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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998. 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:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------- ---------------
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
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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 of the Registrant on March 23, 1999, was approximately
$1,752,699,000.
The number of outstanding shares of the Registrant's Common Stock as of
March 23, 1999 was 77,419,478.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in ICN Pharmaceuticals, Inc.'s definitive
Proxy Statement for the 1999 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 hereof.
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TABLE OF CONTENTS
PAGE
----
PART I
1. Business................................................................................ 2
2. Properties.............................................................................. 12
3. Legal Proceedings....................................................................... 14
4. Submission of Matters to a Vote of Security Holders..................................... 14
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................... 15
6. Selected Financial Data................................................................. 16
7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 18
7a. Quantitative and Qualitative Disclosures About Market Risk.............................. 29
8. Financial Statements and Supplementary Data............................................. 32
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 61
PART III
10. Directors and Executive Officers of the Registrant...................................... 62
11. Executive Compensation.................................................................. 62
12. Security Ownership of Certain Beneficial Owners and Management.......................... 62
13. Certain Relationships and Related Transactions.......................................... 62
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 63
(ii)
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. In 1998, the Company had revenues of $838.1 million and a net loss of
$352.1 million. Based on the closing price of the Company's common stock on the
New York Stock Exchange on March 23, 1999, the Company has an equity market
capitalization of approximately $1.8 billion.
The Company distributes and sells a broad range of prescription (or "ethical")
and OTC pharmaceutical and nutritional products in over 90 countries. These
pharmaceutical products treat viral and bacterial infections, diseases of the
skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and
psychiatric disorders.
The Company pursues a strategy of international expansion which includes: (i)
the consolidation of the Company's leadership position in Eastern Europe,
including Russia; (ii) the acquisition of high margin products that complement
existing product lines and can be 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. The Company continues to review
opportunities for acquisitions throughout the regions in which it operates.
The Company currently operates nine pharmaceutical companies throughout Eastern
Europe (including Russia) and, as measured by sales, the Company believes it is
one of the largest pharmaceutical companies in Eastern Europe (including
Russia), 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 also believes it has established itself as one of the
largest pharmaceutical companies, as measured by sales, in Russia, a market that
is expected to grow significantly over the next decade.
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 pharmaceutical companies. The Company has
increased sales and profitability in part by acquiring high margin
pharmaceutical products that complement its existing product lines.
RECENT DEVELOPMENTS
ICN YUGOSLAVIA
On February 6, 1999, the government of the Federal Republic of Yugoslavia,
acting through the Federal Ministry of Health and/or the Ministry of Health of
Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia.
This action, based on a decision reached by the Ministry for Economic and
Property Transformation on November 26, 1998, effectively reduced the Company's
equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and
Property Transformation decision was based on the unilaterally imposed
recalculation of the Company's original capital contribution to ICN Yugoslavia.
Subsequent to the seizure, the Commercial Court of Belgrade issued an order
stating that a change in control had occurred. These actions were taken,
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contrary to Yugoslav law, without any notification to or representation by the
Company. Since the change of control, representatives of the Company and ICN
Yugoslavia's management have been denied access to the premises and any
representation as to the management of ICN Yugoslavia. As a result of the
Yugoslavian government's actions, the Company recorded a charge of $235.3
million in the fourth quarter of 1998, reflecting the write-off of all of the
Company's investment in ICN Yugoslavia and related assets. ICN Yugoslavia
represented a material part of the Company's business, generating approximately
17%, 30%, and 44% of the Company's revenues for the years ended December 31,
1998, 1997, and 1996. See "Management's Discussion and Analysis of Results of
Operations--Recent Events."
RUSSIA
The Company's operations in Russia were adversely affected by the Russian
economic crisis. In the third quarter of 1998, the Russian government and the
Russian Central Bank were no longer able to support the ruble at its
then-current exchange rate of approximately 6.3 rubles to the dollar.
Subsequently, the ruble fell sharply and at December 31, 1998, the exchange rate
was approximately 20.7 rubles to the dollar, a decline of more than 68% from the
ruble's mid-August 1998 level. As a result of the decline in the ruble exchange
rate, the Company recorded foreign exchange losses of $53.8 million related to
its Russian operations during 1998. Subsequent to December 31, 1998, the value
of the ruble has continued to decline in relation to the dollar, exceeding 23
rubles to the dollar.
The Company believes that the economic crisis in Russia has adversely affected
the pharmaceutical industry in the region. Many Russian companies, including
many of the Company's customers, continue to experience severe liquidity
shortages as rubles are in short supply, and Russian companies' hard-currency
assets remain frozen in Russian banks. This liquidity crisis has diminished many
Russian companies' ability to pay their debts and is likely to lead to a number
of business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, thus increasing pressure on
the Company and other producers to limit price increases in hard currency terms.
These factors have adversely affected, and may continue to adversely affect,
sales and gross margins in the Company's Russian operations. See "Management's
Discussion and Analysis of Results of Operations--Recent Events."
ACQUISITIONS
Effective October 1, 1998, the Company completed the acquisition of the
worldwide rights (except India) to four products from F. Hoffmann - La Roche
Ltd. ("Roche"). The products include Dalmadorm(R), a sleep disorder drug;
Fluoro-Uracil(R), an oncology product; Librax(R), a treatment for
gastrointestinal disorders; and Mogadon(R), a sleep disorder drug also used to
treat epilepsy. Aggregate consideration for the products was $178.8 million,
paid in a combination of $89.4 million cash and 2,883,871 shares of the
Company's common stock, valued at $89.4 million. Under the terms of the
Company's agreement with Roche, the Company has guaranteed to Roche a per share
price initially at $31.00, increasing at a rate of 6% per annum through December
31, 2000. If Roche sells any of the shares prior to December 31, 2000, the
Company is entitled to one-half of any proceeds realized by Roche in excess of
the guaranteed price. If the market price of the Company's common stock is below
the guaranteed price at the end of the guarantee period, the Company will be
required to satisfy the aggregate guarantee amount by payment to Roche in cash
or, in certain circumstances, in additional shares of the Company's common
stock.
In October 1998, the Company entered into agreements with Senetek plc under
which it obtained rights to market certain products, including the worldwide
rights to market Kinetin(R) (marketed by the Company as Kinerase(R)), a skin
cream to inhibit signs of aging, through physicians and pharmacies. The Company
will market this product primarily through its existing operations. In Latin
America, the Company recently acquired the rights to market three products from
SmithKline Beecham plc ("SKB"), which the Company believes complement its
existing product line and increase its market presence in Latin America.
In July 1998, the Company acquired Vyzkumny Ustav Antibiotic a Biotransformacii
("VUAB"), a manufacturing and research facility located in a suburb of Prague,
Czech Republic for $17.9 million in cash. VUAB's two main product lines are
finished forms of human drugs, including injectable antibiotics and infusion
solutions, and pharmaceutical raw materials, including ephedrine, a powdered or
crystalline alkaloid used in the treatment of allergies and asthma, and
nystatin, an antibiotic used in the treatment of fungal infections. The Company
believes that VUAB currently accounts for approximately 10 % and 8%,
respectively, of the world market for ephedrine and nystatin. Exports of these
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products accounted for more than 50% of VUAB's total 1998 pro forma product
sales volume of $17.5 million.
On April 1, 1998, Eli Lilly and Company ("Lilly") and the Company entered into
an agreement in which the Company acquired the rights to manufacture, market and
sell several Lilly pharmaceutical products in Russia and the Commonwealth of
Independent States ("CIS") under the Company's brand names. Lilly will continue
to market these products under its own brand names.
On March 18, 1998, the Company acquired the global rights to a portfolio of 32
dermatology products from Laboratorio Pablo Cassara, an Argentine-based
pharmaceutical manufacturer, for consideration of $22.5 million. These products
had pro forma annual sales in Argentina of $9.2 million in 1998. The Company
markets these products through its subsidiary, ICN Argentina.
In February 1998, the Company acquired from SKB the Asian, African and
Australian rights to 39 prescription and over-the-counter pharmaceutical
products. These products had pro forma annual sales of $27.1 million in 1998.
The Company received the product rights in exchange for $45.5 million, of which
$22.5 million was paid in cash and the balance in 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.
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 the guarantee 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, should SKB sell the SKB shares
at any time during the guarantee period, the agreement entitles the Company to
any of the proceeds realized by SKB in excess of the guarantee price.
In 1997, the Company acquired the rights to 11 products from Roche for $183.2
million. The products include Librium(R) (tranquilizer), Efudex(R) (topical
anti-skin cancer), Glutril(R) (anti-diabetic), Alloferin(R) (anesthetic),
Ancotil(R) (antifungal), Limbitrol(R) (anti-depressant), Protamin(R) (heparin
overdose), Levo-Dromoran(R) (pain management) and
Mestinon(R)/Prostigmin(R)/Tensilon(R) (myasthenia gravis). Sales of these
products contributed $106.1 million to the Company's revenues for 1998. 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.
The Company's research and development activities are based upon the expertise
accumulated in over 35 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. In 1995, the Company entered into a License Agreement
with Schering-Plough Corporation ("Schering-Plough") whereby Schering-Plough
licensed all oral forms of ribavirin for the treatment of chronic hepatitis C in
combination with Schering-Plough's alpha interferon (the "Combination Therapy").
The License Agreement provided the Company an initial non-refundable payment and
future royalty payments to the Company from sales of ribavirin by
Schering-Plough, including certain minimum royalty rates. As part of the initial
License Agreement, the Company retained the right to co-market ribavirin
capsules in the European Union under its trademark Virazole(R). Schering-Plough
currently has exclusive marketing rights for oral forms of ribavirin for
hepatitis C worldwide and is responsible for all clinical development and
regulatory activities. In addition, Schering-Plough agreed to purchase up to
$42.0 million in common stock of the Company upon achieving certain regulatory
milestones. In 1998, the Company sold to Schering-Plough its rights to co-market
oral ribavirin for the treatment of hepatitis C in the European Union in
exchange for increased royalty rates on sales of ribavirin worldwide.
5
In June 1998, Schering-Plough received approval from the United States Food and
Drug Administration ("FDA") to market Combination Therapy under the brand name
Rebetron(TM) for the treatment of chronic hepatitis C in patients with
compensated liver disease who have relapsed following alpha interferon therapy
and began selling Combination Therapy in the United States. On June 9, 1998,
Schering-Plough submitted a Marketing Authorization Application ("MAA") for
Rebetron(R) to the European Agency for the Evaluation of Medicinal Products
("EMEA") for the treatment of relapsed chronic hepatitis C patients. On June 16,
1998, Schering-Plough filed a supplemental New Drug Application ("NDA") with the
FDA for Combination Therapy for the treatment of chronic hepatitis C in patients
with compensated liver disease previously untreated with alpha interferon
therapy (referred to as treatment-naive patients) and in December 1998, this
supplemental NDA was approved by the FDA.
The Company believes that the approval of Combination Therapy for the treatment
of chronic hepatitis C is important to the Company because of the potential size
of the chronic hepatitis C market in the United States, Western Europe, Japan
and other markets. According to the Centers for Disease Control and Prevention
("CDCP"), approximately four million Americans are chronically infected with the
hepatitis C virus. Of these, 20%-50% are expected to develop liver cirrhosis, of
which 20%-30% are expected to go on to develop liver cancer or liver failure
requiring liver transplant. An equal or greater degree of disease prevalence is
projected in Western Europe and Japan.
Besides the use of ribavirin in Combination Therapy, the Company markets
ribavirin under its own trademark Virazole(R) for commercial sale in over 40
countries for one or more of a variety of viral infections, including
respiratory syncytial virus ("RSV"). In the United States and Europe,
Virazole(R) is approved only for use in hospitalized infants and children with
severe lower respiratory infections due to RSV.
In addition to its pharmaceutical operations, the Company also develops,
manufactures and sells, through its wholly-owned subsidiary, Biomedicals, 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. Biomedicals
accounted for approximately 7% of the Company's total 1998 revenues.
PRODUCTS
During 1998, the ten pharmaceutical products generating the greatest sales
volume for the Company represented approximately 24% of worldwide pharmaceutical
sales. The following table summarizes the Company's top 10 pharmaceutical
products based on sales in 1998:
1998 % OF
PRODUCT GENERIC NAME THERAPEUTIC PRODUCT PRODUCT
CATEGORY/INDICATION SALES SALES
- --------------- --------------------- --------------------- -------- ----------
(in millions)
Efudex(R)/ Efudix(R) fluorouracil Dermatological $ 43.3 6%
Mestinon(R) pyridostigmine bromide Neuromuscular disorders 29.6 4
Bedoyecta(R) vitamin B complex Vitamin supplement 19.7 3
Pentalgin(R) paracetamol, analgine, Pain management 18.9 3
caffeine, phenobarbital,
codeine
Librium(R) chlordiazepoxide HCl Tranquilizer 12.1 2
Limbitrol(R) chlordiazepoxide HCl, Antidepressant 11.4 2
amitriptyline HCl
Virazole(R) ribavirin Antiviral/RSV 11.2 1
Mogadon(R) nitrazepam Tranquilizer/sleep 11.2 1
disorders, epilepsy
Ascorbic Acid vitamin C Vitamin supplement 10.1 1
Oxsoralen(R) methoxsalen Antipsoriatic 8.5 1
------- -------
Sub-total 176.0 24
All others 563.1 76
------- -------
Total pharmaceutical product sales $ 739.1 100%
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ANTIVIRALS
The Company 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).
Ribavirin accounted for approximately 1%, 3% and 5% of the Company's net product
sales for the years ended December 31, 1998, 1997 and 1996, respectively.
Ribavirin 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 only been approved 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, a system that permits
direct delivery of ribavirin to the site of the infection. Similar approvals for
ribavirin for use in the treatment of RSV have been granted by governmental
authorities in 22 other countries. In 1995, 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 Therapy for the treatment of chronic hepatitis C.
ANTIBACTERIALS
The Company sells approximately 70 antibacterial products which accounted for
approximately 10%, 14% and 22% of the Company's net product sales for the years
ended December 31, 1998, 1997 and 1996, respectively.
Palitrex(R) belongs to the cefalesporin group of medications used to treat
afflictions that may not be responsive to penicillin treatment. Pentrexyl(R)
belongs to the penicillin group of medications used in a wide variety of
bacterial infections including urinary and upper respiratory tract infections.
Bactrim(R) is a combination product that is used in the treatment of urinary
tract infections. Gentamicin(R) and Amikasin(R) are antibacterials sold by ICN
Yugoslavia in various Eastern European markets. As a result of the Yugoslavian
government's seizure of the Company's Yugoslavian operations, the Company
expects to generate substantially lower revenues from sales of antibacterials in
the future.
OTHER ETHICALS
The Company manufactures and/or markets a wide variety of other ethical
pharmaceuticals, including analgesics, anticholinesterases, antirheumatics,
cardiovasculars, dermatologicals, endocrine agents, gastrointestinals, hormonals
and psychotropics. Other ethicals accounted for approximately 59%, 49% and 41%
of net product sales for the years ended December 31, 1998, 1997 and 1996,
respectively.
Dermatological products represent the Company's largest selling product line
among its other ethical pharmaceutical products. The Company manufactures and
markets approximately 75 dermatological products primarily in North America.
Dermatological products include Efudex(R)/Efudix(R), Oxsoralen-Ultra(R),
Solaquin(R), Trisoralen(R) and Eldoquine(R), which are principally used for skin
cancer, intractable psoriasis and pigmentation disorders, hypopigmentation (the
skin losing its color) and hyperpigmentation (the skin darker than normal).
The Company's largest selling ethical product is Efudex(R)/Efudix(R), a topical
anti-skin cancer product. The Company markets three anticholinesterase product
lines under the names Mestinon(R), Prostigmin(R), and Tensilon(R). These
products are used in treating myasthenia gravis, a progressive neuromuscular
disorder, and in reversing the effects of certain muscle relaxants. Pentalgin(R)
is a pain management product sold in Russia. Librium(R), a tranquilizer, and
Limbitrol(R), an antidepressant, are sold in all regions outside of Eastern
Europe. Mogadon(R) is a sleep disorder drug also used to treat epilepsy.
OTC PRODUCTS
OTC products encompass a broad range of ancillary products which are sold
through the Company's existing distribution channels, including Bedoyecta(R), a
B-complex injectable vitamin marketed by ICN Mexico, and Ascorbic Acid, a
Vitamin C product sold in Russia. OTC products accounted for approximately 22%,
25% and 22% of the Company's net product sales for the years ended December 31,
1998, 1997 and 1996, respectively.
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BIOMEDICAL PRODUCTS
Research chemicals, diagnostic and other biomedical products accounted for
approximately 8%, 9% and 10% of the Company's net product sales for the years
ended December 31, 1998, 1997 and 1996, 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, 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.
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.
RESEARCH AND DEVELOPMENT
The Company's research and development activities use the expertise accumulated
by the Company and its predecessors in over 35 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 464 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 Central and Eastern Europe. This ongoing activity introduces both
high quality generic and licensed proprietary products into under-served
markets.
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. These compounds include:
VIRAZOLE(R) (RIBAVIRIN): In addition to the use of ribavirin for chronic
hepatitis C, clinical studies have been performed with ribavirin 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 ribavirin are herpes
zoster, genital herpes, chicken pox, hemorrhagic fever with renal syndrome,
measles, influenza and HIV. The Company is initiating focused clinical studies
evaluating the use of ribavirin for early intervention against RSV infections in
persons whose immune defenses are compromised as a consequence of bone marrow
transplantation.
SOMATORELIN(TM) (HGRF1-44): Somatorelin(TM) 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 benefits to patients. The Company is currently
sponsoring Phase III trials in short stature pediatric patients.
8
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 myelogenous leukemia. The Company is in the process of
preparing 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.
ADENAZOLE(TM) (8-CI CAMP, OCLADESINE): This nucleotide analog has been shown to
control cell growth and proliferation in certain cancers by selective
interaction with intracellular regulatory molecules. Independent investigators
in Italy and Scotland have conducted preliminary trials in humans that indicate
significant utility of this compound. Based on these encouraging results, the
Company has undertaken a formal development program designed to lead to
registration in the United States for the treatment of colon cancer. Based on an
initial meeting with the FDA in October 1998, the Company is preparing to file
an Investigational New Drug Application ("IND") with the FDA in the second half
of 1999, with clinical evaluations beginning shortly thereafter.
The rights to the compounds Tiazole(TM) and Adenazole(TM) were among the assets
which the Company contributed to its former 75%-owned subsidiary, ICN
Yugoslavia, upon the formation of that joint venture in 1991. See "Management's
Discussion and Analysis--Recent Developments".
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 that 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 ribavirin 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 any of the Company's research and
development efforts or the ultimate commercial success of any of the products in
development.
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 successfully
market a wide array of pharmaceutical products within diverse regional markets
as well as certain drugs on a worldwide basis.
The Company has a marketing and sales staff of approximately 1,700 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 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.
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 Canada, the Company has its
own sales force and promotes and sells directly to physicians, hospitals,
wholesalers and large drug store chains. In Latin America, principally Mexico
and Argentina, 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
9
wholesalers. In other Western European markets, particularly the United Kingdom
and Germany, sales forces have recently been established and distribution
methods are in transition as Company affiliates are formed.
The Company's sales and marketing organizations are in various stages of
development in Russia, Hungary, Poland and the Czech Republic. In Russia, the
lower-priced generic domestic product line is sold through a network of
distributors and their agents and accounts 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 600 personnel in Russia
supporting the sales and marketing function. ICN Hungary, ICN Poland and ICN
Czech Republic are building their marketing, sales, and distribution
capabilities as they transition their product portfolios in anticipation of the
potential future integration of these countries into the European Union common
market.
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. The Company's customer group
for research products is principally composed of biomedical research
institutions, such as universities, the National Institutes of Health,
pharmaceutical companies and, to a lesser extent, hospitals. The Company has a
sales and marketing organization for its research products of approximately 186
persons, including approximately 118 persons in the United States and Canada,
and approximately 42 persons in Europe.
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 may also face increased competition from manufacturers of generic
pharmaceutical products when patents covering certain of its currently marketed
products expire.
MANUFACTURING
The Company manufactures or will manufacture its products at 21 facilities. The
Humacao, Puerto Rico plant is currently being leased to Roche under a two year
lease which expires in August 1999. After expiration of the lease, the Company
intends to use the Humacao plant to produce pharmaceutical products. The Company
believes it has sufficient manufacturing facilities to meet its needs for the
foreseeable future. All of the manufacturing facilities that require current
Good Manufacturing Practices approval from the FDA or foreign agencies have
obtained such approval.
The Company subcontracts the manufacture of many of the products which it
currently markets under rights acquired from other pharmaceutical companies. In
connection with such acquisitions, the Company generally contracts for the
continued supply of the product for specified periods of time. As a result of
the acquisition of products from Roche, the Company is in the process of
transferring technology that will allow the Company to assume the production of
the acquired products. However, there can be no assurance that the Company will
be successful in its efforts to manufacture such products or that such products
will continue to be available from outside suppliers.
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 immunobiologicals); and Eschwege, Germany
(chromatography products).
10
EMPLOYEES
As of December 31, 1998, the Company employed 13,266 persons. Of such
employees, the Company employed 8,918 in production, 1,879 persons in sales and
marketing, 464 in research and development, and 2,005 in general and
administrative matters. The majority of the Company's employees in Mexico, Spain
and Poland are covered by collective bargaining or similar agreements.
Substantially all of the employees of ICN Russia, ICN Czech Republic and ICN
Hungary are covered by national labor laws which establish the rights of
employees, including the amount of wages and benefits paid and, in certain
cases, severance and similar benefits. The Company currently considers its
relations with its employees to be satisfactory and has not experienced any work
stoppages, slowdown or other serious labor problems which have materially
impeded its business operations.
LICENSES, PATENTS AND TRADEMARKS (PROPRIETARY RIGHTS)
The Company may be dependent on the protection afforded by its patents relating
to ribavirin 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 July 1999 relating to the use of
ribavirin to treat specified viral diseases. Revenues in 1998 from the sale of
products for the uses covered by such patent rights were approximately $3.1
million. Also, the Drug Price Competition and Patent Term Restoration Act of
1984 (the Waxman-Hatch Act) provides for the award of exclusivity for a period
of three years from the date of approval of NDAs containing significant new
clinical studies for products whose patent protection would otherwise expire. A
request for such an award has been made subsequent to the approval of
Combination Therapy for the treatment of relapsed patients. The FDA
Modernization Act of 1997 provides for the award of six months of additional
exclusivity following the submission to the FDA of data from appropriate studies
in pediatric patients. Studies that qualify under this provision are planned.
The Company has patents in certain foreign countries, including Japan, covering
the antiviral use of ribavirin, for which coverage and expiration varies and
which patents expire at various times through June 2005. The Company has no, or
limited, patent rights relating to the antiviral use of ribavirin in certain
foreign countries where ribavirin is currently, or in the future may be,
approved for commercial sale, including countries in the European Union.
However, Combination Therapy was granted a favorable review classification
through the Concertation Procedure for regulatory approval within the European
Union. As a result, if approval is obtained to market Combination Therapy, the
data submitted to obtain such approval cannot be referenced in support of
another's application to register a competing product for the approved
indications for a period of no less than six and not more than ten years. Any
such application must be on the basis of independently generated data of
substantially equal quality, thus providing a significant barrier to entry for
any generic substitutes of Combination Therapy in the European Union.
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 that 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; nor can there be any assurance as to their 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.
11
Many of the names of the Company's products are registered trademarks in the
United States, 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 that 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.
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 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 a majority of countries in which it operates. The Company has been
affected in the past by pricing adjustments in Spain and by the lag in allowed
price increases in Yugoslavia and Mexico, which has created lower sales in
United States 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 INSURANCE: The Company is currently self-insured with respect
to product liability claims. 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.
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, see Note 13 of Notes to Consolidated Financial
Statements.
Approximately 77%, 82%, and 80% of the Company's revenues for the years ended
December 31, 1998, 1997, and 1996 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.
12
ITEM 2. PROPERTIES
The following are the principal facilities of the Company and its subsidiaries:
OWNED OR SQUARE
LOCATION PURPOSE LEASED FOOTAGE
-------- ------- ------ -------
NORTH AMERICA
Costa Mesa, California Corporate headquarters and Owned 178,000
administrative offices
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
Humacao, Puerto Rico Offices and manufacturing facility Owned 410,000
Montreal, Canada Offices and manufacturing facility Owned 93,519
LATIN AMERICA
Buenos Aires, Argentina Offices and manufacturing facility Owned 26,890
Mexico City, Mexico Offices and manufacturing facility Owned 220,000
WESTERN EUROPE
Brussels, Belgium Sales office Leased 6,323
Orsay, France Sales office Leased 2,658
Eschwege, Germany Offices and manufacturing facility Owned 13,278
Opera, Italy Sales office and warehouse Owned 153,777
Zoetermeer, The Netherlands Offices and manufacturing facility Owned 23,430
Barcelona, Spain Offices and manufacturing facility Owned 93,991
Basingstoke, United Kingdom Administrative office Leased 4,400
EASTERN EUROPE
Prague, Czech Republic Offices and manufacturing facility Owned 262,032
Budapest, Hungary Administrative and sales office Leased 15,253
Tiszavasvari, Hungary Offices and manufacturing facility Owned 559,465
Rzeszow, Poland Offices and manufacturing facility Owned 472,133
Chelyabinsk, Russia Offices and manufacturing facility Owned 369,593
Kursk, Russia Offices and manufacturing facility Owned 64,603
Moscow, Russia Eastern European headquarters Owned 102,400
St. Petersburg, Russia Offices and manufacturing facility Owned 319,102
Tomsk, Russia Offices and manufacturing facility Owned 301,680
Yoshkar-Ola, Russia Offices and manufacturing facility Owned 142,397
Reutov, Russia Offices and warehouse Owned 169,900
ASIA, AFRICA, AUSTRALIA
Wuxi, China Offices and manufacturing facility Owned 121,363
New South Wales, Australia Sales office Leased 10,650
13
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.
14
ITEM 3. LEGAL PROCEEDINGS
See Note 12 of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matters to a vote of security holders during
the quarter ended December 31, 1998.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading of the Company's common stock on the New York Stock Exchange began on
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. As of February 28, 1999, there were 8,994 holders of record of
the Company's common stock.
The following table sets forth the high and low sales prices of the Company's
common stock on the New York Stock Exchange--Composite Transactions reporting
system. The 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.
1998 1997
----------------------- -----------------------
FISCAL QUARTERS High Low High Low
---------- ----------- ---------- ----------
First 51 5/8 25 15/16 18 13
Second 52 1/4 40 1/16 19 3/8 13 5/8
Third 47 7/8 13 13/16 35 1/4 17 5/8
Fourth 27 3/8 13 7/8 37 3/8 26 1/4
In March 1997, the Company 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. In March
1999, the Board of Directors increased the quarterly per share dividend to 7
cents.
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.
During 1998 and 1999, the Company repurchased through open-market purchases an
aggregate of 423,967 shares of its common stock under the Company's Stock
Repurchase Program.
16
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, 1998. The Company's selected historical financial data
for each of the years in the five-year period ended December 31, 1998 were
derived from the audited consolidated financial statements of the Company. The
trends in the Company's revenues and net income (loss) are affected by several
business combinations completed in fiscal years 1995 through 1998. The Company's
results of operations for all years include the results of the Company's former
subsidiary, ICN Yugoslavia. For 1998, ICN Yugoslavia generated revenues of
$141,740,000 and a loss from operations of ($140,419,000). 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.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(in thousands)
STATEMENTS OF OPERATIONS
Product sales $ 800,639 $ 752,202 $ 614,080 $ 507,905 $ 366,851
Royalties 37,425 -- -- -- --
---------- --------- --------- --------- ---------
Total revenues 838,064 752,202 614,080 507,905 366,851
Cost of product sales 353,600 351,978 291,807 206,049 182,946
Selling, general and administrative
expenses 312,377 256,234 192,441 191,459 112,919
Royalties to affiliates, net -- -- -- -- 7,468
Research and development costs 20,835 18,692 15,719 17,231 7,690
Write-off of purchased research and
development(1) -- -- -- -- 221,000
Eastern European charges (2) 440,820 -- -- -- --
---------- --------- --------- --------- ---------
Income (loss) from operations(1)(2) (289,568) 125,298 114,113 93,166 (165,172)
Translation and exchange (gains)
losses, net 80,501 12,790 2,282 (9,484) 191
Interest income (13,057) (15,912) (3,001) (6,488) (4,728)
Interest expense 38,069 22,849 15,780 22,889 9,317
---------- --------- --------- --------- ---------
Income (loss) before income taxes
and minority interest (395,081) 105,571 99,052 86,249 (169,952)
Provision (benefit) for income taxes 1,983 (27,736) (6,815) 2,997 10,360
Minority interest (44,990) 19,383 18,939 15,915 3,269
---------- --------- --------- --------- ---------
Net income (loss)(1)(2) $ (352,074) $ 113,924 $ 86,928 $ 67,337 $(183,581)
========== ========= ========= ========= =========
Per share information:
Net income (loss)-- basic $ (4.78) $ 1.93 $ 1.75 $ 1.51 $ (5.29)
========== ========= ========= ========= =========
Net income (loss)-- diluted $ (4.78) $ 1.69 $ 1.51 $ 1.44 $ (5.29)
========== ========= ========= ========= =========
Cash dividends paid (3) $ .24 $ .21 $ .20 $ .19 $ .17
========== ========= ========= ========= =========
See accompanying Notes to Selected Financial Data.
17
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
BALANCE SHEET DATA:
Working capital(2) $ 236,994 $ 585,606 $ 306,764 $ 190,802 $ 137,802
Total assets(2) 1,356,396 1,491,745 778,651 518,298 441,473
Total debt 556,489 348,206 195,681 166,269 215,005
Stockholders' equity(2) 586,164 796,328 315,350 162,172 88,908
NOTES TO SELECTED FINANCIAL DATA:
(1) The 1994 merger of ICN and its predecessor companies in 1994 resulted in
$221,000,000 being ascribed to purchased research and development for which
no alternative use existed and 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 ribavirin. Net income, excluding
this one-time write-off, was $37,419,000 in 1994.
(2) As a result of recent political and economic events in Eastern Europe,
including the Yugoslavian government's seizure of the Company's Yugoslavian
operations effective November 26, 1998, the Company has recorded provisions
for losses related to Eastern Europe totaling $451,019,000 in the year
ended December 31, 1998. Of this amount, $440,820,000 is included in
operating expenses, representing the write-off of the Company's investment
in Yugoslavia and related assets ($235,290,000), provisions for losses on
accounts and notes receivable (including accounts and notes receivable from
the Yugoslavian government) ($203,519,000), and the write-off of certain
investments ($2,011,000). The losses related to Eastern Europe also include
reductions in the value of certain inventories ($6,072,000) and a charge
against interest ($4,127,000). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments."
(3) Dividends paid for 1998 and 1996 include the fourth quarter distributions
declared and paid in the first quarter of the following years.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
The Company's operations in Eastern Europe were adversely affected by
recent economic and political developments in the region, including the
Yugoslavian government's seizure of the Company's Yugoslavian operations and the
increasingly volatile Russian economic situation.
YUGOSLAVIA
On February 6, 1999, the government of the Federal Republic of Yugoslavia,
acting through the Federal Ministry of Health and/or the Ministry of Health of
Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia.
This action, based on a decision by the Ministry for Economic and Property
Transformation that was reached on November 26, 1998, effectively reduced the
Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of
Economic and Property Transformation decision was based on a unilaterally
imposed recalculation of the Company's original capital contribution to ICN
Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued
an order stating that a change in control had occurred. These actions were
taken, contrary to Yugoslavian law, without any notification to or
representation by the Company. Since the change of control, representatives of
the Company and ICN Yugoslavia's management have been denied access to the
premises and any representation as to the management of ICN Yugoslavia. As a
result of the Yugoslavian government's actions, the Company recorded a charge of
$235,290,000 in the fourth quarter of 1998, reflecting the write-off of all of
the Company's investment in ICN Yugoslavia and related assets.
Prior to the seizure, ICN Yugoslavia's operations were adversely affected
by the April 1998 devaluation of the dinar, which resulted in foreign exchange
losses of $23,865,000 for the year. ICN Yugoslavia's domestic sales were
adversely affected by the Company's previously-announced suspension of sales to
the Yugoslavian government. In addition, ICN Yugoslavia's export sales for the
second half of 1998 were adversely affected by the Russian economic crisis. In
the second and third quarters of 1998, the Yugoslavian government defaulted on
its obligations to the Company on $176,204,000 of accounts and notes receivable.
As a result, the Company recorded a $173,440,000 charge against earnings at ICN
Yugoslavia in the second quarter of 1998, including losses on accounts and notes
receivable (including accrued interest) from the Yugoslavian government and
government-sponsored entities of $158,961,000 and a $14,479,000 write-down of
the value of certain related investments and assets.
The Company has commenced litigation in the United States District Court of
the District of Columbia against the government of Yugoslavia and related
agencies to recover damages and obtain injunctive relief. In addition, the
government of Yugoslavia, through a related agency, filed an arbitration
proceeding against the Company before the International Chamber of Commerce for
damages related to the Company's acquisition of majority control of ICN
Yugoslavia. See Note 12 of Notes to Consolidated Financial Statements. The
resolution of these matters may affect the ownership of certain compounds which
were contributed to ICN Yugoslavia by the Company, pursuant to the agreement
which led to the formation of ICN Yugoslavia. Several of these compounds are
under development by the Company and its subsidiaries and there are no
assurances that the Company will maintain ownership rights to these compounds.
RUSSIA
The Company's operations in Eastern Europe for 1998 were affected by the
Russian economic crisis. In the third quarter of 1998, the Russian government
and the Russian Central Bank were no longer able to support the ruble at its
then-current exchange rate of approximately 6.3 rubles to $1. Subsequently, the
ruble fell sharply and at December 31, 1998, the exchange rate was approximately
20.7 rubles to $1, a decline of more than 68% from the ruble's mid-August 1998
19
level. As a result of the decline in the ruble exchange rate, the Company
recorded foreign exchange losses of $53,848,000 related to its Russian
operations during 1998. Subsequent to December 31, 1998, the value of the ruble
has continued to decline in relation to the dollar, exceeding 23 rubles to $1.
The Company believes that the economic crisis in Russia has adversely
affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience severe
liquidity shortages as rubles are in short supply, and Russian companies'
hard-currency assets remain frozen in Russian banks. This liquidity crisis has
diminished many Russian companies' ability to pay their debts and is likely to
lead to a number of business failures in the region. In addition, the
devaluation has reduced the purchasing power of Russian companies and consumers,
thus increasing pressure on the Company and other producers to limit price
increases in hard currency terms. These factors have adversely affected, and may
continue to adversely affect, sales and gross margins in the Company's Russian
operations. As a result of the Russian economic crisis, the Company recorded a
third quarter 1998 charge against earnings of $42,289,000, representing reserves
for accounts receivable of $37,873,000, the write-off of certain investments of
$2,011,000, and a reduction in the value of certain inventories of $2,405,000.
RECENT ACQUISITIONS
The Company continues to review opportunities for acquisitions throughout
its regions of operations. In November 1998, the Company completed the
acquisition of the worldwide rights (except India) to four products from Roche
for $178,800,000 in cash and common stock. The products include Dalmadorm(R), a
sleep disorder drug; Fluoro-Uracil(R), an oncology product; Librax(R), a
treatment for gastrointestinal disorders; and Mogadon(R), a sleep disorder drug
also used to treat epilepsy. In addition, the Company recently entered into an
agreement with Senetek plc under which it obtained worldwide rights to market
Kinetin(R) (marketed by the Company as Kinerase(R)), a skin cream to inhibit
signs of aging, through physicians and pharmacies. The Company will market these
products primarily through its existing North American and Western European
operations. In Latin America, the Company recently acquired the rights to market
three products--Breacol, Cynoplus and Cytomel--from SKB, which the Company
believes complement its existing product line and increase its market presence
in the region. 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.
ROYALTY REVENUES
Royalty revenues represent amounts earned under the Company's Exclusive
License and Supply Agreement (the "License Agreement") with Schering-Plough.
Under the License Agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C ("HCV") in combination with
Schering-Plough's alpha interferon. Schering-Plough received approval from the
FDA to market Rebetron(TM) Combination Therapy, containing Rebetol(TM)
(ribavirin) Capsules and Intron(R)A (interferon alfa-2b, recombinant) Injection,
for the treatment of HCV in patients with compensated liver disease who have
relapsed following alpha interferon therapy. In June 1998, Schering-Plough began
selling Rebetron(TM) in the United States. Also in June 1998, Schering-Plough
submitted a Marketing Authorization Application for Combination Therapy to the
European Agency for the Evaluation of Medicinal Products for the treatment of
relapsed HCV patients. Schering-Plough also filed a supplemental New Drug
Application with the FDA for Combination Therapy for the treatment of HCV in
patients with compensated liver disease previously untreated with alpha
interferon therapy (referred to as treatment-naive patients) and in December
1998, this supplemental NDA was approved by the FDA.
Royalty revenues for 1998 were $37,425,000, including amounts earned from
United States commercial sales made by Schering-Plough subsequent to receipt of
FDA approval, as well as royalties on compassionate use sales outside the United
States, primarily in Western Europe. Royalty revenues for 1998 also include a
one-time payment of $16,500,000 which the Company received from Schering-Plough
in consideration for the sale to Schering-Plough of additional marketing rights
in the European Union, in settlement of past royalties, and as reimbursement for
expenses incurred by the Company in preparation for the launch of ribavirin
capsules in the European Union.
20
RESULTS OF OPERATIONS
Certain financial information for the Company's business segments is set
forth below. This discussion should be read in conjunction with the consolidated
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 for the year ended December 31, 1998.
REVENUES
--------------------------------------
1998 1997 1996
---- ---- ----
REVENUES:
Pharmaceuticals
North America $ 176,902 $ 117,355 $ 106,442
Western Europe 66,994 44,960 35,826
Latin America 85,351 63,668 47,359
Russia 163,691 134,688 66,788
Yugoslavia 141,740 225,530 267,166
Other Eastern Europe 93,228 73,050 21,461
Asia, Africa, Australia 48,649 22,036 4,711
----------- ----------- -----------
Total Pharmaceuticals 776,555 681,287 549,753
Biomedicals 61,509 70,915 64,327
----------- ----------- -----------
Total revenues $ 838,064 $ 752,202 $ 614,080
=========== =========== ===========
Product sales $ 800,639 $ 752,202 $ 614,080
Royalty revenues 37,425 -- --
----------- ----------- -----------
Total revenues $ 838,064 $ 752,202 $ 614,080
=========== =========== ===========
Cost of product sales $ 353,600 $ 351,978 $ 291,807
Gross profit margin on product sales 56% 53% 52%
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
REVENUES: The increase in revenues for the Company's Pharmaceuticals
segments of $95,268,000 (14%) for 1998 reflects growth in product sales driven
by the Company's successful acquisition program and increased royalty revenues,
partially offset by lower sales in the Yugoslavia Pharmaceuticals segment.
Despite the Russian economic crisis, revenues in the Russia Pharmaceuticals and
Other Eastern Europe Pharmaceuticals segments increased $29,003,000 (22%) and
$20,178,000 (28%), respectively, primarily due to additional revenues from the
Company's 1998 and 1997 acquisitions in Russia, Poland and the Czech Republic.
Revenues in the Yugoslavia Pharmaceuticals segment, which were adversely
affected by the suspension of sales to the Yugoslavian government in April 1998,
decreased by $83,790,000 (37%) compared to 1997. The acquisition of products
from Roche and increased royalty revenues were the major contributors to revenue
increases in North America and Western Europe. Latin America Pharmaceuticals
revenues reflect continued growth in the Company's base business as well as
sales of the products acquired from Roche and Cassara. The acquisition of
products from SKB and Roche contributed to the revenue increase in the Asia,
Africa, and Australia Pharmaceuticals segment.
In the North America Pharmaceuticals segment, revenues were $176,902,000
for 1998, compared to $117,355,000 for 1997. The $59,547,000 (51%) increase in
revenues for the year was primarily the result of the Company's acquisition of
the rights to certain products from Roche in 1997 and 1998. In 1997, the Company
acquired the worldwide rights (except India) to nine products--Alloferin(R),
Ancotil(R), Efudex(R), Glutril(R), Librium(R), Limbitrol(R), Mestinon(R),
Prostigmin(R) and Protamin(R)--and the worldwide rights to Levo-Dromoran(R) and
Tensilon(R). Effective October 1, 1998, the Company obtained the worldwide
rights to Dalmadorm(R), Fluoro-Uracil(R), Librax(R), and Mogadon(R). Sales of
the acquired products generated additional revenues of $61,827,000 in the North
America Pharmaceuticals segment for 1998. In addition, the 1998 amounts include
$31,549,000 of royalty revenues from sales of ribavirin by Schering-Plough under
the License Agreement. These amounts were partially offset by lower sales in
several of the Company's existing product lines, including an $8,982,000 decline
in Virazole(R) sales and lower sales of certain dermatological and hormone
replacement products, principally due to increased competition from generic
products.
21
In the Western Europe Pharmaceuticals segment, revenues for 1998 were
$66,994,000 compared to $44,960,000 in 1997. The increase in revenues of
$22,034,000 (49%) is primarily due to the Company's acquisition of the rights to
certain products from Roche in the third and fourth quarters of 1997, which
generated additional sales of $19,582,000 in 1998.
In the Latin America Pharmaceuticals segment, revenues were $85,351,000 for
1998, compared to $63,668,000 for 1997. The increase of $21,683,000 (34%) is
primarily due to price increases and higher unit volume, partially offset by
unfavorable currency exchange fluctuations. The increase also reflects 1998
sales of $13,636,000 generated by products that the Company acquired from
Cassara and Roche during 1997 and 1998. Excluding the effect of the acquired
products, revenues for Latin America for 1998 increased 13% from their 1997
level.
In the Russia Pharmaceuticals segment, revenues for 1998 were $163,691,000,
compared with $134,688,000 for 1997, an increase of $29,003,000 (22%). The
inclusion in 1998 of a full year's results for the Company's 1997 acquisitions
of AO Tomsk and Marbiopharm (acquired in the fourth quarter of 1997) provided
additional revenues of $44,804,000. The effect of these acquisitions was
partially offset by lower volumes in the Company's existing Russian operations
and the effect of unfavorable currency exchange fluctuations due to the economic
crisis in Russia during 1998.
The Yugoslavia Pharmaceuticals segment was adversely affected by the
economic events in the region during 1998 and effective November 26, 1998 the
Company's Yugoslavia operations were seized by the Yugoslavian government. Prior
to the seizure, the Yugoslavia Pharmaceuticals segment generated revenues of
$141,740,000 for 1998, compared to $225,530,000 in 1997. The decrease of
$83,790,000 (37%) reflects lower domestic sales resulting from the effects of
the April 1998 devaluation of the dinar and the continued suspension of sales to
the Yugoslavian government. The decrease also reflects lower export sales,
principally to customers in Russia, due to the economic crisis in Russia during
the year.
In the Other Eastern Europe Pharmaceuticals segment, revenues for 1998 were
$93,228,000, compared with $73,050,000 for 1997, an increase of $20,178,000
(28%). The increase is the result of the inclusion in 1998 of a full year's
operations of Polfa Rzeszow, S.A. in Poland and the 1998 acquisition of VUAB in
the Czech Republic. The effect of these acquisitions was partially offset by a
decline in revenues of $8,384,000 at Alkaloida in Hungary resulting from lower
export sales due to the Russian economic crisis.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for
1998 were $48,649,000 compared to $22,036,000 for 1997, an increase of
$26,613,000 (121%). The increase is primarily due to the 1998 acquisition of the
rights to 39 prescription and over-the-counter pharmaceutical products from SKB,
which generated sales of $22,553,000 and sales of the products acquired from
Roche, which generated additional sales of $10,241,000 in this segment in 1998.
The effect of these acquisitions was partially offset by lower sales of certain
hormone replacement products and lower revenues at Wuxi ICN Pharmaceuticals in
China.
In the Company's Biomedicals segment, revenues for 1998 were $61,509,000
compared to $70,915,000 for 1997, a decrease of $9,406,000 (13%). The decrease
is primarily due to lower unit sales volume in certain diagnostics product
lines. The decrease is also affected by the 1997 revenue amounts including
dosimetry product shipments made to fulfill the higher than normal order backlog
that existed at the beginning of 1997.
GROSS PROFIT: Gross profit margin on product sales increased to 56% for
1998, compared to 53% for 1997. The improvement in gross profit margin is
primarily due to increased sales of the products acquired from Roche and SKB in
1997 and 1998, which generally yield higher gross profit margins than were
previously achieved by the Company's base business. Gross profit margins in the
North America Pharmaceuticals segment increased to 82% from 81% in the prior
year, reflecting the effect of the acquired products. The Company's gross profit
margin for 1998 was also affected by gross margin declines in the Yugoslavia
Pharmaceuticals segment. Subsequent to the April 1998 devaluation of the
Yugoslavian dinar, gross profit margins at ICN Yugoslavia suffered as sales were
translated at higher exchange rates, while no significant price increases were
received. Gross profit margins at ICN Yugoslavia were further impacted as
inventories manufactured prior to the devaluation were charged to cost of
product sales at the higher historical exchange rate. The overall gross margins
for the Company's Russia Pharmaceuticals segment were 42% for 1998, compared to
39% for 1997. Improvements in operating efficiency at most of the Company's
Russian factories offset the adverse impact of the weakening of the ruble. While
the Company is generally able to set its prices for Russian markets without
government approval, the severe liquidity crisis in Russia and the reduced
purchasing power of Russian consumers after the devaluation of the ruble
22
restricted price increases to a level that does not fully offset the impact of
the devaluation. Gross profit margins at ICN Russia were further impacted as
inventories manufactured prior to the devaluation were charged to cost of
product sales at the higher historical exchange rate. In the Other Eastern
Europe Pharmaceuticals segment, the gross profit margin improved to 48% from 36%
in 1997 primarily due to the fourth quarter 1997 acquisition of Polfa Rzeszow in
Poland, and improved operating efficiency at the Company's factory in Hungary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $312,377,000 (37% of revenues) for 1998 compared to
$256,234,000 (34% of revenues) for 1997. The Company's 1997 and 1998 acquisition
of four pharmaceutical companies in Eastern Europe and the acquisition of
product rights from Roche and SKB generated additional expenses of $48,791,000
in 1998, of which approximately $11,726,000 represents increased amortization of
goodwill and purchased intangibles. In addition, the ongoing development of the
sales, marketing, and administrative functions at the Company's Eastern European
headquarters in Moscow, Russia resulted in additional expenses of $16,820,000 in
1998. Other increases in selling, general and administrative expenses reflect
increased expenditures, primarily at the Company's United States corporate
offices, to support the Company's recent acquisitions and increased sales volume
in the base business. These changes were partially offset by lower expenses in
the Yugoslavia Pharmaceuticals and Russia Pharmaceuticals segments, reflecting
the effect of exchange rate changes during the year.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs were
$20,835,000 for 1998, compared to $18,692,000 for 1997. The increase reflects
the Company's continued investment in the development of products, primarily at
its facilities in the United States.
TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, were
$80,501,000 for the year ended December 31, 1998. The Company incurred losses of
$53,848,000 related to its Russian operations, principally due to the third
quarter 1998 devaluation of the ruble. ICN Yugoslavia recorded foreign exchange
losses of $23,865,000 in 1998, including the effect of the April 1998
devaluation of the dinar. Additionally, the Company recorded foreign currency
transaction losses of $2,966,000 in Hungary, principally related to long-term
debt denominated in currencies other than the forint, the Hungarian subsidiary's
functional currency.
INTEREST INCOME AND EXPENSE: For 1998, interest expense increased
$15,220,000 compared to the same period in 1997, primarily due to interest
expense on the Company's $200,000,000 8-3/4% Senior Notes issued in August 1998
and the inclusion in 1998 of a full year's interest on the Company's 9-1/4%
Senior Notes issued in August 1997. The additional interest expense on the
Senior Notes was partially offset by interest savings resulting from the
conversion of certain long-term debt to common stock and capitalization of
interest costs related to plant construction in Russia and Yugoslavia. Interest
income for the year ended December 31, 1998 decreased to $13,057,000 in 1998
from $15,912,000 in 1997 due to lower interest income earned on notes receivable
from the Yugoslavian government, which was partially offset by increased
earnings from the investment of a significant portion of the proceeds of the
Senior Notes.
INCOME TAXES: The Company's effective income tax rate (benefit) was 1% for
1998 compared to (26%) for 1997. The Company operates in many regions where the
tax rate is low or it benefits from a tax holiday. In 1998, the provision for
income taxes reflects the effect of income in Russia, Yugoslavia and other
jurisdictions taxed at rates lower than the U.S. Federal statutory rate of 35%.
Offsetting these benefits was an increase in the valuation allowance associated
with the write-off of the Company's Yugoslavian subsidiary. In addition, the
Company received no tax benefit for the foreign currency translation losses
included in the Company's 1998 net loss.
In 1998, the provision for income taxes reflects a deferred tax benefit of
$8,223,000 resulting from the recognition of certain deferred tax assets and the
reduction of the related valuation allowance. During 1997 and 1998, the Company
acquired certain products from Roche and SKB. Also in 1998, Schering-Plough's
sales of Rebetron(R) Combination Therapy for HCV commenced following receipt of
FDA approval to market the drug and the Company began to receive royalty
revenues under the License Agreement. These new products and royalties are
23
expected to generate future taxable income that resulted in a deferred tax
benefit in 1998 and 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 Company received the benefit of certain favorable tax laws that
resulted in income taxes at a rate lower than the current 25% Yugoslavian
statutory rate. Under Yugoslavian law, taxable earnings attributed to foreign
investment are exempt from taxation for a five year period. Accordingly, 75% of
ICN Yugoslavia's taxable income, the Company's ownership in ICN Yugoslavia, was
exempt from taxation for the five years ending December 31, 1996. The Company
also received tax credits in Yugoslavia for certain capital investments,
including investments in short-term government bonds and plant and equipment,
which can only be used in the year in which the investment is made. Effective
January 1, 1997, additional changes in the Yugoslavian tax law resulted in
benefits to the Company in the form of a reduction in taxes otherwise payable as
a result of its foreign investment in ICN Yugoslavia. The effect of these items
was to reduce the 1997 effective tax rate at ICN Yugoslavia to 2%. In 1998, the
effective tax rate of ICN Yugoslavia was approximately 1%.
In Russia, the Company continues to benefit from special tax relief that
benefits pharmaceutical companies. Under this relief, approximately 75% of the
income generated in Russia related to the manufacture and sale of prescription
medicines is exempt from taxation. This reduced the effective rate to
approximately 1% in 1998 and 1997. In Hungary, the Company benefited from a tax
holiday which expired on December 31, 1998.
The trend of low tax rates may not continue in the future. In 1997, the
Company recognized substantially all of the benefit of its United States net
operating loss carryforwards. In Hungary, the tax holiday expired on December
31, 1998 and the Company expects to incur taxes on the income of its Hungarian
operations at a rate of approximately 18% in 1999. The continuing tax benefits
in Russia are subject to potential changes in tax law that may be enacted in the
future. Should these benefits be repealed, income generated in Russia would
require the Company to provide taxes at then-current statutory rates, which
could have a material impact on the consolidated financial position, results of
operations and cash flows of the Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
REVENUES: Revenues in the North America Pharmaceuticals segment for 1997
were $117,355,000 compared to $106,442,000 for 1996. The increase of $10,913,000
(10%) is primarily the result of the Company's purchase of the rights to eleven
products from Roche in the third and fourth quarters of 1997. The increase in
revenues related to the acquired product rights was partially offset by a
$10,254,000 decrease in unit sales of ribavirin for respiratory syncytial virus
("RSV").
Revenues in the Western Europe Pharmaceuticals segment for 1997 were
$44,960,000 compared to $35,826,000 in 1996. The increase of $9,134,000 (26%) is
primarily the result of 1997 sales of $12,939,000 generated by the products
acquired from Roche during 1997 and increased ribavirin sales, partially offset
by unfavorable currency exchange fluctuations.
Revenues in the Latin America Pharmaceuticals segment for 1997 were
$63,668,000 compared with $47,359,000 for 1996, an increase of $16,309,000
(34%). Such increases were primarily due to price increases and volume
increases, partially offset by unfavorable currency exchange fluctuations. The
increase also reflects 1997 sales of $4,296,000 generated by the products
acquired from Roche during 1997.
Revenues in the Russia Pharmaceuticals segment for 1997 were $134,688,000
compared with $66,788,000 for 1996, an increase of $67,900,000 (102%). The
Company acquired AO Tomsk and Marbiopharm in the fourth quarter of 1997, which
added revenues of $17,882,000. In addition, the Company's 1996 Russian
acquisitions, Polypharm and Leksredstva, generated additional revenues in 1997
of $35,374,000, of which $15,923,222 was due to price and volume increases and
the remainder was the result of the inclusion of a full year's sales in 1997.
Revenues at ICN Oktyabr in Russia increased $14,644,000 in 1997 compared to 1996
due to price and volume increases.
24
Revenues in the Yugoslavia Pharmaceuticals segment for 1997 were
$225,530,000, compared to $267,166,000 in 1996. During 1997, the Company limited
its sales to the Yugoslavian government to those amounts which could be paid in
cash or in notes receivable fixed in dollar amounts. Revenues at ICN Yugoslavia
in 1996 and 1997 were also affected by limitations on governmental health care
expenditures.
Revenues in the Other Eastern Europe Pharmaceuticals segment for 1997 were
$73,050,000, compared to $21,461,000 in 1996. The $51,589,000 increase reflects
the inclusion in 1997 of a full year's operations of Alkaloida and the Company's
acquisition of Polfa Rzeszow in the fourth quarter of 1997.
Revenues in the Asia, Africa and Australia Pharmaceuticals segment for 1997
were $22,036,000 compared to $4,711,000 for 1996. The increase of $17,325,000
(368%) is primarily due to the 1997 acquisition of Wuxi ICN Pharmaceuticals,
Inc. in China, which generated revenues of $9,050,000 for the year. The increase
also reflects 1997 sales of $7,649,000 generated by the products acquired from
Roche during 1997.
Revenues in the Biomedicals segment for 1997 were $70,915,000 compared with
$64,327,000 in 1996, an increase of $6,588,000 (10%). This increase was
primarily due to the acquisition of the former Dosimetry Service Division of
Siemens Medical Systems, Inc. in July 1996, partially offset by a $1,261,000
decrease 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 product sales for
inventory manufactured prior to the devaluation is expensed at a higher
historical exchange rate. In the Russia Pharmaceuticals segment, the Company
achieved a gross profit of 39% in 1997 compared to 45% in 1996, reflecting lower
gross profit margins on the Company's 1997 Russian acquisitions and at ICN
Oktyabr, where gross profit was affected by competitive pricing pressures. In
the Other Eastern Europe Pharmaceuticals segment, gross profit margins improved
to 36% in 1997 from 22% in 1996 due to improved operating efficiency in Hungary
and the acquisition of Polfa Rzeszow in the fourth quarter of 1997. In the
Company's North America Pharmaceuticals segment, gross profit margins were 81%
for 1997 compared to 85% in 1996, primarily due to lower sales of ribavirin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $256,234,000 (34% of revenues) in 1997 compared to
$192,441,000 (31% of revenues) in 1996. The increase was primarily due to
additional expenses of the operations acquired in 1997 and 1996 totaling
$25,692,000, including additional amortization of purchased intangibles of
$3,762,000 resulting from the acquisition of certain product rights from Roche
and additional costs of approximately $5,892,000 resulting from the
establishment of the Company's Eastern European headquarters in Moscow. 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 NDA.
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 in Hungary, and
increased investment in research and development efforts at ICN Yugoslavia.
TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, in 1997
were $12,790,000 compared to $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, Hungary 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.
INTEREST INCOME AND EXPENSE: The increase in interest expense of $7,069,000
in 1997 compared to 1996 is primarily due to interest expense on the 9-1/4%
Senior Notes, issued in August 1997 and interest expense on debt acquired in
connection with the Company's 1996 and 1997 acquisitions. This additional
25
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 to $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 9 1/4% Senior
Notes.
INCOME TAXES: The Company's effective income tax rate (benefit) was (26%)
for 1997 compared to (7%) for 1996. 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 SKB. 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.
In Russia, the Company continued to benefit from special tax relief that
benefits pharmaceutical companies resulting in an effective rate of 1%. In
Hungary, the Company benefited 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
United States which was carried back to prior tax years and resulted in the
recovery of taxes previously paid.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, cash provided by operating activities totaled $9,624,000,
compared to $9,315,000 in 1997. Operating cash flows reflect the Company's net
loss of $352,074,000 combined with working capital increases (after the effect
of business acquisitions and currency translation adjustments) totaling
approximately $173,168,000, offset by net noncash charges (including the Eastern
European charges of $451,019,000, along with depreciation, minority interest,
and foreign exchange gains and losses) of $534,866,000. The write-off of the
Company's Yugoslavian operations in the fourth quarter of 1998 reduced its
working capital by $120,927,000, including cash of $22,101,000.
The working capital increases principally relate to the Company's accounts
and notes receivable and its inventories, especially at ICN Yugoslavia and ICN
Russia. The Company's accounts and notes receivable decreased by $225,925,000
during 1998. Before the effects of currency devaluation and the Eastern European
charges, the Company experienced a $160,345,000 increase in accounts and notes
receivable as sales volume grew during the first half of the year. At the same
time, cash collections were adversely affected by the continuing liquidity
problems among many of the Company's key customers in Russia and Eastern Europe
(including the Yugoslavian government). However, the April 1998 devaluation of
the Yugoslavian dinar and the Yugoslavian government's default on $176,204,000
of accounts and notes receivable led to the write-off of all of these accounts.
In the third quarter, the devaluation of the Russian ruble reduced the dollar
value of the Company's Russian accounts receivable by over 70%; the resulting
liquidity problems among the Company's customers in the region caused the
Company to record additional reserves for anticipated losses on accounts
receivable of $37,873,000, further reducing net accounts receivable. In the
fourth quarter, the Company's receivables decreased by an additional $83,188,000
as a result of the write-off of ICN Yugoslavia.
The Company's inventories decreased by $20,443,000 during 1998. The Company
used cash of approximately $29,075,000 to increase inventory levels (principally
in the Company's Russian and Eastern European operations) to support the sales
growth experienced in the first half of 1998. The Company also built up stocks
of the products acquired in 1998 from Roche and SKB. These increases were offset
by the loss of inventories valued at $46,652,000 resulting from the write-off of
ICN Yugoslavia, and by reserves for losses on certain inventories which the
Company incurred as a result of the Russian economic crisis. The Company also
26
used cash to fund increases in prepaid expenses and other assets of
approximately $22,290,000, primarily due to vendor prepayments made in
Yugoslavia and Russia to reduce the Company's exposure to exchange rate
fluctuations; this increase was offset by the write-off of ICN Yugoslavia. The
cash used to support the increased levels of receivables, inventories, and
prepaid expenses was partially offset by an increase in trade payables and
accrued liabilities of $38,912,000 and other working capital changes.
Cash used in investing activities was $295,046,000 for 1998 compared to
$100,096,000 for 1997. In 1998, the Company used cash of $172,926,000 for
acquisitions, including $148,242,000 paid for the acquisition of rights to
certain products from Roche, SKB and Cassara. The Company also purchased VUAB
and acquired a portion of the minority interests in five of the Company's
subsidiaries. In addition, the Company made capital expenditures of
$110,281,000, principally representing the continuation of its plant expansion
efforts. Cash used in investing activities also reflects the effect of the
Yugoslavian government's seizure of the Company's Yugoslavian operations, which
resulted in the loss of ICN Yugoslavia's cash balances of $22,101,000. The
increase in restricted cash of $15,009,000 was due to additional deposit
requirements to collateralize the Company's potential obligation under certain
letters of credit. These amounts were partially offset by proceeds from the sale
of marketable securities of $22,958,000 and proceeds of $1,202,000 from the sale
of assets. In 1997, net cash used in investing activities of $100,096,000
principally consisted of payments for acquisitions totaling $44,829,000 and
capital expenditures of $100,397,000, which were partially offset by proceeds
from the sale of marketable securities of $40,826,000 and other sources.
Cash provided by financing activities totaled $186,019,000 during 1998,
including proceeds of long-term borrowings totaling $225,082,000. In August
1998, the Company completed a private placement of $200,000,000 of its 8-3/4%
Senior Notes due 2008 for net proceeds of approximately $190,821,000. Other cash
flows from financing activities included proceeds of $6,783,000 from the
exercise of employee stock options and a net decrease in short-term borrowings
of $1,245,000. The Company also received proceeds of $4,299,000 related to
shares of its common stock issued in the Company's acquisition of certain
product rights from Roche in 1997. Under the purchase agreement, the Company was
entitled to a portion of the proceeds realized by Roche from the sale of the
shares in excess of a specified price. These amounts were partially offset by
principal payments on long-term debt of $27,381,000, and cash dividends paid on
common stock of $17,069,000. The dividend payments reflect higher levels of
shares outstanding and a 12.5% increase in the per share dividend from the same
period in 1997. Net cash provided by financing activities of $262,675,000 for
1997 principally came from 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
in August 1997, and proceeds from the exercise of stock options of $20,498,000.
These amounts were partially offset by principal payments of $17,555,000 on
long-term debt, a net $14,395,000 reduction in short term borrowings, and cash
dividends of $11,631,000.
In March 1998, the Company announced the redemption of its Bio Capital
Holdings 5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates")
and SFr 37,670,000 principal amount of the New Certificates was exchanged for an
aggregate of approximately 802,000 shares of the Company's common stock. The
remaining SFr 200,000 principal amount of the New Certificates was redeemed for
cash. Upon the exchange of the New Certificates, marketable securities held in
trust for payment of the New Certificates, having a market value of
approximately $22,958,000, became available to the Company, and were sold.
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, 1998 totaled $104,921,000, compared to $209,896,000 at December 31,
1997. Working capital at December 31, 1998 was $236,994,000, compared to
$585,606,000 at December 31, 1997. The decrease in working capital is primarily
due to the losses incurred in Eastern Europe during 1998 (including the
write-off of the Company's investment in ICN Yugoslavia and losses on accounts
and notes receivable) and the use of cash for the acquisition of product rights
and businesses, partially offset by the proceeds of the Company's offering of
its 8-3/4% Senior Notes due 2008. Certain of the Company's lines of credit and
long term borrowings include covenants restricting payment of dividends,
issuance of new indebtedness, and repurchase of the Company's common stock and
27
requiring the maintenance of certain financial ratios. In February 1999, the
Company sold 1,141,498 shares of its common stock to Schering-Plough for cash
proceeds of $27,000,000.
The August 1998 devaluation of the Russian ruble decreased the Company's
working capital by approximately $32,000,000. In addition, the current economic
crisis in Russia continues to adversely affect the Company's operating cash
flows in that region, as its Russian customers continue to experience severe
liquidity shortages. The Company may need to invest additional working capital
in Eastern Europe (including Russia) to sustain its operations, to provide
increasing levels of working capital necessary to support renewed growth, and to
fund the purchase or upgrading of facilities. The Company also has several
preliminary acquisition prospects that may require significant funds in 1999.
However, there can be no assurance that any such acquisitions will be
consummated. In March 1999, the Company repurchased an additional 223,967 shares
of its common stock for $5,550,000, completing the first part of its stock
repurchase program. Under the term of the indentures related to the Company's
Senior Notes, the Company is not currently permitted to repurchase additional
shares of its common stock.
Management believes that the Company's existing cash and cash equivalents
and funds generated from operations will be sufficient to meet its operating
requirements in 1999 and to fund anticipated acquisitions and capital
expenditures, including the continued development of its network of retail
pharmacies in Russia. The Company may also seek additional debt financing or
issue additional equity securities to finance future acquisitions.
The Company 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 for the year ended December 31, 1998.
FOREIGN OPERATIONS
Approximately 77%, 82%, and 80% of the Company's revenues for the years
ended December 31, 1998, 1997 and 1996 were generated from operations outside
the United States. All of the Company's foreign operations are subject to
certain risks inherent in conducting business abroad, including price and
currency exchange controls, fluctuations in the relative values of currencies,
political instability and restrictive governmental actions. Changes in the
relative values of currencies occur from time to time and may, in certain
instances, materially affect the Company's results of operations. The effect of
these risks remains difficult to predict.
ICN Russia operates in a highly inflationary economy and uses the dollar as
the functional currency rather than the Russian ruble. During the three year
period ended December 31, 1998, the cumulative rate of inflation was
approximately 180%. All foreign exchange gains and losses arising from foreign
currency transactions and the effects of foreign exchange rate fluctuations are
included in income. As of December 31, 1998, ICN Russia had a net monetary asset
position of approximately $13,952,000 which would be subject to foreign exchange
loss if a further decline in the value of the ruble in relation to the dollar
were to occur. Due to the extremely large fluctuation in the ruble exchange
rate, the ultimate amount of any future foreign exchange loss the Company may
incur cannot presently be determined and such loss may have a material adverse
effect on the Company's financial position and results of operations. The
Company's management continues to work to reduce its net monetary exposure,
including the tightening of credit policies and increased accounts receivable
collection efforts including, in some cases, discounts for early payment from
customers. However, there can be no assurance that such efforts will be
successful.
The Company does not currently provide any hedges on its foreign currency
exposure and, in certain countries in which the Company operates, no effective
hedging programs are available. The Company and its subsidiaries are also
subject to foreign currency risk on its foreign-denominated debt of
approximately $43,030,000 at December 31, 1998, which is primarily denominated
in Swiss francs and German marks and, at Hungary and Poland, in U.S. dollars.
See Note 9 of Notes to Consolidated Financial Statements for the year ended
December 31, 1998 for further discussion.
28
INFLATION AND CHANGING PRICES
The effects of inflation are experienced by the Company through increases
in the costs of labor, services and raw materials. The Company is subject to
price control restrictions on its pharmaceutical products in the majority of
countries in which it operates. While the Company attempts to raise selling
prices in anticipation of inflation, the Company has been affected by the lag in
allowed price increases in 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.
THE YEAR 2000 ISSUE
Many computer systems and equipment and instruments with embedded
microprocessors were designed to recognize only the last two digits of a
calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. Systems that are not
Year 2000 compliant" could malfunction, potentially resulting in an adverse
impact on the Company's business.
The Company is pursuing an action plan to be Year 2000 compliant in all
locations by the third quarter of 1999. The Company does not have significant
reliance on custom, internally generated software; the Company principally uses
third party software that is, in most cases, already Year 2000 compliant. The
Company has completed an assessment of its worldwide information systems and has
determined that it will be required to perform some modification or replacement
of software so that all systems will properly utilize dates beyond December 31,
1999. The Company has spent approximately $6,800,000 to upgrade its information
systems to be Year 2000 compliant, and currently considers its information
systems to be over 90% Year 2000 compliant. The Company recently converted its
Russian operations to Year 2000-compliant software.
The remaining projects that must be completed for full Year 2000 compliance
are software upgrades at the Company's plants in Hungary and Puerto Rico. The
purchase of replacement software is necessary to maintain the existing "Good
Manufacturing Practices" status of these plants. The Company has acquired
appropriate replacement software for these facilities and installation began
early in 1999. The estimated additional cost to complete the conversion to full
Year 2000 compliance is estimated to be approximately $1,500,000 which will be
spent primarily in 1999 and funded with cash from operations. There can be no
assurance that the conversion will be completed within internal or external
deadlines.
The Company's operations may also be impacted in the event that computer
disruption is encountered by third parties with whom the Company conducts
significant business. These third parties include suppliers and service
providers on whom the Company relies, and the wholesalers, distributors, health
care providers, and others from whom the Company derives its revenues. The
Company has identified the most critical of these third parties and the Company
intends to communicate with these third parties concerning their state of
readiness. However, the Company can provide no assurance that these third
parties will not experience business disruption. If a number of these third
parties experience business disruption due to a Year 2000 computer problem, the
Company's results of operations and cash flows could be materially adversely
affected.
The Company is evaluating the need for contingency plans to address
potential business disruptions at these third parties. Contingency planning may
include increasing inventory levels, establishing secondary sources of supply
and manufacturing, modifying production schedules, and maintaining backup lines
of communications with our customers. Should the Company determine that
important third parties may experience business interruption, appropriate
contingency plans will be developed. However, it is unlikely that any
contingency plan can fully mitigate the impact of significant business
disruptions among these third parties.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced a new currency called the "Euro". The conversion rates between the
Euro and the participating nations' existing legacy currencies were fixed
irrevocably as of January 1, 1999. Prior to full implementation of the new
29
currency on January 1, 2002, there will be a transition period during which
parties may, at their discretion, use either the legacy currencies or the Euro
for financial transactions.
The Company expects its affected subsidiaries to continue to operate
primarily in their respective legacy currencies for at least two years. The
majority of the Company's affected subsidiaries currently can accommodate
transactions for customers or suppliers operating in either the legacy currency
or the Euro. Action plans are currently being implemented which are expected to
result in full compliance with all laws and regulations relating to the Euro
conversion. Such plans include the adaptation of information technology and
other systems to accommodate Euro-denominated transactions as well as the
requirements of the transition period. The Company is also addressing the impact
of the Euro on its currency exchange-rate risk, taxation, contracts, competition
and pricing. While it is not possible to accurately predict the impact the Euro
will have on the Company's business or on the economy in general, management
currently does not anticipate that the Euro conversion will have a material
adverse impact on the Company's market risk with respect to foreign exchange,
its results of operations, or its financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and becomes
effective for the Company for the first quarter of 2000. The Company does not
currently engage in any program of hedging and consequently the Company does not
expect the adoption of SFAS No. 133 to have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by fluctuations
in world financial markets. The Company evaluates its exposure to such risks on
an ongoing basis, and reviews its risk management policy to manage these risks
to an acceptable level, based on management's judgment of the appropriate
trade-off between risk, opportunity and costs. The Company does not hold any
significant amount of market risk sensitive instruments whose value is subject
to market price and currency risk.
INTEREST RATE RISK: The Company does not hold financial instruments for
trading or speculative purposes. The financial assets of the Company are not
subject to significant interest rate risk due to their short duration. The
financial liabilities of the Company that are subject to interest rate risk are
its fixed-rate long-term debt (principally its 8-3/4% Senior Notes and its
9-1/4% Senior Notes). The Company does not use any derivatives or similar
instruments to manage its interest rate risk. A 90 basis-point increase in
interest rates (approximately 10% of the Company's weighted average interest
rate on fixed-rate debt) affecting the Company's financial instruments would
have an immaterial effect on the Company's 1998 and 1997 pretax earnings.
However, such a change would reduce the fair value of the Company's fixed-rate
debt instruments (principally its 8-3/4% and 9-1/4% Senior Notes) by
approximately $14,900,000 as of December 31, 1998.
30
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 Eastern Europe, Russia, Latin America, and China in light of the
unstable economic, political and regulatory conditions in such regions; the risk
of potential claims against certain of the Company's research compounds; the
Company's ability to successfully develop and commercialize future products; the
limited protection afforded by the patents relating to Virazole(R), and possibly
on future drugs, techniques, processes or products the Company may develop or
acquire; the potential impact of the Year 2000 issue; the potential impact of
the Euro currency; the Company's ability to continue its expansion plan and to
integrate successfully any acquired companies; the results of lawsuits or the
outcome of investigations pending against the Company; the Company's potential
product liability exposure and lack of any insurance coverage thereof;
government regulation of the pharmaceutical industry (including review and
approval for new pharmaceutical products by the FDA in the United States and
comparable agencies in other countries) and competition.
31
QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended
December 31, 1998 and 1997 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
1998(1) QUARTER QUARTER QUARTER QUARTER
- ------- ------- ------- ------- --------
Revenues $240,796 $232,943 $162,991 $201,334
Gross profit on product sales 131,827 114,247 85,388 115,577
Eastern European charges -- 165,646 39,884 235,290
Net income (loss) 33,948 (97,498) (65,223) (223,301)
Basic earnings (loss) per share $ .47 $ (1.34) $ (.89) $ (2.92)
Diluted earnings (loss) per share $ .44 $ (1.34) $ (.89) $ (2.92)
FIRST SECOND THIRD FOURTH
1997(1) QUARTER QUARTER QUARTER QUARTER
- ------- -------- -------- -------- --------
Revenues $158,968 $160,229 $177,397 $255,608
Gross profit on product sales 84,164 84,272 100,088 131,700
Net income 22,312 21,268 34,557 35,787
Basic earnings per share $ .37 $ .38 $ .61 $ .55
Diluted earnings per share $ .32 $ .34 $ .50 $ .49
(1) The increased revenue trend is substantially due to the Company's expansion program in 1998
and 1997. In addition, revenues for 1998 were affected by the charges described above in
"Recent Developments."
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 1998
Report of independent accountants ........................................ 33
Financial statements:
Consolidated balance sheets at December 31, 1998 and 1997........ 34
For the years ended December 31, 1998, 1997 and 1996:
Consolidated statements of income................................ 35
Consolidated statements of stockholders' equity.................. 36
Consolidated statements of cash flows............................ 37
Notes to consolidated financial statements....................... 38
Financial statement schedule for the years ended December 31, 1998,
1997 and 1996:
II. Valuation and qualifying accounts............................ 60
The other schedules have not been submitted because they are not
applicable.
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of ICN
Pharmaceuticals, Inc. (a Delaware corporation) and Subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 2 and 14, effective November 26, 1998, the Company changed
the method of accounting for ICN Yugoslavia, a previously consolidated
subsidiary, and reduced the carrying value of the investment to its fair
value.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Newport Beach, California
March 4, 1999
34
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(in thousands, except per share data)
1998 1997
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 104,921 $ 209,896
Restricted cash 15,558 549
Accounts receivable, net 180,001 260,495
Notes receivable, net -- 145,431
Inventories, net 126,545 146,988
Prepaid expenses and other current assets 13,723 23,392
----------- -----------
Total current assets 440,748 786,751
Property, plant and equipment, net 327,756 360,713
Deferred income taxes, net 77,933 69,710
Other assets 45,706 47,978
Goodwill and intangibles, net 464,253 226,593
----------- -----------
$ 1,356,396 $ 1,491,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 92,287 $ 96,437
Accrued liabilities 60,644 67,883
Notes payable 17,584 13,759
Current portion of long-term debt 28,097 19,359
Income taxes payable 5,142 3,707
----------- -----------
Total current liabilities 203,754 201,145
Long-term debt, less current portion 510,808 315,088
Deferred license and royalty income 6,061 12,449
Other liabilities 22,160 24,658
Minority interest 27,449 142,077
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized;
-0- and 2 shares Series B and 1 and -0- shares Series
D issued and outstanding at December 31, 1998 and 1997,
respectively ($22,988 liquidation preference at December
31, 1998) 1 1
Common stock, $.01 par value; 200,000 shares authorized;
76,411 (1998)and 71,432 (1997) shares issued and outstanding
(after deducting shares in treasury of 200 and 482,
respectively) 764 714
Additional capital 928,956 766,868
Retained earnings (deficit) (295,211) 70,129
Accumulated other comprehensive income (48,346) (41,384)
----------- -----------
Total stockholders' equity 586,164 796,328
----------- -----------
$ 1,356,396 $ 1,491,745
=========== ===========
The accompanying notes are an integral part of these consolidated
statements.
35
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
1998 1997 1996
---- ---- ----
Revenues:
Product sales $ 800,639 $ 752,202 $ 614,080
Royalties 37,425 -- --
------------ ----------- -----------
Total revenues 838,064 752,202 614,080
Costs and expenses:
Cost of product sales 353,600 351,978 291,807
Selling, general and administrative expenses 312,377 256,234 192,441
Research and development costs 20,835 18,692 15,719
Eastern European charges 440,820 -- --
------------ ------------ -----------
Total expenses 1,127,632 626,904 499,967
------------ ------------ -----------
Income (loss) from operations (289,568) 125,298 114,113
Translation and exchange losses, net 80,501 12,790 2,282
Interest income (13,057) (15,912) (3,001)
Interest expense 38,069 22,849 15,780
------------ ------------ -----------
Income (loss) before income
taxes and minority interest (395,081) 105,571 99,052
Provision (benefit) for income taxes 1,983 (27,736) (6,815)
Minority interest (44,990) 19,383 18,939
------------ ------------ -----------
Net income (loss) $ (352,074) $ 113,924 $ 86,928
============ ============ ===========
Basic earnings (loss) per share $ (4.78) $ 1.93 $ 1.75
============ ============ ===========
Shares used in per share computation 73,637 55,965 48,341
============ ============ ===========
Diluted earnings (loss) per share $ (4.78) $ 1.69 $ 1.51
============ ============ ===========
Shares used in per share computation 73,637 69,650 60,197
============ ============ ===========
The accompanying notes are an integral part of these consolidated statements.
36
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
ACCUMULATED
RETAINED OTHER
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL
------ ------ ------ ------ ---------- ---------- --------- -------
BALANCE AT DECEMBER 31, 1995 -- $ -- 45,630 $ 456 $ 289,954 $ (105,844) $ (22,394) $ 162,172
Comprehensive income:
Net income -- -- -- -- -- 86,928 -- 86,928
Foreign currency translation
adjustments -- -- -- -- -- -- (4,623) (4,623)
Net unrealized gain on marketable
securities -- -- -- -- -- -- (230) (230)
---------
Total comprehensive income 82,075
Exercise of stock options -- -- 1,302 13 10,154 -- -- 10,167
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
Tax benefit of stock options exercised -- -- -- -- 1,600 -- -- 1,600
Cash dividends -- -- -- -- -- (6,999) -- (6,999)
------ ------- -------- ------ -------- ----------- --------- ---------
BALANCE AT DECEMBER 31, 1996 50 1 48,536 485 368,026 (25,915) (27,247) 315,350
Comprehensive income:
Net income -- -- -- -- -- 113,924 -- 113,924
Foreign currency translation
adjustments -- -- -- -- -- -- (14,137) (14,137)
---------
Total comprehensive income 99,787
Exercise of stock options -- -- 1,863 19 20,479 -- -- 20,498
Expiration of put option -- -- 1,598 16 24,614 (533) -- 24,097
Issuance of common stock:
In connection with acquisitions 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 -- -- -- -- -- (15,472) -- (15,472)
Stock dividends on preferred stock -- -- 320 3 1,872 (1,875) -- --
------ ------- -------- ------ ---------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 1997 2 1 71,432 714 766,868 70,129 (41,384) 796,328
Comprehensive income:
Net loss -- -- -- -- -- (352,074) -- (352,074)
Foreign currency translation
adjustments -- -- -- -- -- -- (6,962) (6,962)
---------
Total comprehensive income (359,036)
Exercise of stock options -- -- 634 6 6,777 -- -- 6,783
Stock compensation -- -- 319 3 5,304 -- -- 5,307
Issuance of preferred stock 1 -- -- -- 23,000 -- -- 23,000
Issuance of common stock:
In connection with acquisitions -- -- 2,884 29 93,530 -- -- 93,559
Conversion of debt -- -- 802 8 25,329 -- -- 25,337
Issuance of treasury stock -- -- 482 5 12,528 -- -- 12,533
Purchase of treasury stock -- -- (200) (2) (4,448) -- -- (4,450)
Conversion of preferred shares (2) -- 57 1 (1) -- -- --
Cash dividends -- -- -- -- -- (13,197) -- (13,197)
Stock dividends on preferred stock -- -- 1 -- 69 (69) -- --
------ ------- -------- -------- ---------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 1998 1 $ 1 76,411 $ 764 $ 928,956 $ (295,211) $ (48,346) $ 586,164
====== ======= ======== ======== ========== ========== ========= =========
The accompanying notes are an integral part of these consolidated statements.
37
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (352,074) $ 113,924 $ 86,928
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 51,096 28,753 17,936
Eastern European charges 451,019 -- --
Provision for losses on accounts receivable 7,559 4,021 4,345
Provision for inventory obsolescence 602 3,342 106
Translation and exchange losses, net 80,501 12,790 2,282
Deferred income (6,112) (5,072) (1,644)
Loss (gain) on sale of assets 100 (1,184) 982
Deferred income taxes (8,223) (35,376) 358
Other non-cash gains 3,314 (2,047) (387)
Minority interest (44,990) 19,383 18,939
Change in assets and liabilities, net of effects of
acquisitions:
Accounts and notes receivable (160,345) (154,433) (181,726)
Inventories (29,075) (6,227) 43,306
Prepaid expenses and other assets (22,290) 3,936 (11,618)
Trade payables and accrued liabilities 38,912 30,665 13,683
Income taxes payable 2,555 1,679 (7,885)
Other liabilities (2,925) (4,839) (11,153)
----------- ---------- ---------
Net cash provided by (used in) operating activities 9,624 9,315 (25,548)
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 22,958 40,826 27,663
Proceeds from sale of assets 1,202 3,051 6,954
(Increase) decrease in restricted cash (15,009) 3 --
Cash acquired in connection with acquisitions 1,111 1,250 859
Capital expenditures (110,281) (100,397) (26,216)
Acquisition of license rights, product lines and businesses (172,926) (44,829) (51,222)
Loss of Yugoslavian operations (22,101) -- --
----------- ---------- ---------
Net cash used in investing activities (295,046) (100,096) (41,962)
----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 225,082 284,051 20,975
Proceeds from exercise of stock options 6,783 20,498 10,167
Proceeds from issuance of preferred stock -- -- 47,392
Proceeds from issuance of common stock 4,299 -- 32,842
Proceeds from issuance of stock put right -- 1,707 3,195
Net decrease in notes payable (1,245) (14,395) (10,908)
Payments on long-term debt (27,381) (17,555) (13,984)
Dividends paid (17,069) (11,631) (6,999)
Purchase of treasury stock (4,450) -- --
----------- ---------- ---------
Net cash provided by financing activities 186,019 262,675 82,680
----------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents (5,572) (1,364) 102
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (104,975) 170,530 15,272
Cash and cash equivalents at beginning of year 209,896 39,366 24,094
----------- ---------- ---------
Cash and cash equivalents at end of year $ 104,921 $ 209,896 $ 39,366
=========== ========== =========
The accompanying notes are an integral part of these consolidated statements.
38
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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., SPI
Pharmaceuticals, Inc., Viratek, Inc. 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 the lower of cost or realizable value. The
accompanying consolidated financial statements reflect the elimination of all
significant intercompany account balances and transactions.
Effective November 26, 1998, the Company's equity ownership for ICN
Yugoslavia was effectively reduced from 75% to 35% based upon a decision by the
Yugoslavian Ministry of Economic and Property Transformation. Additionally,
representatives of the Company and ICN Yugoslavia's management have been denied
access to the premises and any representation as to the management of ICN
Yugoslavia. As a result, the Company is no longer able to influence the
operating and financial affairs of ICN Yugoslavia. Accordingly, the Company has
deconsolidated the financial statements of ICN Yugoslavia as of November 26,
1998, and reduced the carrying value of its investment to the fair value,
currently estimated to be zero. The Company will account for its ongoing
investment in ICN Yugoslavia under the cost method. See Note 14.
CASH AND CASH EQUIVALENTS: Cash equivalents include repurchase agreements,
certificates of deposit, money market funds, and municipal debt securities which
have maturities of three months or less. For purposes of the consolidated
statements of cash flows, the Company considers highly-liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
The carrying amount of these assets approximates fair value due to the
short-term maturity of these instruments. At December 31, 1998 and 1997, cash
equivalents totaled $77,241,000 and $194,026,000, respectively.
MARKETABLE SECURITIES: The Company classifies its investments as available
for sale. Changes in market values are reflected as unrealized gains and losses,
calculated on the specific identification method, in stockholders' equity. In
1998, upon the exchange and redemption of the Company's Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates"),
marketable securities previously held in trust for the payment of the New
Certificates became available to the Company and were sold, resulting in a gain
of $1,993,000. In addition, during 1996, the Company sold certain corporate bond
securities, 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.
39
The Company capitalizes interest on borrowed funds during construction
periods as part of the cost of the related asset.
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 20 years depending upon the nature of the
business or products acquired. 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.
As of December 31, 1998 and 1997, goodwill and intangibles included the
following:
1998 1997
---- ----
(in thousands)
Goodwill $ 69,741 $ 57,215
Acquired product rights 423,813 183,209
Other intangible assets 11,811 7,750
------------ -----------
505,365 248,174
Accumulated amortization (41,112) (21,581)
------------ -----------
$ 464,253 $ 226,593
============ ===========
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, 1998 and 1997 was
approximately 8% and 18%, respectively.
REVENUE RECOGNITION: Revenues and related cost of product sales are
recorded at the time of shipment or as services are performed, provided that
collection of the revenue is reasonably assured.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's
foreign operations, except those in highly inflationary economies, are
translated at 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 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. Recorded losses from foreign exchange translation and
transactions were $80,501,000, $12,790,000, and $2,282,000 for 1998, 1997 and
1996, 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 tax laws or rates.
40
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.
COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which
established standards for the reporting and display of comprehensive income. The
Company has adopted SFAS No. 130 effective January 1, 1998. Comprehensive income
includes such items as foreign currency translation adjustments and unrealized
holding gains and losses on available-for-sale securities. These amounts are
presented as a component of stockholders' equity, consistent with the Company's
previous practice. SFAS No. 130 does not affect current principles of
measurement of revenues and expenses and accordingly the adoption of SFAS No.
130 had no effect on the Company's results of operations or financial position.
The balance of accumulated other comprehensive income at December 31, 1998
and 1997 consists of accumulated foreign currency translation adjustments. None
of the components of other comprehensive income have been recorded net of any
tax provision or benefit as the Company does not expect to realize any
significant tax benefit or expense from these items.
PER SHARE INFORMATION: In 1997, the FASB issued SFAS No. 128, EARNINGS PER
SHARE. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding. In
computing diluted earnings per share, the weighted average number of shares
outstanding is adjusted to reflect the effect of potentially dilutive securities
including options, warrants, and convertible debt or preferred stock, and income
available to common stockholders is adjusted to reflect any changes in income or
loss that would result from the issuance of the dilutive common shares. The
Company adopted SFAS No. 128 in 1997, and earnings per share amounts for all
periods prior to 1997 were restated to comply with its requirements.
The Company's Board of Directors declared a quarterly cash dividend or
distribution of $0.06 per share for each fiscal quarter of 1998 (including the
fourth quarter 1998 distribution declared in January 1999). During 1997, the
Company's Board of Directors declared quarterly cash distributions and dividends
for each quarter, totaling $0.21 per share. During 1996, the Company's Board of
Directors declared quarterly cash distributions for the first, second and third
quarters totaling $0.15 per share. For the fourth quarter of 1996, the Company's
Board of Directors declared a cash distribution of $0.05 per share in January
1997.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure only
provisions of SFAS No. 123 for stock options issued to employees. Compensation
cost for stock-based compensation has been measured using the intrinsic value
method provided by Accounting Principles Board No. 25.
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
ACQUIRED PRODUCT RIGHTS - In February 1998, the Company acquired from
SmithKline Beecham plc ("SKB") the Asian, Australian and African rights to 39
prescription and over-the-counter pharmaceutical products. The Company received
the product rights in exchange for $45,500,000 payable in a combination of
$22,500,000 in cash and 821 shares of the Company's Series D Convertible
Preferred Stock (see Note 10). Effective October 1, 1998, the Company acquired
from SKB the Latin American rights to three ethical pharmaceutical products for
$3,500,000 in cash.
In November 1998, the Company completed the acquisition of the worldwide
rights (except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche").
Aggregate consideration for the products was $178,800,000, paid in a combination
41
of $89,400,00 cash and 2,883,871 shares of the Company's common stock, valued at
$89,400,000 (based on the initial guarantee price of $31.00 per share). See Note
11.
In March 1998, the Company acquired the rights to a portfolio of 32
dermatology products from Laboratorio Pablo Cassara ("Cassara") for $22,450,000
in cash. The Company will market the products through its subsidiary, ICN
Argentina.
The acquisitions of the product rights from SKB, Roche, and Cassara will be
accounted for using the purchase method of accounting, with the purchase price
being allocated to acquired product rights included in goodwill and intangibles
and amortized on a straight-line basis over 18 years. The amortization period
was determined based upon analysis and valuations which considered the relative
profitability and growth prospects of the acquired products rights, the
distribution networks and the recognizable trade names.
VYZKUMNY USTAV ANTIBIOTIC A BIOTRANSFORMACII - In July 1998, the Company
acquired Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a pharmaceutical
manufacturing and research facility located in a suburb of Prague, Czech
Republic, for $17,942,000 in cash. VUAB produces and sells pharmaceutical
products in finished forms, principally injectable antibiotics and infusion
solutions, and pharmaceutical raw materials. The acquisition was accounted for
as a purchase and is not material to the financial position or results of
operations of the Company. Goodwill of $1,328,000 was recorded in connection
with the acquisition and is being amortized over a 20 year estimated useful
life.
OTHER ACQUISITIONS - During 1998, the Company acquired a 57% interest in
Pharmsnabsbyt, a distributor of pharmaceutical products in St. Petersburg,
Russia. Pharmsnabsbyt distributes a variety of pharmaceutical products within
Russia, including many of those produced by the Company's Russian factories. The
Company also acquired a portion of the minority interests in five of its
existing Eastern European operations for an aggregate of $6,489,000 in cash. The
book value of the minority interests acquired exceeded the consideration paid by
an aggregate of $8,983,000, resulting in a reduction of the carrying value of
the related goodwill or acquired property and equipment.
The following table presents unaudited consolidated pro forma financial
information for the twelve months ended December 31, 1998 and 1997, as though
the acquisitions made in 1998 had occurred on January 1, 1997 (in thousands,
except per share data):
Year Ended
December 31,
-----------------------
1998 1997
--------- ---------
(unaudited)
Revenues $ 901,980 $ 892,296
Income (loss) before provision for
income taxes and minority interest (375,084) 143,552
Net income (loss) (339,720) 137,685
Basic earnings (loss) per share $ (4.48) $ 2.24
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, 1997. 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.
42
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.
The Company has allocated the purchase price first to the identifiable
assets acquired (based upon estimated fair values) and the liabilities assumed
(at estimated present values). A summary of the purchase price allocation of the
1998 acquisitions is as follows (in thousands):
Current assets (excluding cash of $1,111) $ 2,476
Property, plant and equipment 21,163
Other non-current assets 8,972
Acquired product rights 244,106
Goodwill 13,844
Current liabilities (11,374)
Long-term liabilities (1,461)
------------
Total purchase price $ 277,726
============
4. RELATED PARTY TRANSACTIONS
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
options to acquire 150,000 shares 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
The Company is exposed to concentrations of credit risk related to its 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. At December 31, 1998 and 1997,
the Company's cash and cash equivalents and restricted cash include $109,000,000
and $178,536,000, respectively, held in time deposits, money market funds, and
municipal debt securities through seven major financial institutions.
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):
1998 1997 1996
---- ---- ----
Domestic $ (252,597) $ (21,886) $ 5,039
Foreign (142,484) 127,457 94,013
---------- ---------- ---------
$ (395,081) $ 105,571 $ 99,052
========== ========== =========
43
The income tax (benefit) provision for each of the years ended December 31,
consists of the following (in thousands):
1998 1997 1996
---- ---- ----
Current
Federal $ -- $ -- $ (9,469)
State 640 200 68
Foreign 9,566 7,440 2,228
------------ ------------ ------------
10,206 7,640 (7,173)
Deferred
Federal (11,409) (31,375) --
Foreign 3,186 (4,001) 358
------------ ------------ ------------
(8,223) (35,376) 358
------------ ------------ ------------
$ 1,983 $ (27,736) $ (6,815)
============ ============ ============
The current federal tax provision has not been reduced for the tax benefit
associated with the exercise of employee stock options of $-0-, $-0-, and
$1,600,000 in 1998, 1997 and 1996, respectively, which were credited directly to
additional capital.
The primary components of the Company's net deferred tax asset at December
31, 1998 and 1997 are as follows (in thousands):
1998 1997
---- ----
Deferred tax assets:
NOL carryforward $ 100,840 $ 78,356
Inventory and other reserves 14,514 6,605
Tax credit carryover 947 1,226
Capital loss carryforward 18,988 --
Deferred income 1,989 4,415
Long-term debt -- 4,984
Other 3,685 781
Valuation allowance (55,938) (23,077)
----------- -----------
Total deferred tax asset 85,025 73,290
----------- -----------
Deferred tax liabilities:
Property, plant and equipment (168) (196)
Inventory (1,770) (1,770)
Other (5,154) (1,614)
----------- -----------
Total deferred tax liability (7,092) (3,580)
----------- -----------
Net deferred tax asset $ 77,933 $ 69,710
=========== ===========
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 1998 and 1997, the provision for income taxes reflects a deferred tax
benefit of $8,223,000 and $35,376,000, respectively, resulting from the
recognition of certain deferred tax assets and the reduction of the related
valuation allowance. During 1998 and 1997, the Company acquired certain product
rights from Roche and SKB and in 1998, its partner Schering-Plough received FDA
approval to market Rebetron(TM), for which the Company will receive royalties.
These new products and royalties are expected to generate future taxable income
that resulted in a deferred tax benefit in 1998 and 1997.
44
In 1998, the valuation allowance primarily relates to the deduction for the
write-off of the Yugoslavian subsidiary, a $12,000,000 benefit of stock options
included in the NOL carryforward, the tax credit carryforward, and certain
foreign NOLs. Upon realization, the $12,000,000 benefit of stock options
included in the NOL carryforward will be added to additional capital. 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.
At December 31, 1998, the Company has domestic and foreign NOLs of
approximately $240,000,000 and $25,000,000, respectively. The Company's NOLs and
tax credit carryovers begin to expire in 1999 and the capital loss carryforward
of $54,250,000 expires in 2003.
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
1998 1997 1996
---- ---- ----
Statutory rate (35%) 35% 35%
Foreign source income taxed at lower
effective rates:
Yugoslavia 15 (17) (24)
Russia 3 (5) (5)
Hungary -- (2) --
Others (1) (4) (2)
Change in valuation allowance 5 (33) --
Basis difference in Yugoslavia 14 -- --
Favorable audit settlement -- -- (5)
Domestic NOL loss carryback -- -- (5)
Other, net -- -- (1)
------- ------- ------
Effective rate 1% (26)% (7)%
======= ======= ======
In Yugoslavia, the Company received the benefit of certain favorable tax
laws that resulted in income taxes at a rate lower than the 25% Yugoslavian
statutory rate. Under Yugoslavian law, taxable earnings attributed to foreign
investment are exempt from taxation for a five year period. Accordingly, 75% of
ICN Yugoslavia's taxable income, the Company's ownership in ICN Yugoslavia, was
exempt from taxation for the five years ending December 31, 1996. Also in
Yugoslavia, the Company received a tax credit for capital investments, which may
include short-term government bonds and property and equipment, which can only
be used in the year in which the investment is made. Effective January 1, 1997,
additional changes in the Yugoslavian tax law resulted in benefits to the
Company in the form of a reduction in taxes otherwise payable as a result of its
foreign investment in ICN Yugoslavia.
In Russia, the Company continues to benefit from special tax relief that
benefits pharmaceutical companies. Under this relief approximately 75% of the
income generated in Russia related to the manufacture and sale of prescription
medicines is exempt from taxation. This reduces the statutory rate to
approximately 8%. The continuing tax benefits in Russia are subject to potential
changes in tax law that may be enacted in the future. Should these benefits be
repealed, income generated in Russia would require the Company to provide taxes
at the current statutory rate of 35%. In Hungary, the Company benefited from a
tax holiday which expired on December 31, 1998.
45
In 1998, ICN Yugoslavia and ICN Hungary generated tax loss carryforwards
and the Company's Russian subsidiaries generated deferred income tax assets,
primarily related to bad debt reserves. Management believes that it is more
likely than not that these future tax benefits will not be realized as a result
of the seizure of ICN Yugoslavia and the Russian economic crisis affecting
Eastern Europe. Accordingly, the Company recorded a valuation allowance against
these loss carryforwards and deferred income tax assets, resulting in no tax
benefit being recorded in 1998.
The aggregate benefit using the local statutory rates in Yugoslavia,
Russia, and Hungary in 1997 and 1996 relating to the above items was
approximately $23,300,000 ($0.33 per diluted share) and $22,700,000 ($0.38 per
diluted share), respectively.
During 1998, 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, 1998, is
approximately $145,000,000 of accumulated earnings of foreign operations that
would be subject to U.S. income or foreign withholding taxes, if and when
repatriated.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
1998 1997 1996
---- ---- ----
Income:
Net income (loss) $ (352,074) $ 113,924 $ 86,928
Dividends and accretion on preferred stock (34) (5,651) (2,199)
------------- ------------ -----------
Numerator for basic earnings per share -- income
available to common stockholders (352,108) 108,273 84,729
Effect of dilutive securities:
8-1/2% Convertible Subordinated Notes -- 9,328 7,520
5-5/8% Swiss Franc Exchangeable Certificates -- 123 (738)
5-1/2% Swiss Franc Exchangeable Certificates -- 37 (345)
Other dilutive securities -- -- 21
------------ ------------ -----------
Numerator for diluted earnings per share -- income
available to common stockholders after assumed
conversions $ (352,108) $ 117,761 $ 91,187
============ ============ ===========
Shares:
Denominator for basic earnings per share --
weighted-average shares outstanding 73,637 55,965 48,341
Effect of dilutive securities:
Employee stock options -- 3,033 1,596
Series C Convertible Preferred Stock -- 1,266 --
8-1/2% Convertible Subordinated Notes -- 6,744 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
------------ ------------ -----------
Dilutive potential common shares -- 13,685 11,856
------------ ------------ -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed
conversions 73,637 69,650 60,197
============ ============ ===========
Basic earnings (loss) per share $ (4.78) $ 1.93 $ 1.75
============ ============ ===========
Diluted earnings (loss) per share $ (4.78) $ 1.69 $ 1.51
============ ============ ===========
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 Convertible Preferred Stock. The Company's Series B Convertible Preferred
Stock is not reflected in the computation of diluted earnings per share for any
46
periods, as such securities were antidilutive. Because the Company recorded a
net loss for 1998, the effects of stock options, the Series D Convertible
Preferred Stock, and other potentially dilutive securities are not included in
the computation of earnings per share as all such securities are antidilutive.
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 Convertible Preferred Stock been converted to
common stock at the time of issuance.
8. DETAIL OF CERTAIN ACCOUNTS
1998 1997
---- ----
(in thousands)
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable $ 209,444 $ 254,376
Other receivables 19,305 18,118
------------ ------------
228,749 272,494
Allowance for doubtful accounts (48,748) (11,999)
------------ ------------
$ 180,001 $ 260,495
============ ============
INVENTORIES, NET:
Raw materials and supplies $ 33,915 $ 65,937
Work-in-process 13,372 16,745
Finished goods 90,846 75,782
------------ ------------
138,133 158,464
Allowance for inventory obsolescence (11,588) (11,476)
------------ ------------
$ 126,545 $ 146,988
============ ============
PROPERTY, PLANT AND EQUIPMENT, NET:
Land $ 17,678 $ 20,531
Buildings 124,402 127,577
Machinery and equipment 152,037 145,640
Furniture and fixtures 19,372 20,273
Leasehold improvements 3,341 3,426
------------ ------------
316,830 317,447
Accumulated depreciation and amortization (57,455) (53,112)
Construction in progress 68,381 96,378
------------ ------------
$ 327,756 $ 360,713
============ ============
At December 31, 1998 and 1997, construction in progress includes costs
incurred to date for the construction of a new pharmaceutical factory at the
Company's Rzeszow, Poland facility and other plant expansion projects. At
December 31, 1997, construction in progress also includes costs incurred for the
construction and modernization of its former pharmaceutical complex outside
Belgrade, Yugoslavia, which was written off in 1998.
1998 1997
---- ----
(in thousands)
ACCRUED LIABILITIES:
Payroll and related items $ 11,505 $ 16,423
Interest 13,726 11,683
Other 35,413 39,777
----------- -----------
$ 60,644 $ 67,883
=========== ===========
47
9. DEBT
Long-term debt consists of the following (in thousands):
1998 1997
---- ----
9-1/4% Senior Notes due 2005 $ 275,000 $ 275,000
8-3/4% Senior Notes due 2008 (net of unamortized discount
of $3,226) 196,774 --
Hungarian mortgages, with interest at rates ranging from
LIBOR + 0.9% to LIBOR + 1.0%; interest and principal
due in varying amounts through 2001 5,010 5,258
U.S. mortgages with variable interest at rates ranging
from 7.1% to 8.9%; interest and principal payable monthly
through 2022 10,753 11,925
Polish mortgage note, repaid in 1998 -- 8,604
U.S. capital leases with interest at rates ranging from 4.9%
to 6.1% payable monthly through 2000 599 1,651
Swiss Franc Guaranteed Bonds with an effective interest rate
of 8.5%, maturing in 2002 (net of unamortized discount of
$88 in 1997) 228 6,056
Hungarian loans in U.S. dollars and various foreign currencies,
with interest at rates ranging from LIBOR + 0.5% to 21.0%,
maturing at various dates through 2002 33,389 24,563
Other long-term debt due in U.S. dollars and various foreign
currencies, with interest at rates ranging from 6.0% to 15.0%;
interest and principal due in varying amounts through 2004 17,152 1,390
------------ -----------
538,905 334,447
Less current portion 28,097 19,359
------------ -----------
Total long-term debt $ 510,808 $ 315,088
============ ===========
In August 1998, the Company completed a private placement of $200,000,000
of its 8-3/4% Senior Notes due 2008 (the "8-3/4% Senior Notes") for net proceeds
of $190,821,000. The 8-3/4% Senior Notes are subject in limited circumstances to
redemption at the Company's option at any time prior to November 15, 2001, at
108.75% of their principal amount, plus accrued and unpaid interest. In
connection with the private placement, the Company granted the purchasers of the
8-3/4% Senior Notes certain registration rights.
In August 1997, the Company completed an underwritten public offering of
$275,000,000 of its 9-1/4% Senior Notes Due 2005 (the "9-1/4% Senior Notes") for
net proceeds of $265,646,000. The 9-1/4% Senior Notes 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.
The 8-3/4% Senior Notes and the 9-1/4% Senior Notes (together, the "Senior
Notes") each are general unsecured obligations of the Company which rank pari
passu in right of payment with all other unsecured senior indebtedness, and are
senior to all subordinated indebtedness of the Company. Upon a change of control
(as defined in the related indentures), 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 indentures governing
the Senior Notes include 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.
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
48
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 for SFr. 32,440,000 which are guaranteed by the Company. Each series of
the Swiss Franc 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"). Substantially
all of the outstanding Old Certificates were exchanged for New Certificates.
In March 1998, the Company announced the redemption of the New Certificates
and during 1998, SFr 37,670,000 principal amount of the New Certificates was
exchanged for an aggregate of approximately 802,000 shares of the Company's
common stock and the remainder of the New Certificates were redeemed for cash.
Upon the exchange and redemption of the New Certificates, Danish Bonds held in
trust for the payment of the New Certificates, having a market value of
approximately $22,958,000, became available to the Company and were sold. The
exchange increased stockholders' equity by $25,337,000 and reduced long-term
debt and accrued interest by $4,680,000. At December 31, 1998, the face value of
the outstanding Bio Certificates, SFr. 1,745,000, is convertible into
approximately 21,000 shares of the Company's common stock at the exchange price
of $54.17 using a fixed exchange rate of SFr. 1.54 to U.S. $1.00.
The Company has long-term debt totaling $34,430,000 payable in U.S.
dollars, Deutsche marks, and Dutch guilders, collateralized by certain real
property and personal property of the Company (principally inventories) having a
net book value of $41,005,000 at December 31, 1998.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
1999 $ 28,097
2000 17,319
2001 12,632
2002 5,632
2003 202
Thereafter 475,023
-----------
Total $ 538,905
===========
The estimated fair value of the Company's debt, based on quoted market
prices or on current interest rates for similar obligations with like
maturities, was approximately $549,819,000 and $351,722,000 compared to its
carrying value of $538,905,000 and $334,447,000 at December 31, 1998 and 1997,
respectively.
The Company has short and long-term lines of credit, classified in notes
payable, aggregating $45,211,000 under which borrowings of $7,346,000 and
letters of credit of $28,300,000 were outstanding at December 31, 1998. 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
(approximately 5.1% at December 31, 1998) 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 and cash collateral
balances.
10. PREFERRED STOCK
In connection with the acquisition of rights to certain products from SKB,
the Company issued to SKB 821 shares of its 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
49
Shares"), subject to certain antidilution adjustments, and has a liquidation
preference of $28,000 per share. Except under certain circumstances, SKB has
agreed not to sell the SKB Shares until November 4, 1999, unless the market
price of the Company's common stock exceeds $50.00 per common share. In
connection with the issuance of the SKB shares, the Company guaranteed SKB a
price initially at $37.37 per common share, increasing at a monthly rate of
$0.43 per share for twenty months. 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 the guarantee 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,
should SKB sell the SKB shares at any time during the guarantee period, the
agreement entitles the Company to any of the proceeds realized by SKB in excess
of the guarantee price. The Company has also granted SKB certain registration
rights covering the common shares issuable upon conversion of the Series D
Preferred Stock. At December 31, 1998, the aggregate guaranteed value of the SKB
Shares exceeds their market value by approximately $15,117,000, and the Company
may be required to issue approximately 705,000 additional common shares in
satisfaction of this agreement.
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 had a liquidation preference of $1,000 per
share and was 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 had a 6% annual dividend that was cumulative and
payable quarterly. The Company had the option to pay the dividend in either cash
or common stock of the Company. The Series B Convertible Preferred Stock was
mandatorily convertible into common stock on the fifth anniversary of its
issuance. However, this provision was subject to extension under certain
circumstances. Dividends paid in common stock were based on the fair value of
common stock at the time of declaration. During 1997 and 1998, all of the Series
B Convertible Preferred Stock was converted into a total of 2,854,000 shares of
the Company's common stock.
11. COMMON STOCK
During 1998, the Board of Directors and the stockholders each approved the
Company's Amended and Restated 1998 Stock Option Plan (the "Stock Option Plan").
The Stock Option Plan, as amended, provides for the granting of options to
purchase a maximum of 7,854,000 shares (including 3,000,000 shares authorized in
1998) of the Company's common stock to key employees, officers, directors,
consultants and advisors of the Company. Options granted under the Stock Option
Plan must have an option price not less than 85% of the fair market value of the
Company's common stock at the date of the grant, and a term not exceeding 10
years. Options vest ratably over a four year period from the date of the grant.
Under the Stock Option Plan each nonemployee director is granted 22,500 options
on each April 18. In addition to options granted under the Stock Option Plan, in
connection with the Merger all stock options outstanding under the stock option
plans of each of the Predecessor Companies were exchanged for options to
purchase shares of the Company, based upon the respective exchange ratios.
The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for options granted under
the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan
been determined based on the fair value at the grant date for awards in 1998,
1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been the pro forma
amounts indicated below (in thousands, except per share data):
1998 1997 1996
---- ---- ----
Net income (loss) $ (359,757) $ 110,426 $ 85,035
Earnings (loss) per share-- basic (4.89) 1.87 1.71
Earnings (loss) per share-- diluted (4.89) 1.64 1.48
50
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
1998 1997 1996
---- ---- ----
Weighted-average life (years) 5.0 5.0 6.5
Volatility 56% 46% 60%
Annual dividend per share $ 0.36 $ 0.24 $ 0.21
Risk-free interest rate 5.15% 6.33% 6.25%
Weighted-average fair value of options granted $ 19.54 $ 6.00 $ 9.49
The following table sets forth information relating to stock option plans
during the years ended December 31, 1998, 1997 and 1996 (in thousands, except
per share data):
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- ---------
Shares under option, December 31, 1995 9,369 $ 11.24
Granted 798 15.16
Exercised (1,302) 8.01
Canceled (150) 11.97
---------
Shares under option, December 31, 1996 8,715 12.09
Granted 2,267 13.86
Exercised (1,870) 11.03
Canceled (192) 14.07
---------
Shares under option, December 31, 1997 8,920 12.68
Granted 2,211 42.75
Exercised (634) 10.94
Canceled (144) 14.96
---------
Shares under option, December 31, 1998 10,353 $ 18.97
=========
Exercisable at December 31, 1996 5,660 $ 12.29
=========
Exercisable at December 31, 1997 5,643 $ 12.29
=========
Exercisable at December 31, 1998 6,841 $ 13.43
=========
Options available for grant at December 31, 1997 500
=========
Options available for grant at December 31, 1998 1,433
=========
The schedule below reflects the number of outstanding and exercisable
shares as of December 31, 1998 segregated by price range (in thousands, except
per share data):
OUTSTANDING EXERCISABLE
-------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE AVERAGE
OF EXERCISE OF EXERCISE REMAINING
RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE LIFE (YEARS)
------------------------ ------ ----- ------ ----- ------------
$ 2.56 to $ 12.36 3,795 $ 9.41 3,642 $ 9.36 4.6
$12.75 to $ 17.99 4,071 15.05 2,586 15.44 6.6
$19.21 to $ 49.00 2,487 39.96 613 29.17 8.1
------- ------
10,353 6,841
======= ======
51
During 1998, the Company extended by one year the term of options to
purchase an aggregate of 304,000 shares of common stock which are held by four
employees, including the Chairman and CEO and a director. The Company recorded
compensation expense of $2,909,000 related to these options.
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.
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.
STOCK REPURCHASE PLAN: In September and October 1998, the Company's Board
of Directors authorized two stock repurchase programs. The first repurchase
program authorized the Company to repurchase up to $10,000,000 of its
outstanding common stock. The second authorized the Company to initiate a
long-term repurchase program that allows the Company to repurchase up to
3,000,000 shares of its common stock. In executing the repurchase programs, the
Company is limited by certain covenants contained in the indentures relating to
the Company's Senior Notes. In the indentures, the Company is permitted to
repurchase up to $10,000,000 of its common stock under the first program;
however, repurchases under the second program will only be permitted as the
Company generates cumulative net income, as provided for in the indentures. In
1998, the Company repurchased an aggregate of 200,000 shares of its common stock
for $4,450,000.
STOCKHOLDER RIGHTS PLAN: 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 $0.01 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 $0.01 per right until the occurrence of certain events.
The Rights expire on November 1, 2004.
LONG-TERM INCENTIVE PLAN: The Company has a long-term incentive plan which
provides for the issuance of shares of the Company's common stock to senior
executives. Shares issued under the long-term incentive plan are restricted and
vest over a four-year period. In 1998, approximately 319,000 shares of the
Company's common stock having a value of $10,466,000 were issued under this
plan. Compensation expense for the value of the common shares issued is being
recognized over the vesting period and is credited to additional capital. As of
December 31, 1998, the unamortized compensation cost related to the restricted
shares is $8,068,000.
52
CONTINGENTLY ISSUABLE SHARES: Effective October 1, 1998, the Company issued
2,883,871 shares of its common stock to Roche as part of the consideration for
the rights to four pharmaceutical products. Under the terms of the agreement
with Roche, the Company has guaranteed to Roche a per share price initially at
$31.00, increasing at a rate of 6% per annum through December 31, 2000. Should
Roche sell any of the shares prior to December 31, 2000, the Company is entitled
to one-half of any proceeds realized by Roche in excess of the guaranteed price.
Should the market price of the Company's common stock be below the guaranteed
price at the end of the guarantee period, the Company will be required to
satisfy the aggregate guarantee amount by payment to Roche in cash or, in
certain circumstances, in additional shares of the Company's common stock. At
December 31, 1998, the aggregate guaranteed value of the shares issued to Roche
exceeds their market value by approximately $29,927,000, and the Company may be
required to issue approximately 1,419,000 additional common shares in
satisfaction of this agreement.
OTHER: 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.
12. COMMITMENTS AND CONTINGENCIES
INVESTIGATIONS: Pursuant to an Order Directing Private Investigation and
Designating Officers to Take Testimony, entitled In the Matter of ICN
Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is being
conducted by the United States Securities and Exchange Commission (the
"Commission") with respect to certain matters pertaining to the status and
disposition of the 1994 Hepatitis C NDA. As set forth in the Order, the
investigation concerns whether, during the period from June 1994 through
February 1995, the Company, persons or entities associated with it and others,
in the offer and sale or in connection with the purchase and sale of Company
securities, engaged in possible violations of Section 17(a) of Securities Act of
1933 (the "Securities Act") and Section 10(b) of the Securities and Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, by having possibly: (i)
made false or misleading statements or omitted material facts with respect to
the status and disposition of the 1994 Hepatitis C NDA; (ii) purchased or sold
Common Stock while in possession of material, non-public information concerning
the status and disposition of the 1994 Hepatitis C NDA; or (iii) conveyed
material, non-public information concerning the status and disposition of the
1994 Hepatitis C NDA, to other persons who may have purchased or sold Common
Stock. The Company has cooperated and continues to cooperate with the Commission
in its investigation. On January 13, 1998, the Company received a letter from
the Commission's Philadelphia District Office (the "District Office") stating
the District Office's intention to recommend to the Commission that it authorize
the institution of a civil action against the Company, Milan Panic, Chairman and
Chief Executive Officer of the Company, and a former senior executive of the
Company. As set forth in the letter, the District Office 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 commence a civil action: (i) to enjoin Mr. Panic
from future violations of Section 17(a) of the Securities Act, Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder; (ii) for disgorgement of
approximately $390,000; (iii) for prejudgment interest; (iv) for a civil penalty
pursuant to Section 21A of the Exchange Act that cannot exceed three times any
amount disgorged; and (v) for an order barring Mr. Panic from serving as an
officer or director of a public company pursuant to Section 21 of the Exchange
Act. On January 30, 1998 and thereafter, the Company filed submissions with the
Commission urging that it reject the District Office's request. On August 27,
1998, the Company's counsel was informed by the District Office that (i) the
District Office had withdrawn its request for authorization to commence an
enforcement action against Mr. Panic with respect to allegations of illegal
insider trading and the remedies of disgorgement, interest, and monetary
penalties attendant thereto; and (ii) the Commission had granted the District
53
Office's request for authorization to commence an enforcement action against the
Company, Mr. Panic, and a senior executive officer of the Company alleging false
or misleading statements or omissions with respect to the status and disposition
of the 1994 Hepatitis C NDA, including the remedies of injunctive relief and a
civil penalty not to exceed $500,000 against the Company, and injunctive relief
and a director and officer bar against Mr. Panic.
The Company has received subpoenas from a Grand Jury in the United States
District Court, Central District of California requesting the production of
documents covering a broad range of matters over various time periods. The
Company understands that the Company, Mr. Panic, two current senior executive
officers, a former senior officer, and a current employee of the Company are
targets of the investigation. The Company also understands that a senior
executive officer, a former officer, a current employee, and a former employee
are subjects of the investigation. The United States Attorney's office has
advised counsel for the Company that the areas of its investigation include
disclosures made and not made concerning the 1994 Hepatitis C NDA to the public
and other third parties; stock sales for the benefit of Mr. Panic following
receipt on November 28, 1994 of a letter from the FDA informing the Company that
the 1994 Hepatitis C NDA had been found not approvable; possible violations of
the economic embargo imposed by the United States upon the Federal Republic of
Yugoslavia, based upon alleged sales by the Company and Mr. Panic of stock
belonging to Company employees; and, with respect to Mr. Panic, personal
disposition of assets of entities associated with Yugoslavia, including possible
misstatements and/or omissions in federal tax filings. The Company has and
continues to cooperate in the Grand Jury investigation. A number of current and
former employees of the Company have been interviewed by the government in
connection with the investigation. The United States Attorney's office has
issued subpoenas requiring various current and former officers and employees of
the Company to testify before the Grand Jury. Certain current and former
employees testified before the Grand Jury beginning in July 1998.
On or about February 9, 1999, the Company commenced an action in the United
States District Court of the District of Columbia against the Federal Republic
of Yugoslavia ("FRY"), the Republic of Serbia and the State Health Fund of
Serbia (the "State Fund") seeking damages in the amount of at least $500,000,000
and declaratory relief arising out of the FRY's recent seizure of the Company's
majority interest in ICN Yugoslavia and the failure of the State Fund to pay ICN
Yugoslavia for goods sold and delivered. On or about March 9, 1999, the State
Fund commenced an arbitration against the Company before the International
Chamber of Commerce for unquantified damages due to alleged breaches of the
agreement pursuant to which the Company acquired its majority ownership interest
in ICN Yugoslavia, and for unspecified injunctive relief. The Company intends to
prosecute vigorously its claims against the FRY and any related entities, and to
defend against the State Fund's claims against the Company, which the Company
believes to be meritless and filed solely as a response to the Company's
earlier-filed action in the United States District Court.
The Company is party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Commission and Grand Jury investigations cannot be predicted
with certainty, and an unfavorable outcome could have a material adverse effect
on the Company, at this time in the opinion of management, the ultimate
resolution of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or liquidity.
PRODUCT LIABILITY INSURANCE: The Company is currently self-insured with
respect to product liability claims and 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 1998, 1997
and 1996.
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,
1998, the present value of the deferred compensation benefits to be paid has
been accrued in the amount of $2,868,000. 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.
54
OTHER: Milan Panic, the Company's Chairman of the Board and Chief Executive
Officer, is employed under a contract expiring December 31, 2002 that provides
for, among other things, certain health and retirement benefits. The contract is
automatically extended at the end of each term 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 $584,000. 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 is organized
and operates in the Pharmaceutical group and the Biomedical group. The
Pharmaceuticals group produces and markets a variety of pharmaceutical products
worldwide and derives royalty revenues from sales of certain of its products by
a third party under a license agreement. The Biomedicals group markets research
products and related services, immunodiagnostic reagents and instrumentation,
and provides radiation monitoring services.
In 1998, the principal markets for the Company's products were the United
States, Russia, and Yugoslavia, which represented approximately 23%, 20%, and
17%, respectively, of the Company's revenues for the year. However, as discussed
in Note 14, effective November 26, 1998, the Company's Yugoslavian operations
were seized by the Yugoslavian government. Operations in Russia are subject to
business risks described in Note 15. Approximately 77%, 82%, and 80% of the
Company's revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, were generated from operations outside the United States. The
Company'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 any hedges on its foreign currency exposure and, in certain
countries in which the Company operates, no effective hedging programs are
available. At December 31, 1998, the Company had a net monetary asset position
in Russia of approximately $13,952,000 which is subject to loss in the event
that a decline in the value of the ruble relative to the dollar were to occur.
55
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which requires reporting certain financial
information according to the "management approach." This approach requires
reporting information regarding operating segments on the basis used internally
by management to evaluate segment performance. SFAS 131 also requires
disclosures about products and services, geographic areas and major customers.
The Statement was effective December 31, 1998 and has been adopted for all
periods presented.
The Company is organized into business units on the basis of geographic
region. In applying SFAS 131, these business units have been aggregated into
eight reportable segments based on similar long-term economic characteristics.
The Company's operations in the Czech Republic, Hungary, and Poland comprise the
Other Eastern Europe segment.
The accounting policies of the segments are the same as those described in
the Note 2. The Company evaluates segment performance based on income from
operations, which excludes intersegment sales as well as interest income and
expense and foreign exchange gains and losses. The Company allocates
amortization on the product rights acquired from Roche and SKB among the
segments where the related revenues are reported; the unamortized cost of such
acquired product rights is included in assets of the North America
Pharmaceuticals segment.
The tables below present information about reported segments and geographic
data for the years ended December 31, 1998, 1997, and 1996 (in thousands).
REVENUES OPERATING INCOME (LOSS)
------------------------------------ -----------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ------------ ----------- ---------- ----------
Pharmaceuticals
North America $ 176,902 $ 117,355 $ 106,442 $ 94,435 $ 48,453 $ 46,937
Western Europe 66,994 44,960 35,826 18,358 10,719 2,113
Latin America 85,351 63,668 47,359 26,791 17,467 10,690
Russia 163,691 134,688 66,788 9,561 28,982 22,021
Yugoslavia 141,740 225,530 267,166 (140,419) 60,235 70,616
Other Eastern Europe 93,228 73,050 21,461 (855) 12,951 1,964
Asia, Africa, Australia 48,649 22,036 4,711 10,062 2,903 1,003
----------- ----------- ----------- ----------- ---------- ----------
Total Pharmaceuticals 776,555 681,287 549,753 17,933 181,710 155,344
Biomedicals 61,509 70,915 64,327 5,471 5,148 4,985
----------- ----------- ----------- ----------- ---------- ----------
Consolidated revenues and
segment operating income $ 838,064 $ 752,202 $ 614,080 23,404 186,858 160,329
=========== =========== ===========
Corporate expenses 312,972 61,560 46,216
Interest income (13,057) (15,912) (3,001)
Interest expense 38,069 22,849 15,780
Translation and exchange losses, net 80,501 12,790 2,282
----------- ---------- ----------
Income (loss) before income
Taxes and minority interest $ (395,081) $ 105,571 $ 99,052
=========== ========== ==========
Operating income (loss) for 1998 includes the Eastern European charges
totaling $440,820,000. These charges are included in Yugoslavia Pharmaceuticals
($173,508,000), Russia Pharmaceuticals ($11,770,000), Other Eastern Europe
Pharmaceuticals ($15,659,000), North America Pharmaceuticals ($3,150,000), and
Biomedicals ($647,000). In addition, Eastern European charges of $236,086,000
(principally the write-off of the Company's investment in ICN Yugoslavia) are
included in Corporate expenses.
56
DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES (1)
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------
Pharmaceuticals
North America $ 13,609 $ 7,284 $ 1,708 $ 2,425 $ 57,921 $ 4,492
Western Europe 4,728 1,197 1,249 2,043 343 364
Latin America 5,563 2,014 823 2,366 1,727 1,314
Russia 104 246 2,252 41,803 17,923 5,820
Yugoslavia 3,720 4,046 4,185 22,472 13,492 1,984
Other Eastern Europe 6,265 3,843 1,075 20,039 4,583 1,777
Asia, Africa, Australia 5,488 142 13 13 646 34
----------- ----------- ----------- ----------- ----------- ----------
Total Pharmaceuticals 39,477 18,772 11,305 91,161 96,635 15,785
Biomedicals 4,669 4,535 2,718 3,019 3,160 5,230
Corporate 6,950 5,446 3,913 16,101 6,602 8,317
----------- ----------- ----------- ----------- ----------- ----------
$ 51,096 $ 28,753 $ 17,936 $ 110,281 $ 106,397 $ 29,332
=========== =========== =========== =========== =========== ==========
(1) Includes noncash capital expenditures of $-0-, $6,000 and $3,116 for 1998,
1997, and 1996, respectively.
ASSETS
----------------------------------
1998 1997 1996
----------- ----------- ---------
Pharmaceuticals
North America $ 520,017 $ 333,698 $ 56,126
Western Europe 34,816 29,728 36,199
Latin America 66,486 30,191 30,691
Russia 155,368 145,162 54,990
Yugoslavia -- 421,731 342,983
Other Eastern Europe 190,675 147,698 77,245
Asia, Africa, Australia 79,274 25,735 1,785
----------- ----------- ---------
Total Pharmaceuticals 1,046,636 1,133,943 600,019
Biomedicals 76,671 74,334 78,095
Corporate 233,089 283,468 100,537
----------- ----------- ---------
$ 1,356,396 $ 1,491,745 $ 778,651
=========== =========== =========
GEOGRAPHIC DATA
REVENUES LONG-LIVED ASSETS
----------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
United States $ 193,358 $ 137,725 $ 121,782 $ 512,261 $ 343,900 $ 107,219
Canada 18,960 20,824 18,953 3,345 3,602 1,978
Western Europe 85,567 65,352 59,294 26,161 24,010 29,226
Latin America 86,634 66,166 49,444 34,456 8,603 8,493
Russia 163,691 134,688 66,788 86,969 39,330 15,658
Yugoslavia 141,740 225,530 267,166 -- 115,784 93,149
Other Eastern Europe 93,228 73,050 21,461 119,380 90,626 43,985
Asia, Africa, Australia 54,886 28,867 9,192 55,143 9,429 208
--------- --------- --------- --------- --------- ---------
$ 838,064 $ 752,202 $ 614,080 $ 837,715 $ 635,284 $ 299,916
========= ========= ========= ========= ========= =========
Revenues are attributed to the countries based upon the country of domicile
of the Company's subsidiary which made the sale, with the exception of certain
sales exported from the United States into the Asia, Africa, and Australia
region, where the sales are attributed to the region based upon the location of
the customer. During 1997, sales to the Yugoslavian government and
government-sponsored entities represented approximately 22% of the Company's
total revenues. For 1998 no customer accounted for 10% or more of the Company's
revenues. Long-lived assets principally consist of property, plant, and
equipment, acquired product rights, and goodwill.
57
14. ICN YUGOSLAVIA
On February 6, 1999, the government of the Federal Republic of Yugoslavia,
acting through the Federal Ministry of Health and/or the Ministry of Health of
Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia.
This action, based on a decision by the Ministry for Economic and Property
Transformation that was reached on November 26, 1998, effectively reduced the
Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of
Economic and Property Transformation decision was based on the unilaterally
imposed recalculation of the Company's original capital contribution to ICN
Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued
an order stating that a change in control had occurred. These actions were
taken, contrary to Yugoslavian law, without any notification to or
representation by the Company. Since the change of control, representatives of
the Company and ICN Yugoslavia's management have been denied access to the
premises and any representation as to the management of ICN Yugoslavia. As a
result, the Company is no longer able to influence the operating and financial
affairs of ICN Yugoslavia and deconsolidated the financial statements of ICN
Yugoslavia as of November 26, 1998. Accordingly, the Company recorded a charge
of $235,290,000 in the fourth quarter of 1998, which is included in Eastern
European Charges in the accompanying consolidated statements of income. This
charge reduces the carrying value of the Company's investment in ICN Yugoslavia
to its fair value, currently estimated to be zero.
The summary balance sheet of ICN Yugoslavia as of the effective date of the
write-off (November 26, 1998) is presented below.
ICN YUGOSLAVIA SUMMARY BALANCE SHEET,
EXCLUDING INTERCOMPANY BALANCES
AS OF NOVEMBER 26, 1998
(unaudited, in thousands)
Cash $ 22,101
Accounts receivable, net 58,188
Notes receivable 25,000
Inventories, net 46,652
Other current assets 8,153
Other long-term assets 167,059
-------------
$ 327,153
=============
Current liabilities $ 39,167
Minority interest and long-term liabilities 52,696
Stockholders' equity 235,290
-------------
$ 327,153
=============
Prior to the seizure, ICN Yugoslavia's operations were adversely affected
by the April 1998 devaluation of the dinar, and by the Company's
previously-announced suspension of sales to the Yugoslavian government. On April
1, 1998, the Yugoslavian government devalued the dinar from a rate of 6.0 dinars
per U.S. $1 to 10.92 dinars per U.S. $1. At the time of the devaluation the
Company's net monetary asset position in Yugoslavia was approximately
$38,000,000, resulting in a foreign exchange loss of approximately $17,000,000
which was recognized in the second quarter of 1998. In addition, sales and gross
profit margins at ICN Yugoslavia were adversely affected by the exchange rate
changes and the Yugoslavian government's refusal to approve price increases
sought by the Company. The Company, along with many of its competitors,
suspended all direct sales to the Yugoslavian government in an effort to
encourage the Yugoslavian government to approve price increases. The suspension
of sales to the Yugoslavian government continued through 1998.
58
Through the first quarter of 1998, the majority of ICN Yugoslavia's
domestic sales were made to the Yugoslavian government or government-funded
entities. During early 1997, the Company established credit terms with the
Yugoslavian government under which future receivables were interest-bearing with
one year terms and payable in dinars, but fixed in dollar amounts. At December
31, 1997, the Company had approximately $145,431,000 of notes receivable from
the Yugoslavian government under such terms. During the first quarter of 1998,
the Company continued to make sales to the Yugoslavian government and
government-sponsored entities under similar terms in order to reduce the
Company's exposure to losses resulting from exchange rate fluctuations. In the
second and third quarters of 1998, the Yugoslavian government defaulted on its
obligations to the Company on $176,204,000 of accounts and notes receivable. As
a result of the government's default and the suspension of sales to the
government, the Company recorded a $173,440,000 charge against earnings at ICN
Yugoslavia in the second quarter of 1998. The charge is included in Eastern
European Charges ($165,646,000), cost of product sales ($3,667,000), and
interest income ($4,127,000) in the accompanying consolidated statements of
income. The charge consists of a $151,204,000 reserve for losses on notes
receivable (including accrued interest), reserves of $7,757,000 for losses on
accounts receivable from government-sponsored entities, and a $14,479,000
write-down of the value of certain related investments and assets.
In March 1998, ICN Yugoslavia acquired a 33.7% interest in a healthcare
center in the Republic of Montenegro from the Yugoslavian government in exchange
for 147,000,000 dinars ($24,400,000) of accounts receivable and approximately
$1,200,000 in cash. ICN Yugoslavia also acquired a 15% interest in the financial
institution Komercijalna Banka A.D. from the Yugoslavian government in exchange
for 28,600,000 dinars ($4,700,000) of accounts receivable.
15. ICN RUSSIA
The Company's Russian operations consist of five pharmaceutical factories
and related distribution operations. In addition, the Company operates 28 retail
pharmacies in Russia. The Company's Russian operations generated 20% (1998), 18%
(1997), and 11% (1996) of the Company's total revenues.
The Company's Russian operations have been adversely affected by the recent
economic events in the region. During 1998, in response to worsening liquidity
and declining currency reserves, the Russian government sought international
financial assistance and the Russian Central Bank used financial assistance from
the International Monetary Fund, along with its existing monetary reserves, in
an effort to support the value of the ruble. However, in August 1998, the
Central Bank announced that it was no longer able to support the ruble at its
then-current exchange rate of approximately 6.3 rubles to $1, and that it would
allow the ruble to fall as far as 9.5 rubles to $1. Subsequently, the ruble fell
sharply and the Russian Central Bank was unable to support the ruble, even at
the previously-announced level. Through the end of 1998, there were large
fluctuations in exchange rates for the ruble and the value of the ruble
continued to decline in relation to the dollar, at times exceeding 20 rubles to
$1. As of December 31, 1998, the exchange rate was approximately 20.7 rubles to
$1, a decline of more than 68% from the ruble's mid-August 1998 level. As a
result of the decline in the ruble exchange rate, the Company recorded foreign
exchange losses of $53,848,000 related to its Russian operations during 1998.
FOREIGN EXCHANGE RISK: ICN Russia operates in a highly inflationary economy
and uses the dollar as the functional currency rather than the Russian ruble.
During the three year period ended December 31, 1998, the cumulative rate of
inflation was approximately 180%. All foreign exchange gains and losses arising
from foreign currency transactions and the effects of foreign exchange rate
fluctuations are included in income. As of December 31, 1998, ICN Russia had a
net monetary asset position of approximately $13,952,000 which would be subject
to foreign exchange loss if a further decline in the value of the ruble in
relation to the United States dollar were to occur.
59
CREDIT RISK: The Company believes that the economic crisis in Russia has
adversely affected the pharmaceutical industry in the region. Many Russian
companies, including many of the Company's customers, continue to experience
severe liquidity shortages as rubles are in short supply, and as Russian
companies' hard-currency assets remain frozen in Russian banks. This liquidity
crisis has diminished many Russian companies' ability to pay their debts, and is
likely to lead to a number of business failures in the region.
In 1998, as a result of the Russian economic crisis, the Company recorded a
charge of $42,289,000 among several of its operating segments, which is included
in Eastern European Charges ($39,884,000) and cost of product sales ($2,405,000)
in the accompanying consolidated statements of income. The charge consists of
reserves of $37,873,000 for losses on accounts receivable, the write-off of
certain investments of $2,011,000, and a reduction in the value of certain
inventories of $2,405,000.
16. AGREEMENT WITH SCHERING-PLOUGH CORPORATION
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement (the "License Agreement") and a Stock Purchase Agreement with
Schering-Plough Corporation ("Schering-Plough"). Under the License Agreement,
Schering-Plough licensed all oral forms of ribavirin for the treatment of
chronic hepatitis C (HCV) in combination with Schering-Plough's alpha
interferon. The License Agreement provided the Company an initial non-refundable
payment and future royalty payments to the Company from sales of ribavirin by
Schering-Plough, including certain minimum royalty rates. As part of the initial
License Agreement, the Company retained the right to co-market ribavirin
capsules in the European Union under its trademark Virazole(R). 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. In 1998,
the Company sold to Schering-Plough its right to co-market oral ribavirin for
the treatment of HCV in the European Union, in exchange for increased royalty
rates on sales of ribavirin worldwide.
Royalty revenues for 1998 include amounts earned from United States
commercial sales made by Schering-Plough subsequent to receipt of FDA approval,
as well as royalties on compassionate use sales outside the United States,
primarily in Western Europe. Royalty revenues for 1998 also include a one-time
payment of $16,500,000 which the Company received from Schering-Plough in
consideration for the sale to Schering-Plough of the additional marketing rights
in the European Union, in settlement of past royalties, and as reimbursement for
expenses incurred by the Company in preparation for the launch of ribavirin
capsules in the European Union.
In February 1999, Schering-Plough purchased 1,141,498 shares of the
Company's common stock for $27,000,000. Although the shares are initially
unregistered, under the terms of the Agreement, Schering-Plough is entitled to
certain registration rights.
17. SUPPLEMENTAL CASH FLOW DISCLOSURES
The following table sets forth the amounts of interest and income taxes
paid during 1998, 1997 and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Interest paid (net of amounts capitalized
of $3,540, $5,419, and $3,770 in 1998,
1997, and 1996, respectively) $ 34,240 $ 11,750 $ 20,477
========= ========= =========
Income taxes paid $ 15,207 $ 4,543 $ 6,845
========= ========= =========
60
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, 1998
Allowance for doubtful accounts $ 11,999 $ 53,189 $ 9,849(1) $ (26,289) $ 48,748
======== ========= ======== ========= ========
Allowance for losses
on notes receivable $ -- $ 151,204 $ -- $(151,204) $ --
======== ========= ======== ========= ========
Reserve for inventory obsolescence $ 11,476 $ 6,674 $ 369(1) $ (6,931) $ 11,588
======== ========= ======== ========= ========
Deferred tax asset valuation allowance $ 23,077 $ 32,861 $ -- $ -- $ 55,938
======== ========= ======== ========= ========
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 8,870 $ 4,021 $ 1,901(1) $ (2,793) $ 11,999
======== ========= ======== ========= ========
Reserve for inventory obsolescence $ 10,153 $ 3,342 $ 600(1) $ (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
======== ========= ======== ========= ========
(1) These amounts represent acquisition-date balances of allowances for
doubtful receivables and reserves for inventory obsolescence of acquired
companies.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is set forth under the captions
"Information Concerning Nominees and Directors" and "Executive Officers" in the
Company's definitive Proxy Statement to be filed in connection with the
Company's 1999 annual meeting of stockholders (the "Proxy Statement") and is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is set forth under the caption
"Executive Compensation and Related Matters" in the Proxy Statement and is
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is set forth under the caption
"Ownership of the Company's Securities" in the Proxy Statement and is
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is set forth under the captions
"Executive Compensation and Related Matters" and "Certain Transactions" in the
Proxy Statement and is incorporated by reference.
63
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 33-84534
on Form S-4, which is incorporated herein by reference, as amended
by the Certificate of Merger, dated November 10, 1994, of ICN
Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Viratek, Inc.
with and into ICN Merger Corp. previously filed as Exhibit 4.1 to
Registration Statement No. 333-08179 on Form S-3, which is
incorporated herein by reference.
3.2 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. 33-84534 on Form S-4, 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, previously filed as
Exhibit 3.5 to ICN Pharmaceuticals, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997, which is incorporated
herein by reference.
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 Indenture, dated as of August 20, 1998, by and among ICN and
United States Trust Company of New York, relating to $200,000,000
8-3/4% Senior Notes due 2008, previously filed as Exhibit 4.3 to
the Company's Registration Statement No. 333-63721 on Form S-4,
which is incorporated herein by reference.*
10.3 Registration Rights Agreement, dated as of August 20, 1998, by and
among ICN and Schroder & Co. Inc., previously filed as Exhibit 4.3
to the Company's Registration Statement No. 333-63721 on Form S-4,
which is incorporated herein by reference.
64
10.4 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.
10.5 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.
10.6 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.
10.7 Amendment to Employment Contract between ICN Pharmaceuticals,
Inc., and Milan Panic, dated September 6, 1995 previously filed as
Exhibit 10.29 to ICN Pharmaceuticals, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1995, which is incorporated
herein by reference.
10.8 Amendment to Employment Contract between ICN Pharmaceuticals,
Inc., and Milan Panic, to be filed by amendment.
10.9 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.
10.10 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.
10.11 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.
10.12 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals,
Inc. and Jack Sholl 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 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.
10.14 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.
10.15 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.
10.16 Agreement between ICN Pharmaceuticals, Inc. and Richard A. Meier
dated December 31, 1998, filed herewith.
65
10.17 ICN Pharmaceuticals, Inc. 1992 Employee Incentive Stock Option
Plan, previously filed as Exhibit 10.56 to ICN Pharmaceuticals,
Inc.'s Form 10-K for the year ended December 31, 1992, which is
incorporated herein by reference.
10.18 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.
10.19 ICN Pharmaceuticals, Inc. 1994 Stock Option Plan previously filed
as Exhibit 10.30 to the Registrant's Form 10-K for the year ended
December 31, 1995, which is incorporated herein by reference.
10.20 ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, filed herewith.
10.21 Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July 28, 1995
previously filed as Exhibit 10 to ICN Pharmaceuticals, 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.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
66
10.27 Agreement for the Sale and Purchase of a Portfolio of
Pharmaceutical, OTC and Consumer Healthcare Products between
SmithKline Beecham plc and ICN Pharmaceuticals, Inc., previously
filed as Exhibit 10.22 to ICN Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated herein by reference.
10.28 Asset Purchase Agreement dated October 2, 1998 by and between F.
Hoffmann - LaRoche Ltd. and ICN Puerto Rico, Inc., previously
filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998,
which is incorporated herein by reference.
10.29 Credit Agreement dated as of March 31, 1997 by and between Banque
Nationale de Paris and ICN Pharmaceuticals, Inc., previously filed
as Exhibit 10.23 to ICN Pharmaceuticals, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997, which is
incorporated herein by reference.
10.30 Second Amendment to Credit Agreement dated as of March 31, 1997 by
and between Banque Nationale de Paris and ICN Pharmaceuticals,
Inc., previously filed as Exhibit 10.24 to ICN Pharmaceuticals,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1997, which is incorporated herein by reference.
10.31 ICN Pharmaceuticals, Inc. Executive Long Term Incentive Plan,
previously filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998, which is incorporated herein by reference.
10.32 Amendment to Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering-Plough Ltd., to be filed by
amendment.
21. Subsidiaries of the Registrant.
23. Consent of PricewaterhouseCoopers LLP, independent accountants.
27. Financial Data Schedule.
* 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.
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
67
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, 1999
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, 1999
- ----------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
/S/ JOHN E. GIORDANI Date: March 30, 1999
- ----------------------------------------------------
John E. Giordani
Executive Vice President, Chief Financial Officer
and Corporate Controller
/S/ NORMAN BARKER, JR. Date: March 30, 1999
- ----------------------------------------------------
Norman Barker, Jr., Director
/S/ BIRCH BAYH Date: March 30, 1999
- ----------------------------------------------------
Senator Birch Bayh, Director
/S/ ALAN F. CHARLES Date: March 30, 1999
- ----------------------------------------------------
Alan F. Charles, Director
/S/ ROGER GUILLEMIN Date: March 30, 1999
- ----------------------------------------------------
Roger Guillemin, M.D., Ph.D., Director
/S/ ADAM JERNEY Date: March 30, 1999
- ----------------------------------------------------
Adam Jerney, President, Chief Operating Officer, Director
/S/ WELDON B. JOLLEY Date: March 30, 1999
- ----------------------------------------------------
Weldon B. Jolley, Ph.D., Director
68
SIGNATURES - CONTINUED
/S/ ANDREI V. KOZYREV Date: March 30, 1999
- ----------------------------------------------------
Andrei V. Kozyrev, Director
/S/ JEAN-FRANCOIS KURZ Date: March 30, 1999
- ----------------------------------------------------
Jean-Francois Kurz, Director
/S/ THOMAS LENAGH Date: March 30, 1999
- ----------------------------------------------------
Thomas Lenagh, Director
/S/ CHARLES T. MANATT Date: March 30, 1999
- ----------------------------------------------------
Charles T. Manatt, Director
/S/ STEPHEN MOSES Date: March 30, 1999
- ----------------------------------------------------
Stephen Moses, Director
/S/ MICHAEL SMITH Date: March 30, 1999
- ----------------------------------------------------
Michael Smith, Ph.D., Director
/S/ ROBERTS A. SMITH Date: March 30, 1999
- ----------------------------------------------------
Roberts A. Smith, Ph.D., Director
/S/ RICHARD W. STARR Date: March 30, 1999
- ----------------------------------------------------
Richard W. Starr, Director
69
EXHIBIT INDEX
EXHIBIT PAGE NO.
- ------- --------
10.16 Agreement between ICN Pharmaceuticals, Inc. and
Richard A. Meier dated December 31, 1998, filed herewith.
10.20 ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, filed
herewith.
21. Subsidiaries of the Registrant.
23. Consent of PricewaterhouseCoopers LLP Independent
Accountants.
27. Financial Data Schedule.