achieve profitability that cannot be realized under the production and
marketing constraints of larger pharmaceuticals companies. The Company has
therefore increased sales and profitability in part by acquiring high margin
pharmaceutical products that complement its existing product lines.
In 1997, the Company acquired the rights to eleven products from F. Hoffmann-La
Roche Ltd. ("Roche"). The products include Librium (tranquilizer), Efudex
(topical anti-skin cancer), Glutril (anti-diabetic), Alloferin (anesthetic),
Ancotil (antifungal), Limbitrol (anti-depressant), Protamin (heparin overdose),
Levo-Dromoran (pain management) and Mestinon/Prostigmin (myasthenia gravis).
Sales of these products since the initial acquisition (effective July 1, 1997)
contributed $37,895,000 to the Company's revenues for 1997. The Company believes
that certain of these products in specific markets have growth potential and
intends to promote the products accordingly. A state-of-the-art manufacturing
facility in Humacao, Puerto Rico was also purchased from Roche in a separate
transaction. In February 1998, the Company acquired the Asian, Australian and
African rights to 39 prescription and over-the-counter pharmaceutical products
from SmithKline Beecham plc ("SKB"). The products include Actal, Breacol,
Coracten, Eskornade, Fefol, Gyno-Pevaryl, Maxolan, Nyal, Pevaryl, Ulcerin and
Vylcim.
The Company's research and development activities are based upon the expertise
accumulated in over thirty years of nucleic acids research focusing on the
internal generation of novel molecules. The research and development function
works closely with corporate marketing on a local, regional and worldwide basis.
In this connection, the Company has entered into a number of licensing
arrangements with other larger pharmaceutical companies, as well as strategic
partnerships to develop its proprietary products.
Among the Company's products is the broad spectrum antiviral agent ribavirin
which it markets in the United States, Canada and most of Europe under the
Virazole(R) trademark. Virazole(R) is currently approved for commercial sale in
over 40 countries for one or more of a variety of viral infections, including
respiratory syncytial virus ("RSV"), herpes simplex, influenza, chicken pox,
hepatitis and human immunodeficiency virus ("HIV"). In the United States and
Europe, Virazole(R) is approved only for use with hospitalized infants and
children with severe lower respiratory infections due to RSV.
In 1995, the Company entered into an agreement (the "License Agreement") with
Schering-Plough Corporation ("Schering-Plough") whereby Schering-Plough licensed
all oral forms of ribavirin, including for the treatment of chronic hepatitis C
in combination with their product INTRON-A(R) (interferon alpha 2b) (the
"Combination Therapy"). The License Agreement provided the Company an initial
non-refundable payment by Schering-Plough of $23,000,000 and future royalty
payments to the Company from sales of the drug by Schering-Plough, including
certain minimum royalty rates. Schering-Plough will have exclusive marketing
rights for oral forms of ribavirin for hepatitis C worldwide, except that the
Company will retain the right to co-market in the countries of the European
Union. In addition, Schering-Plough agreed to purchase up to $42,000,000 in
common stock of the Company upon achieving certain regulatory milestones. Under
the License Agreement, Schering-Plough will be responsible for all clinical
development and regulatory activities worldwide. During 1997, phase III clinical
trials comparing the Combination Therapy versus INTRON-A alone were completed in
the U.S. and Europe and demonstrated a statistically significant improvement in
sustained response in patients taking the Combination Therapy who had relapsed
following previous interferon treatment. In December 1997, the Company was
informed by Schering-Plough that Schering-Plough had filed a New Drug
Application for the Combination Therapy with the US Food and Drug Administration
(the "FDA"). The Company believes that Schering-Plough will submit similar
applications in Europe in 1998. Additional trials are ongoing to broaden
potential claims, specifically as first-line therapy.
Under the License Agreement, if the Company pursues regulatory approval to
market Virazole(R) for an additional hepatitis indication, Schering-Plough will
have the right to require that such indication become included in the License
Agreement on the same terms and conditions (including royalties), in which case
Schering-Plough must take responsibility for all further development activities
and reimburse the Company for its development costs.
Page 4
ITEM 1. BUSINESS--continued
Schering-Plough has the right to terminate the License Agreement on six months'
notice, in which event it would retain a non-exclusive license to all oral forms
of ribavirin, subject to the royalty obligations of the License Agreement, but
it would no longer have any obligation to purchase common stock of the Company.
Also, on such a termination, Schering-Plough would be required to provide to the
Company reference to any regulatory approvals obtained by Schering-Plough and
all information and data to allow the Company to pursue regulatory approval of
oral forms of ribavirin.
The Company believes that the approval of Virazole(R) in Combination Therapy for
the treatment of chronic hepatitis C would be important to the Company because
of the potential size of the chronic hepatitis C market both in the United
States, Western Europe, Japan and other markets. However, there can be no
assurance that the clinical trials will be successful or that the required
governmental approvals will be obtained with respect to Virazole(R) for the
treatment of hepatitis C in Combination Therapy.
In addition to its pharmaceutical operations, the Company also develops,
manufactures and sells, through its wholly-owned subsidiary, ICN Biomedicals,
Inc., a broad range of research products and related services, immunodiagnostic
reagents and radiation monitoring services. The Company markets these products
internationally to major scientific, academic, health care and governmental
institutions through catalog and direct mail marketing programs. ICN
Biomedicals, Inc. accounted for approximately 9% of the Company's total 1997
revenues.
In March 1998, the Company completed a three-for-two stock split (in the form of
a dividend). Common share and per common share amounts for all periods presented
have been restated to give effect to the stock split.
PRODUCTS
ETHICAL DRUGS
ANTI-INFECTIVES: Anti-infective drugs treat bacterial and viral infections. The
Company sells approximately 70 antibacterial products, and sells its antiviral
drug, ribavirin, under the tradename Virazole(R) in North America and most
European countries. Ribavirin is sold as Vilona(R) and Virazide(R) in Latin
America and Virazide(R) in Spain. Reference to the sale of Virazole(R) includes
sales made under the trademarks Vilona(R) and Virazide(R).
ANTIVIRALS: Virazole(R) accounted for approximately 3%, 5% and 10% of the
Company's net sales for the years ended December 31, 1997, 1996 and 1995,
respectively. Virazole(R) is currently approved for sale in various
pharmaceutical formulations in over 40 countries for the treatment of several
different human viral diseases, including RSV, hepatitis, herpes, influenza,
measles, chicken pox and HIV. In the United States and Canada, Virazole(R) has
been approved only for hospital use in aerosolized form to treat infants and
young children who have severe lower respiratory infections caused by RSV. In
treating RSV, the drug is administered by a small particle aerosolized generator
("SPAG"), a system that permits direct delivery of Virazole(R) to the site of
the infection. Similar approvals for Virazole(R) for use in the treatment of RSV
have been granted by governmental authorities in 22 other countries.
A variety of small, independent clinical studies comparing the results of
combining Virazole(R) capsules and interferon alpha 2b therapies versus
interferon alone in the treatment of hepatitis C, demonstrated enhanced efficacy
of the combination. Based upon these clinical findings, the Company entered into
the License Agreement with Schering-Plough whereby Schering-Plough has assumed
responsibility for worldwide clinical development and registration of oral
ribavirin in combination with their product, INTRON-A(R) (interferon alpha 2b),
for the treatment of hepatitis C.
Page 5
ITEM 1. BUSINESS--continued
ANTIBACTERIALS: Antibacterials accounted for approximately 14%, 22% and 21% of
the Company's net sales for the years ended December 31, 1997, 1996 and 1995,
respectively. Most of the antibacterials manufactured and sold by the Company
are under exclusive licenses held by ICN Yugoslavia for specific geographical
areas, primarily Yugoslavia, from other manufacturers, including Roche,
Bristol-Meyers Squibb and Eli Lilly. Jugocillin(R) and Pentrexyl(R) belong to
the penicillin group of medications used in a wide variety of bacterial
infections including urinary and upper respiratory tract infections.
Longaceph(R) and Palitrex(R) belong to the cefalesporin group of medications
used to treat afflictions that may not be responsive to penicillin treatment.
Bactrim(R) is a combination product that is used in the treatment of urinary
tract infections.
OTHER ETHICALS: Other ethicals accounted for approximately 49%, 41% and 40% of
net sales for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company manufacturers a wide variety of other ethical pharmaceuticals
covering virtually every therapeutic category and/or disease state. Leading
product segments in the Company's portfolio, in addition to anti-infectives,
include: pain management, vitamins/minerals, cardiovascular, central nervous
system, respiratory, dermatology and gastrointestinal.
During 1997, the 10 pharmaceutical products generating the greatest sales for
the Company represented approximately 21% of worldwide pharmaceutical sales. The
anticholinergic product line consisting of Mestinon(R), Prostigmin(R) and
Tensilon(R), used for the treatment of myasthenia gravis (a progressive
neuromuscular disorder) and reversing the effects of certain muscle relaxants,
was the Company's leading sales contributor with worldwide sales of $28,000,000.
Virazole, with worldwide sales of $23,000,000, ranked second. Other major
products included: Bedayecta, a B-complex injectable vitamin marketed by ICN
Mexico; Palitrex, Pentrexyl, Gentamycin, Amikacin and Bactrim, anti-infectives
sold by ICN Yugoslavia in various Eastern European markets; Oxsoralen, an
antipsoriatic with sales primarily in North America; and Prilazid, an
antihypertensive sold in Yugoslavia. The Company also manufactures and markets
approximately 60 dermatological products, primarily in North America and Eastern
Europe.
OTHER OTC PRODUCTS: Other OTC products accounted for approximately 25%, 22% and
17% of the Company's net sales for the years ended December 31, 1997, 1996 and
1995, respectively. Other OTC products encompass a broad range of ancillary
products, sold through the Company's existing distribution channels.
RESEARCH PRODUCTS
Research chemicals, diagnostic and other biomedical products accounted for
approximately 9%, 10% and 12% of the Company's net sales for the years ended
December 31, 1997, 1996 and 1995, respectively.
RESEARCH CHEMICALS: The Company serves life science researchers throughout the
world through a catalog sales operation, direct sales and distributors. The
Company's catalog lists approximately 55,000 products which are used by medical
and scientific researchers involved in molecular biology, cell biology,
immunology and biochemistry, microbiology and other areas. A majority of these
products are purchased from third party manufacturers and distributed by the
Company. Products include biochemicals, immunobiologicals, radiochemicals,
tissue culture products and organic and rare and fine chemicals.
DIAGNOSTICS: Among the diagnostics marketed by the Company are reagents that are
routinely used by physicians and medical laboratories to accurately and quickly
diagnose hundreds of patient samples for a variety of disease conditions. The
Company manufactures both enzyme and radio-immunoassay kits, which it markets
under the ImmuChem(TM) product line. The Company is also a supplier of
immunodiagnostic tests for the screening of newborn infants for inherited and
other disorders.
Page 6
ITEM 1. BUSINESS--continued
DOSIMETRY: The Company is a supplier of analytical monitoring services to
detect personal occupational exposure to radiation. This service is provided to
dentists, veterinarians, chiropractors, podiatrists, hospitals, universities,
government institutions, nuclear power plants, small office practitioners and
others exposed to ionizing radiation. The Company's service includes both film
and thermo luminescent badges in several configurations to accommodate a broad
scope of users. This service includes the manufacture of badges, distribution to
and from clients, analysis of badges and a radiation report including exposure.
ACQUISITIONS
The Company has pursued a strategy of targeted expansion into regional markets
which are considered to have significant potential for pharmaceutical and
related products. This strategy has been implemented in large part through the
acquisition of compatible businesses and product lines and the formation of
strategic alliances and joint ventures in targeted markets. In 1996 and 1997,
the Company undertook a series of strategic acquisitions designed to strengthen
its product lines and geographic presence.
PRODUCT RIGHTS: Effective July 1, 1997, the Company purchased the worldwide
rights to seven products and the non-U.S. rights to two other products (with an
option to purchase the U.S. rights to these products) from Roche, for aggregate
consideration of $90,000,000. The consideration was paid in a combination of
2,400,000 shares of the Company's common stock, valued at $40,000,000, and 2,000
shares of the Company's Series C Convertible Preferred Stock, valued at
$50,000,000 (together, the "Roche Shares"). Each share of the Company's Series C
Convertible Preferred Stock was convertible into 1,500 shares of the Company's
common stock. In conjunction with the issuance of the Roche Shares, the Company
guaranteed Roche a price initially at $17.17 per common share, increasing at a
rate of 6% per year for the three-year guarantee period. Should Roche sell the
Roche Shares at any time during the guarantee period, the agreement entitled the
Company to any of the proceeds realized by Roche in excess of the guaranteed
price. Effective October 1, 1997, as a result of the rise in the per share
market price of the Company's common stock since the initial acquisition from
Roche, the Company exercised its option to acquire the U.S. rights to the two
products noted above, plus two other U.S. product rights, for aggregate
consideration of $89,008,000, which was paid with cash owed to the Company by
Roche from the sale of the Roche Shares.
The Company also purchased from Roche a GMP-standard manufacturing plant in
Humacao, Puerto Rico (the "Humacao Plant") for $55,000,000. The Humacao Plant is
not currently producing any of the products acquired from Roche. The purchase of
the Humacao Plant is under a sale/leaseback arrangement, whereby Roche will
lease the Humacao Plant from the Company under a two year lease with lease
payments totaling $4,000,000 annually. During the term of the lease, Roche will
continue to use the Humacao Plant for the manufacture of pharmaceutical
products. The Company also entered into a toll manufacturing agreement under
which it will produce pharmaceutical products for Roche for a one-year period
after the expiration of the lease. The Company intends to use the Humacao Plant
to produce the products acquired from Roche and other products.
Page 7
ITEM 1. BUSINESS--continued
In February 1998, the Company acquired from SKB the Asian, Australian and
African rights to 39 prescription and over-the-counter pharmaceutical products,
including Actal, Breacol, Coracten, Eskornade, Fefol, Gyno-Pevaryl, Maxolan,
Nyal, Pevaryl, Ulcerin and Vylcim. The Company received the product rights in
exchange for $45,000,000 payable in a combination of $22,500,000 in cash and 821
shares of the Company's Series D Convertible Preferred Stock valued at
$22,500,000. Each share of the Series D Convertible Preferred Stock is initially
convertible into 750 shares of the Company's common stock (together, the "SKB
Shares"). Except under certain circumstances, SKB has agreed not to sell the SKB
Shares until November 4, 1999. The Company has agreed to pay SKB an additional
amount in cash (or, under certain circumstances, in shares of common stock) to
the extent proceeds received by SKB from the sale of the SKB Shares during a
specified period ending in December 1999 and the then market value of the unsold
SKB Shares do not provide SKB with an average value of $46.00 per common share
(including any dividend paid on the SKB Shares). Alternatively, SKB is required
to pay the Company an amount, in cash or shares of the Company's common stock,
to the extent that such proceeds and market value provide SKB with an average
per share value in excess of $46.00 per common share (including any dividend
paid on the SKB Shares). The Company has also granted SKB certain registration
rights covering the common shares issuable upon conversion of the Series D
Preferred Stock.
WUXI ICN PHARMACEUTICALS: Effective January 1, 1997, ICN China, Inc., a
wholly-owned subsidiary of the Company, commenced operations of a pharmaceutical
company under a joint venture agreement with Wuxi Pharmaceutical Corporation
("Wuxi"), a Chinese state-owned company. Under the agreement, a limited
liability company (the "Chinese Joint Venture Entity") was established to
produce and sell pharmaceutical products. The Chinese Joint Venture Entity is
75% owned by ICN China and 25% owned by Wuxi. Wuxi is a supplier of injectable
antibiotics. Wuxi agreed to contribute its existing operation, with an
approximate net book value of $6,000,000, to the Chinese Joint Venture Entity
and ICN China agreed to contribute a total of $24,000,000 in cash over three
years, primarily for the construction of a new pharmaceutical production plant
and the purchase of related machinery and equipment. The Company contributed
approximately $3,600,000 to the joint venture in 1997.
AO TOMSK CHEMICAL PHARMACEUTICAL PLANT: Effective October 1, 1997, the Company
acquired a 75% interest in AO Tomsk Chemical Pharmaceutical Plant ("Tomsk"), a
pharmaceutical company located in Tomsk, Russia, for approximately $3,000,000 in
cash. Tomsk makes and distributes a wide range of pharmaceuticals, including
antiseptics, analgesics, antibiotics and herbal liquids and extracts. Under the
terms of the agreement, the Company will invest approximately $8,000,000 over
the next two years.
MARBIOPHARM: Effective October 1, 1997, the Company acquired a 72% interest in
Marbiopharm, a pharmaceutical company located in Yoshkar-Ola, Russia, for
approximately $3,500,000 in cash. Marbiopharm manufactures, sells and
distributes pharmaceutical products in Russia.
POLFA RZESZOW, S.A.: Effective October 1, 1997, the Company acquired an 80%
interest in Polfa Rzeszow, S.A., ("Polfa") a pharmaceutical company located in
Rzeszow, Poland, for approximately $33,700,000 in cash and approximately 48,000
shares of common stock of the Company valued at $1,709,000. Polfa makes and
distributes a wide range of pharmaceuticals, including anti-depressants,
anti-fungals, anti-infectives, pain relievers, anti-allergy, cardiovasculars and
nutritionals. Under the terms of the agreement, the Company will invest
approximately $20,000,000 over the next two years, primarily for the
construction of a new pharmaceutical production plant, at which time the Company
will own approximately 90% of Polfa.
Page 8
ITEM 1. BUSINESS--continued
VELEFARM: In October 1997, the Company acquired a 42.6% ownership interest in
Velefarm, a major distributor of pharmaceutical products located in Belgrade,
Yugoslavia, for approximately $13,224,000. Under the terms of the agreement, the
Company exchanged accounts receivable due from Velefarm for the 42.6% interest.
ICN Yugoslavia recorded sales to Velefarm of approximately $140,700,000 and
$44,800,000 for the years ended December 31, 1997 and 1996, respectively, of
which approximately $30,200,000 of 1997 sales were subsequent to the Company's
investment.
FOREIGN OPERATIONS
The Company operates directly and through distributors in North America, Latin
America (principally Mexico), Western Europe and Eastern Europe and through
distributors elsewhere in the world. For financial information about domestic
and foreign operations and export sales, see Note 13 of Notes to Consolidated
Financial Statements.
Approximately 78%, 80%, and 75% of the Company's net sales for the years ended
December 31, 1997, 1996, and 1995 were generated from operations outside the
U.S. Foreign operations are subject to certain risks inherent in conducting
business abroad, including possible nationalization or expropriation, price and
exchange controls, limitations on foreign participation in local enterprises,
health-care regulation and other restrictive governmental actions. Changes in
the relative values of currencies take place from time to time and may
materially affect the Company's results of operations. Their effects on the
Company's future operations are not predictable. The Company does not currently
provide a hedge on its foreign currency exposure and, in certain countries in
which the Company operates, no effective hedging program is available.
ICN Yugoslavia represents a material part of the Company's business.
Approximately 30%, 44%, and 46% of the Company's net sales for the years ended
December 31, 1997, 1996, and 1995 were from ICN Yugoslavia. ICN Yugoslavia, a
75%-owned subsidiary, operates in a business environment that is subject to
significant economic volatility and political instability. The economic problems
in Yugoslavia include continuing liquidity problems, unemployment, a weakened
banking system and a high trade deficit. Between May 1992 and December 1995, ICN
Yugoslavia operated under sanctions imposed by the United Nations that severely
limited the ability to import raw materials and prohibited all exports. While
most of the United Nations sanctions have been suspended, certain risks, such as
hyperinflation, currency devaluations, wage and price controls and potential
government action could continue to have a material adverse effect on the
Company's financial position and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Inflation and Changing Prices and ICN Yugoslavia".
MARKETING AND CUSTOMERS
The Company markets its pharmaceutical products in some of the most developed
pharmaceutical markets, including the United States, Canada and Western Europe,
as well as developing markets, including Russia, Eastern Europe and Latin
America. The Company adjusts its marketing strategies according to the
individual markets in which it operates. The Company believes its marketing
strategy is distinguished by flexibility, allowing the Company to market
successfully a wide array of pharmaceutical products within diverse regional
markets as well as certain drugs, notably Virazole(R), on a worldwide basis.
The Company has a marketing and sales staff of approximately 2,200 persons,
including sales representatives in North America, Latin America, Western Europe
and Eastern Europe, who promote its pharmaceutical products. As part of its
marketing program for pharmaceuticals, the Company also uses direct mailings,
advertises in trade and medical periodicals, exhibits products at medical
conventions, sponsors medical education symposia, and sells through distributors
in countries where it does not have its own sales staff.
Page 9
ITEM 1. BUSINESS--continued
In the United States, the Company currently promotes its pharmaceutical products
to physicians through its own sales force. These products are distributed to
drug stores and hospitals through wholesalers. In Latin America, principally
Mexico, the Company promotes to physicians and distributes products either
directly or indirectly to hospitals and pharmacies. The Company's Spanish and
Dutch subsidiaries promote and sell pharmaceutical products through their own
sales forces to physicians, hospitals, retail outlets, pharmacies and
wholesalers. In other Western European markets, particularly the United Kingdom
and Germany, sales forces have been recently established and distribution
methods are in transition as the Company's affiliates are formed. In Canada, the
Company has its own sales force and promotes and sells directly to physicians,
hospitals, wholesalers, and large drug store chains.
ICN Yugoslavia sells a broad range of pharmaceutical and other products in
Yugoslavia through approximately 30 wholesalers, 6 sales offices and 85 sales
representatives. In December 1995, the United Nations Security Council adopted a
resolution that suspended most economic sanctions imposed on the Federal
Republic of Yugoslavia. The suspension of sanctions enabled ICN Yugoslavia to
resume exporting certain of its product lines to Russia, other Eastern European
markets, Africa, the Middle East and the Far East. During 1997, approximately
80% or $162,200,000 of ICN Yugoslavia's domestic sales were to
government-sponsored entities of the Federal Republic of Yugoslavia. Future
domestic sales by ICN Yugoslavia could be dependent on the ability of the
Yugoslavian government to continue to subsidize purchases of pharmaceutical
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - ICN Yugoslavia".
In Russia, Hungary and Poland, the Company's sales and marketing organizations
are in various stages of development. In Russia, the lower-priced generic
domestic product line is sold through a network of distributors and their agents
which account for approximately 90% of in-market sales. Products imported from
other subsidiaries as branded generics or proprietary drugs are promoted to
physicians through the Company's own sales force to create demand and are
distributed to pharmacies and hospitals through distributors and wholesalers.
There are currently over 400 personnel in Russia supporting the sales and
marketing function. Alkaloida and Polfa Rzeszow, S.A. continue to develop sales
and marketing organizations sized and structured for their specific market
opportunities.
The research chemical and diagnostic product lines are sold worldwide primarily
through the Company's mail order catalogs, with additional sales being generated
through affiliates and a network of distributors.
RESEARCH AND DEVELOPMENT
The Company's research and development activities use the expertise accumulated
by the Company and its predecessors in over 30 years of nucleic acids research.
In addition, the Company develops innovative products targeted to address the
specific needs of the Company's local markets. The Company currently has
approximately 580 employees devoted to Research and Development activities.
NEAR AND MEDIUM-TERM RESEARCH AND DEVELOPMENT
The Company's short-term development pipeline includes the registration of a
number of products in regional markets, including, but not limited to, Latin
America and Eastern and Central Europe. This ongoing activity introduces both
high quality generic and licensed proprietary products into under-served
markets. There can be no assurance of the results of the Company's research and
development efforts or the ultimate commercial success of any of the products in
the development.
Page 10
ITEM 1. BUSINESS--continued
The Company's medium-term research and development pipeline involves the
preclinical and clinical evaluation of certain nucleotide compounds which have
broad market attractiveness and which have shown promise for successful
commercialization (although there can be no assurances that these products will
be commercialized successfully). The majority of these compounds arose from the
nucleic acids programs but certain other compounds are in development to broaden
the portfolio of the Company. These compounds include:
VIRAZOLE(R) (RIBAVIRIN): Prior to 1995, a number of small, independent clinical
studies which compared the results of combining Virazole(R) capsules with
interferon alpha versus interferon alpha alone, found enhanced efficacy for the
combination. Based on these clinical findings, in 1995, the Company entered into
the License Agreement with Schering-Plough, under which Schering-Plough assumed
responsibility for the worldwide clinical development and registration of oral
ribavirin in combination with their product INTRON-A(R) (interferon alpha 2b),
for the treatment of hepatitis C virus infections and received certain
geographically exclusive marketing rights. During 1997, phase III clinical
trials comparing the Combination Therapy versus INTRON-A(R) alone were completed
in the U.S. and Europe and demonstrated a statistically significant improvement
in sustained response in patients taking the Combination Therapy who had
relapsed following previous interferon treatment. In December 1997, the Company
was informed by Schering-Plough that Schering-Plough had filed a New Drug
Application for the Combination Therapy with the FDA. The Company believes that
Schering-Plough will submit similar applications in Europe in 1998. Additional
trials are ongoing to broaden potential claims, specifically as first-line
therapy.
Clinical studies have been performed with Virazole(R) in various formulations
for the treatment of several other viral diseases. Among diseases for which at
least one governmental health regulatory agency, in countries other than the
United States, has approved commercialization of Virazole(R) are herpes zoster,
genital herpes, chicken pox, hemorrhagic fever with renal syndrome, Lassa Fever,
measles, influenza and HIV. The Company is initiating carefully focused clinical
studies evaluating the use of Virazole(R) in the treatment of papilloma virus
infections and for early intervention against RSV infections in persons whose
immune defenses are compromised as a consequence of bone marrow transplantation.
TIAZOLE(TM) (TIAZOFURIN): The Company has maintained an active research program
centered on tiazofurin, which the Company is developing under the tradename
Tiazole(TM). This product is a nucleoside analog demonstrated to cause
inhibition of IMP-dehydrogenase, whose activity is elevated in a number of
cancers. Studies of Tiazole(TM) by independent investigators indicate
significant activity in the treatent of myelogenous leukemia. The Company is in
the process of conducting Phase II/III evaluation of Tiazole(TM) for use in the
treatment of the late stages of refractory chronic myelogenous leukemia. The
Company is also evaluating Tiazole(TM) for the treatment of ovarian carcinoma.
Page 11
ITEM 1. BUSINESS--continued
ADENAZOLE(TM) (8-CL-C-AMP): This nucleotide has been shown to control cell
proliferation and differentiation in certain cancers. Independent investigators
in Italy and Scotland have conducted human trials which indicate significant
utility of this compound. The Company is planning to continue to pursue the
development of Adenazole(TM).
SOMATORELIN (HGRF1-44): Somatorelin is a peptide which causes the synthesis and
release of human growth hormone. The Company believes that somatorelin offers
advantages over treatment with growth hormone. Notable among these advantages
are the induction of a normal daily cycle of growth hormone levels and the
induction of the ability of the body to produce growth hormone, which should
offer significant benefit to patients. The Company is currently sponsoring Phase
III trials in short stature pediatric patients.
A2545: This compound was acquired as part of the 1996 purchase of Alkaloida.
A2545 has a favorable preclinical profile and has shown good activity in Phase
I/II studies for the prevention of life-threatening irregularities of the
heartbeat (arrythmias), with good effectiveness in arrythmias resistant to
conventional therapy. The Company has not yet ascertained whether or not this
compound will have certain clinical advantages when compared with other agents
in this category. The drug is orally bioavailable and has a favorable toxicology
profile.
LONG-TERM RESEARCH AND DEVELOPMENT
The Company's long-term research and development activities are focused on the
identification and development of novel therapeutic and diagnostic agents for
the treatment of viral diseases, cancer, immunologic dysfunction, diseases of
the skin, hormonal therapy, and cardiovascular diseases.
The Company is engaged in two research areas both of which involve nucleic
acids. One area is based on extending the library of nucleoside analogs through
new synthesis and screening efforts. This is a proven approach which led to the
identification of Virazole(R) by the Company and to other nucleoside
therapeutics by other companies. The second area is the use of "antisense"
oligonucleotide technology. This approach seeks to block the undesirable
expression of genetic material in a highly selective way through the
construction of short sequences of nucleotides which uniquely bind and
inactivate the disease-causing genetic material. Both these approaches take
advantage of the Company's knowledge base in nucleic acids.
There can be no assurance of the results of the Company's research and
development efforts or the ultimate commercial success of any of the products in
development.
COMPETITION
The Company operates in a highly competitive environment. The Company's
competitors, many of whom have substantially greater capital resources and
marketing capabilities and larger research and development staffs and facilities
than the Company, are actively engaged in marketing products similar to those of
the Company and in developing new products similar to those proposed to be
developed and sold by the Company. The Company believes that many of its
competitors spend significantly more on research and development related
activities than the Company spends. Competitive factors vary by product line and
customer and include service, product availability and performance, price and
technical capabilities. The Company does business in an industry characterized
by extensive and ongoing research efforts. Others may succeed in developing
products that are more effective than those presently marketed or proposed for
development by the Company. Progress by other researchers in areas similar to
those explored by the Company may result in further competitive challenges.
The Company is aware of several ongoing research programs which are attempting
to develop new products for the prevention or treatment of RSV, including one
product recently approved by the FDA for the prevention of RSV infections in
newborns. Although the Company will follow publicly disclosed developments in
this field, on the basis of currently available data it is unable to evaluate
whether the technology being developed in these programs poses a threat to its
current market position in the treatment of RSV or its revenue streams.
ORDER BACKLOG
As is customary in the pharmaceutical industry, all the Company's products are
sold on an "open order" basis. Consequently, order backlog is not considered a
significant factor.
Page 12
ITEM 1. BUSINESS--continued
MANUFACTURING AND RAW MATERIALS
The Company manufactures pharmaceuticals at 15 facilities. Those facilities are
located in Bryan, Ohio; Mexico City, Mexico (at two locations); Montreal,
Canada; Zoetermeer, The Netherlands; Barcelona, Spain; Belgrade, Yugoslavia; St.
Petersburg, Chelyabinsk, Kursk, Tomsk, and Yoshkar-Ola, Russia; Rzeszow, Poland;
Tiszavasvari, Hungary; and Wuxi, China. The Company believes it has sufficient
manufacturing capacity to meet its needs for the foreseeable future. The
manufacturing facilities which require good manufacturing practices ("GMP")
approval from the FDA or foreign agencies, have obtained such approval.
In Bryan, Ohio, the Company manufactures topical and oral dosages of several
pharmaceutical products for the United States market. All of the Company's
dermatology products are formulated, packaged and distributed from the Bryan,
Ohio facility. The Bryan, Ohio facility also packages and distributes
Virazole(R) for RSV on a worldwide basis.
At the two facilities in Mexico City, the Company manufactures a variety of
pharmaceuticals in topical, oral and injectable dosage forms to serve the Latin
America market. In Montreal, Canada, the Company manufactures its line of
proprietary and generic pharmaceutical dosage forms for the U.S. and Canadian
markets, SPAG units for the administration of Virazole(R) in the treatment of
RSV, and other related medical devices. The Canadian facility also manufactures
a full line of products using the controlled drug substance morphine for the
management of pain in cancer and post-surgical states. In Spain, the Company
manufacturers and markets ethical pharmaceuticals principally for distribution
in Spain and Holland. In Yugoslavia, the Company manufactures over 450
pharmaceutical, veterinary, dental and other products in topical, oral and
injectable forms. In St. Petersburg, Russia, the Company manufactures primarily
pharmaceutical products in oral and injectable forms. At Kursk, Russia, the
Company produces bulk drugs as well as other chemically synthesized bulk drug
structures, and a variety of oral dosage forms for the Russian market. In
Chelyabinsk, Russia, the Company produces oral and injectable dosage forms for
the Russian market. The Company's recently acquired manufacturing sites in
Rzeszow, Poland and in Tomsk and Yoshkar-Ola, Russia manufacture a variety of
pharmaceutical products in oral and injectable forms. In Tiszavasvari, Hungary
the Company produces a variety of bulk drug substances for sale worldwide and
oral dosage forms for European and Asian markets. At Wuxi in China the Company
produces oral and injectable dosage forms for the Chinese market.
The Company subcontracts all of the manufacture of bulk ribavirin to third party
suppliers. Most of the finishing and packaging of Virazole(R) is done by the
Company and the balance by third party subcontractors. The Company believes that
capacities of these manufacturers are sufficient to meet the current demand for
Virazole(R).
Manufacturing of the Company's research chemical products is chiefly carried out
in three domestic facilities and one foreign facility: Irvine, California
(radiochemicals), Orangeburg, New York (diagnostic and immunobiologicals),
Aurora, Ohio (biochemicals and immuno-biologicals) and Eschwege, Germany
(chromatography products).
In general, raw materials used by the Company in the manufacture of all of its
products are obtainable from multiple sources in the quantities desired.
Page 13
ITEM 1. BUSINESS--continued
LICENSES, PATENTS AND TRADEMARKS (PROPRIETARY RIGHTS)
The Company may be dependent on the protection afforded by its patents relating
to Virazole(R) and no assurance can be given as to the breadth or degree of
protection which these patents will afford the Company. The Company has patent
rights in the United States expiring in 1999 relating to the use of Virazole(R)
to treat specified human viral diseases. If future development of Virazole(R) in
Combination Therapy is successful and approval granted in the United States, an
additional award of exclusivity will likely be granted for up to three years
from date of approval pursuant to the Waxman-Hatch Act; however, there can be no
assurance that such development will be successful or that such approval will be
obtained. The Company has patents in certain foreign countries covering use of
Virazole(R) in the treatment of certain diseases, which coverage and expiration
varies and which patents expire at various times through 2006. The Company has
no, or limited, patent rights with respect to Virazole(R) and/or its use in
certain foreign countries where Virazole(R) is currently, or in the future may
be, approved for commercial sale, including France, Germany and Great Britain.
However, it is expected that Schering-Plough and the Company will be granted a
favorable review classification (Concertation Procedure) for Virazole(R) as a
treatment for chronic hepatitis C in Combination Therapy in all European Union
countries (including France, Germany and Great Britain). As a result, approval
of the application of Virazole(R) for treatment of chronic hepatitis C in
Combination Therapy (if such approval is granted) would, in the European Union,
provide Schering-Plough and the Company six or more years of regulatory
protection from the date of such approval of the application against generic
substitutes of Virazole(R) for treatment of chronic hepatitis C. There can be no
assurance that the loss of the Company's patent rights with respect to
Virazole(R) upon expiration of the Company's patent rights in the United States,
Europe and elsewhere will not result in competition from other drug
manufacturers or will not otherwise have a significant adverse effect upon the
business and operations of the Company.
Marketing approvals in certain foreign countries provide an additional level of
protection for products approved for sale in such countries. As a general
policy, the Company expects to seek patents, where available, on inventions
concerning novel drugs, techniques, processes or other products which it may
develop or acquire in the future. However, there can be no assurance that any
patents applied for will be granted, or that, if granted, they will have
commercial value or as to the breadth or the degree of protection which these
patents, if issued, will afford the Company. The Company intends to rely
substantially on its unpatented proprietary know-how, but there can be no
assurance that others will not develop substantially equivalent proprietary
information or otherwise obtain access to the Company's know-how. Patents for
pharmaceutical compounds are not available in certain countries in which the
Company markets its products.
ICN Yugoslavia manufactures and sells three of its top-selling antibacterial
products, Pentrexyl(R), Longaceph(R) and Palitrex(R), under licenses from
Bristol-Myers Squibb, Roche Holding AG and Eli Lilly, respectively. See
"Products."
Many of the names of the Company's products are registered trademarks in the
United States, Yugoslavia, Mexico, Canada, Spain, The Netherlands and other
countries. The Company anticipates that the names of future products will be
registered as trademarks in the major markets in which it will operate. Other
organizations may in the future apply for and be issued patents or own
proprietary rights covering technology which may become useful to the Company's
business. The extent to which the Company at some future date may need to obtain
licenses from others is not known.
Page 14
ITEM 1. BUSINESS--continued
GOVERNMENT REGULATION
The Company is subject to licensing and other regulatory control by the FDA, the
Nuclear Regulatory Commission, other Federal and state agencies and comparable
foreign governmental agencies.
FDA approval must be obtained in the United States and approval must be obtained
from comparable agencies in other countries prior to marketing or manufacturing
new pharmaceutical products for use by humans. Obtaining FDA approval for new
products and manufacturing processes can take a number of years and involve the
expenditure of substantial resources. To obtain FDA approval for the commercial
sale of a therapeutic agent, the potential product must undergo testing programs
on animals, the data from which is used to file an Investigational New Drug
Application with the FDA. In addition, there are three phases of human testing.
Phase I: safety tests for human clinical experiments, generally in normal,
healthy people; Phase II: expanded safety tests conducted in people who are sick
with the particular disease condition that the drug is designed to treat; and
Phase III: greatly expanded clinical trials to determine the effectiveness of
the drug at a particular dosage level in the affected patient population. The
data from these tests is combined with data regarding chemistry, manufacturing
and animal toxicology and is then submitted in the form of a NDA to the FDA. The
preparation of a NDA requires the expenditure of substantial funds and the
commitment of substantial resources. The review by the FDA could take up to
several years. If the FDA determines that the drug is safe and effective, the
NDA is approved. No assurance can be given that authorization for the commercial
sale by the Company of any new drugs or compounds for any application will be
secured in the United States or any other country, or that, if such
authorization is secured, those drugs or compounds will be commercially
successful. The FDA in the United States and other regulatory agencies in other
countries also periodically inspect manufacturing facilities.
The Company is subject to price control restrictions on its pharmaceutical
products in the majority of countries in which it operates. To date, the Company
has been affected by pricing adjustments in Spain and by the lag in allowed
price increases in Yugoslavia and Mexico, which has created lower sales in U.S.
dollars and reductions in gross profit. Future sales and gross profit could be
materially affected if the Company is unable to obtain price increases
commensurate with the levels of inflation.
LITIGATION, GOVERNMENT INVESTIGATIONS AND OTHER MATTERS
LITIGATION: See Note 12 of Notes to Consolidated Financial Statements for a
description of the Company's Litigation.
PRODUCT LIABILITY: The Company could be exposed to possible claims for personal
injury resulting from allegedly defective products. The Company generally
self-insures against potential product liability exposure with respect to its
marketed products, including Virazole(R). While to date no material claim for
personal injury resulting from allegedly defective products, including
Virazole(R), has been successfully maintained against the Company or any of the
Predecessor Companies, a substantial claim, if successful, could have a material
adverse effect on the Company.
ENVIRONMENTAL MATTERS: The Company has not experienced any material impact on
its capital expenditures, earnings or competitive position as a result of
compliance with any laws or regulations regarding the protection of the
environment. The Company believes it is in compliance in all material respects
with applicable laws relating to the protection of the environment. For a
description of environmental exposure related to the Company's acquisition of
Alkaloida Chemical, see Note 12 of Notes to Consolidated Financial Statements.
Page 15
ITEM 1. BUSINESS--continued
EMPLOYEES
As of December 31, 1997, the Company employed 15,744 persons, an increase from
12,784 in 1996. The increase is primarily due to acquiring the controlling
interest in the Tomsk, Russia, Yoshkar-Ola, Russia, and Rzeszow, Poland
operations and the commencement of operations under the joint venture in China.
At year end, the Company employed 2,168 persons in sales and marketing, 587 in
research and development, 10,676 in production and 2,313 in general and
administrative capacities. All of the employees employed by ICN Yugoslavia and
Alkaloida, 1,620 of the employees of ICN Russia, St. Petersburg, 708 of the
employees of ICN Russia, Chelyabinsk, 227 of the employees of the Company's
Mexican subsidiaries, 238 employees of the Company's Spanish subsidiary and 26
employees of the Company's German subsidiary are covered by collective
bargaining or similar agreements. National labor laws in some foreign countries
in which the Company has substantial operations, including Yugoslavia, Russia
and Spain, govern the amount of wages and benefits paid to employees and
establish severance and related provisions. The Company currently considers its
relations with its employees to be satisfactory and has not experienced any work
stoppage or serious labor problems which have materially impacted its business
operations.
Page 16
ITEM 2. PROPERTIES
The following are the principal facilities of the Company and its subsidiaries:
OWNED OR SQUARE
LOCATION PURPOSE LEASED FOOTAGE
Costa Mesa, California Corporate headquarters and administrative offices Owned 178,000
Moscow, Russia Eastern European Headqauarters and
Administrative offices Owned 102,400
Moscow, Russia Administrative and sales office Leased 8,450
Budapest, Hungary Administrative and sales office Leased 8,740
Basingstoke, United Kingdom Administrative office Leased 3,300
Irvine, California Manufacturing facility Leased 27,000
Orangeburg, New York Manufacturing facility Owned 100,000
Aurora, Ohio Manufacturing and repackaging facility Leased 67,000
Bryan, Ohio Warehouse and manufacturing facility Owned 37,000
Montreal, Canada Offices and manufacturing facility Owned 93,519
Zoetermeer, The Netherlands Offices and manufacturing facility Owned 23,430
Eschwege, Germany Offices and manufacturing facility Owned 13,278
Mexico City, Mexico Offices and manufacturing facility Owned 220,000
Belgrade, Yugoslavia Offices and manufacturing facility Owned 781,000
St. Petersburg, Russia Offices and manufacturing facility Owned 319,102
Kursk, Russia Offices and manufacturing facility Leased 167,791
Chelyabinsk, Russia Offices and manufacturing facility Owned 166,534
Tomsk, Russia Offices and manufacturing facility Owned 294,582
Yoshkar-Ola, Russia Offices and manufacturing facility Owned 142,397
Rzeszow, Poland Offices and manufacturing facility Owned 397,775
Tiszavasvari, Hungary Offices and manufacturing facility Owned 559,465
Barcelona, Spain Offices and manufacturing facility Owned 93,991
Wuxi, China Offices and manufacturing facility Leased 299,240
Wuxi, China Offices and manufacturing facility Owned 112,750
Brussels, Belgium Sales office Leased 6,323
Paris, France Sales office Leased 2,658
Opera, Italy Sales office and warehouse Owned 153,777
Sydney, Australia Sales office Leased 10,650
Humacao, Puerto Rico Office and manufacturing facility Owned 410,000
The Humacao, Puerto Rico plant is currently being leased to Roche under a two
year lease which expires in August 1999. After the expiration of the lease, the
Company intends to use the Humacao plant to produce pharmaceutical products.
In the opinion of the Company's management, all facilities occupied by the
Company are adequate for present requirements, and the Company's current
equipment is considered to be in good condition and suitable for the operations
involved.
Page 17
ITEM 3. LEGAL PROCEEDINGS
See Note 12 of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company began trading its common stock on the New York Stock Exchange
beginning November 14, 1994, the first trading day after the Merger was
completed and New ICN common stock was approved for listing on the New York
Stock Exchange (Symbol: ICN). Prior to the Merger, SPI common stock was first
listed on NASDAQ (National Association of Securities Dealers Automated Quotation
System) on October 7, 1983 and was subsequently listed on the American Stock
Exchange on July 22, 1988.
The following table sets forth the high and low sales prices of the Company's
common stock on the New York Stock Exchange. The market prices set forth below
have been retroactively adjusted for the effect of the three-for-two stock split
(in the form of a dividend) which became effective on March 16, 1998.
HIGH LOW
-------- ---------
1996
First Quarter $ 16 3/8 $ 11 3/8
Second Quarter 18 5/8 14 1/8
Third Quarter 16 5/8 13 3/8
Fourth Quarter 13 7/8 11 3/4
1997
First Quarter 18 13
Second Quarter 19 3/8 13 5/8
Third Quarter 35 1/4 17 5/8
Fourth Quarter 37 3/8 26 3/4
As of March 20, 1998, there were 9,339 holders of record of the Company's common
stock.
Beginning with the first quarter dividend of 1996, the Board of Directors
elected to discontinue the issuance of stock distributions while increasing the
quarterly per share cash dividend to 5.1 cents per quarter from 4.7 cents per
quarter in 1995. In March 1997, the Company again increased its quarterly per
share cash dividend to 5.3 cents per share. In January 1998, the Company
increased its quarterly per share cash dividend to 6 cents per share from 5.3
cents per share.
The Board of Directors will continue to review the Company's dividend policy.
The amount and timing of any future dividends will depend upon the financial
condition and profitability of the Company, the need to retain earnings for use
in the development of the Company's business, contractual restrictions and other
factors.
Page 19
ITEM 6. SELECTED FINANCIAL DATA
ICN Pharmaceuticals, Inc. and Subsidiaries (the "Company") was formed in
November 1994, as a result of the merger of ICN Pharmaceuticals, Inc. ("ICN"),
SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek") and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies") in
a transaction accounted for using the purchase method of accounting (the
"Merger"). For accounting purposes, SPI was treated as the acquiring company in
the Merger and, as a result, the Company's historical financial data includes
only the historical financial data of SPI for periods prior to the Merger; the
results of ICN, Viratek and Biomedicals are included in the consolidated
financial statements of the Company since the effective date of the Merger. The
following table sets forth certain consolidated financial data for the five
years ended December 31, 1997. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements included elsewhere in this
Form 10-K. (Amounts in thousands, except per share information.)
DECEMBER 31,
1997 1996 1995 1994 1993
-------------------------------------------------------------
Statement of
OPERATIONS DATA:
Net sales(1) $752,202 $614,080 $507,905 $366,851 $403,957
Cost of sales 351,978 291,807 206,049 182,946 211,923
-------------------------------------------------------------
Gross profit 400,224 322,273 301,856 183,905 192,034
Selling, general and
administrative expenses 256,234 192,441 191,459 112,919 134,895
Royalties to affiliates, net -- -- -- 7,468 6,121
Research and development costs 18,692 15,719 17,231 7,690 11,516
Purchased research
and development(2) -- -- -- 221,000 --
-------------------------------------------------------------
Income (loss) from operations 125,298 114,113 93,166 (165,172) 39,502
Translation and exchange (gains)
losses, net 12,790 2,282 (9,484) 191 (3,282)
Interest income (15,912) (3,001) (6,488) (4,728) (8,033)
Interest expense 22,849 15,780 22,889 9,317 23,750
-------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes and
minority interest 105,571 99,052 86,249 (169,952) 27,067
Provision (benefit) for
income taxes (27,736) (6,815) 2,997 10,360 5,368
Minority interest 19,383 18,939 15,915 3,269 189
-------------------------------------------------------------
Net income (loss) $ 113,924 $ 86,928 $ 67,337 $(183,581) $ 21,510
=============================================================
PER SHARE INFORMATION: (3) (4)
Basic earnings (loss) per common share $ 1.93 $ 1.75 $ 1.51 $ (5.29) $ .66
=============================================================
Shares used in per share computation 55,965 48,341 44,562 34,707 32,367
=============================================================
Cash dividends paid $ .21 $ .15 $ .19 $ .17 $ .16
=============================================================
BALANCE SHEET DATA:
Working capital $ 585,606 $306,764 $190,802 $ 137,802 $127,259
Total assets 1,491,745 778,651 518,298 441,473 302,017
Long-term debt 315,088 176,489 154,193 195,181 16,980
Stockholders' equity 796,328 315,350 162,172 88,908 155,879
See accompanying notes to Selected Financial Data.
Page 20
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
NOTES TO SELECTED FINANCIAL DATA
(1) ICN Yugoslavia's sales have been adversely affected since the imposition in
May 1992 of United Nations sanctions on Yugoslavia, suspended in December
1995.
(2) The Merger resulted in $221,000,000 or $6.37 per basic share being ascribed
to purchased research and development for which no alternative use existed,
which was written-off immediately. This write-off was a one-time, non-cash
charge and is not related to the Company's ongoing research and development
activities for Virazole(R). Net income, excluding this one-time, non-cash
write-off, was $37,419,000 or $1.08 per basic share in 1994.
(3) Earnings per share amounts for all periods prior to 1997 have been restated
to comply with the requirements of Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE (see Note 7 of Notes to Consolidated
Financial Statements).
(4) In March 1998, the Company completed a three-for-two stock split (in the
form of a dividend). During 1995, 1994 and 1993 the Company issued stock
dividends and distributions which totaled 5.6%, 4.8%, and 6%, respectively.
Common share and per common share amounts for all periods presented in the
accompanying Selected Financial Data have been restated to reflect the
stock split and each of the stock dividends and distributions.
Page 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For financial reporting purposes, the Company's operations are divided into two
business segments, the Pharmaceutical segment and the Biomedical segment.
Certain financial information for the two business segments is set forth below.
This discussion should be read in conjunction with the consolidated financial
statements of the Company included elsewhere in this document. For additional
financial information by business segment, see Note 13 of Notes to Consolidated
Financial Statements.
1997 1996 1995
---- ---- ----
NET SALES (IN THOUSANDS)
Pharmaceutical......... $ 681,287 $ 549,753 $ 446,566
Biomedical............. 70,915 64,327 61,339
------------ ------------ ------------
Total Company.......... $ 752,202 $ 614,080 $ 507,905
============ ============ ============
NET SALES: Eastern Europe was the major contributor to sales growth in 1997.
Pharmaceutical net sales in Eastern Europe for the year ended December 31, 1997
were $433,268,000 compared to $355,415,000 for the same period in 1996. The
increase of $77,853,000 or 22% is primarily the result of the Company's
continued expansion program that includes three acquisitions in 1997, and of the
inclusion in 1997 of a full year's results of operations for the Company's 1996
acquisitions. In Russia, the Company acquired AO Tomsk and Marbiopharm in the
fourth quarter of 1997, which added $17,882,000 of sales. The Company's 1996
Russian acquisitions, Polypharm and Leksredstva, generated additional sales in
1997 of $35,374,000, of which approximately $15,923,000 was due to price and
volume increases and the remainder was the result of the inclusion of a full
year's sales in 1997. Sales at ICN Oktyabr in Russia have increased $14,644,000
in 1997 compared with 1996 due to price and volume increases. The Company also
acquired Polfa Rzeszow S.A., a pharmaceutical company in Rzeszow, Poland, in the
fourth quarter of 1997, which generated sales of $13,070,000. In Hungary, sales
at Alkaloida increased by $38,519,000, principally due to the inclusion of a
full year's operations in 1997. These increases were partially offset by ICN
Yugoslavia, where net sales were $225,530,000 in 1997, compared with
$267,166,000 in 1996. The Company has limited its sales to the Yugoslavian
government to those amounts which could be paid in cash or in notes receivable
fixed in dollar amounts. Sales at ICN Yugoslavia have also been affected by
limitations on governmental health care expenditures. See expanded discussion
below regarding ICN Yugoslavia.
Pharmaceutical net sales in Eastern Europe for the year ended December 31, 1996
were $355,415,000 compared to $254,961,000 for the same period in 1995. The
increase of $100,454,000 or 39% reflects the Company's expansion program that
included three acquisitions in 1996. In Russia, the Company acquired Leksredstva
in the second quarter of 1996, which added $21,068,000 of sales, and in the
third quarter of 1996 it acquired Polypharm, which added $7,397,000 of sales. In
Hungary, the Company acquired Alkaloida in the fourth quarter of 1996, which
added $21,461,000 of sales. Sales at ICN Oktyabr in Russia increased $18,023,000
in 1996 compared to 1995 due to price and volume increases and the inclusion of
a full twelve months of activity in 1996 compared to three quarters of ICN
Oktyabr sales in 1995. During 1996, ICN Yugoslavia began recovering from the
effects of a November 1995 devaluation of the Yugoslavian dinar. Net sales at
ICN Yugoslavia amounted to $267,166,000 in 1996, an increase of $32,505,000 or
14% over the previous year, primarily due to higher prices partially offset by
currency fluctuations resulting from the 1995 devaluation. With the lifting of
United Nations sanctions, ICN Yugoslavia was able to begin exporting in 1996,
which contributed $20,227,000 of sales.
Page 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Pharmaceutical net sales in North America for the year ended December 31, 1997
were $142,239,000 compared to $106,442,000 for the same period in 1996. The
increase of $35,797,000 or 34% is primarily the result of the Company's purchase
of the rights to eleven products from F. Hoffmann-La Roche Ltd. ("Roche".)
Effective July 1, 1997, the Company acquired the worldwide rights (except India)
to seven products: Alloferin, Ancotil, Glutril, Limbitrol, Mestinon, Prostigmin
and Protamin and the worldwide rights (outside of the United States and India)
to Efudex and Librium. Effective October 1, 1997, the Company obtained the
worldwide rights to Levo-Dromoran and Tensilon and the United States rights to
Efudex and Librium. Sales of the acquired products totaled $37,895,000 for 1997.
The increase in North American net sales related to the acquired product rights
was partially offset by a $10,254,000 decrease in unit sales of Virazole(R).
Virazole(R) is used in aerosol form to treat infants hospitalized with severe
respiratory infection caused by respiratory syncytial virus ("RSV") and is the
only antiviral therapeutic for this infection. RSV is a seasonal illness which
occurs primarily in late fall through early spring. Sales of Virazole(R) for
1997 were adversely impacted by increased wholesale inventory levels that
developed in 1996, along with continued health care industry trends toward cost
containment.
Pharmaceutical net sales in North America for the year ended December 31, 1996
were $106,442,000 compared to $109,505,000 for the same period in 1995. The
decrease of $3,063,000 or 3% reflects a decrease in unit sales of Virazole(R) in
the amount of $22,393,000, partially offset by an increase in unit sales
primarily in the dermatological, medicinal, and myasthenia gravis product lines.
Early in the 1995/1996 season, the number of hospital admissions and positive
cultures for RSV suggested a heavy incidence of infection. However, the severity
of infection in this season was not as high as the prior seasons nor as heavy as
such earlier evidence indicated, resulting in a lower hospital demand for
Virazole(R) and consequently an increased level of inventory at the wholesale
level. The increased wholesale inventory levels, combined with trends in the
industry toward managed health care during the first part of the 1996/1997
season, adversely impacted total 1996 Virazole(R) sales despite additional sales
promotional efforts which included more favorable credit terms and sales
discounts.
Sales of Virazole(R) for 1997 and 1996 may have been (and may continue to be)
affected by a January 1996 change in the American Academy of Pediatrics
guidelines for the use of Virazole(R) in RSV from "should be used" to "may be
considered". Future sales may also be impacted by the severity of the next RSV
season, the increased level of inventory still remaining at the wholesale level,
and by a recently approved product designed to prevent RSV. Due to the fact that
RSV is a seasonal disease, Virazole(R) sales from year to year are subject to
the incidence and severity of the disease which cannot be predicted with
certainty.
Pharmaceutical net sales in Western Europe for the year ended December 31, 1997
were $32,022,000 compared with $35,826,000 in 1996. The decrease of $3,804,000
or 11% primarily reflects unfavorable currency exchange fluctuations, partially
offset by an increase in Virazole(R) sales.
Pharmaceutical net sales in Western Europe for the year ended December 31, 1996
were $35,826,000 compared to $37,226,000 in 1995. The decrease of $1,400,000 or
4% primarily reflects a decline in vision care sales in Holland and a decline in
other pharmaceutical sales, partially offset by an increase in Virazole(R)
sales.
Pharmaceutical net sales in Latin America for the year ended December 31, 1997
were $59,371,000 compared with $47,359,000 for the same period in 1996, an
increase of $12,012,000 or 25%. Such increases were primarily due to price
increases and volume increases, partially offset by unfavorable currency
exchange fluctuations.
Pharmaceutical net sales in Latin America for the year ended December 31, 1996
were $47,359,000 compared to $41,984,000 for the same period in 1995, an
increase of $5,375,000 or 13%. Such increases were primarily due to price
increases, partially offset by a small decrease in unit sales and currency
exchange fluctuations. Net sales for 1995 were negatively impacted by inflation
and the devaluation of the Mexican peso.
Biomedical products net sales for 1997 were $70,915,000 compared with
$64,327,000 in 1996, an increase of $6,588,000 or 10%. This increase was
primarily due to the acquisition of the former Siemens Dosimetry Service in July
1996, partially offset by a $1,261,000 decrease resulting from the sale of the
Instrument business in March 1996.
Page 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The Biomedical business had net sales for 1996 of $64,327,000 compared to
$61,339,000 in 1995, an increase of $2,988,000 or 5%. This increase was
primarily due to the effect of the additional sales of diagnostic products
acquired from Becton-Dickinson in May 1995 of $1,837,000 and additional
Dosimetry sales resulting from the acquisition of the former Siemens Dosimetry
Service in July 1996 of $446,000, which were partially offset by a decrease in
Instrument sales of approximately $4,423,000 resulting from the sale of the
Instrument business in March 1996.
GROSS PROFIT: Gross profit as a percentage of sales was 53% for 1997 compared to
52% for 1996. ICN Yugoslavia achieved a gross profit margin of 48% in 1997
compared to 41% for 1996, when gross profit margins were adversely affected by
the November 1995 devaluation of the Yugoslavian dinar. The devaluation
suppressed gross margins in 1996 due to higher exchange rates and a lack of
sufficient price increases while the cost of sales for inventory manufactured
prior to the devaluation is expensed at a higher historical exchange rate. The
Company also achieved improved gross profit margins in each of the businesses
acquired during 1996, Leksredstva, Polypharm and Alkaloida, where in 1997
margins improved to 40%, 37% and 32%, respectively, compared with 36%, 36% and
22% for 1996. The improved margins on the previously acquired businesses were
partially offset by lower gross profit margins on the Company's 1997 Russian
acquisitions and at ICN Oktyabr where gross profit was affected by competitive
pricing pressures. Gross profit margins for the Company's North American
operations were 79% for 1997 compared with 85% in 1996. Lower Virazole sales,
which carry higher gross profit margins, and sales of the products acquired from
Roche, which generally yield a relatively lower gross profit, contributed to the
decrease.
Gross profit as a percentage of sales was 52% for 1996 compared to 59% for 1995.
The decrease in gross profit margins was primarily due to a decrease in gross
margins at ICN Yugoslavia reflecting the impact of the November 1995 devaluation
which was partially offset by an 83% price increase in December 1995 and a 30%
price increase in April 1996. Typically, sales made subsequent to a devaluation
are lower due to higher exchange rates and a lack of sufficient price increases
while the cost of sales for inventory manufactured prior to the devaluation is
expensed at a higher historical exchange rate. Margins will begin to improve
after a devaluation if price increases are obtained and when older, higher
priced inventory is replaced with inventory manufactured after the devaluation.
ICN Yugoslavia's gross margins for the first, second, third and fourth quarters
of 1996 were 29%, 37%, 43% and 53%, respectively. Additionally, the gross profit
margins of the companies acquired in 1996, Leksredstva (36%), Polypharm (36%)
and Alkaloida (22%), also contributed to the relative decline. The gross profit
margin in the Company's operating units outside of Eastern Europe remained
consistent with 1995 at 69%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $256,234,000 or 34% of sales in 1997 compared to
$192,441,000 or 31% in 1996. The increase is primarily due to additional
expenses of the operations acquired in 1997 and 1996 totaling $25,692,000,
additional costs of approximately $5,892,000 resulting from the establishment of
the Company's Eastern European headquarters in Moscow, and additional
amortization of purchased intangibles of approximately $3,762,000 resulting from
the acquisition of certain product rights from Roche. The 1997 amount also
includes a one-time $12,000,000 charge related to the settlement of the 1995
class action suit related to the Company's hepatitis C new drug application with
the Food and Drug Administration.
Under the Exclusive License and Supply Agreement with a subsidiary of
Schering-Plough Corporation ("Schering-Plough") to develop Virazole(R) for the
treatment of hepatitis C, the Company retains the right to co-market in the
countries of the European Economic Community. The Company expects to incur
significant pre-launch marketing expenses over the next two years. These efforts
may cause the ratio of selling, general and administrative expenses to sales to
increase during this period of time resulting from additional expenses without
immediate incremental revenues.
Selling, general and administrative expenses were $192,441,000 or 31% of sales
in 1996 compared to $191,459,000 or 38% in 1995. For 1996, these costs reflect
decreasing expenses primarily at ICN Yugoslavia principally due to differences
in exchange rates of the Yugoslavian dinar in 1996 compared to 1995 and lower
level of expenditures. Offsetting such decreases were increases in selling,
general and administrative expenses in North America and Western Europe due to
expanded marketing efforts in these regions and a charge of $3,500,000 related
to the settlement of a commercial dispute and a penalty imposed by the Canadian
Patent Price Review Board. Additionally, the new Eastern European acquisitions
contributed $4,504,000 of expenses in 1996.
Page 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
RESEARCH AND DEVELOPMENT COSTS: Research and development costs increased
$2,973,000 in 1997 compared to 1996. The increase is primarily the result of the
acquisition of personnel and modern research facilities at Alkaloida, and
increased investment in research and development efforts at ICN Yugoslavia.
Research and development costs decreased $1,512,000 in 1996 compared to 1995.
Such decrease occurred primarily at ICN Yugoslavia and was principally due to
differences in exchange rates of the Yugoslavian dinar.
TRANSLATION AND EXCHANGE GAINS AND LOSSES, NET: Foreign exchange losses, net, in
1997 were $12,790,000 compared to foreign exchange losses, net, of $2,282,000 in
1996. In 1997, ICN Yugoslavia had translation losses of $12,602,000, related to
changes in local currency and its impact on their net monetary asset position.
In addition, Alkaloida recorded transaction losses of approximately $2,421,000
on long-term obligations denominated in currencies other than its functional
currency. Partially offsetting these losses were gains of $1,121,000 related to
the Company's foreign-denominated debt.
Foreign exchange losses, net, in 1996 were $2,282,000 compared to foreign
exchange gains, net, of $9,484,000 in 1995. For the year ended December 31,
1996, ICN Yugoslavia's and ICN Oktyabr's translation losses were $4,290,000 and
$1,033,000, respectively, which related to changes in local currency and its
impact on their net monetary asset position. Partially offsetting these losses
were translation gains of $3,276,000 related to the Company's foreign
denominated debt.
INTEREST INCOME AND EXPENSE: The increase in interest expense in 1997 compared
to 1996 of $7,069,000 is primarily due to interest expense on the Company's
$275,000,000 9-1/4% Senior Notes due 2005, issued in August 1997 and to interest
expense on debt acquired in connection with the Company's 1996 and 1997
acquisitions. This additional interest expense was partially offset by reduced
interest expense as a result of the conversion of $114,980,000 principal amount
of the Company's 8.5% Convertible Subordinated Notes due 1999 and all of the
outstanding 5-5/8% Swiss Franc Exchangeable Certificates, as well as increased
interest capitalization of interest costs related to plant construction at ICN
Yugoslavia. During 1997, the Company capitalized interest of $5,419,000 compared
with $3,770,000 in 1996. Interest income increased to $15,912,000 in 1997 from
$3,001,000 in 1996 due to the investment of a significant portion of the
proceeds of the $275,000,000 Senior Notes.
The decrease in interest expense in 1996 compared to 1995 of $7,109,000 is
primarily due to the effect of the retirement of $34,160,000 of the Company's 12
7/8% Sinking Fund Debentures during 1995 and the capitalization of interest cost
related to plant construction at ICN Yugoslavia. During 1996, the Company
capitalized $3,770,000 compared to $1,978,000 in 1995.
INCOME TAXES: The Company's effective income tax rate (benefit) was (26%), (7%),
and 3% for 1997, 1996, and 1995, respectively. The Company operates in many
regions where the tax rate is low or it benefits from a tax holiday. In 1997,
the provision for income taxes reflects a deferred tax benefit of $35,376,000
resulting from the recognition of certain deferred tax assets and the reduction
of the related valuation allowance. During 1997 the Company acquired certain
products from Roche and in early 1998 it acquired certain products from
SmithKline Beecham plc. These new products are expected to generate future
taxable income that provided a basis for reducing the Company's valuation
allowance for its deferred tax assets in 1997. Ultimate realization of the
deferred tax assets is dependent upon the Company generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized. In 1997, the benefits from a tax holiday
expired in Yugoslavia; however, changes in Yugoslavian tax law in 1997 created
benefits that resulted in an overall 2% effective tax rate. The benefits from
the 1997 change in tax law will probably continue into 1998. In Russia, the
Company continued to benefit from special tax relief that benefits
pharmaceutical companies resulting in an effective tax rate of 8%. In Hungary,
the Company continued to benefit from a tax holiday expiring December 31, 1998.
In 1996, the Company benefited from tax credits arising from the acquisition of
ICN Yugoslavia and in Russia the tax rate was low due to special tax relief
afforded to pharmaceutical companies. In 1996, the Company recorded a tax
benefit of $6,815,000 primarily resulting from the favorable outcome of tax
audits and the tax benefit from the Company's current year tax loss in the U.S.
which was carried back to prior tax years resulting in the recovery of taxes
previously paid.
Page 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The trend of low tax rates may not continue in the future. In 1997, the Company
recognized substantially all of the benefit of its future U.S. net operating
loss carryforwards. The continuing tax benefits in Yugoslavia and Russia are
subject to potential changes in tax law that may be enacted in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 1997 was $9,315,000 compared with cash
used by operating activities of $25,548,000 in 1996. Operating cash flows for
1997 were affected by working capital increases (after the effect of business
acquisitions and currency translation adjustments) totaling approximately
$129,219,000. The working capital increases are principally related to increases
in accounts and notes receivable, especially at ICN Yugoslavia. The collection
period of receivables for ICN Yugoslavia continues to be affected by the lack of
availability of dinars in Yugoslavia. During 1997, approximately $50,000,000 of
accounts receivable from the Yugoslavian government were converted from
dinar-denominated, unsecured accounts receivable to notes receivable payable in
dinars, but fixed in dollar amounts. Additional sales to the Yugoslavian
government and government-sponsored entities during 1997 were made under similar
note receivable terms in order to reduce the Company's exposure to losses
resulting from exchange rate fluctuations. The outstanding balance of the notes
receivable from the Yugoslavian government is approximately $145,431,000 at
December 31, 1997. See expanded discussion below regarding liquidity at ICN
Yugoslavia. The Company's inventories increased by approximately $6,227,000,
primarily to support increased sales volume in the Company's Russian operations.
The net deferred income tax asset increased by $35,376,000 due to increases in
the expected tax benefits to be derived from the future utilization of the
Company's net operating losses. These amounts were partially offset by a
$30,665,000 increase in trade payables and accrued liabilities, and by other
working capital changes.
Cash used in investing activities increased to $100,096,000 in 1997 compared
with $41,962,000 in 1996. Capital expenditures totaled $100,397,000, including
cash payments of approximately $49,000,000 for the Humacao, Puerto Rico
manufacturing plant acquired from Roche, approximately $7,250,000 for the
Company's Eastern European headquarters building in Moscow, Russia,
approximately $12,740,000 of capital expenditures at ICN Yugoslavia, and
approximately $11,343,000 at the Company's Russian subsidiaries. The ICN
Yugoslavia expenditures primarily represent the continuation of the Company's
ongoing plant expansion efforts. The estimated cost of completing this project
is approximately $50,000,000, with a planned completion date in 2000. From the
beginning of the project in 1994, ICN Yugoslavia has expended $62,358,000. ICN
Yugoslavia intends to fund this program through existing funds, funds generated
from local operations and locally funded debt. Cash used in investing activities
also includes payments of $44,829,000 for the acquisition of four businesses--AO
Tomsk and Marbiopharm in Russia, Polfa Rzeszow S.A. in Poland, and Wuxi ICN
Pharmaceuticals in China. These expenditures were partially offset by proceeds
from the sale of marketable securities of $40,826,000 and other sources. In
1996, net cash used in investing activities of $41,962,000 principally consisted
of payments for acquisitions (primarily in Eastern Europe and the United States)
totaling $51,222,000 and capital expenditures of $26,216,000, which were
partially offset by proceeds from the sale of marketable securities of
$27,663,000 and other sources.
Net cash provided by financing activities was $262,675,000 in 1997 compared with
$82,680,000 in 1996. In 1997 funds were principally provided by long-term
borrowings totaling $284,051,000, including the sale of $275,000,000 principal
amount of the Company's 9-1/4% Senior Notes due 2005 in August 1997, and
proceeds from the exercise of stock options of $20,498,000. These amounts were
partially offset by principal payments on long-term debt of $17,555,000, a net
reduction in notes payable of $14,395,000, and cash dividends of $11,631,000.
Included in 1996 are $32,842,000 and $47,392,000 of net proceeds from the
issuance of common stock and preferred stock, respectively, primarily used to
fund acquisitions in the United States and Eastern Europe and working capital,
and $10,167,000 of proceeds from the exercise of stock options, partially offset
by payment of short-term and long-term debt of $42,288,000 and $6,999,000 of
dividends paid.
Page 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
During 1997, $114,919,000 of the Company's 8-1/2% Convertible Subordinated Notes
were converted into approximately 7,793,939 shares of the Company's common
stock, and the remainder was redeemed for cash. In addition, Swiss francs
66,510,000 principal amount of the Company's 5-5/8% Swiss Franc Exchangeable
Certificates were converted into 2,246,868 shares of the Company's common stock,
and the remainder was redeemed for cash. The conversion and redemption of these
obligations reduced the Company's long-term debt by an aggregate of
$123,817,000. In addition, marketable securities with a value of approximately
$38,779,000, previously held in trust for the payment of debt service on the
5-5/8% Swiss Franc Exchangeable Certificates, became available to the Company
and were sold for cash.
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates"). At
December 31, 1997 the SFr 37,870,000 outstanding principal amount of the New
Certificates are exchangeable for an aggregate of approximately 806,000 shares
of the Company's common stock. Based upon the current market price of the
Company's common stock and the exchange rate of the New Certificates, the
Company expects the holders of the New Certificates will elect to exercise their
right to exchange the New Certificates for shares of the Company's common stock.
If the holders of the New Certificates do not exchange the certificates for
common stock, the Company will redeem the New Certificates using existing cash
and cash equivalents. Upon completion of such redemption, marketable securities
presently held in trust for the payment of the New Certificates, having a market
value of approximately $23,300,000, will become available to the Company.
DEMANDS ON LIQUIDITY: The Company's principal sources of liquidity are its
existing cash and cash equivalents and cash provided by operations. Cash and
cash equivalents at December 31, 1997 are $209,896,000 compared with $39,366,000
at December 31, 1996. Working capital increased to $585,606,000 compared with
$306,764,000 at the end of 1996, primarily due to 1997 net income and the net
increase in long-term borrowings. The Company currently has available various
lines of credit with financial institutions which provide for aggregate
borrowings of up to $46,027,000; outstanding borrowings under these lines of
credit totaled $10,598,000 at December 31, 1997. Certain of the lines of credit
and long-term borrowings include covenants restricting the payment of dividends,
the issuance of new indebtedness, and the repurchase of the Company's common
stock and requiring the maintenance of certain financial ratios. Management
believes that funds generated from operations will be sufficient to meet its
normal operating requirements and to fund capital expenditures estimated at
$116,300,000 for the coming year. Also, if the historic rate of growth in
Eastern Europe continues, these operations will require increasing levels of
working capital and funds for additional facilities or upgrading of existing
facilities. The Company also has several preliminary acquisition prospects that
may require significant funds in 1998. Management believes that the Company's
existing cash and cash equivalents along with funds generated from operations
will be sufficient to meet these liquidity requirements and to fund anticipated
acquisitions.
PRODUCT LIABILITY: 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. See Note 12
of Notes to Consolidated Financial Statements.
INFLATION AND CHANGING PRICES: Foreign operations are subject to certain risks
inherent in conducting business abroad, including price and currency exchange
controls, fluctuations in the relative values of currencies, political
instability and restrictive governmental actions. Changes in the relative values
of currencies 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.
During the last three years, the cumulative inflation rate in Mexico has
exceeded 100%. In 1997, the Company began translating the financial statements
of its operations in Mexico using accounting methods that apply to
hyperinflationary economies, resulting in a foreign exchange loss of
approximately $400,000. At December 31, 1997, Mexico had a net monetary asset
position of approximately $6,719,000, which would be subject to loss if a
devaluation were to occur.
page 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The Company and its subsidiaries are also subject to foreign currency risk on
its foreign-denominated debt of $26,006,000 at December 31, 1997, which is
primarily denominated in Swiss francs and German Marks and, at Alkaloida, in
U.S. dollars, and to devaluation losses on net monetary asset positions in
Yugoslavia and Russia. See "ICN Yugoslavia" below and Note 14 of Notes to
Consolidated Financial Statements for further discussion. At December 31, 1997,
the net monetary asset position of the Company's Russian operations was
$28,745,000, which would be subject to a loss if a devaluation were to occur.
The effects of inflation are experienced by the Company through increases in the
costs of labor, services and raw materials. The Company is subject to price
control restrictions on its pharmaceutical products in the majority of countries
in which it operates. While the Company attempts to raise selling prices in
anticipation of inflation, the Company has been affected by the lag in allowed
price increases in Yugoslavia and Mexico, which has created lower sales in U.S.
dollars and reductions in gross profit. Future sales and gross profit could be
materially affected if the Company is unable to obtain price increases
commensurate with the levels of inflation. Pharmaceutical prices in neither the
United States nor the Russian pharmaceutical markets are heavily regulated by
the government.
THE YEAR 2000 ISSUE: The Company is pursuing an action plan to be Year 2000
compliant in all locations by the middle of 1999. The Company does not have
heavy reliance on custom, internally generated software; the Company principally
uses third party software that is in most cases already Year 2000 compliant. The
Company has completed an assessment of its worldwide computer systems and has
determined that it will be required to perform some modification or replacement
of software so that all systems will properly utilize dates beyond December 31,
1999.
The cost of making the Company's information systems and software Year 2000
compliant is not expected to be material to the financial results of the
Company. The Company does not consider itself particularly vulnerable to third
parties' failure to remediate those third parties' own Year 2000 issues and
continues to assess the issue.
ICN YUGOSLAVIA
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
current economic trend in Yugoslavia is toward unfavorable economic conditions
that include continuing liquidity problems, inflation and monetary exposures,
potential currency devaluation, government spending limitations, credit risk,
political instability, sanctions and price controls. The future of the economic
and political environment of Yugoslavia is uncertain and could deteriorate to
the point that a material adverse impact on the Company's financial position and
results of operations could occur.
Yugoslavia is subject to political instability. The elections that took place in
1997 have not resulted in a change of political leadership that would provide
for a foundation of significant economic reforms. The Federal Republic of
Yugoslavia is comprised of two states, Serbia and the much smaller state of
Montenegro. Within Yugoslavia there exist political dissension and unrest. The
state of Montenegro has been active in seeking greater autonomy from Serbia.
Additionally, recent social unrest in the Serbian province of Kosovo could lead
to increased instability in the Balkans. United States diplomats have warned
that the Serbian actions and policies in Kosovo could lead to the reinstatement
of economic sanctions on Yugoslavia.
Page 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Inflationary trends in Yugoslavia continue to worsen, resulting in increased
risk of a devaluation of the Yugoslavian Dinar in 1998. During 1997, the Company
has reduced its net monetary asset exposure by $74,000,000 from its net monetary
asset position of $134,000,000 at the beginning of 1997. The reduction in net
monetary asset exposure was achieved through the conversion of dinar-denominated
accounts receivable into notes receivable payable in dinars, but fixed in dollar
amounts. At December 31, 1997, ICN Yugoslavia holds approximately $145,431,000
notes receivable from the Yugoslavian government. ICN Yugoslavia's net monetary
asset exposure of approximately $60,000,000 at December 31, 1997 would be
subject to foreign exchange loss if a devaluation of the dinar were to occur.
Since the last devaluation on November 24, 1995, the cumulative level of
inflation has been estimated at approximately 70%. If a devaluation were to
occur based on this level of inflation, and assuming the Company's net monetary
exposure of $60,000,000 at December 31, 1997, the Company could incur a foreign
exchange loss of approximately $24,000,000. The risk of devaluation increases as
time passes and inflation continues. However, the Company is unable to predict
either the exact magnitude or the timing of any future devaluation.
For additional information and expanded discussion regarding the impact of ICN
Yugoslavia, see Note 14 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and becomes effective for the Company for the year ending
December 31, 1998. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on
available-for-sale securities that are currently being presented by the Company
as a component of stockholders' equity (deficit). SFAS No. 130 does not affect
current principles of measurement of revenues and expenses and accordingly the
adoption of SFAS No. 130 will not have any effect on the Company's results of
operations or financial position.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS Enterprise. The new standard becomes effective for the
Company for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company does not expect this pronouncement to materially
change the Company's current reporting and disclosures.
Page 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995.
This Annual Report on Form 10-K 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 Annual
Report on Form 10-K 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 Annual Report on Form 10-K and
also include, without limitation, the Company's dependence on foreign operations
(which are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and exchange control,
limitations on foreign participation in local enterprises, health-care
regulations and other restrictive governmental conditions); the risk of
operations in Yugoslavia, Eastern Europe, Russia and China in light of the
unstable economies, political and regulatory conditions in such regions; the
Company's ability to successfully develop and commercialize future products; the
limited protection afforded by the patents relating to Virazole(R), and possibly
on future drugs, techniques, processes or products the Company may develop or
acquire; the potential impact of the Year 2000 issue; the Company's ability to
continue its expansion plan and to integrate successfully any acquired
companies; the results of lawsuits pending against the Company; the Company's
dependence on its management, including Milan Panic, its Chairman and Chief
Executive Officer; the Company's potential product liability exposure and lack
of any insurance coverage thereof; government regulation of the pharmaceutical
industry (including review and approval for new pharmaceutical products by the
FDA in the United States and comparable agencies in other countries) and
competition.
Page 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended December
31, 1997 and 1996 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
1997(1) QUARTER QUARTER QUARTER QUARTER
- ------- ------- ------- ------- -------
Net sales $158,968 $160,229 $177,397 $255,608
Gross profit 84,164 84,272 100,088 131,700
Net income 22,312 21,268 34,557 35,787
Basic earnings per common share(2) $ .37 $ .38 $ .61 $ .55
Diluted earnings per common share(2) $ .32 $ .34 $ .50 $ .49
FIRST SECOND THIRD FOURTH
1996(1) QUARTER QUARTER QUARTER QUARTER
- ------- ------- ------- ------- -------
Net sales $138,162 $143,746 $157,917 $174,255
Gross profit 70,134 71,439 87,402 93,298
Net income 22,003 14,893 20,835 29,197
Basic earnings per common share(2) $ .47 $ .32 $ .42 $ .54
Diluted earnings per common share(2) $ .42 $ .27 $ .38 $ .46
(1) The increased sales trend is substantially due to the Company's expansion
program in 1997 and 1996.
(2) Earnings per share for 1996 and the first three quarters of 1997 have been
restated to comply with Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE. Earnings per share amounts for all periods have
also been restated to reflect the Company's three-for-two stock split (in
the form of a dividend) which became effective March 16, 1998.
Page 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 1997
Report of independent accountants ............................................... 32
Financial statements:
Consolidated balance sheets at December 31, 1997 and 1996..................... 33
For the years ended December 31, 1997, 1996 and 1995:
Consolidated statements of income............................................. 34
Consolidated statements of stockholders' equity............................... 35
Consolidated statements of cash flows......................................... 36
Notes to consolidated financial statements.................................... 37
Schedule supporting the consolidated financial statements for the years ended
December 31, 1997, 1996 and 1995:
II.-- Valuation and qualifying accounts....................................... 62
The other schedules have not been submitted because they are not
applicable.
Page 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ICN Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of ICN Pharmaceuticals, Inc. (a Delaware corporation) and
Subsidiaries listed in the index on page 31 of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 14 to the financial statements, as of December 31, 1997,
the Company has net monetary assets of $60,000,000 at ICN Yugoslavia which would
be subject to foreign exchange loss if a devaluation of the Yugoslavian dinar
were to occur.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ICN Pharmaceuticals, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 5, 1998
Page 33
ICN PHARMACEUTICALS, INC.
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
1997 1996
---- ----
Current Assets:
Cash and cash equivalents $ 209,896 $ 39,366
Restricted cash 549 552
Receivables, net 260,495 258,531
Notes receivable 145,431 --
Inventories, net 146,988 120,973
Prepaid expenses and other current assets 23,392 24,979
------------ ----------
Total current assets 786,751 444,401
Property, plant and equipment, net 360,713 234,209
Deferred income taxes, net 69,710 34,334
Other assets 47,978 32,230
Goodwill and intangibles, net 226,593 33,477
------------ ----------
$ 1,491,745 $ 778,651
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 96,437 $ 62,049
Accrued liabilities 67,883 55,383
Notes payable 13,759 13,231
Current portion of long-term debt 19,359 5,961
Income taxes payable 3,707 1,013
------------ ----------
Total current liabilities 201,145 137,637
Long-term debt, less current portion:
Convertible into common stock 220 130,941
Other long-term debt 314,868 45,548
Deferred license and royalty income 12,449 13,850
Other liabilities 24,658 15,622
Minority interest 142,077 96,583
Common stock subject to Put Agreement -- 23,120
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized;
2 and 50 shares of Series B issued and outstanding at
December 31, 1997 and 1996, respectively
($2,249 liquidation preference at December 31, 1997) 1 1
Common stock, $.01 par value; 100,000 shares authorized;
71,432 and 50,134 shares issued and outstanding
at December 31, 1997 and 1996, respectively
(including shares subject to Put Agreement in 1996) 714 485
Additional capital 766,868 368,026
Retained earnings (deficit) 70,129 (25,915)
Foreign currency translation adjustment (41,384) (27,247)
------------- ----------
Total stockholders' equity 796,328 315,350
------------ ----------
$ 1,491,745 $ 778,651
============ ==========
The accompanying notes are an integral part of these consolidated
statements.
Page 34
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
---- ---- ----
Net sales $ 752,202 $ 614,080 $ 507,905
Cost of sales 351,978 291,807 206,049
---------- ---------- ---------
Gross profit 400,224 322,273 301,856
Selling, general and administrative expenses 256,234 192,441 191,459
Research and development costs 18,692 15,719 17,231
---------- ---------- ---------
Income from operations 125,298 114,113 93,166
Translation and exchange (gains) losses, net 12,790 2,282 (9,484)
Interest income (15,912) (3,001) (6,488)
Interest expense 22,849 15,780 22,889
---------- ---------- ---------
Income before provision (benefit) for income
taxes and minority interest 105,571 99,052 86,249
Provision (benefit) for income taxes (27,736) (6,815) 2,997
Minority interest 19,383 18,939 15,915
---------- ---------- ---------
Net income $ 113,924 $ 86,928 $ 67,337
========== ========== =========
Basic earnings per common share $ 1.93 $ 1.75 $ 1.51
========== ========== =========
Shares used in per share computation 55,965 48,341 44,562
========== ========== =========
Diluted earnings per common share $ 1.69 $ 1.51 $ 1.44
========== ========== =========
Shares used in per share computation 69,650 60,197 54,384
========== ========== =========
The accompanying notes are an integral part of these consolidated statements.
Page 35
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOREIGN UNREALIZED GAIN
RETAINED CURRENCY (LOSS) ON
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS TRANSLATION MARKETABLE
---------------- --------------
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT SECURITIES TOTAL
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 -- $ -- 42,042 $ 420 $ 251,575 $(142,946) $(16,709) $ (3,432) $ 88,908
Exercise of stock options -- -- 754 7 3,695 -- -- -- 3,702
Translation adjustments -- -- -- -- -- -- (5,915) -- (5,915)
Issuance of common stock in
connection with acquisitions -- -- 1,073 11 11,069 -- -- -- 11,080
Net unrealized gain on
marketable securities -- -- -- -- -- -- -- 3,662 3,662
Tax benefit of stock options exercised -- -- -- -- 1,300 -- -- -- 1,300
Cash dividends ($.19 per share) -- -- -- -- (7,902) -- -- (7,902)
Effect of 1995 quarterly stock
distributions -- -- 1,761 18 22,315 (22,333) -- -- --
Net income -- -- -- -- -- 67,337 -- -- 67,337
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 -- -- 45,630 456 289,954 (105,844) (22,624) 230 162,172
Exercise of stock options -- -- 1,302 13 10,154 -- -- -- 10,167
Translation adjustments -- -- -- -- -- -- (4,623) -- (4,623)
Issuance of preferred stock 50 1 -- -- 47,391 -- -- -- 47,392
Issuance of common stock in
connection with acquisitions -- -- 536 5 6,840 -- -- -- 6,845
Issuance of common stock -- -- 1,068 11 12,087 -- -- -- 12,098
Net unrealized gain on
marketable securities -- -- -- -- -- -- -- (230) (230)
Tax benefit of stock options exercised -- -- -- -- 1,600 -- -- -- 1,600
Cash dividends ($.15 per share) -- -- -- -- -- (6,999) -- -- (6,999)
Net income -- -- -- -- -- 86,928 -- -- 86,928
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 50 1 48,536 485 368,026 (25,915) (27,247) -- 315,350
Exercise of stock options -- 1,863 19 20,479 -- -- -- 20,498
Translation adjustments -- -- -- -- -- -- (14,137) -- (14,137)
Expiration of put option -- -- 1,598 16 24,614 (533) -- -- 24,097
Issuance of common stock:
In connection with acquisition 2 -- 2,454 24 180,685 -- -- -- 180,709
Conversion of debt -- -- 10,052 101 161,258 -- -- -- 161,359
In settlement of litigation -- -- 812 8 9,992 -- -- -- 10,000
Conversion of preferred shares (50) -- 5,797 58 (58) -- -- -- --
Cash dividends ($.21 per share) -- -- -- -- -- (15,472) -- -- (15,472)
Stock dividends -- -- 320 3 1,872 (1,875) -- -- --
Net income -- -- -- -- -- 113,924 -- -- 113,924
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 2 $ 1 71,432 $714 $766,868 $ 70,129 $(41,384) $ -- $796,328
============================================================================================
The accompanying notes are an integral part of these consolidated statements.
Page 36
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
----- ------ -----
Cash flows from operating activities:
Net income $ 113,924 $ 86,928 $ 67,337
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 28,753 17,936 13,814
Provision for losses on accounts receivable 4,021 4,345 (1,262)
Provision for inventory obsolescence 3,342 106 (2,310)
Translation and exchange (gains) losses, net 12,790 2,282 (9,484)
Deferred income (5,072) (1,644) --
Loss (gain) on sale of fixed assets (1,184) 982 10
Deferred income taxes (35,376) 358 (1,820)
Other non-cash gains (2,047) (387) (331)
Minority interest 19,383 18,939 15,915
Change in assets and liabilities, net of effects of
acquired companies:
Accounts and notes receivable (154,433) (181,726) 524
Inventories (6,227) 43,306 (33,950)
Prepaid expenses and other assets 3,936 (11,618) (11,461)
Proceeds from license and royalty fees -- -- 23,000
Other liabilities (4,839) (11,153) 20,940
Trade payables and accrued liabilities 30,665 13,683 5,410
Income taxes payable 1,679 (7,885) (7,006)
---------- ----------- ---------
Net cash provided by (used in) operating activities 9,315 (25,548) 79,326
---------- ----------- ---------
Cash flows from investing activities:
Capital expenditures (100,397) (26,216) (49,685)
Proceeds from sale of fixed assets 3,051 6,954 64
Proceeds from sale of marketable securities 40,826 27,663 6,204
Decrease in restricted cash 3 -- 887
Cash acquired in connection with acquisitions 1,250 859 --
Acquisition of foreign license rights,
product lines and businesses (44,829) (51,222) (4,495)
---------- ---------- ----------
Net cash used in investing activities (100,096) (41,962) (47,025)
---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in notes payable (14,395) (10,908) 268
Proceeds from issuance of long-term debt 284,051 20,975 284
Payments on long-term debt (17,555) (13,984) (52,623)
Proceeds from issuance of preferred stock -- 47,392 --
Proceeds from issuance of common stock -- 32,842 5,753
Proceeds from issuance of stock put right 1,707 3,195 --
Proceeds from exercise of stock options 20,498 10,167 3,702
Dividends paid (11,631) (6,999) (7,902)
---------- ---------- ---------
Net cash provided by (used in) financing activities 262,675 82,680 (50,518)
---------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents (1,364) 102 (65)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 170,530 15,272 (18,282)
Cash and cash equivalents at beginning of year 39,366 24,094 42,376
---------- ---------- ---------
Cash and cash equivalents at end of year $ 209,896 $ 39,366 $ 24,094
========== ========== =========
The accompanying notes are an integral part of these consolidated statements.
Page 37
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BACKGROUND
ICN Pharmaceuticals, Inc. and Subsidiaries ("the Company") was formed in
November 1994, as a result of the merger of ICN Pharmaceuticals, Inc. ("ICN"),
SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek") and ICN
Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies"),
in a transaction accounted for using the purchase method of accounting (the
"Merger"). The Company is a multinational pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical, research, and diagnostic
products and provides radiation monitoring services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of 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 cost. The accompanying consolidated financial statements reflect the
elimination of all significant intercompany account balances and transactions.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents at December 31, 1997 and
1996 includes $22,221,000 and $28,687,000, respectively, of certificates of
deposit which have maturities of three months or less. For purposes of the
consolidated statements of cash flows, the Company considers highly-liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amount of these assets approximates fair value due to
the short-term maturity of these instruments.
MARKETABLE SECURITIES: In 1995, the Company classified its investment in
corporate bond securities, with maturities ranging from 1999 to 2003, as
available for sale. Changes in market values were reflected as unrealized gains
and losses, calculated on the specific identification method, in stockholders'
equity. The contractual maturity value of these securities was $26,700,000.
During 1996, the Company sold $26,663,000 of corporate bond securities for a
total of $26,952,000 resulting in a realized gain of $289,000.
INVENTORIES: Inventories, which include material, direct labor and factory
overhead, are stated at the lower of cost or market. Cost is determined on a
first-in, first-out ("FIFO") basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost.
The Company primarily uses the straight-line method for depreciating property,
plant and equipment over their estimated useful lives. Buildings and related
improvements are depreciated from 7-50 years, machinery and equipment from 3-30
years, furniture and fixtures from 3-15 years and leasehold improvements and
capital leases are amortized over their useful lives, limited to the life of the
related lease.
The Company follows the policy of capitalizing expenditures that materially
increase the lives of the related assets and charges maintenance and repairs to
expense. Upon sale or retirement, the costs and related accumulated depreciation
or amortization are eliminated from the respective accounts and the resulting
gain or loss is included in income.
The Company capitalizes interest on borrowed funds during construction periods
as part of the cost of the related asset.
Page 38
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
GOODWILL AND INTANGIBLES: The difference between the purchase price and the fair
value of net assets acquired at the date of acquisition is included in the
accompanying consolidated balance sheets as goodwill and intangibles. Intangible
assets also include acquired product rights. Goodwill and intangibles
amortization periods range from 5 to 23 years depending upon the nature of the
business or products acquired. Accumulated amortization at December 31, 1997 and
1996 was $18,145,000 and $14,945,000, respectively. The Company periodically
evaluates the carrying value of goodwill and intangibles including the related
amortization periods. The Company determines whether there has been impairment
by comparing the anticipated undiscounted future operating income of the
acquired entity or product line with the carrying value of the goodwill. Based
on its review, the Company does not believe that any impairment of its goodwill
and intangibles has occurred.
NOTES PAYABLE: The Company classifies various borrowings with initial terms of
one year or less as notes payable. The weighted average interest rate on
short-term borrowings outstanding at December 31, 1997 and 1996 was
approximately 18% and 17%, respectively.
REVENUE RECOGNITION: Revenues and related cost of sales are recorded at the time
of shipment or as services are performed.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's
foreign operations, except those in highly inflationary economies, are
translated at the end of period exchange rates. Revenues and expenses are
translated at the average exchange rates prevailing during the period. The
effects of unrealized exchange rate fluctuations on translating foreign currency
assets and liabilities into U.S. dollars are accumulated in stockholders'
equity. The monetary assets and liabilities of foreign subsidiaries in highly
inflationary economies are remeasured into U.S. dollars at the end of period
exchange rates and non-monetary assets and liabilities at historical exchange
rates. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, FOREIGN CURRENCY TRANSLATION, the Company has included in earnings all
foreign exchange gains and losses arising from foreign currency transactions and
the effects of foreign exchange rate fluctuations on subsidiaries operating in
highly inflationary economies. The recorded (gains) losses from foreign exchange
translation and transactions for 1997, 1996 and 1995, were $12,790,000,
$2,282,000 and $(9,484,000), respectively.
INCOME TAXES: Income taxes are calculated in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been recognized in the
Company's financial statements or tax returns. A valuation allowance is
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than an enactment of
changes in the tax law or rates.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PER SHARE INFORMATION: In 1997, the Financial Accounting Standards Board issued
SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share. The Company has adopted SFAS No. 128 in 1997, and earnings per share
amounts for all periods prior to 1997 have been restated to comply with its
requirements.
During 1997, the Company's Board of Directors declared quarterly cash
distributions and dividends for each quarter, totaling $.213 per share. During
1996, the Company's Board of Directors declared quarterly cash distributions for
the first, second and third quarters totaling $.154 per share. For the fourth
quarter of 1996, the Company's Board of Directors declared a cash distribution
of $.051 per share in January 1997.
page 39
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
STOCK SPLIT AND STOCK DISTRIBUTIONS: In February 1998, the Company's Board of
Directors approved a three-for-two stock split (in the form of a dividend) which
became effective March 16, 1998. In addition, during 1995, the Company issued
quarterly stock distributions which totaled 5.6%. Common share and per common
share amounts for all periods presented have been restated to reflect the stock
split and the stock distributions.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only provisions
of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 defines a
fair value based method of accounting for an employee stock option. Fair value
of the stock option is determined considering factors such as the exercise
price, the expected life of the option, the current price of the underlying
stock and its volatility, expected dividends on the stock, and the risk-free
interest rate for the expected term of the option. Under the fair value based
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period. Pro forma disclosures
for entities that elect to continue to measure compensation cost under the
intrinsic value method provided by Accounting Principles Board No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
RECLASSIFICATIONS: Certain prior year items have been reclassified to conform
with the current year presentation, with no effect on previously reported net
income or stockholders' equity.
3. ACQUISITIONS
WUXI ICN PHARMACEUTICALS - Effective January 1, 1997, ICN China, Inc. (a
wholly-owned subsidiary of the Company), commenced operations of a
pharmaceutical company under a joint venture agreement with Wuxi Pharmaceutical
Corporation ("Wuxi"), a Chinese state-owned company. Under the agreement, a
limited liability company (the "Chinese Joint Venture Entity") was established
to produce and sell pharmaceutical products. The Chinese Joint Venture Entity is
75% owned by ICN China and 25% owned by Wuxi. Wuxi is a supplier of injectable
antibiotics. Wuxi agreed to contribute its existing operation, with an
approximate net book value of $6,000,000, to the Chinese Joint Venture Entity
and ICN China agreed to contribute a total of $24,000,000 in cash over three
years, primarily for the construction of a new pharmaceutical production plant
and the purchase of related machinery and equipment. The Company contributed
approximately $3,600,000 to the joint venture in during 1997.
AO TOMSK CHEMICAL PHARMACEUTICAL PLANT - Effective October 1, 1997, the Company
acquired a 75% interest in AO Tomsk Chemical Pharmaceutical Plant ("Tomsk"), a
pharmaceutical company located in Tomsk, Russia, for approximately $3,000,000 in
cash. Tomsk makes and distributes a wide range of pharmaceuticals, including
antiseptics, analgesics, antibiotics and herbal liquids and extracts. Under the
terms of the agreement, the Company will invest approximately $8,000,000 over
the next two years.
MARBIOPHARM - Effective October 1, 1997, the Company acquired a 72% interest in
Marbiopharm, a pharmaceutical company located in Yoshkar-Ola, Russia, for
approximately $3,500,000 in cash. Marbiopharm manufactures, sells and
distributes pharmaceutical products in Russia.
POLFA RZESZOW, S.A. - Effective October 1, 1997, the Company acquired an 80%
interest in Polfa Rzeszow, S.A., ("Polfa") a pharmaceutical company located in
Rzeszow, Poland, for approximately $33,700,000 in cash and approximately 48,000
shares of common stock of the Company valued at $1,709,000. Polfa makes and
distributes a wide range of pharmaceuticals, including anti-depressants,
anti-fungals, anti-infectives, pain relievers, anti-allergy, cardiovasculars and
nutritionals. Under the terms of the agreement, the Company will invest
approximately $20,000,000 over the next two years, primarily for the
construction of a new pharmaceutical production plant, at which time the Company
will own approximately 90% of Polfa.
Page 40
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
ACQUIRED PRODUCT RIGHTS - Effective July 1, 1997, the Company purchased the
worldwide rights to seven products and the non-U.S. rights to two other products
(with an option to purchase the U.S. rights to these products) from F.
Hoffmann-La Roche Ltd. ("Roche"), for aggregate consideration of $90,000,000.
The consideration was paid in a combination of 2,400,000 shares of the Company's
common stock, valued at $40,000,000, and 2,000 shares of the Company's Series C
Convertible Preferred Stock, valued at $50,000,000 (together, the "Roche
Shares"). Each share of the Company's Series C Convertible Preferred Stock was
convertible into 1,500 shares of the Company's common stock. In conjunction with
the issuance of the Roche Shares, the Company guaranteed Roche a price initially
at $17.17 per common share, increasing at a rate of 6% per year for the
three-year guarantee period. Should Roche sell the common shares at any time
during the guarantee period, the agreement entitled the Company to any of the
proceeds realized by Roche in excess of the guaranteed price. Effective October
1, 1997, as a result of the rise in the per share market price of the Company's
common stock since the initial acquisition from Roche, the Company exercised its
option to acquire the U.S. rights to the two products noted above, plus two
other U.S. product rights, for aggregate consideration of $89,008,000, which was
paid with cash owed to the Company by Roche from the sale of the Roche Shares.
The aggregate cost of the acquired product rights of $183,193,000 (including
acquisition costs) is included in goodwill and intangibles in the accompanying
consolidated balance sheets at December 31, 1997.
The following table presents unaudited consolidated pro forma financial
information for the twelve months ended December 31, 1997 and 1996, as though
the acquisitions made in 1997 had occurred on January 1, 1996 (in thousands).
(Unaudited)
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
---------- ----------
Net sales $ 896,689 $ 819,978
Income before provision for income taxes
and minority interest $ 148,455 $ 153,520
Net income $ 140,940 $ 121,333
Basic earnings per share $ 2.25 $ 2.21
The unaudited pro forma financial information is presented for information
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions taken place on January 1, 1996. In
addition, the pro forma results are not intended to be a projection of the
future results and do not reflect any synergies that might be achieved from the
combined operations.
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The excess of the purchase price over the fair value of net assets acquired is
included in goodwill and intangibles and is being amortized on a straight-line
basis over 10 to 20 years based upon the nature of the business or products
acquired.
A summary of the purchase price allocation of the 1997 acquisitions is as
follows (in thousands):
Current assets (excluding cash of $1,250) $ 62,980
Property, plant and equipment 52,664
Other non-current assets 1,607
Goodwill and intangibles 194,967
Current liabilities (38,898)
Long-term liabilities (20,399)
Minority interest (24,357)
-----------
Total purchase price $ 228,564
===========
Page 41
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
The purchase price allocations are preliminary, pending completion of the
Company's evaluation of the fair values of the net assets acquired.
HUMACAO PLANT - The Company also purchased from Roche a GMP-standard
manufacturing plant in Humacao, Puerto Rico (the "Plant") for $55,000,000. The
purchase of the Plant is under a sale/leaseback arrangement, whereby Roche will
lease the Plant from the Company under a two year lease with lease payments
totaling $4,000,000 annually. Approximately $6,000,000 of the purchase price was
offset against amounts due from Roche under the lease and related agreements,
and the remainder was paid in cash. Roche will continue to use the Plant for the
manufacture of pharmaceutical products during the term of the lease. The Company
also entered into a toll manufacturing agreement under which it will produce
pharmaceutical products for Roche for a one-year period after the expiration of
the lease.
VELEFARM - In October 1997, the Company acquired a 42.6% interest in Velefarm, a
major distributor of pharmaceutical products located in Belgrade, Yugoslavia,
for an investment of approximately $13,224,000. Under the terms of the
agreement, the Company exchanged accounts receivable due from Velefarm (as agent
for the Yugoslavian government) for the 42.6% interest. ICN Yugoslavia recorded
sales to Velefarm of approximately $140,700,000 and $44,800,000 for the years
ended December 31, 1997 and 1996, respectively, of which approximately
$30,200,000 of 1997 sales were subsequent to the Company's investment. The
Company's investment in Velefarm has been recorded under the equity method of
accounting.
4. RELATED PARTY TRANSACTIONS
In August 1996, the Company loaned the Chairman and CEO $428,000 in regards to
tax matters relating to the exercise of stock options. This loan along with
accrued interest was repaid in November 1996. In June 1996, the Company made a
short-term loan to the Chairman and CEO in the amount of $3,500,000 for certain
personal obligations. During August 1996, this amount was repaid to the Company.
In connection with this transaction, the Company guaranteed $3,600,000 of debt
of the Chairman with a third party bank. In addition to the guarantee, the
Company deposited $3,600,000 with this bank as collateral to the Chairman's
debt. This deposit is recorded as a long-term asset on the consolidated balance
sheet. The Chairman has provided collateral to the Company's guarantee in the
form of a right to the proceeds of the exercise of stock options in the amount
of 150,000 options with an exercise price of $15.17 and the rights to a
$4,000,000 life insurance policy provided by the Company. In the event of any
default on the debt to the bank, the Company has recourse that is limited to the
collateral described above. Both the transaction and the sufficiency of the
collateral for the guarantee were approved by the Board of Directors.
In 1997, the Company made a short-term advance of $327,000 to the Chairman and
CEO, which was repaid, with interest, in 1997.
5. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, consist primarily of cash deposits and
marketable securities. The Company places its cash and cash equivalents with
respected financial institutions and limits the amount of credit exposure to any
one financial institution. (See also Note 14.) At December 31, 1997, the
Company's cash and cash equivalents include $178,536,000 held in time deposits,
money market funds, and municipal debt securities through seven major financial
institutions.
Page 42
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
6. INCOME TAXES
Pretax income (loss) from continuing operations before minority interest for
each of the years ended December 31, consists of the following (in thousands):
1997 1996 1995
---- ---- ----
Domestic $ (21,886) $ 5,039 $ 7,145
Foreign 127,457 94,013 79,104
----------- ---------- -----------
$ 105,571 $ 99,052 $ 86,249
=========== ========== ===========
The income tax (benefit) provision for each of the years ended December 31,
consists of the following (in thousands):
1997 1996 1995
---- ---- ----
Current
Federal $ -- $ (9,469) $ --
State 200 68 425
Foreign 7,440 2,228 4,392
----------- ---------- -----------
7,640 (7,173) 4,817
Deferred
Federal (31,375) -- (1,820)
Foreign (4,001) 358 --
------------ ---------- -----------
(35,376) 358 (1,820)
------------ ---------- -----------
$ (27,736) $ (6,815) $ 2,997
============ ========== ===========
The current federal tax provision has not been reduced for the tax benefit
associated with the exercise of employee stock options of $-0-, $1,600,000, and
$1,300,000 in 1997, 1996 and 1995, respectively, which were credited directly to
additional capital.
In connection with the Merger, the Company acquired approximately $226,000,000
of net operating loss carryforwards ("NOLs"). Included in the total acquired
NOLs were $191,000,000 of domestic NOLs and $35,000,000 of foreign NOLs.
Internal Revenue Service Code Section 382 imposes an annual limitation on the
availability of NOLs that can be used to reduce taxable income after certain
substantial ownership changes of a corporation. Consequently, the Company's
annual limitation on utilization of the acquired domestic NOLs is approximately
$33,000,000 per year.
In addition to the utilization of the NOLs described above, the Company
recognized during 1995 a $27,000,000 tax benefit of an additional $76,000,000 of
acquired NOLs and other deferred tax assets through a reduction in the Company's
deferred tax asset valuation allowance. This reduction resulted in a $24,000,000
reduction in goodwill and intangibles acquired in connection with the Merger and
a $3,000,000 reduction in deferred income tax expense. In 1997, the provision
for income taxes reflects a deferred tax benefit of $35,376,000 resulting from
the recognition of certain deferred tax assets and the reduction of the related
valuation allowance. During 1997, the Company acquired certain product rights
from Roche, and in early 1998 it acquired certain products from SmithKline
Beecham plc. These new products are expected to generate future taxable income
that provided a basis for reducing the Company's valuation allowance for
deferred tax assets in 1997. Ultimate realization of the deferred tax assets is
dependent upon the Company generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that the net deferred tax assets
will be realized. The amount of the deferred tax assets considered realizable,
however, could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced.
page 43
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
At December 31, 1997, the Company has domestic and foreign NOLs of approximately
$209,000,000 and $25,000,000, respectively, expiring in varying amounts from
1998 to 2012.
The primary components of the Company's net deferred tax asset at December 31,
1997 and 1996 are as follows (in thousands):
1997 1996
----------- -----------
Deferred tax assets:
NOL carryforward $ 78,356 $ 71,019
Inventory and other reserves 6,605 11,011
Tax credit carryover 1,226 554
Deferred income 4,415 4,848
Long-term debt 4,984 4,745
Other 781 855
Valuation allowance (23,077) (55,769)
------------ -----------
Total deferred tax asset 73,290 37,263
Deferred tax liabilities:
Property, plant and equipment (196) (223)
Inventory (1,770) (1,770)
Other (1,614) (936)
----------- ------------
Total deferred tax liability (3,580) (2,929)
----------- -----------
Net deferred tax asset $ 69,710 $ 34,334
=========== ===========
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
1997 1996 1995
---- ---- ----
Statutory rate 35% 35% 35%
Foreign source income taxed at
lower effective rates (28) (31) (24)
Utilization of foreign NOL -- -- (1)
Recognition of fully reserved deferred tax assets (33) -- (4)
Favorable audit settlement -- (5) (2)
State income taxes, net of federal income taxes benefit -- -- (1)
Domestic NOL loss carryback -- (5) --
Other, net -- (1) --
------ ------- -----
Effective rate (26)% (7)% 3%
======= ======= =====
During 1996, no U.S. income or foreign withholding taxes were provided on the
undistributed earnings of the Company's foreign subsidiaries with the exception
of the Company's Panamanian subsidiary, Alpha Pharmaceuticals, since management
intends to reinvest those undistributed earnings in the foreign operations.
Included in consolidated retained earnings at December 31, 1997, is
approximately $290,000,000 of accumulated earnings of foreign operations that
would be subject to U.S. income or foreign withholding taxes, if and when
repatriated.
The Internal Revenue Service has concluded its examination of the Company's tax
years ended November 30, 1991, 1990, 1989 and 1988, which resulted in a
reduction in net operating loss carryforwards of $13,000,000 (pretax) and a
corresponding decrease in the pretax valuation allowance.
Page 44
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1997 1996 1995
---- ---- ----
Income:
Net income $ 113,924 $ 86,928 $ 67,337
Dividends and accretion on preferred stock (5,651) (2,199) --
---------- --------- ---------
Numerator for basic earnings per share--
income available to common stockholders 108,273 84,729 67,337
Effect of dilutive securities:
8-1/2% Convertible Subordinated Notes 9,328 7,520 10,759
5-5/8% Swiss Franc Exchangeable Certificates 123 (738) --
5-1/2% Swiss Franc Exchangeable Certificates 37 (345) --
Other dilutive securities -- 21 201
---------- --------- ---------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 117,761 $ 91,187 $ 78,297
========== ========= ==========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 55,965 48,341 44,562
Effect of dilutive securities:
Employee stock options 3,033 1,596 1,373
Series C Preferred Stock 1,266 -- --
8-1/2% Convertible Subordinated Notes 6,744 7,800 7,800
5-5/8% Swiss Franc Exchangeable Certificates 1,811 1,377 --
5-1/2% Swiss Franc Exchangeable Certificates 831 831 --
Other dilutive securities -- 252 649
---------- --------- ---------
Dilutive potential common shares 13,685 11,856 9,822
---------- --------- ---------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 69,650 60,197 54,384
---------- --------- ---------
Basic earnings per share $ 1.93 $ 1.75 $ 1.51
========== ========= =========
Diluted earnings per share $ 1.69 $ 1.51 $ 1.44
========== ========= =========
All common share and per common share amounts have been adjusted to reflect the
three for two stock split which became effective March 16, 1998.
Page 45
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
Income available to common stockholders, for purposes of computing basic
earnings per share, reflects adjustments for cumulative preferred dividends and
an embedded dividend arising from the discounted conversion terms of the Series
B Preferred Stock. The Company's Series B Convertible preferred stock is not
reflected in the computation of diluted earnings per share as such securities
are antidilutive. As of December 31, 1997 the 2,249 outstanding shares of Series
B Preferred Stock are convertible into approximately 82,500 shares of the
Company's common stock. All shares of the Company's Series C Convertible
Preferred Stock, issued in July 1997, were converted into common stock during
1997 and the adjustment to the number of shares outstanding represents the
additional shares that would have been outstanding had the Series C Preferred
Stock been converted to common stock at the time of issuance.
8. DETAIL OF CERTAIN ACCOUNTS
(in thousands)
1997 1996
---- ----
RECEIVABLES, NET:
Trade accounts receivable $ 254,376 $ 257,619
Other receivables 18,118 9,782
---------- ----------
272,494 267,401
Allowance for doubtful accounts (11,999) (8,870)
---------- ----------
$ 260,495 $ 258,531
========== ==========
INVENTORIES, NET:
Raw materials and supplies $ 65,937 $ 48,656
Work-in-process 16,745 14,625
Finished goods 75,782 67,845
---------- ----------
158,464 131,126
Allowance for inventory obsolescence (11,476) (10,153)
---------- ----------
$ 146,988 $ 120,973
========== ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Advances to inventory suppliers $ 16,415 $ 14,335
Tax receivable -- 6,100
Other 6,977 4,544
---------- ----------
$ 23,392 $ 24,979
========== ==========
PROPERTY, PLANT AND EQUIPMENT, NET:
Land $ 20,531 $ 17,708
Buildings 127,577 84,054
Machinery and equipment 145,640 91,602
Furniture and fixtures 20,273 18,819
Leasehold improvements 3,426 3,019
---------- ----------
317,447 215,202
Accumulated depreciation and amortization (53,112) (46,420)
Construction in progress 96,378 65,427
---------- ----------
$ 360,713 $ 234,209
========== ==========
Page 46
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
During the third quarter of 1994, ICN Yugoslavia commenced a construction and
modernization program at its pharmaceutical complex outside Belgrade,
Yugoslavia. At December 31, 1997 and 1996, construction in progress primarily
relates to costs incurred to date for these facilities and includes capitalized
interest of $5,419,000 in 1997 and $3,770,000 in 1996.
(in thousands)
1997 1996
---- ----
ACCRUED LIABILITIES:
Payroll and related items $ 16,423 $ 18,149
Interest 11,683 3,687
Legal settlement -- 10,000
Other 39,777 23,547
----------- ----------
$ 67,883 $ 55,383
=========== ==========
9. DEBT
Long-term debt consists of the following (in thousands):
1997 1996
---- ----
Convertible debt:
8-1/2% Convertible Subordinated Notes due 1999, converted
in 1997 $ -- $ 114,980
Swiss Franc Subordinated Bonds due 1988-2001, converted
in 1997 -- 11,149
Swiss Franc Guaranteed Bonds with an effective
interest rate of 8.5%, maturing in 2002 (net of unamortized
discount of $88 and $261 in 1997 and 1996, respectively) 6,056 7,536
--------- ---------
6,056 133,665
Other Debt:
9-1/4% Senior Notes due 2005 275,000 --
Hungarian mortgages, with interest at rates ranging from
LIBOR + 0.9% to LIBOR + 1.0%;interest and principal due
in varying amounts through 2001 5,258 6,625
U.S. mortgages with variable interest at rates ranging from 7.1%
to 8.9% interest and principal payable monthly through 2022 11,925 13,098
Polish mortgage note with interest at a variable rate (effectively
26% at December 31, 1997); interest and principal payable
monthly through December 2002 8,604 --
U.S. capital leases with interest at rates ranging from 4.9%
to 6.1% payable monthly through 2000 1,651 2,589
Hungarian loans in U.S. dollars and various foreign currencies,
with interest at rates ranging from LIBOR +0.5% to 21.6%,
maturing at various dates through 2002 24,563 24,328
Other long-term debt due in U.S. dollars and various foreign
currencies, with interest at rates ranging from 5.5% to 9.4% 1,390 2,145
--------- ---------
334,447 182,450
Less current portion 19,359 5,961
--------- ---------
Total long-term debt $ 315,088 $ 176,489
========= =========
Page 47
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
In August 1997, the Company completed an underwritten public offering of
$275,000,000 of its 9 1/4% Senior Notes Due 2005 (the "Senior Notes") for net
proceeds of $265,646,000. The Senior Notes are general unsecured obligations of
the Company which rank pari passu in right of payment with all unsecured senior
indebtedness, and are senior to all subordinated indebtedness of the Company.
The Senior Notes mature on August 15, 2005, and are redeemable in cash at the
option of the Company, in whole or in part, on or after August 15, 2001, at
specified redemption prices. Upon a change of control (as defined in the related
indenture), the Company will be required to offer to repurchase the Senior Notes
at a purchase price equal to 101% of the principal amount thereof, plus accrued
interest thereon to the date of repurchase. Interest on the Senior Notes is
payable semi-annually. The indenture governing the Senior Notes includes certain
covenants which may restrict the incurrence of additional indebtedness, the
payment of dividends and other restricted payments, the creation of certain
liens, the sale of assets, or the Company's ability to consolidate or merge with
another entity, subject to certain qualifications and exceptions. The fair value
of the Senior Notes was approximately $292,188,000 at December 31, 1997.
In November 1994, the Company completed an underwritten public offering in the
principal amount of $115,000,000 of 8-1/2% Convertible Subordinated Notes Due
1999 (the "Convertible Notes"). During 1997, $114,919,000 of the Convertible
Notes were converted into 7,793,939 shares of the Company's common stock and the
remainder was redeemed for cash.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust established by ICN,
completed an underwritten public offering in Switzerland of Swiss francs
100,000,000 principal amount of 5-5/8% Swiss Franc Exchangeable Certificates
(the "Xr Certificates"). The net proceeds of the offering were used by Xr
Capital to purchase Swiss Franc Subordinated Bonds of the Company due 1988-2001
and SFr. 45,700,000 principal amount of cumulative 5.4% Italian Electrical
Agency Bonds ("Agency Bonds") due 2001. During 1997, SFr. 66,510,000 of the Xr
Certificates were exchanged for 2,246,868 shares of the Company's common stock
and the remainder, SFr. 180,000, was redeemed for cash. In addition, Agency
Bonds with a value of approximately $38,779,000, previously held in trust for
the payment of debt service on the Xr Certificates, became available to the
Company and were sold during 1997.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN and
Biomedicals, completed a public offering in Switzerland of SFr. 70,000,000
principal amount of 5-1/2% Swiss Franc Exchangeable Certificates ("Old
Certificates"). The Bio Capital debt is senior, uncollateralized indebtedness of
the Company. At the option of the certificate holder, the Old Certificates are
exchangeable into shares of the Company's common stock. Net proceeds were used
by Bio Capital to purchase SFr. 70,000,000 face amount of zero coupon Swiss
Franc Debt Notes due 2002 of the Kingdom of Denmark (the "Danish Bonds") for
SFr. 33,772,000 and 15 series of zero coupon Swiss Franc Guaranteed Bonds of the
Company (the "Zero Coupon Guaranteed Bonds") for SFr. 32,440,000 which are
guaranteed by the Company. Each series of the Zero Coupon Guaranteed Bonds are
in an aggregate principal amount of SFr. 3,850,000 maturing February of each
year through 2002. The Company has no obligation with respect to the payment of
the principal amount of the Old Certificates since they will be paid upon
maturity by the Danish bonds. During 1990, Biomedicals offered to exchange, to
all certificate holders, the Old Certificates for newly issued certificates
("New Certificates"), the terms of which remain the same except that 106.48
shares per SFr. 5,000 principal certificate can be exchanged at $31.43 using a
fixed exchange rate of SFr. 1.49 to U.S. $1.00. Substantially all of the
outstanding Old Certificates were exchanged for New Certificates (together
referred to as "Bio Certificates"). Currently, the face value of the outstanding
Bio Certificates, SFr. 39,615,000, is convertible into approximately 827,000
shares of the Company's common stock at the exchange prices of $31.43 and $54.17
using fixed exchange rates of SFr. 1.49 and SFr. 1.54 to U.S. $1.00 for New and
Old Certificates, respectively. The fair value of the Zero Coupon Guaranteed
Bonds was approximately $6,143,000 at December 31, 1997.
Page 48
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
The Company has the option to redeem the Bio Certificates in the event that the
market price of the Company's common stock meets certain conditions. In March
1998, the Company met the conditions for redemption of the New Certificates and
announced its intent to redeem all of the New Certificates for cash at a
redemption price of 100% plus accrued interest. The holders of the New
Certificates may elect to exchange the New Certificates for shares of the
Company's common stock until April 9, 1998, at which time any New Certificates
not exchanged will be redeemed for cash. Through March 5, 1998, holders of SFr.
2,400,000 principal amount of the New Certificates elected to exchange the
certificates for 51,104 shares of the Company's common stock. Upon completion of
the exchange or redemption of the New Certificates, the Danish Bonds become
available to the Company.
The Company has mortgage notes payable totaling $26,663,000 payable in U.S.
dollars, Deutsche marks, Dutch guilders and Hungarian forints, collateralized by
certain real property of the Company, having a net book value of $36,968,000 at
December 31, 1997. The Company also has Hungarian loans totaling $12,144,000
payable in U.S. dollars, Deutsche marks, and Hungarian forints, collateralized
by certain personal property of the Company (principally inventories) having a
net book value of $18,691,000 at December 31, 1997.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
1998 $ 19,359
1999 13,610
2000 7,398
2001 6,380
2002 2,654
Thereafter 285,046
----------
Total $ 334,447
==========
The fair value of the Company's debt is estimated based on quoted market prices
for the same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities. The carrying amount of all short-term
and variable interest rate borrowings approximates fair value.
The Company has short and long-term lines of credit, classified in notes
payable, aggregating $32,727,000, under which borrowings of $10,598,000 were
outstanding at December 31, 1997. The lines of credit provide for short-term
borrowings and for the issuance of letters of credit, and bear interest at
variable rates based upon LIBOR or other indices. Certain of the lines of credit
also include covenants restricting the payment of dividends, the issuance of new
indebtedness, and the repurchase of the Company's common stock and requiring the
maintenance of certain financial ratios. In February 1998, the aggregate amount
of the lines of credit was increased to approximately $46,027,000.
10. PREFERRED STOCK
In October 1996, the Company issued 50,000 shares of Series B Convertible
Preferred Stock, for net proceeds of $47,392,000, in a private placement. The
Series B Convertible Preferred Stock has a liquidation preference of $1,000 per
share and is convertible at the option of the holder into common stock based on
a conversion price calculated using the average daily low for the five trading
days preceding the conversion date and applying a discount of 13%. The Series B
Convertible Preferred Stock has a 6% annual dividend that is cumulative and
payable quarterly. The Company has the option to pay the dividend in either cash
or common stock of the Company. The Series B Convertible Preferred Stock is
mandatorily convertible into common stock on the fifth anniversary of its
issuance. However, this provision is subject to extension under certain
circumstances. Dividends paid in common stock are based on the fair value of
common stock at the time of declaration. During 1997, 47,951 shares of the
Series B Convertible Preferred Stock were converted into a total of 2,797,820
shares of the Company's common stock.
Page 49
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
In August 1997, the Company issued 2,000 shares of its Series C Convertible
Preferred Stock, having a value of $50,000,000, to Roche in connection with the
acquisition of the rights to certain products. The Series C Preferred Stock has
no dividend rights, but has a liquidation preference of $25,000 per share. Each
share was convertible at the option of the holder, initially into 1,500 shares
of the Company's common stock (subject to certain antidilution adjustments).
During 1997, all of the Series C Convertible Preferred Stock was converted into
3,000,000 shares of the Company's common stock.
11. COMMON STOCK
Prior to the Merger, each of the Predecessor Companies had their own stock
option plans. Upon consummation of the Merger, the Company assumed all options
outstanding under the existing stock option plans. The existing stock option
plans were exchanged for shares of the Company. Each option of SPI common stock,
ICN common stock, Viratek common stock and Biomedicals common stock was
exchanged for 1.5, 0.768, 0.749 and 0.296 options of the Company common stock,
respectively. Subsequent to the Merger, no new grants are being issued under
these Plans.
The 1994 Stock Option Plan was adopted on January 26, 1995 and subsequently
approved by shareholders. This plan provides for the granting of options to
purchase a maximum of 4,854,000 shares of the Company's common stock. Under the
plan each nonemployee director is granted 22,500 options on the day following
the annual meeting of stockholders.
Under the terms of all stock option plans, the option price may not be less than
the fair market value at the date of the grant and may not have a term exceeding
10 years. Option grants vest ratably over a four year period from the date of
the grant. The options granted are reserved for issuance to officers, directors,
key employees, scientific advisors and consultants. The Company has adopted the
disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
data):
1997 1996 1995
---------- ---------- ----------
Net income $ 110,426 $ 85,035 $ 66,467
Earnings per share - basic 1.87 1.71 1.49
Earnings per share - diluted 1.64 1.48 1.42
The schedule below reflects the number of outstanding and exercisable shares as
of December 31, 1997 segregated by price range (in thousands, except per share
data):
OUTSTANDING EXERCISABLE
------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE AVERAGE
RANGE OF OF EXERCISE OF EXERCISE REMAINING
EXERCISE PRICES SHARES PRICE SHARES PRICE LIFE (YEARS)
---------------- ------ ----- ------ ----- ------------
$2.53 to $ 11.31 3,375 $ 8.52 2,755 $ 8.13 5.2
$11.36 to $14.75 3,074 13.33 1,000 12.67 8.4
$14.83 to $29.09 2,471 17.55 1,888 18.18 5.2
-------- ------
8,920 5,643
======== ======
Page 50
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
1997 1996 1995
--------- -------- --------
Weighted-average expected life (years) 5.0 6.5 6.5
Expected volatility 46% 60% 60%
Annual dividend per share $ 0.24 $ 0.21 $ 0.21
Risk-free interest rate 6.33% 6.25% 6.25%
Weighted-average fair value of options granted $ 6.00 $ 9.49 $ 6.84
Because the determination of the fair value of all options granted includes the
factors described in the preceding paragraph and, because additional option
grants are expected to be made each year, the above pro forma disclosures are
not likely to be representative of the pro forma effect on reported net income
for future years.
The following table sets forth information relating to stock option plans during
the years ended December 31, 1997, 1996 and 1995 (in thousands, except per share
data):
WEIGHTED
NUMBER AVERAGE
OF OPTION
SHARES PRICE
------ -----
Shares under option, December 31, 1994 9,498 $ 11.77
Granted 932
Exercised (773) $ 5.35
Canceled (288)
--------
Shares under option, December 31, 1995 9,369 $ 11.24
Granted 798
Exercised (1,302) $ 8.01
Canceled (150)
--------
Shares under option, December 31, 1996 8,715 $ 12.09
Granted 2,267
Exercised (1,870) $ 11.03
Canceled (192)
--------
Shares under option, December 31, 1997 8,920 $ 12.68
========
Exercisable at December 31, 1995 5,222
========
Exercisable at December 31, 1996 5,660
========
Exercisable at December 31, 1997 5,643
========
Options available for grant at December 31, 1996 2,576
========
Options available for grant at December 31, 1997 500
========
In 1997, long-term debt of the Company having an aggregate carrying value of
$124,060,000 was converted into 10,052,000 shares of the Company's common stock.
In addition, the Company issued 812,000 shares of its common stock, having a
value of $10,000,000, in settlement of litigation. The Company also issued
129,665 shares of its common stock, having a value of $1,875,000, in payment of
a portion of the 6% annual dividend on the Series B Convertible Preferred Stock.
In January 1996, the Company sold approximately 600,000 shares of its common
stock to a foreign bank for net proceeds of $6,000,000. The proceeds were used
by the Company for the acquisition of GlyDerm, a Michigan based skin care
company, and several smaller acquisitions.
Page 51
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
In 1996, the Company acquired the net assets of the Siemens Dosimetry Service
Division of Siemens Medical Systems, Inc. ("Siemens'), for 1,447,250 shares of
the Company's common stock (the "Siemens Shares") plus other consideration. On
December 23, 1996 Siemens sold the Siemens Shares to certain accounts over which
an investment company exercises investment authority (collectively, the
"Purchasers"), for $13.00 per share. In conjunction with and conditioned upon
the consummation of the sale of the Siemens Shares, the Company entered into an
agreement (the "Put Agreement") with the Purchasers pursuant to which the
Company sold 150,000 additional shares of common stock for $1,950,000 (together
with the Siemens shares, the "Purchaser Shares") and sold the Purchasers, for
$3,200,000, the right to put (the "Put Right") 1,597,250 shares of common stock,
valued at $23,120,000 at December 31, 1996, to the Company at $20 per share on
January 10, 2000. The Put Agreement also entitled the Company to a portion of
any proceeds from the sale of the Purchaser shares in excess of the $20 per
share put price. In 1997 the Purchaser sold substantially all shares subject to
the Put Right and the Put Right expired entirely; the $23,120,000 value of the
Purchaser Shares was added to the Company's stockholders' equity. In addition,
the Company received a cash payment from the Purchasers, which was also added to
stockholders' equity.
In connection with the Merger, the Company adopted a Stockholder Rights Plan to
protect stockholders' rights in the event of a proposed or actual acquisition of
15% or more of the outstanding shares of the Company's common stock. As part of
this plan, each share of the Company's common stock carries a right to purchase
one one-hundredth (1/100) of a share of Series A Preferred Stock (the "Rights"),
par value $.01 per share, of the Company at a price of $125 per one
one-hundredth of a share, subject to adjustment, which becomes exercisable only
upon the occurrence of certain events. The Rights are subject to redemption at
the option of the Board of Directors at a price of $.01 per right until the
occurrence of certain events. The Rights expire on November 1, 2004.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION: In a Consolidated Amended Class Action Complaint for Violations of
Federal Securities Laws (the "Securities Complaint") (the "1995 Actions"),
plaintiffs allege that Defendants made various deceptive and untrue statements
of material fact and omitted material facts regarding the Company's 1994
hepatitis C NDA in connection with: (i) the Merger of ICN, SPI, Viratek and
Biomedicals in November 1994 and the issuance of convertible debentures in
connection therewith; and (ii) information provided to the public. Plaintiffs
also allege that the Chairman of the Company traded on inside information
relating to the 1994 hepatitis C NDA. The Securities Complaint asserts claims
for alleged violations of Sections 11 and 15 of the Securities Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Plaintiffs motion seeking the certification of (i) a
class of persons who purchased ICN securities from November 10, 1994 through
February 17, 1995; and (ii) a subclass consisting of persons who owned SPI
and/or Biomedicals common stock prior to the Merger was granted. On July 23,
1997, plaintiffs and defendants entered into a Memorandum of Agreement to Settle
Action, whereby the parties agreed to settle the 1995 Actions for $15,000,000 in
cash. The settlement was approved by the Court on February 24, 1998 and the case
is now at an end.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware (the "1994 Actions"). Three of these lawsuits
were filed by stockholders of SPI and, in one lawsuit, of Viratek against ICN,
SPI, Viratek (in the one lawsuit) and certain directors and officers of ICN, SPI
and/or Viratek (including the Chairman) and purport to be class actions on
behalf of all persons who held shares of SPI and Viratek common stock. The
fourth lawsuit was filed by a stockholder of Viratek against ICN, Viratek and
certain directors and officers of ICN, SPI and Viratek (including the Chairman)
and purports to be a class action on behalf of all persons who held shares of
Viratek common stock. These suits allege that the consideration provided to the
public stockholders of SPI and/or Viratek in the Merger was unfair and
inadequate, and that the defendants breached their fiduciary duties in approving
the Merger and otherwise. The 1994 Actions have been dormant since their
commencement, and it is expected that they will be dismissed as a result of the
settlement of the 1995 Actions.
Page 52
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
INVESTIGATIONS: Pursuant to an Order Directing Private Investigation and
Designating Officers to Take Testimony, entitled In the Matter of ICN
Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is being
conducted by the SEC with respect to certain matters pertaining to the status
and disposition of the 1994 hepatitis C NDA. As set forth in the Order, the
investigation concerns whether, during the period June 1994 through February
1995, the Company, persons or entities associated with it and others, in the
offer and sale or in connection with the purchase and sale of Company
securities, engaged in possible violations of Section 17(a) of the Securities
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder, by having possibly: (i) made false or misleading statements or
omitted material facts with respect to the status and disposition of the 1994
hepatitis C NDA; or (ii) purchased or sold ICN common stock while in possession
of material, non-public information concerning the status and disposition of the
1994 hepatitis C NDA; or (iii) conveyed material, non-public information
concerning the status and disposition of the 1994 hepatitis C NDA, to other
persons who may have purchased or sold ICN stock. The Company has cooperated
with the Commission in its investigation. On January 13, 1998, the Company
received a letter from the SEC's Philadelphia Office (the "District Office")
stating the District Office's intention to recommend to the Commission that it
authorize the institution of a civil action against the Company and Milan Panic.
As set forth in the letter, the District Office seeks the authority to commence
a civil action to enjoin the Company from future violations of Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder and to impose a civil penalty of up
to $500,000 on the Company. In regard to Mr. Panic, the District Office seeks
the authority to begin a civil action (i) to enjoin Mr. Panic from future
violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange
Act and Rule 10b-5 thereunder; (ii) for disgorgement of approximately $390,000;
(iii) for prejudgment interest; (iv) for a civil penalty pursuant to Section 21A
of the Exchange Act that cannot exceed three times any amount disgorged and (v)
for an officer and director bar pursuant to Section 21 of the Exchange Act. On
January 30, 1998, the Company and Mr. Panic filed submissions with the
Commission urging that it reject the District Office's request.
The Company has received Subpoenas (the "Subpoenas") from a Grand Jury in the
United States District Court, Central District of California requesting the
production of documents covering a broad range of matters over various time
periods. In March 1998, the Company was advised that the office of the United
States Attorney for the Central District of California, is considering the
Company, Mr. Panic and a former officer of the Company targets of the
investigation. The Company was also advised that certain current and former
officers of the Company are considered subjects of the investigation. 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 Company is a party to a number of other pending or threatened lawsuits. In
the opinion of management, the ultimate resolution of these other matters will
not have a material effect on the Company's consolidated financial position,
results of operations, or liquidity.
PRODUCT LIABILITY INSURANCE: The Company could be exposed to possible claims for
personal injury resulting from allegedly defective products. 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.
BENEFITS PLANS: The Company has a defined contribution plan that provides all
U.S. employees the opportunity to defer a portion of their compensation for
payout at a subsequent date. The Company can voluntarily make matching
contributions on behalf of participating and eligible employees. The Company's
expense related to such defined contribution plan was not material in 1997, 1996
and 1995.
Page 53
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
In connection with the Merger, the Company assumed deferred compensation
agreements with certain officers and certain key employees of the Predecessor
Companies, with benefits commencing at death or retirement. As of December 31,
1997, the present value of the deferred compensation benefits to be paid has
been accrued in the amount of $2,894,000. Interest accrues on the outstanding
balance at rates ranging from 9.4% to 12.6%. No new contributions are being
made; however, interest continues to accrue on the present value of the benefits
expected to be paid.
ENVIRONMENTAL ISSUES IN HUNGARY: In connection with the acquisition of
Alkaloida, an environmental remediation fund (the "Fund") of approximately
$7,200,000 was established by the government from the proceeds that the Company
tendered. This Fund will be used to remediate a waste disposal site adjacent to
Alkaloida, contaminated by past plant operations, by 1998. In 1997, ownership of
waste disposal site was transferred to the Hungarian government and the Company
was released from all future liability associated with the site.
OTHER: Milan Panic, the Company's Chairman of the Board and Chief Executive
Officer, is employed under a contract expiring December 31, 1998 that provides
for, among other things, certain health and retirement benefits. The contract is
automatically extended at the end of each year for successive one year periods
unless either the Company or Mr. Panic terminates the contract upon six months
prior written notice. Mr. Panic, at his option, may provide consulting services
upon his retirement for $120,000 per year for life, subject to annual
cost-of-living adjustments from the base year of 1967, and will be entitled when
serving as a consultant to participate in the Company's medical and dental
plans. Including such cost-of-living adjustments, the annual cost of such
consulting services is currently estimated to be in excess of $535,000. The
consulting fee shall not at any time exceed the annual compensation as adjusted,
paid to Mr. Panic. Upon Mr. Panic's retirement, the consulting fee shall not be
subject to further cost of living adjustments.
The Company has employment agreements with six key executives which contain
"change in control" benefits. Upon a "change in control" of the Company as
defined in the contract, the employee shall receive severance benefits equal to
three times salary and other benefits.
13. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company is a multinational pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical, research, and diagnostic
products and provides radiation monitoring services. The Company operates in two
business segments: the Pharmaceutical group and the Biomedical group. The
Pharmaceutical group produces and markets pharmaceutical products principally in
the United States, Mexico, Canada and Europe. The Biomedical group markets
research products and related services, immunodiagnostic reagents and
instrumentation, and provides radiation monitoring services.
The Company's largest selling product, Virazole(R), accounts for approximately
3% of total Company sales for 1997 and is sold principally in the United States
for the treatment of respiratory syncytial virus ("RSV") in infants. In July
1995, the Company entered into a licensing agreement with a subsidiary of
Schering-Plough Corporation ("Schering-Plough") to license Virazole(R) as a
treatment for chronic hepatitis C in combination with alpha interferon. Under an
agreement, Schering-Plough is responsible for all clinical developments
worldwide.
The principal markets for the Company's products are Yugoslavia, the United
States, and Russia, which represented approximately 30%, 22%, and 18% of the
Company's net sales for 1997. Operations in Yugoslavia are subject to business
risks described in Note 14. Approximately 78%, 80%, and 75% of the Company's net
sales for the years ended December 31, 1997, 1996, and 1995 were generated from
operations outside the U.S. Foreign operations are subject to certain risks
inherent in conducting business abroad, including possible nationalization or
expropriation, price and exchange controls, limitations on foreign participation
in local enterprises, health-care regulation and other restrictive governmental
actions. Changes in the relative values of currencies take place from time to
time and may materially affect the Company's results of operations. Their
effects on the Company's future operations are not predictable. The Company does
not currently provide a hedge on its foreign currency exposure and, in certain
countries in which the Company operates, no effective hedging program is
available. At December 31, 1997 the Company had net monetary asset positions in
Yugoslavia, Russia, and Mexico of approximately $60,000,000, $28,475,000, and
$6,719,000 which would be subject to a loss if a devaluation were to occur.
Page 54
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
The following tables set forth certain information of the Company by business
segment and geographic areas for 1997, 1996 and
1995 (in thousands):
BUSINESS SEGMENTS
1997 1996 1995
----------- ----------- -----------
NET SALES
Pharmaceutical $ 681,287 $ 549,753 $ 446,566
Biomedical 70,915 64,327 61,339
----------- ----------- -----------
Total $ 752,202 $ 614,080 $ 507,905
=========== =========== ===========
OPERATING INCOME (LOSS):
Pharmaceutical $ 181,710 $ 155,344 $ 129,753
Biomedical 5,148 4,985 5,707
Corporate (61,560) (46,216) (42,294)
----------- ----------- -----------
Total $ 125,298 $ 114,113 $ 93,166
=========== =========== ===========
IDENTIFIABLE ASSETS:
Pharmaceutical $ 1,133,943 $ 600,019 $ 373,027
Biomedical 74,334 78,095 51,407
Corporate 283,468 100,537 93,864
----------- ----------- -----------
Total $ 1,491,745 $ 778,651 $ 518,298
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Pharmaceutical $ 18,772 $ 11,305 $ 9,549
Biomedical 4,535 2,718 2,221
Corporate 5,446 3,913 2,044
----------- ----------- -----------
Total $ 28,753 $ 17,936 $ 13,814
=========== =========== ===========
CAPITAL EXPENDITURES (1):
Pharmaceutical $ 96,635 $ 15,785 $ 56,363
Biomedical 3,160 5,230 2,680
Corporate 6,602 8,317 450
----------- ----------- -----------
Total $ 106,397 $ 29,332 $ 59,493
=========== =========== ===========
(1) Includes noncash capital expenditures of $6,000, $3,116, and $9,808 for
1997, 1996, and 1995, respectively.
Page 55
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
GEOGRAPHIC DATA
1997 1996 1995
---------- ----------- ----------
NET SALES:
United States $ 162,610 $ 121,782 $ 124,865
Canada 20,824 18,953 18,765
---------- ----------- ----------
North America 183,434 140,735 143,630
Latin America
(principally Mexico) 61,869 49,444 43,684
Western Europe 52,413 59,294 58,170
Yugoslavia 225,530 267,166 234,661
Russia 134,688 66,788 20,300
Hungary 59,980 21,461 --
Poland 13,070 -- --
----------- ----------- ----------
Eastern Europe 433,268 355,415 254,961
Asia, Africa, and Australia 21,218 9,192 7,460
---------- ----------- ----------
Total $ 752,202 $ 614,080 $ 507,905
========== =========== ==========
OPERATING INCOME (LOSS):
United States $ 60,188 $ 52,461 $ 64,810
Canada 7,423 1,399 4,501
---------- ----------- ----------
North America 67,611 53,860 69,311
Latin America
(principally Mexico) 16,167 11,246 8,757
Western Europe 1,761 607 4,712
Yugoslavia 60,235 70,616 46,296
Russia 28,982 22,021 6,179
Hungary 10,256 1,964 --
Poland 2,695 -- --
---------- ----------- ----------
Eastern Europe 102,168 94,601 52,475
Asia, Africa, and Australia (849) 15 205
Corporate (61,560) (46,216) (42,294)
----------- ----------- ----------
Total $ 125,298 $ 114,113 $ 93,166
=========== =========== ==========
Page 56
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
1997 1996 1995
----------- ---------- ---------
IDENTIFIABLE ASSETS:
United States $ 377,315 $ 105,670 $ 57,070
Canada 11,282 7,433 8,865
----------- ---------- ---------
North America 388,597 113,103 65,935
Latin America
(principally Mexico) 30,191 30,691 23,823
Western Europe 48,086 56,578 57,950
Yugoslavia 421,731 342,983 262,272
Russia 145,162 54,990 12,668
Hungary 79,632 77,245 --
Poland 68,066 -- --
----------- ---------- ---------
Eastern Europe 714,591 475,218 274,940
Asia, Africa, and Australia 26,812 2,524 1,786
Corporate 283,468 100,537 93,864
----------- ---------- ---------
Total $ 1,491,745 $ 778,651 $ 518,298
=========== ========== =========
14. ICN YUGOSLAVIA
The summary balance sheets of ICN Yugoslavia as of December 31, 1997 and 1996,
and the summary statements of income before provision for income taxes and
minority interest for the years ended December 31, 1997, 1996 and 1995, are
presented below.
ICN YUGOSLAVIA SUMMARY BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(in thousands)
1997 1996
---- ----
Cash $ 31,701 $ 27,074
Accounts receivable, net 73,115 158,292
Notes receivable 145,431 --
Inventories, net 43,549 53,016
Other current assets 11,255 11,452
Other long-term assets 126,424 104,983
---------- ----------
$ 431,475 $ 354,817
========== ==========
Current liabilities $ 55,070 $ 38,386
Minority interest and long-term liabilities 94,455 76,344
Stockholders' equity 281,950 240,087
---------- ----------
$ 431,475 $ 354,817
========== ==========
Page 57
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
ICN YUGOSLAVIA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
1997 1996 1995
---- ---- ----
Net sales $ 225,530 $ 267,166 $ 234,661
Cost of sales 117,210 157,981 116,748
--------- --------- ---------
Gross profit 108,320 109,185 117,913
Operating expenses 48,085 38,569 71,617
--------- --------- ---------
Income from operations 60,235 70,616 46,296
Interest income (10,893) (2,132) (4,087)
Interest expense 107 1,478 3,610
Translation and exchange (gains) losses, net 12,602 4,290 (12,063)
--------- --------- ---------
Income before provision for income
taxes and minority interest $ 58,419 $ 66,980 $ 58,836
========= ========= =========
BUSINESS ENVIRONMENT: ICN Yugoslavia, a 75% owned subsidiary, operates in a
business environment that is subject to significant economic volatility and
political instability. The current trend in Yugoslavia is toward unfavorable
economic conditions that include continuing liquidity problems, inflationary
pressures, unemployment, a weakened banking system and a high trade deficit. The
future of the economic and political environment of Yugoslavia is uncertain and
could deteriorate to the point that a material adverse impact on the Company's
financial position and results of operations could occur.
LIQUIDITY PROBLEMS: In an effort by the Central Bank of Yugoslavia to control
inflation through tight monetary controls, Yugoslavia is now experiencing severe
liquidity problems. This has resulted in longer collection periods for ICN
Yugoslavia's receivables. Most of ICN Yugoslavia's customers are slow to pay due
to delays of health care payments by the government. This has also resulted in
ICN Yugoslavia being unable to make timely payments on its payables. Under the
current credit terms with the Yugoslavian government, discussed below, the
government is obligated to pay a minimum of $9,500,000 per month on its
outstanding obligations to the Company. The credit arrangement also limits the
total receivable from the government to $200,000,000 which could limit sales in
the future to an amount equal to cash collections from the government. ICN
Yugoslavia holds approximately U.S. $19,731,000 of cash in a bank outside of
Yugoslavia, originally intended to be used for future plant expansion in
Yugoslavia. These funds may be available for working capital purposes if
necessary.
INFLATION AND MONETARY EXPOSURE: ICN Yugoslavia operates in a highly
inflationary economy and uses the dollar as the functional currency rather than
the Yugoslavian dinar. Before the enactment of an economic stabilization program
in January 1994, the rate of inflation in Yugoslavia was over one billion
percent per year. The rate of inflation was dramatically reduced when, on
January 24, 1994, the Yugoslavian government enacted a "Stabilization Program"
designed to strengthen its currency. Throughout 1994, this program was
successful in reducing inflation to approximately 5% per year, increasing the
availability of hard currency, stabilizing the exchange rate of the dinar, and
improving the overall economy in Yugoslavia.
Throughout 1995, the effectiveness of the Stabilization Program weakened and ICN
Yugoslavia began experiencing a decline in the availability of hard currency and
inflation levels accelerated to an approximate annual rate of 90% by the end of
the year. In expectation of a devaluation late in 1995, ICN Yugoslavia took
action early in the fourth quarter of 1995 to reduce its monetary exposure by
shortening the payment terms on its receivables, reducing sales levels,
accelerating the purchase of inventory and accelerating the purchase of building
materials for its plant expansion. On November 24, 1995, the dinar devalued from
a rate of 1.4 dinars per U.S. $1 to a rate of 4.7 dinars per U.S. $1. On this
date, ICN Yugoslavia had a net monetary liability position that resulted in a
gain of $8,724,000.
Page 58
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
Throughout 1996, the level of inflation in Yugoslavia was relatively stable,
with a Yugoslavian government reported inflation rate of 60%. During that time
the government exercised restraint on the amount of dinars in circulation. The
net monetary asset position of ICN Yugoslavia increased during 1996 due to
rising accounts receivable balances resulting from higher sales and a
lengthening of the accounts receivable collection period. From a beginning
balance of $7,396,000 at December 31, 1995, the net monetary asset position of
ICN Yugoslavia rose to $134,000,000 at December 31, 1996.
During 1997, the Company reduced its monetary exposure by converting certain
dinar-denominated accounts receivable into notes receivable payable in dinars,
but fixed in dollar amounts. Additionally, the Company established credit terms
with the government whereby future receivables would be interest bearing with
one-year terms and would be payable in dinars, but fixed in dollar amounts. As
of December 31, 1997, ICN Yugoslavia had a net monetary asset position of
$60,000,000 which would be subject to foreign exchange loss if a devaluation of
the dinar were to occur.
As required by generally accepted accounting principles ("GAAP"), the Company
translates ICN Yugoslavia financial results at the dividend payment rate
established by the National Bank of Yugoslavia. To the extent that changes in
this rate lag behind the level of inflation, sales and expenses will, at times,
tend to be inflated. Future sales and expenses can increase substantially if the
timing of future devaluations falls significantly behind the level of inflation.
POTENTIAL DEVALUATION: The potential loss arising from a devaluation will depend
on the size of the devaluation and the magnitude of the net monetary asset
position at the time of the devaluation. The timing and the size of a
devaluation are strongly influenced by the amount of inflation and length of
time from the last devaluation. Since the last devaluation on November 24, 1995,
the cumulative level of inflation has been estimated at approximately 70%. If a
devaluation were to occur based on this level of inflation, and assuming the
Company's net monetary exposure of $60,000,000 at December 31, 1997, the Company
could incur a foreign exchange loss of approximately $24,000,000. The risk of
devaluation increases as time passes and inflation continues. However, the
Company is unable to predict either the exact magnitude or the timing of any
future devaluation.
CREDIT RISK: ICN Yugoslavia is subject to credit risk in that approximately 80%
or $162,200,000 of 1997 Yugoslavian domestic sales are to the government or
government funded entities. During 1997, other than the customer discussed below
there were no other customers that represented more than 10% of total sales or
accounts receivable.
During 1997, the Company reduced its monetary exposure by converting dinar
denominated accounts receivable from various distributors into notes receivable
from the Yugoslavian government payable in dinars, but fixed in dollar amounts.
The first agreement was made early in the first quarter of 1997 with $50,000,000
accounts receivable converted into a one year note bearing interest at LIBOR
plus 1%. Approximately $47,000,000 from this first note was refinanced in early
1998, with full payment including interest at LIBOR plus 1% scheduled for 1998.
A second agreement was arranged at the end of the first quarter of 1997 whereby
the Yugoslavian government agreed to purchase $50,000,000 of drugs. The sales
under this agreement were recorded as notes receivable bearing interest at LIBOR
plus 1% on the outstanding balance which have payment guarantees fixed in dollar
amounts. The second agreement also allows the Company to offset certain payroll
tax obligations against outstanding accounts receivable balances. Subsequent to
these two agreements, the Company negotiated an arrangement with the Yugoslavian
government under which ICN Yugoslavia would commit to continue to provide
products, in dollar denominated sales, in an amount up to $50,000,000 per
calendar quarter for one year, and the government would pay a minimum of
$9,500,000 per month towards outstanding accounts receivable. However, at no
point in time can the amount due to ICN Yugoslavia from the government exceed
$200,000,000, including both accounts and notes receivable. Receivables that
arise from this agreement are interest bearing with interest at LIBOR plus 1%.
As of December 31, 1997, ICN Yugoslavia has approximately $145,431,000 of notes
receivable from the Yugoslavian government under these credit terms.
Additionally, sales of approximately $140,700,000 under the above agreements
were made to Velefarm, an affiliated entity, acting as agent for the Yugoslavian
government.
SANCTIONS AND POLITICS: In December 1995, the United Nations Security Council
adopted a resolution that suspended economic sanctions that had been imposed on
the Federal Republic of Yugoslavia since May 1992. A substantial majority of ICN
Yugoslavia's business is conducted in the Federal Republic of Yugoslavia.
Page 59
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
Sanctions had contributed to an overall deteriorating business environment in
which ICN Yugoslavia operated. Sanctions also created restrictions on ICN
Yugoslavia's overseas investments and imposed administrative burdens in
obtaining raw materials outside of Yugoslavia.
The Company believes the suspension of sanctions continues to provide a more
favorable business environment; however, the beneficial effects of the
suspension will not take place immediately as the economy needs to adjust to new
opportunities. Additionally, Yugoslavia has not fully recovered the
international status it held before sanctions. The Yugoslavian government is
still negotiating to regain membership in the International Monetary Fund and
the World Bank.
Yugoslavia is subject to political instability. The elections that took place in
1997 have not resulted in a change of political leadership that would provide
for a foundation of significant economic reforms. The Federal Republic of
Yugoslavia is comprised of two states, Serbia and the much smaller state of
Montenegro. Within Yugoslavia there exists significant political dissension and
unrest. The state of Montenegro has been active in seeking greater autonomy from
Serbia. Additionally, recent social unrest in the Serbian province of Kosovo
could lead to increased instability in the Balkans. United States diplomats have
warned that the Serbian actions and policies in Kosovo could lead to
reinstatement of economic sanctions on Yugoslavia.
PRICE CONTROLS: ICN Yugoslavia is subject to price controls in Yugoslavia. The
size and frequency of government approved price increases is influenced by local
inflation, devaluations, cost of imported raw materials and demand for ICN
Yugoslavia products. During 1997 and 1996, ICN Yugoslavia received no price
increases due to relatively lower levels of inflation. As inflation rises, the
size and frequency of price increases are expected to increase. During the third
quarter of 1995, ICN Yugoslavia received a 30% price increase on its
pharmaceutical products. This was the first price increase the government had
allowed since the start of the Stabilization Program. Subsequent to the
devaluation on November 24, 1995, ICN Yugoslavia received an 80% price increase
on its pharmaceutical products. Price increases obtained by ICN Yugoslavia are
based on economic events preceding the price increase and not on expectations of
ongoing inflation. This lag in permitted price increases creates downward
pressure on the gross margins that ICN Yugoslavia receives on its products. When
necessary, ICN Yugoslavia will limit sales of products that have poor margins
until an acceptable price increase is received. The impact of an inability to
obtain adequate price increases in the future could have an adverse impact on
the Company as a result of declining gross profit margins or declining sales in
an effort to maintain existing gross margin levels.
DIVIDENDS: In 1992, ICN Yugoslavia paid a $10,000,000 dividend of which the
Company received 75% or $7,500,000. Yugoslavian law allows free distribution of
earnings whether to domestic (Yugoslavian) or international investors. Under
this law a dividend must be declared and paid immediately after year end.
Earnings that are not immediately paid as a dividend cannot be used for future
dividends. Additionally, ICN Yugoslavia is allowed to pay dividends out of
earnings calculated under local statutory tax basis rules, not earnings
calculated under GAAP. ICN Yugoslavia dividends are payable in dinars which must
be exchanged for dollars before the dividend is repatriated. During high levels
of inflation the dinar denominated dividend could devalue substantially by the
time the dividend is exchanged for dollars. Under GAAP, ICN Yugoslavia had
accumulated earnings, which are not available for distributions, of
approximately $207,384,000 at December 31, 1997. However, additional
repatriation of cash could be declared from contributed capital for Yugoslavian
purposes of $360,000,000 at December 31, 1997, as provided for in the original
purchase agreement. In 1992, the Company made the decision to no longer
repatriate the earnings of ICN Yugoslavia and instead will use these earnings
for local operations, plant expansion, reduction of debt and additional
investment in Eastern Europe.
Page 60
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
15. AGREEMENT WITH SCHERING-PLOUGH CORPORATION
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement (the "Agreement") and a Stock Purchase Agreement with a subsidiary of
Schering-Plough to license the Company's proprietary antiviral drug ribavirin as
a treatment for chronic hepatitis C in combination with Schering-Plough's alpha
interferon. The Agreement provided the Company an initial non-refundable payment
by Schering-Plough of $23,000,000 and future royalty payments to the Company for
marketing of the drug, including certain minimum royalty rates. Schering-Plough
will have exclusive marketing rights for ribavirin for hepatitis C worldwide,
except that the Company will retain the right to co-market in the countries of
the European Economic Community. In addition, Schering-Plough will purchase up
to $42,000,000 in common stock of the Company upon the achievement of certain
regulatory milestones. Under the Agreement, Schering-Plough is responsible for
all clinical developments worldwide.
The $23,000,000 non-refundable payment has been recorded by the Company as
prepaid royalty income of $10,000,000, a license fee of $8,000,000 and a
liability to Schering-Plough for certain cost sharing agreements of $5,000,000.
The prepaid royalty will be amortized to income based upon future sales of the
product and the license fee will be amortized on a straight-line basis to income
over the fifteen year exclusive period of the Agreement. At December 31, 1997,
the unamortized portion of these balances totals $12,614,000.
16. SUPPLEMENTAL CASH FLOWS DISCLOSURES
During 1997, noncash transactions included the conversion of $124,060,000 of
long-term debt to 10,052,000 shares of common stock, the issuance of 5,400,00
shares of common stock valued at $179,008,000 in connection with the acquisition
of product rights from Roche, and the issuance of 812,000 shares of common stock
valued at $10,000,000 in settlement of litigation. In addition, the Company
received a 42.6% interest in Velefarm, a Yugoslavian distributor of
pharmaceutical products, in exchange for outstanding accounts receivable of
$13,224,000.
During 1996, a principal amount of SFr. 4,952,000 of the 3-1/4% Subordinated
Double Convertible Bonds due 1997 was converted into 6,190 shares of Ciba-Geigy
Ltd. common stock, reducing long term debt by $4,240,000 and other assets by
$3,988,000. In March 1996, the Company sold its instrument business division to
Titertek Instruments, Inc. ("Titertek"), an Alabama corporation, in exchange for
a $4,400,000 note receivable from Titertek, resulting in a deferred gain of
$2,000,000 (of which approximately $989,000 has been recognized at December 31,
1997). Noncash transactions for 1996 also included the issuance of common stock
for the acquisition of the Siemens dosimetry business (1,447,250 shares), the
Cappel Division of Organon Teknika Corporation (320,078 shares), and the
GlyDerm, Inc. dermatological business (216,000 shares). In addition, during 1996
the Company entered into capital leases of approximately $2,973,000 for the
purchase of computer equipment.
During 1995, the Company issued common stock dividends and distributions of
$29,187,000. There were none issued in 1996. Also during 1995, ICN Yugoslavia
exchanged, in a non-recourse transaction, accounts receivable for $10,900,000 of
inventories and $9,800,000 for construction materials for its plant expansion.
The following table sets forth the amounts of interest and income taxes paid
during 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Interest paid (net of amounts capitalized
of $5,419, $3,770 and $1,978 in
1997, 1996, and 1995, respectively) $ 11,750 $ 20,477 $ 21,330
======== ======== ========
Income taxes paid $ 4,543 $ 6,845 $ 6,915
======== ======== ========
Page 61
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1997
17. SUBSEQUENT EVENT
In February 1998, the Company acquired from SmithKline Beecham plc ("SKB") the
Asian, Australian and African rights to 39 prescription and over-the-counter
pharmaceutical products, including Actal, Breacol, Coracten, Eskornade, Fefol,
Gyno-Pevaryl, Maxolan, Nyal, Pevaryl, Ulcerin and Vylcim. The Company received
the product rights in exchange for $45,000,000 payable in a combination of
$22,500,000 in cash and 821 shares of the Company's Series D Convertible
Preferred Stock. Each share of the Series D Convertible Preferred Stock is
initially convertible into 750 shares of the Company's common stock (together,
the "SKB Shares"), subject to certain antidilution adjustments. Except under
certain circumstances, SKB has agreed not to sell the SKB Shares until November
4, 1999. The Company has agreed to pay SKB an additional amount in cash (or,
under certain circumstances, in shares of common stock) to the extent proceeds
received by SKB from the sale of the SKB Shares during a specified period ending
in December, 1999 and the then market value of the unsold SKB Shares do not
provide SKB with an average value of $46.00 per common share (including any
dividend paid on the SKB Shares). Alternatively, SKB is required to pay the
Company an amount, in cash or shares of the Company's common stock, to the
extent that such proceeds and market value provide SKB with an average per share
value in excess of $46.00 per common share (including any dividend paid on the
SKB Shares). The Company has also granted SKB certain registration rights
covering the common shares issuable upon conversion of the Series D Preferred
Stock.
Page 62
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- -------- -------- ---------- ---------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 8,870 $ 4,021 $ 1,901(2) $ (2,793) $ 11,999
======== ========= ========= ========== ========
Reserve for inventory obsolescence $ 10,153 $ 3,342 $ 600(2) $ (2,619) $ 11,476
======== ========= ========= ========== ========
Deferred tax asset valuation allowance $ 55,769 $ (32,692) $ -- $ -- $ 23,077
======== ========= ========= ========== ========
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts $ 8,070 $ 4,345 $ 557 $ (4,102) $ 8,870
======== ========= ========= ========== ========
Reserve for inventory obsolescence $ 12,709 $ 106 $ -- $ (2,662) $ 10,153
======== ========= ========= ========== ========
Deferred tax asset valuation allowance $54,181 $ -- $ 1,588 $ -- $ 55,769
======== ========= ========= ========== ========
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts $ 10,036 $ (1,262) $ (197) $ (507) $ 8,070
======== ========= ========= ========== ========
Reserve for inventory obsolescence $ 15,390 $ (2,310) $ 550 $ (921) $ 12,709
======== ========= ========= ========== ========
Deferred tax asset valuation allowance $ 86,492 $ -- $ (29,123)(1) $ (3,188) $ 54,181
======== ========= ========= ========== ========
(1) The credit to other accounts represents the reduction of goodwill and
intangible assets for the utilization and reevaluation of the ultimate
realization of acquired net operating losses and other deferred tax assets,
as a result of the Merger, and the settlement of an IRS examination for
1989 and 1988 (see Note 6 of Notes to the Consolidated Financial
Statements).
(2) These amounts represent acquisition-date balances of allowances for
doubtful receivables and reserves for inventory obsolescence of acquired
companies.
Page 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Page 64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1997 annual meeting of stockholders. Reference is made to that portion
of the Proxy Statement entitled "Information Concerning Nominees and Directors"
and "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1997 annual meeting of stockholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Related Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That information required under this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1997 annual meeting of stockholders. Reference is made to that portion
of the Proxy Statement entitled "Ownership of the Company's Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That information required under this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1997 annual meeting of stockholders. Reference is made to that portion
of the Proxy Statement entitled "Executive Compensation and Related Matters" and
"Certain Transactions."
Page 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
Financial Statements of the Registrant are listed in the index to Consolidated
Financial Statements and filed under Item 8, "Financial Statements and
Supplementary Data", included elsewhere in this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule of the Registrant is listed in the index to
Consolidated Financial Statements and filed under Item 8, "Financial Statements
and Supplementary Data," included elsewhere in this Form 10-K.
3. EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of Registrant,
previously filed as Exhibit 3.1 to Registration Statement 33-83952
on Form S-1, 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 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of the Registrant previously filed as
Exhibit 4.4 to Registration Statement No. 333-16409 on Form S-3,
which is incorporated herein by reference.
3.3 Bylaws of the Registrant previously filed as Exhibit 3.2 to
Registration Statement No. 33-83952 on Form S-1, which is
incorporated herein by reference.
3.4 Form of Rights Agreement, dated as of November 2, 1994, between
the Registrant and American Stock Transfer & Trust Company, as
trustee, previously filed as Exhibit 4.3 to the Company's
Registration Statement on Form 8-A, dated November 10, 1994, which
is incorporated herein by reference.
3.5 Certificate of Designation of Rights and Preferences of Series D
Convertible Preferred Stock of the Registrant, filed herewith.
10.1 Indenture, dated as of August 14, 1997, by and among ICN and
United States Trust Company of New York, relating to $275,000,000
9-1/4% Senior Notes due 2005, previously filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, which is incorporated herein by reference.*
10.2 Application for Registration, Foundation Agreement, Joint Venture
- ICN Oktyabr previously filed as Exhibit 10.46 to ICN
Pharmaceuticals, Inc. Annual Report on Form 10-K for the year
ended December 31, 1992, which is incorporated herein by
reference.
* None of the other indebtedness of the Registrant exceeds 10% of
its total consolidated assets. The Registrant will furnish copies
of the instruments relating to such other indebtedness upon
request.
Page 66
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
continued
10.3 Charter of the Joint Stock Company - ICN Oktyabr previously filed
as Exhibit 10.47 to ICN Pharmaceuticals, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1992, which is
incorporated herein by reference.
10.4 Agreement between ICN Pharmaceuticals, Inc. and Milan Panic, dated
October 1, 1988 previously filed as Exhibit 10.51 to ICN
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year
ended November 30, 1989, which is incorporated herein by
reference.
10.5 Amendment to Employment Contract between ICN Pharmaceuticals,
Inc., and Milan Panic, dated September 6, 1995 previously filed as
Exhibit 10.29 to ICN Pharmaceutical, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1995, which is incorporated
herein by reference.
10.6 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals,
Inc. and Adam Jerney, dated March 18, 1993 previously filed as
Exhibit 10.49 to SPI Pharmaceuticals, Inc.'s Amendment No. 2 to
the Annual Report on Form 10-K for the year ended on December 31,
1992, which is incorporated herein by reference.
10.7 Agreement among ICN Pharmaceuticals, Inc., Viratek, Inc. and John
Giordani, dated March 18, 1993 previously filed as Exhibit 10.3 to
Registration Statement No. 33-84534 on Form S-4 dated September
28, 1994, which is incorporated herein by reference.
10.8 Agreement among ICN Pharmaceuticals, Inc., ICN Biomedicals, Inc.,
SPI Pharmaceuticals, Inc. and Bill MacDonald, dated March 18, 1993
previously filed as Exhibit 10.4 to Registration Statement No.
33-84534 on Form S-4 dated September 28, 1994, which is
incorporated herein by reference.
10.9 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals,
Inc. and Jack Sholl dated March 18, 1993, previously filed as
Exhibit 10.49 to ICN Pharmaceuticals, Inc.'s Amendment No. 2 to
the Annual Report on Form 10-K for the year ended December 31,
1992, which is incorporated herein by reference.
10.10 Agreement between ICN Pharmaceuticals, Inc. and John Julian, dated
May 2, 1995, previously filed as Exhibit 10.11 to ICN
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, which is incorporated herein by
reference.
10.11 Agreement between ICN Pharmaceuticals, Inc. and Devron Averett,
dated June 14, 1996, previously filed as Exhibit 10.12 to ICN
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, which is incorporated herein by
reference.
10.12 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals,
Inc. and David Watt dated March 18, 1993, previously filed as
Exhibit 10.49 to SPI Pharmaceuticals, Inc.'s Amendment No. 2 to
the Annual Report on Form 10-K for the year ended December 31,
1992, which is incorporated herein by reference.
10.13 ICN Pharmaceuticals, Inc. 1992 Employee Incentive Stock Option
Plan, previously filed as Exhibit 10.56 to ICN Pharmaceuticals,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1992, which is incorporated herein by reference.
10.14 ICN Pharmaceuticals, Inc. 1992 Non-Qualified Stock Plan,
previously filed as Exhibit 10.57 to ICN Pharmaceuticals, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1992,
which is incorporated herein by reference.
Page 67
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
continued
10.15 ICN Pharmaceuticals, Inc. 1994 Stock Option Plan previously filed
as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, which is incorporated herein
by reference.
10.16 Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July 28, 1995
previously filed as Exhibit 10 to ICN Parmaceuticals, Inc.'s
Amendment 3 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, which is incorporated herein by
reference.
10.17 Collateral Agreement between Milan Panic and the Registrant, dated
August 14, 1996, previously filed as Exhibit 10.32 to ICN
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, which is incorporated herein by
reference.
10.18 Agreement dated December 23, 1996 by and among the Registrant and
those persons identified as purchasers on Schedule A thereto,
previously filed as Exhibit 4 (c) (1) to the Registrant's Current
Report on Form 8-K dated December 24, 1996, which is incorporated
herein by reference.
10.19 Form of Asset Purchase Agreement by and between Hoffman-La Roche
Inc., a New Jersey corporation, and ICN Pharmaceuticals, Inc., a
Delaware corporation, dated as of October 30, 1997, previously
filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997,
which is incorporated herein by reference.
10.20 Form of Asset Purchase Agreement by and between Roche Products
Inc., a Panamanian corporation, and ICN Pharmaceuticals, Inc., a
Delaware corporation, dated as of October 30, 1997, previously
filed as Exhibit 10.2 to ICN Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997,
which is incorporated herein by reference.
10.21 Form of Asset Purchase Agreement by and between Syntex (F.P.)
Inc., a Delaware corporation, Syntex (U.S.A.), a Delaware
corporation, and ICN Pharmaceuticals, Inc., a Delaware
corporation, dated as of October 30, 1997, previously filed as
Exhibit 10.3 to ICN Pharmaceuticals, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, which is
incorporated herein by reference.
10.22 Agreement for the Sale and Purchase of a Portfolio of
Pharmaceutical, OTC and Consumer Healthcare Products between
SmithKline Beecham plc and ICN Pharmaceuticals, Inc., filed
herewith.
10.23 Credit Agreement dated as of March 31, 1997 by and between Banque
Nationale de Paris and ICN Pharmaceuticals, Inc., filed herewith.
10.24 Second Amendment to Credit Agreement dated as of March 31, 1997 by
and between Banque Nationale de Paris and ICN Pharmaceuticals, Inc.,
filed herewith.
10.25 ICN Pharmaceuticals, Inc. Executive Long-Term Incentive Plan, to be
filed by amendment.
Page 68
21. Subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand L.L.P. Independent Accountants.
27. Financial Data Schedule for the year ended December 31, 1997.
27. Financial Data Schedule for the year ended December 31, 1996.
27. Financial Data Schedule for the year ended December 31, 1995.
27. Financial Data Schedule for the three months ended March 31, 1997
27. Financial Data Schedule for the six months ended June 30, 1997.
27. Financial Data Schedule for the nine months ended September 30, 1997.
27. Financial Data Schedule for the three months ended March 31, 1996.
27. Financial Data Schedule for the six months ended June 30, 1996.
27. Financial Data Schedule for the nine months ended September 30, 1996.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarter
ended December 31, 1997:
Form 8-K dated December 8, 1997, as amended, reporting the acquisition
of certain assets from F. Hoffmann-La Roche Ltd., including the following
financial statements:
Special Purpose Financial Statement of F. Hoffman-La Roche Ltd.,
Hoffmann-La Roche Inc., and Roche Products Inc. for the year ended
December 31, 1996.
Unaudited Interim Special-Purpose Financial Stateents of F. Hoffman-
La Roche Ltd., Hoffman-la Roche Inc., and Roche Products Inc. for the
six months ended June 30, 1997.
Unaudited Interim Special-Purpose Financial Statements of Hoffman-La
Roche Inc. and Roche Products Inc. for the three months ended
September 30, 1997.
Page 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 1998
By: /S/ MILAN PANIC
------------------------------------------------
Milan Panic,
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ MILAN PANIC Date: March 30, 1998
- ----------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
/S/ JOHN E. GIORDANI Date: March 30, 1998
- ----------------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
/S/ NORMAN BARKER, JR. Date: March 30, 1998
- ----------------------------------------------------
Norman Barker, Jr., Director
/S/ BIRCH BAYH Date: March 30, 1998
- ----------------------------------------------------
Senator Birch Bayh, Director
/S/ ALAN F. CHARLES Date: March 30, 1998
- ----------------------------------------------------
Alan F. Charles, Director
/S/ ROGER GUILLEMIN Date: March 30, 1998
- ----------------------------------------------------
Roger Guillemin, M.D., Ph.D., Director
/S/ ADAM JERNEY Date: March 30, 1998
- ----------------------------------------------------
Adam Jerney, President, Chief Operating Officer,
Director
/S/ DALE M. HANSON Date: March 30, 1998
- ----------------------------------------------------
Dale M. Hanson, Director
Page 70
SIGNATURES - continued
/S/ WELDON B. JOLLEY Date: March 30, 1998
- ----------------------------------------------------
Weldon B. Jolley, Ph. D., Director
/S/ ANDREI V. KOZYREV Date: March 30, 1998
- ----------------------------------------------------
Andrei V. Kozyrev, Director
/S/ JEAN-FRANCOIS KURZ Date: March 30, 1998
- ----------------------------------------------------
Jean-Francois Kurz, Director
/S/ THOMAS LENAGH Date: March 30, 1998
- ----------------------------------------------------
Thomas Lenagh, Director
/S/ CHARLES T. MANATT Date: March 30, 1998
- ----------------------------------------------------
Charles T. Manatt, Director
/S/ STEPHEN MOSES Date: March 30, 1998
- ----------------------------------------------------
Stephen Moses, Director
/S/ MICHAEL SMITH Date: March 30, 1998
- ----------------------------------------------------
Michael Smith, Ph.D., Director
/S/ ROBERTS A. SMITH Date: March 30, 1998
- ----------------------------------------------------
Roberts A. Smith, Ph.D., Director
/S/ RICHARD W. STARR Date: March 30, 1998
- ----------------------------------------------------
Richard W. Starr, Director
Page 71
EXHIBIT INDEX
EXHIBIT PAGE NO.
3.5 Certificate of Designation of Rights and Preferences of Series
D Convertible Preferred Stock of ICN Pharmaceuticals Inc.
10.22 Agreement for the Sale and Purchase of a Portfolio of Pharma-
ceutical, OTC and Consumer Healthcare Products between SmithKline
Beecham plc and ICN Pharmaceuticals, Inc.
10.23 Credit Agreement dated as of March 31, 1997 by and between Banque
Nationale de Paris and ICN Pharmaceuticals, Inc.
10.24 Second Amendment to Credit Agreement dated as of March 31, 1997 by
and between Banque Nationale de Paris and ICN Pharmaceuticals, Inc.
21. Subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand L.L.P. Independent Accountants.
27. Financial Data Schedule for the year ended December 31, 1997.
27. Financial Data Schedule for the year ended December 31, 1996.
27. Financial Data Schedule for the year ended December 31, 1995.
27. Financial Data Schedule for the three months ended March 31, 1997
27. Financial Data Schedule for the six months ended June 30, 1997.
27. Financial Data Schedule for the nine months ended September 30, 1997.
27. Financial Data Schedule for the three months ended March 31, 1996.
27. Financial Data Schedule for the six months ended June 30, 1996.
27. Financial Data Schedule for the nine months ended September 30, 1996.