<PAGE> 1
$100,000,000
ICN PHARMACEUTICALS, INC.
(PREVIOUSLY NAMED ICN MERGER CORP.)
8 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 1999
INTEREST PAYABLE ON MAY 15 AND NOVEMBER 15
The Notes offered hereby are convertible into Common Stock of ICN
Pharmaceuticals, Inc. (previously named ICN Merger Corp.) (the "Company") at any
time prior to maturity, unless previously redeemed, at a conversion price of
$23.86 per share of Common Stock, subject to adjustment in certain events.
The Company is the surviving corporation of a merger among ICN
Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., Viratek, Inc. and the Company,
which merger was consummated on November 10, 1994. At the same time, ICN
Biomedicals, Inc. was merged into a wholly owned subsidiary of the Company. Upon
consummation of the mergers, the Company was renamed "ICN Pharmaceuticals, Inc."
For accounting purposes, the Company is the successor to SPI Pharmaceuticals,
Inc.
The Notes will mature on November 15, 1999. The Notes are redeemable, in
whole or in part, at the option of the Company at any time on or after November
15, 1997, at the redemption prices set forth herein, plus accrued and unpaid
interest. Upon a Change of Control (as defined), each holder will have the
right, subject to certain conditions, to require the Company to repurchase the
Notes at 100% of the principal amount thereof, plus accrued and unpaid interest.
The Notes will be unsecured and subordinated to all Senior Indebtedness (as
defined) of the Company. At September 30, 1994, after giving effect to the
merger and this offering and the application of the net proceeds therefrom,
Senior Indebtedness and indebtedness (including trade payables) of the Company's
subsidiaries, to which the Notes are effectively subordinated, would have been
approximately $120,634,000 on a pro forma basis. See "Description of Notes."
The Notes and the Common Stock have been approved for listing on the New
York Stock Exchange, subject to notice of issuance. The Common Stock will trade
under the symbol "ICN". The common stock of ICN Pharmaceuticals, Inc. is listed
on the New York Stock Exchange and the common stock of each of SPI
Pharmaceuticals, Inc., Viratek, Inc. and ICN Biomedicals, Inc. is listed on the
American Stock Exchange.
FOR INFORMATION CONCERNING CERTAIN FACTORS RELATING TO THIS OFFERING, SEE
"INVESTMENT CONSIDERATIONS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------------
Per Note............................... 100.00% 3.50% 96.50%
- ------------------------------------------------------------------------------------------------------
Total(4)............................... $100,000,000 $3,500,000 $96,500,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from November 18, 1994.
(2) See "Underwriting" for indemnification arrangements.
(3) Before deducting estimated expenses of $1,750,000 payable by the Company.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $15,000,000 principal amount of Notes solely to cover
over-allotments. If this option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $115,000,000, $4,025,000, and $110,975,000, respectively. See
"Underwriting."
The Notes offered hereby are being offered by the several Underwriters
named herein, subject to prior sale and acceptance by the Underwriters and
subject to their right to reject any order in whole or in part. It is expected
that the Notes, in temporary or definitive registered form, will be available
for delivery on or about November 18, 1994, at the offices of Wertheim Schroder
& Co. Incorporated, New York, New York. If temporary Notes are delivered,
definitive Notes will be available for exchange as soon as practicable after
that date.
WERTHEIM SCHRODER & CO.
INCORPORATED
JEFFERIES & COMPANY, INC.
KEMPER SECURITIES, INC.
November 10, 1994
<PAGE> 2
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION ABOUT THE COMPANY CONTAINED IN THIS PROSPECTUS SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
UNTIL DECEMBER 5, 1994 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 3
The Company........................... 9
Investment Considerations............. 9
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividends........................... 14
Capitalization........................ 16
Selected Pro Forma Combined Condensed
Financial Data...................... 17
Selected Consolidated Financial Data
for the Predecessor Companies....... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Predecessor
Companies........................... 29
Business.............................. 59
<CAPTION>
PAGE
----
<S> <C>
Management............................ 74
Executive Compensation and Related
Matters............................. 78
Principal Stockholders................ 88
Description of Notes.................. 91
Description of Capital Stock.......... 98
Certain Federal Income Tax
Consequences........................ 101
Shares Eligible for Future Sale....... 106
Certain Transactions.................. 107
Underwriting.......................... 111
Legal Opinions........................ 112
Experts............................... 112
Available Information................. 113
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR COMMON
STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 3
SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus. Unless the
context otherwise indicates, (i) all information in this Prospectus assumes that
the Underwriters' over-allotment option is not exercised, (ii) references to New
ICN or the Company mean the ICN Pharmaceuticals, Inc. entity that is the
surviving corporation of the merger mentioned below and the issuer of the Notes
being offered hereby, (iii) references to ICN mean the ICN Pharmaceuticals, Inc.
entity that merged into New ICN, (iv) all information in this Prospectus assumes
that the mergers (collectively, the "Merger") of ICN, SPI Pharmaceuticals, Inc.
("SPI") and Viratek, Inc. ("Viratek") into New ICN and ICN Biomedicals, Inc.
("Biomedicals," and together with ICN, SPI and Viratek, the "Predecessor
Companies") into a wholly owned subsidiary of New ICN have been consummated and
New ICN has succeeded the Predecessor Companies in their respective businesses
and (v) all per share amounts have been restated to reflect stock splits and
dividends. Except as the context otherwise requires, all references to New ICN
or the Company include its subsidiaries.
THE COMPANY
New ICN is an international pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical and nutritional products,
research chemicals and diagnostic products. The Company pursues a strategy of
international expansion which includes (i) the research and development of
proprietary products with the potential to be significant contributors to the
Company's global operations; (ii) the penetration of major pharmaceutical
markets by means of targeted acquisitions; and (iii) the expansion in these
major markets through the development or acquisition of pharmaceutical products
that meet the particular needs of each market.
The Company distributes and sells a broad range of prescription and
over-the-counter ("OTC") pharmaceutical and nutritional products in over 60
countries worldwide, primarily in North America, Latin America, Western Europe
and Eastern Europe. These pharmaceutical products treat viral and bacterial
infections, diseases of the skin, myasthenia gravis, cancer, cardiovascular
disease, diabetes and psychiatric disorders. The Company's leading product is
the broad spectrum antiviral agent ribavirin, which is marketed in the United
States, Canada and most of Europe under the trade name Virazole(R). Virazole(R)
is currently approved for commercial sale in over 40 countries for one or more
of a variety of viral infections, including respiratory syncytial virus ("RSV"),
herpes simplex, influenza, chicken pox, hepatitis and human immunodeficiency
virus ("HIV"). The Company has manufacturing and distribution operations in the
United States, Canada, Mexico, Spain, The Netherlands and the Federal Republic
of Yugoslavia (Montenegro and Serbia) ("Yugoslavia") and has entered into a
letter of intent to form a joint venture to manufacture Virazole(R) in China.
The Company believes it has substantial opportunities to realize growth
from its internally developed compounds. These compounds are the result of
significant investments in its research and development activities related to
nucleic acids conducted over three decades. On June 1, 1994, a New Drug
Application ("NDA") was filed with the United States Food and Drug
Administration (the "FDA") for the use of Virazole(R) for the treatment of
chronic hepatitis C in the United States. Similar applications for approval to
market Virazole(R) for chronic hepatitis C were filed in July, 1994 in the
European Union and in August, 1994 with the Health Protection Branch (HPB) in
Canada. Additional applications have been filed to date in Sweden, Norway,
Finland, Australia and New Zealand. The Company believes that the approval of
Virazole(R) for the treatment of chronic hepatitis C would be important to the
Company because of the potential size of the chronic hepatitis C market both in
the United States and abroad. The Company has been notified by the Committee for
Proprietary Medicinal Products of the European Union that Virazole(R) will be
reviewed as a treatment for chronic hepatitis C under the "Concertation
Procedure" for high technology products as a List B product for marketing in the
European Union. In order to qualify as a List B product, a drug must show
promising treatment potential for disease states of significant therapeutic
interest. The Concertation Procedure involves a European Union-wide simultaneous
review, which may provide up to 10 years of protection for certain submitted
documentation (including results of clinical tests) from manufacturers of
generic brands if Virazole(R) is ultimately approved for treatment of chronic
hepatitis C. The Company is also engaged in, among other things, later stage
clinical trials in the United States for Tiazole(TM) for the treatment of
chronic
3
<PAGE> 4
myelogenous leukemia and end-stage ovarian carcinoma. There can be no assurance,
however, that required governmental approvals will be obtained.
The Company believes it is positioned to expand its presence in the
pharmaceutical market in Eastern Europe. In 1991, a 75% interest was acquired in
ICN Galenika ("Galenika"), which is a large drug manufacturer and distributor in
Yugoslavia. This acquisition added new products and significantly expanded the
sales volume of the Company. With the investment in Galenika, the Company became
one of the first Western pharmaceutical companies to establish a direct
investment in Eastern Europe. Galenika continues to be a significant part of the
Company's operations, although its sales and profitability have been
substantially diminished primarily as a result of the imposition of sanctions on
Yugoslavia by the United Nations. See "Investment Considerations -- Operations
in Yugoslavia." In pursuing its expansion strategy, the Company has also
recently entered into agreements to develop an affiliation with one of the
largest pharmaceutical companies in the Russian Republic.
In addition to its pharmaceutical operations, the Company also develops,
manufactures and sells a broad range of research chemical products, biomedical
instrumentation, diagnostic reagents and radiation monitoring services. The
Company markets these products internationally to major scientific, academic,
health care and governmental institutions through catalogue and direct mail
marketing programs.
THE MERGER
On August 1, 1994, ICN, SPI, Viratek, Biomedicals and New ICN entered into
a merger agreement, as amended (the "Merger Agreement"), to combine the four
Predecessor Companies into New ICN (or, in the case of Biomedicals, into a
wholly owned subsidiary of New ICN). Pursuant to the Merger Agreement, each
share of SPI common stock entitles the holder thereof (other than ICN) to
receive 1.000 share of common stock, par value $.01 (the "Common Stock"), of New
ICN. In addition, the Merger Agreement provides that each share of ICN common
stock entitles the holder thereof to receive 0.512 shares of Common Stock, each
share of Viratek common stock entitles the holder thereof (other than ICN) to
receive 0.499 shares of Common Stock and each share of Biomedicals common stock
entitles the holder thereof (other than ICN) to receive 0.197 shares of Common
Stock. The Merger was consummated on November 10, 1994. For accounting purposes,
SPI is deemed to be the predecessor company to New ICN. Immediately prior to the
Merger, ICN owned approximately 38% of the common stock of SPI (accounted for on
the equity method) and owned approximately 63% and 69% of the common stock of
Viratek and Biomedicals, respectively (accounted for on a consolidated basis).
As compared to each of the Predecessor Companies operating on a separate
basis, the Company believes that after the Merger it will have greater
resources, improved business opportunities and enhanced access to the financial
markets, which will enable it to compete more effectively in the pharmaceutical
industry. In addition, the Company believes it can eliminate unnecessary
duplication of certain costs previously incurred by the Predecessor Companies,
take advantage of certain synergies among the Predecessor Companies and simplify
the operating structure of the Predecessor Companies.
4
<PAGE> 5
RECENT DEVELOPMENTS
The following table presents certain preliminary financial information of
SPI, ICN, Viratek and Biomedicals for the three and nine months ended September
30, 1993 and 1994 and New ICN on a pro forma basis for the nine months ended
September 30, 1994. The financial information has not been audited and the pro
forma financial information was prepared on the same basis as the pro forma
information presented elsewhere in this Prospectus (and does not reflect any
nonrecurring charges incurred in connection with the Merger). Operating results
for the three and nine months are not necessarily indicative of future results.
<TABLE>
<CAPTION>
SPI* ICN
--------------------------------------------- -------------------------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------- ------------------- -------------------
1993 1994 1993 1994 1993 1994 1993 1994
------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $70,214 $92,796 $256,272 $243,890 $15,815 $15,357 $48,170 $48,200
Net income (loss)............. 6,918 10,057 13,745 23,666 (2,343) (2,816) (4,247) (14,193)
Net income (loss) per share... 0.34 0.47 0.68 1.13 (0.11) (0.14) (0.22) (0.69)
</TABLE>
<TABLE>
<CAPTION>
VIRATEK BIOMEDICALS
--------------------------------------------- -------------------------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------- ------------------- -------------------
1993 1994 1993 1994 1993 1994 1993 1994
------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 2,048 $ 2,471 $ 4,032 $ 6,041 $14,607 $13,800 $45,831 $44,458
Net income (loss)............. 249 263 (573) (1,068) 866 418 5,266 1,468
Net income (loss) per share... 0.01 0.01 (0.03) (0.06) 0.05 0.05 0.25 0.16
</TABLE>
<TABLE>
<CAPTION>
NEW ICN
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30, 1994
-------------------
<S> <C>
Net sales..................... $288,348
Net income.................... 8,517
Net income per share.......... 0.31
</TABLE>
- ---------------
* Galenika's revenues were $28.7 million and $45.5 million for the three months
ended September 30, 1993 and 1994, respectively, and $137.7 million and $109.3
million for the nine months ended September 30, 1993 and 1994, respectively.
5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED....................... $100,000,000 aggregate principal amount of 8 1/2%
Convertible Subordinated Notes Due 1999 (the
"Notes").
INTEREST PAYMENT DATES................... May 15 and November 15, commencing May 15, 1995.
MATURITY DATE............................ November 15, 1999.
CONVERSION............................... The Notes are convertible at the option of the
holder, in whole or in part, at any time prior to
maturity, unless previously redeemed, into Common
Stock at a conversion price of $23.86 per share,
subject to adjustment in certain events.
OPTIONAL REDEMPTION...................... The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after
November 15, 1997 at the redemption prices set
forth herein, plus accrued and unpaid interest.
SUBORDINATION............................ The Notes will be subordinated to all Senior
Indebtedness of the Company. At September 30,
1994, after giving effect to the Merger and this
offering and the application of the net proceeds
therefrom, Senior Indebtedness and indebtedness
(including trade payables) of the Company's
subsidiaries, to which the Notes are effectively
subordinated, would have been approximately
$120,634,000 on a pro forma basis.
CHANGE OF CONTROL........................ Upon a Change of Control, each holder will have
the right, subject to certain conditions, to
require the Company to repurchase the Notes at
100% of the principal amount thereof, plus
accrued and unpaid interest.
USE OF PROCEEDS.......................... To repay a substantial portion of existing
long-term debt of the Predecessor Companies and
for general corporate purposes.
LISTING.................................. The Notes and the Common Stock have been approved
for listing on the New York Stock Exchange
("NYSE"), subject to notice of issuance. The
Common Stock will trade under the symbol ICN.
</TABLE>
INVESTMENT CONSIDERATIONS
See "Investment Considerations" for a description of certain factors which
should be considered by prospective investors including, among others, the
Company's dependence on foreign operations, particularly in Yugoslavia; the lack
of assurance of the successful development or commercialization of future
products, including new indications for Virazole(R) and the anti-takeover effect
of certain provisions of the Company's organizational documents.
6
<PAGE> 7
SUMMARY SELECTED FINANCIAL DATA OF SPI AND NEW ICN
The following table sets forth a summary of selected financial data of (i)
SPI, on a historical basis, as of and for the years ended December 31, 1991,
1992 and 1993, and as of and for the six months ended June 30, 1993 and 1994 and
(ii) New ICN, on a pro forma basis, for the year ended December 31, 1993 and as
of and for the six months ended June 30, 1994. The unaudited pro forma combined
financial data do not reflect any nonrecurring charges incurred in connection
with the Merger (in the aggregate, estimated to be approximately $189,000,000
($185,000,000 of which is a non-cash charge) or $7.09 per share of Common Stock,
on a pro forma basis, for the year ended December 31, 1993).
<TABLE>
<CAPTION>
SPI
(PREDECESSOR) NEW ICN
---------------------------------------------------- --------------------------------
YEAR ENDED SIX MONTHS ENDED PRO FORMA PRO FORMA
DECEMBER 31, JUNE 30, YEAR ENDED SIX MONTHS ENDED
------------------------------ ------------------- DECEMBER 31, JUNE 30,
1991(1) 1992 1993 1993 1994 1993(2)(3) 1994(2)
-------- -------- -------- -------- -------- ------------ -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS --
CONSOLIDATED:
Net sales............... $364,358 $476,118 $403,957 $186,058 $151,094 $463,033 $ 181,752
Gross profit............ 190,804 267,373 192,034 90,105 73,311 223,479 90,469
Income before interest
expense, provision for
income taxes and
minority interest..... 61,808 66,271 50,817 18,347 21,942 37,942 13,063
Net income (loss)....... $ 30,126 $ 34,503 $ 21,510 $ 6,827 $ 13,609 $ (1,754) $ 1,057
========= ========= ========= ========= ========= ============ ================
Net income (loss) per
share(4).............. $ 1.55 $ 1.74 $ 1.07 $ 0.34 $ 0.65 $ (0.07) $ 0.04
========= ========= ========= ========= ========= ============ ================
OTHER DATA --
CONSOLIDATED:
Depreciation and
amortization.......... 7,928 6,770 8,513 3,853 3,770 19,226 8,902
Interest expense(5)..... 8,965 13,065 23,750 10,098 3,046 38,913 9,773
Ratio of earnings to
fixed charges(6)...... 6.89x 5.07x 2.14x 1.82x 7.20x (7) 1.33x
OPERATING DATA --
GALENIKA:
Net sales............... $224,782 $325,903 $239,832 $108,964 $ 63,826 $239,832 $ 63,826
Gross profit............ 106,326 173,985 83,643 41,170 14,360 83,643 14,360
Income before interest
expense, provision for
income taxes and
minority interest..... 57,010 43,972 17,084 4,922 2,521 17,084 2,521
Depreciation and
amortization.......... 2,506 2,707 2,969 1,403 1,344 2,969 1,344
Interest expense........ 6,432 5,453 16,774 6,303 506 16,774 506
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30, JUNE 30,
1991 1992 1993 1994 1994
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA --
CONSOLIDATED:
Working capital......... $123,367 $120,942 $127,259 $104,151 $ 129,704
Total assets............ 336,905 333,218 302,017 305,131 451,760
Long-term debt, less
current maturities.... 16,519 21,016 16,980 16,154 173,017
Stockholders' equity.... 88,134 135,427 155,879 165,400 123,704
</TABLE>
7
<PAGE> 8
- ---------------
(1) Financial data for 1991 includes the results of Galenika from the effective
date of acquisition, May 1, 1991. See Note 11 of Notes to Consolidated
Financial Statements of SPI.
(2) The unaudited pro forma combined financial statement information of New ICN
has been derived from the "Selected Pro Forma Combined Condensed Financial
Data" appearing elsewhere in this Prospectus.
(3) New ICN Pro Forma Year Ended December 31, 1993 excludes an extraordinary
gain of $627,000 relating to the early extinguishment of debt.
(4) In March and July 1991, SPI issued 10% and 15% stock distributions,
respectively, which resulted in a 26% stock split. In January 1993, SPI
issued a fourth quarter 1992 stock dividend of 2%. During 1993, SPI issued
additional stock dividends which totaled 6%. In January and May 1994, SPI
declared a first and second quarter 1994 stock dividend of 1.4% and 1.3%,
respectively. All per share amounts have been restated to reflect these
stock splits and dividends.
(5) Included in these amounts is interest expense for Galenika of $6,432,000,
$5,453,000 and $16,774,000 under "SPI (Predecessor)" for the years ended
December 31, 1991, 1992 and 1993, respectively; $6,303,000 and $506,000
under "SPI (Predecessor)" for the six months ended June 30, 1993 and 1994,
respectively; and $6,303,000 and $506,000 under "New ICN" on a pro forma
basis for the year ended December 31, 1993 and the six months ended June 30,
1994, respectively.
(6) For purposes of these calculations, earnings before fixed charges consists
of income (loss) before income taxes, minority interest and extraordinary
income plus fixed charges. Fixed charges consists of interest on
indebtedness and that portion of operating rental expense representative of
the interest factor.
(7) For pro forma year ended December 31, 1993, the deficiency in earnings
available to cover fixed charges was approximately $971,000.
8
<PAGE> 9
THE COMPANY
New ICN is an international pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical and nutritional products,
research chemicals and diagnostic products.
The principal executive offices of the Company are located at 3300 Hyland
Avenue, Costa Mesa, California 92626. The telephone number at such address is
(714) 545-0100.
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully the following factors
before purchasing the securities offered hereby.
DEPENDENCE ON FOREIGN OPERATIONS
Approximately 79% and 70% of the Company's pro forma net sales for 1993 and
the six months ended June 30, 1994, respectively, were generated from operations
outside the United States. The Company operates directly and through
distributors in North America, Latin America, Australia, Western Europe and
Eastern Europe and through distributors elsewhere in the world. Foreign
operations are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and exchange
controls, changes in the relative values of currencies, limitations on foreign
participation in local enterprises and other restrictive governmental actions.
The Company does not currently have a hedging program to protect against risks
of adverse changes in foreign currencies.
RISK OF OPERATIONS IN YUGOSLAVIA
Galenika represents a material part of the Company's business. The current
political and economic circumstances in Yugoslavia create certain business risks
particular to that country. Since May 1992, Yugoslavia has been operating under
economic sanctions imposed by the United Nations which have prohibited all
exports and severely limited the ability of local businesses to import raw
materials for manufacturing. In addition, certain risks such as hyperinflation,
dramatic currency devaluations, fluctuations in the relative value of the
Yugoslav dinar, wage and price controls, potential governmental action and a
rapidly deteriorating economy have had, and could have in the future, a material
adverse effect on the Company's results of operations. Under the sanctions, the
Company is not permitted to make additional capital investments in Yugoslavia.
If, in the future, the Company becomes unable to exercise control over
Galenika's operations or is prohibited by Yugoslavian law from receiving
dividends from Galenika (which the Company believes is unlikely), the Company
could be required to deconsolidate Galenika for financial reporting purposes and
account for the Company's investment in Galenika using the cost method of
accounting. Upon a deconsolidation, the investment in Galenika would be carried
at the lower of cost or realizable value, resulting in a substantial write-down
of the carrying value of the assets of Galenika. Due to the current economic
conditions in Yugoslavia, most segments of the population must rely on the
government to subsidize and pay for prescription drugs. Under the socialist
government in Yugoslavia, the government subsidizes the purchase by hospitals,
pharmacies and other distributors of pharmaceutical products. Under this policy,
the Yugoslavian government reimbursed purchases representing $163,086,000, or
68%, of Galenika's net sales during 1993 (35% of the Company's pro forma net
sales for that period). Future sales of Galenika could be dependent on the
continuation of the current Yugoslavian government policy and the ability of the
government to subsidize the purchase of pharmaceuticals. See Note 12 of Notes to
Consolidated Financial Statements of SPI and also "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Predecessor
Companies -- SPI -- Liquidity and Capital Resources -- Galenika's Operations."
NO ASSURANCE OF SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF FUTURE PRODUCTS
The Company's future growth will depend, in large part, upon its ability to
develop or obtain and commercialize new products and new formulations of or
indications for current products. The Company is engaged in an active research
and development program involving compounds owned by the Company or
9
<PAGE> 10
licensed from others which the Company may, in the future, desire to develop
commercially. The ability of the Company to increase revenues at a substantial
rate may be materially dependent on the authorization for the commercial sale in
the United States and other countries of Virazole(R) for indications and
presentations not currently approved, such as chronic hepatitis C. See
"-- Government Regulation." There can be no assurance that the Company will be
able to develop or acquire new products, obtain regulatory approvals to use such
products for proposed or new clinical indications in a timely manner,
manufacture its potential products in commercial volumes or gain market
acceptance for such products. In addition, the Company may require financing
over the next several years to fund costs of development and acquisitions of new
products and, if Virazole(R) is approved for treatment of chronic hepatitis C
(for which there can be no assurance), to expand the production and marketing of
Virazole(R). It may be desirable that the Company enter into licensing
arrangements with other pharmaceutical companies in order to market effectively
any new products or new indications for existing products such as the marketing
of Virazole(R) for treatment of chronic hepatitis C (if approved). There can be
no assurance that the Company will be successful in raising such additional
capital or entering into such marketing arrangements, if required, or that such
capital will be raised, or such marketing arrangements will be, on terms
favorable to the Company. See "-- Limited Patent Protection"; "-- Government
Regulation"; "Business -- Products"; "Business -- Sales, Marketing and
Customers"; "Business -- Government Regulation"; and "Business -- Research and
Development."
LIMITED PATENT PROTECTION
The Company may be dependent on the protection afforded by its patents
relating to Virazole(R) and no assurance can be given as to the breadth or
degree of protection which these patents will afford the Company. The Company
has patent rights in the United States expiring in 1999 relating to the use of
Virazole(R) to treat specified human viral diseases. The Company has patents in
certain foreign countries covering use of Virazole(R) in the treatment of
certain diseases, which coverage and expiration varies and which patents expire
at various times between 1995 and 2006. The Company has no, or limited, patent
rights with respect to Virazole(R) and/or its use in certain foreign countries
where Virazole(R) is currently, or in the future may be, approved for commercial
sale, including France, Germany and Great Britain. The Company has been granted
a review classification (Concertation Procedure) for Virazole(R) as a treatment
for chronic hepatitis C in all European Union countries (including France,
Germany and Great Britain). As a result, approval of the application of
Virazole(R) for treatment of chronic hepatitis C (if such approval is granted)
would, in the European Union, provide the Company up to ten years of protection
from the date of such approval of the application against competitors relying
upon the Company's submitted documentation, including the results of clinical
trials, to support such competitors' application to manufacture, market or sell
generic substitutes of Virazole(R) for treatment of chronic hepatitis C. There
can be no assurance that the loss of the Company's patent rights with respect to
Virazole(R) upon expiration of the Company's patent rights in the United States,
Europe and elsewhere will not result in competition from other drug
manufacturers or will not otherwise have a significant adverse effect upon the
business and operations of the Company. Marketing approvals in certain foreign
countries provide an additional level of protection for products approved for
sale in such countries. As a general policy, the Company expects to seek
patents, where available, on inventions concerning novel drugs, techniques,
processes or other products which it may develop or acquire in the future.
However, there can be no assurance that any patents applied for will be granted,
or that, if granted, they will have commercial value or as to the breadth or the
degree of protection which these patents, if issued, will afford the Company.
The Company intends to rely substantially on its unpatented proprietary
know-how, but there can be no assurance that others will not develop
substantially equivalent proprietary information or otherwise obtain access to
the Company's know-how. Patents for pharmaceutical compounds are not available
in certain countries in which the Company markets its products. For information
concerning licenses and patents involving the Company, see
"Business -- Licenses, Patents and Trademarks."
UNCERTAIN IMPACT OF ACQUISITION PLANS
The Company expects to continue to pursue the Predecessor Companies'
strategy of targeted expansion through the acquisition of compatible businesses
and product lines and the formation of strategic alliances, joint ventures and
other business combinations. The Company's attempt to acquire an interest on a
non-
10
<PAGE> 11
negotiated basis in a publicly-held company may result in defensive measures by
the subject company, including litigation, which could prevent or delay the
Company from achieving its objectives and cause the Company to incur substantial
expense and risk. Applicable statutes and regulations may delay or preclude an
acquisition. Additional substantial debt or equity financing may be required in
order to finance any future acquisitions. There can be no assurance that the
Company can successfully complete or finance any acquisition. Should the Company
complete any material acquisition, the Company's success or failure in
integrating the operations of the acquired company may have a material impact on
the future growth or success of the Company. See "Business -- Acquisition
Strategy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Predecessor Companies -- SPI" for information
regarding recent acquisitions by the Predecessor Companies.
POTENTIAL LITIGATION EXPOSURE
SPI, ICN and Viratek have been named as defendants in certain consolidated
class action lawsuits alleging, among other things, violations of federal
securities laws. The plaintiffs allege that the defendants made, or aided and
abetted other defendants in making, misrepresentations of material facts and
omitted to state material facts concerning the business, financial condition and
future prospects of such Predecessor Companies, primarily concerning
developments regarding Virazole(R), including the efficacy and safety of the
drug and the market for the drug in the treatment of AIDS and AIDS related
diseases. As a result of the Merger, the Company has assumed all of such
Predecessor Companies' liabilities with respect to such litigation. For
information concerning that litigation and certain other litigation and recent
governmental actions involving the Predecessor Companies, see
"Business -- Litigation, Government Investigations and Other Matters."
POTENTIAL PRODUCT LIABILITY EXPOSURE AND LACK OF INSURANCE
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products. Even if a drug were approved for
commercial use by an appropriate governmental agency, there can be no assurance
that users will not claim that effects other than those intended may result from
the Company's products. The Company generally self-insures against potential
product liability exposure with respect to its marketed products, including
Virazole(R). While to date no material adverse claim for personal injury
resulting from allegedly defective products, including Virazole(R), has been
successfully maintained against any of the Predecessor Companies or the Company,
a substantial claim, if successful, could have a material adverse effect on the
Company. See "Business -- Litigation, Government Investigations and Other
Matters."
GOVERNMENT REGULATION
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 in such respective
jurisdictions. Obtaining FDA approval for new products and manufacturing
processes can take a number of years and involves the expenditure of substantial
resources. Numerous requirements must be satisfied, including preliminary
testing programs on animals and subsequent clinical testing programs on humans,
to establish product safety and efficacy. On June 1, 1994, Viratek submitted a
NDA to the FDA for the approval of Virazole(R) for commercial sale in the
treatment of chronic hepatitis C. No assurance can be given that authorization
of the commercial sale of any new drugs or compounds by the Company 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. Failure to comply
with applicable regulatory requirements can result in, among other things,
sanctions, fines, delays or suspensions of approvals, seizures or recalls of
products, operating restrictions and criminal prosecutions. Furthermore, changes
in existing regulations or adoption of new regulations could prevent or delay
the Company from obtaining future regulatory approvals. See
"Business -- Licenses, Patents and Trademarks" and "Business -- Litigation,
Government Regulation and Other Matters."
11
<PAGE> 12
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. Others may succeed in developing products
that are more effective than those marketed or proposed for development by the
Company. Progress by other researchers in areas similar to those being explored
by the Company may result in further competitive challenges. The Company may
also face increased competition from manufacturers of generic pharmaceutical
products when certain of the patents covering certain of its currently marketed
products expire. See "-- Limited Patent Protection" and
"Business -- Competition."
UNCERTAIN BENEFITS OF THE MERGER
In evaluating the terms of the Merger, each of the Predecessor Companies
analyzed its business and made certain assumptions concerning its future
operations. Each of the Predecessor Companies concluded that, through the
elimination of redundant operations and departments and beneficial sharing of
resources, the Merger would produce a combined company with operating results
better than those historically experienced or presently expected to be
experienced in the future by the four Predecessor Companies in the absence of
the Merger. There can be no assurance, however, that these benefits will be
achieved or that the results of the combined operations will be improved. These
anticipated benefits of the Merger will not be achieved unless the Predecessor
Companies are successfully combined in a timely manner. The process of combining
the organizations could cause the interruption of, or a loss of momentum in, the
activities of any part or all of the Company's business, which could have an
adverse effect on the Company.
UNCERTAIN EFFECT OF UNITED STATES HEALTH CARE PROPOSALS ON PHARMACEUTICAL
INDUSTRY
The Clinton administration has identified the containment of healthcare
costs as a major national priority. As part of the administration's healthcare
proposals, President Clinton and members of the administration have called for
pharmaceutical companies to restrain price increases and have developed
proposals to contain healthcare costs. While the announced proposals, if
enacted, would not have a direct effect on the Company's business, the Company
is unable to predict the ultimate effect of these proposals on the
pharmaceutical industry. Legislation could be enacted that could adversely
affect the industry in general and the business of the Company in particular.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BY-LAWS AND THE INDENTURE
The Company's Certificate of Incorporation and By-laws contain provisions
which may have the effect of discouraging a third party from making an
acquisition proposal for the Company. The Certificate of Incorporation of the
Company, among other things, (i) classifies the Board of Directors into three
classes, with directors of each class serving for staggered three-year periods,
(ii) provides that directors may be removed only for cause and only upon the
affirmative vote of at least 66 2/3% of the voting power of all the then
outstanding shares of stock entitled to vote, (iii) requires that certain
business combinations be approved by an 85% vote of the Company's outstanding
voting stock unless the transaction is approved by at least 66 2/3% of the
continuing directors, (iv) prohibits action of stockholders by written consent,
(v) requires advance notice of stockholder nominations and proposals and (vi)
precludes stockholders from calling a special meeting of stockholders. Such
provisions would make the removal of incumbent directors more difficult and
time-consuming and may have the effect of discouraging a tender offer or other
takeover attempt not previously approved by the Board of Directors. The Board of
Directors of the Company also has the authority to issue up to 10,000,000 shares
of preferred stock in one or more series and to fix the powers, preferences and
rights of any such series without stockholder approval. In addition, the Company
has adopted a shareholder rights plan. See "Description of Capital Stock
Preferred Stock" and "Description of Capital Stock -- Preferred Stock Purchase
Rights." Upon a Change of Control, each holder will have the right, subject to
certain conditions, to require the Company to repurchase the Notes at 100% of
the principal amount thereof, plus accrued and
12
<PAGE> 13
unpaid interest. See "Description of Notes -- Change of Control." These
provisions could have the effect of discouraging unsolicited acquisition
proposals or making it more difficult for a third party to gain control of the
Company or could otherwise adversely affect the market price of the shares of
Common Stock.
ABSENCE OF A PRIOR PUBLIC MARKET
The Notes and the Common Stock constitute new issues of securities with no
established trading market. The Notes and the Common Stock have been approved
for listing on the NYSE, subject to notice of issuance. No assurance can be
given that an active trading market for the Notes or the Common Stock will
develop or be sustained after this offering. If the Notes are traded after their
initial issuance, they may trade at a discount from their initial offering price
depending upon prevailing interest rates, the market for similar securities, the
performance of the Company and other factors.
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby (the "Offering")
are estimated to be $94,750,000 ($109,225,000, if the Underwriters'
over-allotment option is exercised), after deducting underwriting discounts and
commissions and expenses of the Offering.
The Company intends to use a substantial portion of the net proceeds
(approximately $90,000,000) of the Offering to repay or redeem the following
indebtedness of the Predecessor Companies and certain of their foreign
subsidiaries (all interest rates, principal amounts and translation of non-U.S.
dollar denominated loans into U.S. dollars are, except as noted, as of June 30,
1994) (the "Old Debt"), in each case together with accrued but unpaid interest
to the date of repayment or redemption: (a) ICN 12 1/2% Senior Subordinated
Debentures due 1999, in the principal amount of $20,238,000 (with a book value
of approximately $18,052,000) and estimated accrued interest of $260,000 as of
the time of redemption; (b) a foreign bank loan, due March 12, 1995, in the
initial principal amount of $5,067,500 (increased to $6,067,500 in November
1994) collateralized by common stock of SPI owned by ICN (to be replaced, upon
consummation of the Merger, with certificates of deposit in the principal amount
of the loan), at an interest rate as of September 12, 1994 of 7 3/4%, the
initial proceeds of which loan were used together with other cash to repay on
September 15, 1994, ICN 6% Dutch Guilder Subordinated Convertible Bonds due
1994, in the principal amount of approximately $6,696,000; (c) various foreign
bank loans in the aggregate principal amount of approximately $19,744,000, with
variable interest rates having an effective interest rate of 13.3% and maturing
between 1994 and 2000; (d) additional short-term foreign bank loans in the
aggregate principal amount of approximately $400,000 incurred in November 1994;
and (e) approximately $37,000,000 principal amount (and estimated accrued
interest of $1,953,000 as of the time of redemption) of the aggregate
$70,697,000 outstanding principal amount of the ICN 12 7/8% Sinking Fund
Debentures due 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Predecessor
Companies -- ICN -- Working Capital, Liquidity and Capital Resources." The
Company intends to use the balance of the net proceeds for general corporate
purposes.
The Company will issue, simultaneously with the consummation of the
Offering, notices of redemption with respect to the 12 1/2% Senior Subordinated
Debentures and the 12 7/8% Sinking Fund Debentures being redeemed. The funds
required for the redemption of the 12 1/2% Senior Subordinated Debentures and
the 12 7/8% Sinking Fund Debentures will be held in escrow until the requisite
30-day notice periods have expired (during which time interest will continue to
accrue on these securities) and payment can be made. Such interest is estimated
to be approximately $634,615, in the aggregate. All other repayments or
redemptions will be effected upon the consummation of the Offering.
13
<PAGE> 14
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The common stock of ICN is listed on the NYSE (under the symbol ICN) and
the common stock of SPI, Viratek and Biomedicals is listed on the American Stock
Exchange ("AMEX") (under the symbols SPI, VRA and BIM, respectively). The Common
Stock has been approved for listing on the NYSE (under the symbol ICN), subject
to notice of issuance.
The following table sets forth, for the periods shown, the high and low
sale prices of the common stock of each of the Predecessor Companies as reported
on the NYSE or AMEX, as the case may be:
<TABLE>
<CAPTION>
SPI ICN VRA BIM
------------- ----------- ------------- ----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992
First Quarter.................. $33 3/4 $24 1/16 $25 3/8 $14 1/2 $24 17/32 $10 23/32 $ 11 $ 6
Second Quarter................. 26 17 9/16 15 7/8 9 3/4 13 37/6 7 5 6 3/8 4 1/2
Third Quarter.................. 20 3/ 15 1/16 12 7/8 6 5/8 10 5 15/ 5 1/4 3 3/4
Fourth Quarter................. 17 3/1 9 1 10 1/4 5 3/4 9 49/ 5 15/ 4 1/4 3 3/8
1993
First Quarter.................. $20 9/16 $ 9 7/16 $15 3/4 $5 7/8 $13 21/64 $ 5 61/64 $5 1/4 $3 1/4
Second Quarter................. 15 11/1 11 11/1 13 3/4 8 7/8 13 29/6 8 37/ 4 3/8 3 1/8
Third Quarter.................. 17 3/1 11 1/ 12 7 5/8 14 11/6 10 4 3/8 3
Fourth Quarter................. 14 11/1 12 5/1 11 7/8 7 3/8 13 11/1 7 1/ 5 1/2 3 5/8
1994
First Quarter.................. $18 7/8 $14 5/16 $10 5/8 $8 3/8 $11 5/8 $ 8 3/4 $5 3/8 $4 1/8
Second Quarter................. 17 1/ 14 7/1 9 7/8 8 1/8 10 1/ 7 3 4 7/16 3
Third Quarter.................. 26 7/ 15 3/ 13 7/8 8 13 5/ 7 7 5 3/8 3
Fourth Quarter (through
November 10, 1994)........... 26 1/ 20 5/ 13 3/8 10 5/ 13 10 1/ 5 4 1/8
---- ---- ---- ---- ---- ---- ---- ---
</TABLE>
On November 10, 1994, the closing price of the common stock of ICN, as
reported on the NYSE, was $10 5/8 and the closing prices of the common stock of
SPI, Viratek and Biomedicals, as reported on the AMEX, were $20 3/4, $10 1/2 and
$4 1/8, respectively. As of September 30, 1994, there were approximately 5,197
record holders of the common stock of ICN, 6,473 record holders of the common
stock of SPI, 707 record holders of the common stock of Viratek and 369 record
holders of the common stock of Biomedicals. Pursuant to the Merger Agreement,
each share of ICN common stock entitles the holder thereof to receive 0.512
shares of Common Stock, each share of SPI common stock entitles the holder
thereof (other than ICN) to receive 1.000 share of Common Stock, each share of
Viratek common stock entitles the holder thereof (other than ICN) to receive
0.499 shares of Common Stock and each share of Biomedicals common stock entitles
the holder thereof (other than ICN) to receive 0.197 shares of Common Stock.
14
<PAGE> 15
Set forth below is the dividend and distribution history of SPI, Viratek
and Biomedicals for the period commencing with the fiscal year ended 1992. ICN
did not pay a dividend or distribution during that period.
SPI has declared and paid the following cash and stock dividends:
<TABLE>
<CAPTION>
CASH DIVIDENDS: STOCK DIVIDENDS:
------------------------------------- -------------------------------------
<S> <C> <C> <C>
1992 1992
------------------------------------- -------------------------------------
First Quarter........................ $.2383 First Quarter........................ --
Second Quarter....................... .2383 Second Quarter....................... --
Third Quarter........................ .2383 Third Quarter........................ --
Fourth Quarter....................... .0598 Fourth Quarter....................... 2.0%
1993 1993
------------------------------------- -------------------------------------
First Quarter........................ $.0573 First Quarter........................ 1.4%
Second Quarter....................... .0581 Second Quarter....................... 1.4%
Third Quarter........................ .0589 Third Quarter........................ 1.5%
Fourth Quarter....................... .0598 Fourth Quarter....................... 1.7%
1994 1994
------------------------------------- -------------------------------------
First Quarter........................ $.0633 First Quarter........................ 1.4%
Second Quarter....................... .0642 Second Quarter....................... 1.3%
Third Quarter........................ -- Third Quarter........................ --
Fourth Quarter....................... -- Fourth Quarter....................... --
</TABLE>
Biomedicals has declared and paid the following cash dividends:
<TABLE>
<CAPTION>
CASH DIVIDENDS:
-------------------------------------
<S> <C> <C> <C>
1992
-------------------------------------
First Quarter........................ $.0425
Second Quarter....................... .0425
Third Quarter........................ .0425
Fourth Quarter....................... .0425
1993
First Quarter........................ $.0425
Second Quarter....................... .0425
Third Quarter........................ .0425
Fourth Quarter....................... .0425
1994
First Quarter........................ --
Second Quarter....................... --
Third Quarter........................ --
Fourth Quarter....................... --
</TABLE>
On January 21, 1994, Viratek paid a 5% common stock distribution. No other
cash or stock dividends or distributions were declared during 1992, 1993 or
1994.
Although there can be no assurances that the Company will declare and pay
dividends in the future, it is the present intention of the Board of Directors
of the Company that the Company retain the cash dividend policy of SPI ($.0655
per share on a quarterly basis), but the declaration and payment of any
dividends (cash or stock) by the Company will be at the discretion of the Board
of Directors and will depend upon many factors, including, but not limited to,
the Company's earnings, financial condition, business needs, capital and
surplus. In addition, the Company's ability to pay dividends may be limited by
the terms of any additional financing completed in the future.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company on a pro
forma basis at June 30, 1994 (in thousands) after giving effect to the Merger
and the Offering:
<TABLE>
<S> <C>
Long-term debt (including current portion):
The Notes....................................................................... $100,000(1)
Other long-term debt............................................................ 82,717
--------
Total long-term debt......................................................... $182,717
--------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
26,970,909 shares outstanding on a pro forma basis........................... $ 269(2)
Additional capital.............................................................. 240,735
Accumulated deficit............................................................. (107,611)
Unrealized loss on marketable securities........................................ (2,761)
Foreign currency translation adjustments........................................ (6,928)
--------
Total stockholders' equity................................................... $123,704(3)
--------
Total capitalization......................................................... $306,421
========
</TABLE>
- ---------------
(1) Assumes that New ICN will issue $100,000,000 principal amount of Notes in
the Offering, with a stated interest rate of 8.50%, estimated deferred loan
costs of $5,250,000 and an assumed effective annual interest rate of 9.88%.
A substantial portion of the net proceeds will be used to retire the Old
Debt as follows (in thousands):
<TABLE>
<CAPTION>
AT JUNE 30, 1994
---------------------------
FAIR EFFECTIVE
DEBT VALUE INTEREST RATE
----------------------------------------------------- -------- --------------
<S> <C> <C>
12 7/8% sinking fund debentures...................... $ 37,000 13.4%
12 1/2% senior subordinated debentures............... 20,238 17.6
6% Dutch Guilder subordinated convertible bonds(a)... 6,696 6.5
Various foreign bank debt payable in Spanish Pesetas
and Mexican Pesos.................................. 19,744 13.3
Other(b)............................................. 6,094 8.4
-------- -----
$ 89,772 13.5%
======== ==========
</TABLE>
(a) As discussed under "Use of Proceeds," the 6% Dutch Guilder subordinated
convertible bonds were repaid with the proceeds of a foreign bank loan
in the initial principal amount of $5,067,500 (increased to $6,067,500
in November 1994) and other cash of ICN.
(b) Since June 30, 1994, the Company has repaid or refinanced these
obligations, including through the borrowing of approximately
$4,400,000 in short-term foreign bank loans referred to under "Use of
Proceeds."
(2) See Note 13 to Unaudited Pro Forma Combined Condensed Balance Sheet included
in "Selected Pro Forma Combined Condensed Financial Data" for information
with respect to outstanding stock options.
(3) Pro forma stockholders' equity at June 30, 1994 reflects a nonrecurring
charge of $185,000,000 related to purchased research and development for
which no alternative use exists, which will be incurred immediately
following the Merger.
16
<PAGE> 17
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following Unaudited Pro Forma Combined Condensed Balance Sheet of the
Company as of June 30, 1994 and the Unaudited Pro Forma Combined Condensed
Statements of Income of the Company for the year ended December 31, 1993, and
the six months ended June 30, 1994, give effect to the Merger accounted for
under the purchase method of accounting. The Company's unaudited pro forma
combined condensed financial statements are based on the historical consolidated
financial statements of SPI and ICN under the assumptions and adjustments set
forth in the accompanying notes to the Company's unaudited pro forma combined
condensed financial statements. The Company's unaudited pro forma combined
condensed financial statements represent the acquisition by the Company (a
wholly owned subsidiary of SPI) of ICN and the minority stockholder interests in
Viratek and Biomedicals. The separate financial information of Viratek and
Biomedicals has not been reflected separately in the Company's unaudited pro
forma combined condensed financial statements as such information has been
consolidated with ICN and all significant intercompany amounts have been
eliminated. Prior to the Merger, ICN owned approximately 63% and 69% of the
outstanding common stock of Viratek and Biomedicals, respectively. The Company's
Unaudited Pro Forma Combined Condensed Balance Sheet assumes that the Merger was
consummated on June 30, 1994, and the Company's Unaudited Pro Forma Combined
Condensed Statements of Income assume that the Merger was consummated on January
1, 1993.
The pro forma adjustments are based on the Merger Agreement among the
Predecessor Companies and the Company, dated August 1, 1994, as amended (the
"Merger Agreement"), which provides for stockholders of SPI (other than ICN) to
receive 1.000 shares of Common Stock for each share of SPI common stock, for
stockholders of ICN to receive 0.512 shares of Common Stock for each share of
ICN common stock and for the stockholders of Viratek and Biomedicals (other than
ICN) to receive 0.499 and 0.197 shares of Common Stock, respectively, for each
share of Viratek or Biomedicals common stock. In determining these ratios, the
share prices used were $16.89, $8.65, $8.43 and $3.32 for SPI, ICN, Viratek and
Biomedicals, respectively. (These prices represent the average closing share
prices of the Predecessor Companies for the 21 trading days between June 23 and
July 22, 1994, inclusive, which was the basis used by the special committees of
the Predecessor Companies to determine the exchange ratios provided for in the
Merger Agreement). The shares of common stock of SPI, Viratek and Biomedicals
and the Biomedicals preferred stock owned by ICN will be cancelled. For purposes
of the pro forma financial statements, the purchase price paid by the Company
for ICN and the minority stockholder interests in Viratek and Biomedicals was
determined based upon the issuance of an additional 6,477,000 shares of Common
Stock at an estimated purchase price of $22.125 per share (SPI's closing stock
price on November 9, 1994). The actual purchase price may vary to the extent
that this share price is significantly different from the closing price on the
closing date of the Merger. For purposes of developing the Company's Unaudited
Pro Forma Combined Condensed Balance Sheet, the book values of ICN's net assets
are assumed to approximate fair value, and the excess purchase price of
$50,264,000, net of amounts representing purchased research and development for
which no alternative use exists of $185,000,000, has been assigned to patents
and trademarks. The determination of the final assignment to trademarks or
goodwill is subject to appraisals, evaluations and other studies of the fair
value of ICN's net assets which will be completed following consummation of the
Merger.
The Company's Unaudited Pro Forma Combined Condensed Statements of Income
do not reflect any nonrecurring costs expected to be incurred by the Predecessor
Companies in connection with the Merger but do reflect the completion of the
Offering. The amount of these Merger costs are currently estimated to be
approximately $4,000,000, although, the ultimate costs cannot be determined
until after the Merger is completed. Also excluded from the Company's Unaudited
Pro Forma Combined Condensed Statements of Income are any benefits that may
result from the Merger due to synergies that may be derived, the elimination of
duplicate costs, a non-recurring charge to earnings immediately following the
Merger for purchased research and development for which no alternative use
exists and any loss from early extinguishment of the Old Debt (presently, not
expected to be material). See Note 10 to the Unaudited Pro Forma Combined
Condensed Statements of Income, below.
The Company's unaudited pro forma combined condensed financial statements
may not be indicative of the results that actually would have occurred if the
Merger had been consummated on the dates indicated or which may be obtained in
the future. The Company's unaudited pro forma combined condensed financial
statements should be read in conjunction with related historical consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Predecessor Companies" included
elsewhere in this Prospectus.
17
<PAGE> 18
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 SIX MONTHS ENDED JUNE 30, 1994
------------------------------------------------ ------------------------------------------------
HISTORICAL PRO HISTORICAL PRO
-------------------- PRO FORMA FORMA -------------------- PRO FORMA FORMA
SPI ICN ADJUSTMENTS NEW ICN SPI ICN ADJUSTMENTS NEW ICN
-------- -------- ----------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................. $403,957 $ 62,556 $ (3,480)(1) $463,033 $151,094 $ 32,843 $(2,185)(1) $181,752
Cost of sales............. 211,923 27,631 239,554 77,783 13,500 91,283
-------- -------- ----------- -------- -------- -------- ----------- --------
Gross profit.......... 192,034 34,925 (3,480) 223,479 73,311 19,343 (2,185) 90,469
-------- -------- ----------- -------- -------- -------- ----------- --------
Selling, general and
administrative.......... 131,069 43,690 174,759 43,997 20,554 64,551
Royalties to affiliates... 6,121 -- (6,121)(1) -- 3,749 (3,749)(1) --
Research and
development............. 11,516 5,571 17,087 2,476 3,930 6,406
Translation and exchange
(gains) losses.......... (3,282) (1,292) 248(5) (4,326 ) 2,254 3,380 (552)(5) 5,082
Equity in earnings of
SPI..................... (11,646) 2,423(1) -- (6,683) 1,385(1) --
9,223(2) 5,298(2)
Gain on sale of subsidiary
common stock owned by
ICN..................... (8,345) 8,345(3) --
Interest expense, net..... 15,717 18,962 (11,627)(4) 31,053 840 8,734 (5,379)(4) 8,366
(1,880)(4) (769)(4)
9,881(4) 4,940(4)
Other (income) expense,
net..................... 3,826 879 218(1) 5,877 1,099 1,010 179(1) 2,774
(2,395)(6) (1,189)(6)
3,349(7) 1,675(7)
-------- -------- ----------- -------- -------- -------- ----------- --------
Income (loss) before
income taxes, minority
interest,
extraordinary item and
certain nonrecurring
charges (aggregating
$189,000 or $7.09 per
share for the year
ended December 31,
1993)(10)............. 27,067 (12,894) (15,144) (971 ) 18,896 (11,582) (4,024) 3,290
Income taxes.............. 5,368 (474) (4,300)(8) 594 4,854 (32) (3,022)(8) 1,800
Minority interest......... 189 (523) 523(9) 189 433 (173) 173(9) 433
-------- -------- ----------- -------- -------- -------- ----------- --------
Income (loss) before
extraordinary item and
certain nonrecurring
charges (aggregating
$189,000 or $7.09 per
share for the year ended
December 31,
1993)(10)............... $ 21,510 $(11,897) $ (11,367) $(1,754 ) $ 13,609 $(11,377) $(1,175) $ 1,057
======== ======== =========== ======== ======== ======== =========== ========
Per share data:
Income (loss) before
extraordinary item and
certain nonrecurring
charges (aggregating
$189,000 or $7.09 per
share for the year
ended December 31,
1993)(10)............. $ 1.07 $ (0.60) $ (0.07 ) $ 0.65 $ (0.55) $ 0.04
======== ======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding(11)....... 20,157 19,813 26,647 20,815 20,523 27,477
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges(12)............. 1.33x
========
Deficiency in earnings
available to cover fixed
charges(12)............. $ 971
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Statements of
Income
18
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
The following is a summary of adjustments reflected in the Company's
Unaudited Pro Forma Combined Condensed Statements of Income:
(1) Represents elimination of related party royalty income and expense.
SPI pays royalties to Viratek on its worldwide sales of ribavirin and
pays royalties to ICN on its sales of Brown Pharmaceutical products. A
portion of the royalties on sales of ribavirin by SPI had been
previously eliminated in the consolidation of ICN.
(2) Represents elimination of ICN's equity in the earnings of SPI.
(3) Represents elimination of ICN's gain on sales of subsidiary stock.
During 1993, ICN sold 1,618,000 shares of SPI Common Stock and 273,000
shares of Viratek Common Stock for an aggregate gain of $8,345,000.
(4) Assumes that New ICN will issue $100,000,000 principal amount of Notes
in the Offering, with a stated interest rate of 8.50%, estimated
deferred loan costs of $5,250,000 and an assumed effective annual
interest rate of 9.88%. A substantial portion of the net proceeds will
be used to retire the Old Debt as follows (in thousands):
<TABLE>
<CAPTION>
AT JUNE 30, 1994
---------------------------------
EFFECTIVE INTEREST
DEBT FAIR VALUE RATE
-------------------------------------------------- ---------- ------------------
<S> <C> <C>
12 7/8% sinking fund debentures................... $ 37,000 13.4%
12 1/2% senior subordinated debentures............ 20,238 17.6
6% Dutch Guilder subordinated convertible
bonds(a)........................................ 6,696 6.5
Various foreign bank debt payable in Spanish
Pesetas
and Mexican Pesos............................... 19,744 13.3
Other(b).......................................... 6,094 8.4
---------- -----
$ 89,772 13.5%
======== ============
</TABLE>
(a) As discussed under "Use of Proceeds," the 6% Dutch Guilder
subordinated convertible bonds were repaid with the proceeds of a
foreign bank loan in the initial principal amount of $5,067,500
(increased to $6,067,500 in November 1994) and other cash of ICN.
(b) Since June 30, 1994, the Company has repaid or refinanced these
obligations, including through the borrowing of approximately
$4,400,000 in short-term foreign bank loans referred to under
"Use of Proceeds."
The Company's pro forma statements include adjustments to reverse
interest and amortization of deferred loan costs on the Old Debt of
$11,627,000 and $1,880,000, respectively, for the year ended December
31, 1993 and $5,379,000 and $769,000, respectively, for the six months
ended June 30, 1994. The adjustments also reflect interest on the Notes
at an assumed effective interest rate of 9.88% or $9,881,000 and
$4,940,000 for the year ended December 31, 1993 and the six months
ended June 30, 1994, respectively, which includes amortization of the
estimated deferred loan costs on the New Debt.
(5) Represents reversal of the translation gain (loss) in connection with
the early extinguishment of ICN's foreign denominated Old Debt with a
portion of the proceeds from the Offering.
(6) Represents reversal of goodwill and other intangible amortization
previously recorded by ICN.
(7) Represents amortization of the estimated excess purchase price over
the fair value of ICN's net assets acquired (patents, trademarks and
goodwill) over the average estimated useful life of 15 years. The
determination of the final assignments to patents, trademarks and
goodwill is subject to appraisals, evaluations and other studies of
the fair value of ICN's net assets. The actual average amortization
period may vary based upon the results of these appraisals,
evaluations and studies.
19
<PAGE> 20
(8) Represents a reduction in domestic income tax expense as a result of
the pro forma reductions in income for SPI's U.S. operations and the
utilization of ICN's net operating loss carryforwards.
(9) Represents elimination of minority interest relating to Viratek and
Biomedicals as a result of the Merger.
(10) Excludes the following non-recurring expenses which will be incurred
in connection with the Merger:
(a) Estimated Merger costs of approximately $4,000,000.
(b) In connection with the Merger, an independent valuation has been
obtained which valued current in-process research and development
efforts acquired for which no alternative use exists at
$185,000,000, which will be charged to ongoing operations
immediately following consummation of the Merger. In accordance
with Financial Accounting Standards Board ("FASB") Interpretation
No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method," the costs
assigned to in-process research and development for which no
alternative use exists are charged to expense on the date of
consummation of the business combination.
(11) The weighted average number of shares outstanding assumes that the
6,477,000 shares of Common Stock to be issued to ICN stockholders and
Viratek and Biomedicals stockholders (other than ICN) are outstanding
for all periods presented. All per share amounts have been restated to
reflect stock dividends.
(12) For purposes of these calculations, earnings before fixed charges
consists of income (loss) before income taxes, minority interest,
extraordinary income and nonrecurring charges incurred in connection
with the Merger (as discussed in Note 10 above, aggregating
$189,000,000 ($185,000,000 of which is a non-cash charge) or $7.09 per
share of Common Stock for the year ended December 31, 1993) plus fixed
charges. Fixed charges consists of interest on indebtedness and that
portion of operating rental expense representative of the interest
factor.
20
<PAGE> 21
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1994
-------------------------------------------------
HISTORICAL
-------------------- PRO FORMA PRO FORMA
SPI ICN ADJUSTMENTS NEW ICN
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 19,238 $ 13,264 $ 2,169(6) $ 34,671
Restricted cash............................... -- 1,262 1,262
Receivables, net.............................. 50,279 14,134 64,413
Receivable from SPI........................... -- 5,225 (5,225)(1) --
Inventories, net.............................. 91,883 15,473 107,356
Prepaid expenses and other current assets..... 17,465 3,846 21,311
-------- --------- ----------- ---------
Total current assets.................. 178,865 53,204 (3,056) 229,013
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Property, plant and equipment................... 80,183 36,439 116,622
Marketable securities........................... 29,826 224 30,050
Investment in SPI............................... -- 75,407 (75,407)(2) --
Investment in other equity securities........... -- 3,827 3,827
Other assets and deferred charges............... 14,686 7,089 (2,464)(3) 70,677
50,264(4)
(4,148)(5)
5,250(6)
Goodwill related to purchased businesses........ 1,571 2,404 (2,404)(7) 1,571
Goodwill related to publicly traded
subsidiaries.................................. -- 10,046 (10,046)(7) --
-------- --------- ----------- ---------
Total assets.......................... $305,131 $ 188,640 $ (42,011) $ 451,760
======== ========= ========= =========
Current liabilities:
Notes payable................................. $ 15,006 $ 3,456 $ 18,462
Current maturities of long-term debt.......... 4,207 17,942 $ (12,449)(6) 9,700
Accounts payable.............................. 15,277 5,770 21,047
Accrued liabilities........................... 20,827 17,910 (2,809)(6) 35,928
Payable to ICN................................ 5,225 -- (5,225)(1) --
Income taxes payable.......................... 14,172 -- 14,172
-------- --------- ----------- ---------
Total current liabilities............. 74,714 45,078 (20,483) 99,309
Long-term debt, less current portion............ 16,154 132,000 2,186(5) 173,017
(77,323)(6)
100,000(6)
Other liabilities and deferred income taxes..... 7,001 6,867 13,868
Minority interest............................... 41,862 12,720 (12,720)(8) 41,862
Stockholders' equity(13):
ICN Common stock.............................. -- 20,529 (20,529)(9) --
SPI/New ICN Common stock...................... 204 -- 65(10) 269
Additional capital............................ 97,496 180,911 (180,911)(9) 240,735
143,239(10)
Retained earnings............................... 77,389 (205,088) 205,088(9) (107,611)
(185,000)(11)
Unrealized loss on marketable securities........ (2,761) -- (2,761)
Foreign currency translation adjustments........ (6,928) (4,377) 4,377(12) (6,928)
-------- --------- ----------- ---------
Total stockholders' equity............ 165,400 (8,025) (33,671) 123,704
-------- --------- ----------- ---------
Total liabilities and stockholders'
equity........................................ $305,131 $ 188,640 $ (42,011) $ 451,760
======== ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
21
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET OF NEW ICN
The following is a summary of the reclassifications and adjustments
reflected in the Company's Unaudited Pro Forma Combined Condensed Balance Sheet:
(1) Represents elimination of intercompany balances between ICN and SPI.
(2) Represents elimination of ICN's investment in SPI.
(3) Represents elimination of existing intangibles, including patents,
trademarks and clinical trials of ICN.
(4) Represents the preliminary estimate of excess purchase price over the fair
value of ICN net assets acquired (patents, trademarks and goodwill) net of
purchased research and development for which no alternative use exists (see
Note 11). The determination of the final assignments to patents, trademarks
and goodwill is subject to appraisals, evaluations and other studies of the
fair value of ICN's net assets. The actual average amortization periods of
such intangible assets may vary based upon the results of these appraisals,
evaluations and studies.
(5) Represents the adjustment to record debt assumed in the Merger at fair
value and elimination of deferred loan costs on the debt assumed.
(6) Assumes that New ICN will raise $100,000,000 in the Offering, with
estimated deferred loan costs of $5,250,000 and an assumed effective
interest rate of 9.88% substantial portion of the net proceeds will be used
to retire the Old Debt plus accrued interest of $2,809,000. The remaining
net proceeds will be used for general corporate purposes and has been
reflected as cash. See also Note 4 of Notes to Unaudited Pro Forma Combined
Condensed Statements of Income.
(7) Represents elimination of existing goodwill of ICN.
(8) Represents elimination of minority interest relating to Viratek and
Biomedicals as a result of the acquisition of the minority interest by the
Company.
(9) Represents elimination of ICN's historical deficit.
(10) Reflects the additional 6,477,000 shares of Common Stock to be issued to
ICN stockholders and the Viratek and Biomedicals stockholders (other than
ICN) in connection with the Merger at an assumed price of $22.125 per share
(SPI's closing stock price on November 9, 1994). The actual purchase price
may vary to the extent that this price is significantly different from the
closing price on the closing date of the Merger.
(11) In connection with the Merger, an independent valuation has been obtained
which valued current in-process research and development efforts acquired
for which no alternative use exists at $185,000,000 which will be charged
to ongoing operations immediately following consummation of the Merger. In
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the Purchase Method," the
costs assigned to in-process research and development for which no
alternative use exists are charged to expense on the date of consummation
of the business combination.
(12) Represents the elimination of the foreign currency translation adjustment
related to ICN's foreign subsidiaries.
(13) Under the terms of the Merger Agreement, all options outstanding under the
stock option plans of ICN, SPI, Viratek and Biomedicals will remain
outstanding after the consummation of the Merger and will be assumed by New
ICN. Each such option will be exercisable upon the same terms and
conditions as were in effect prior to the consummation of the Merger,
except that (a) each such option will be exercisable for that number of
shares of Common Stock (to the nearest whole share) into which the number
of shares of common stock of the applicable Predecessor Company under the
unexercised portion of such option, if then outstanding, would have been
converted at the effective date of the Merger, and (b) the exercise price
per share of Common Stock will be an amount equal to the exercise price per
share subject to such option prior to the effective date of the Merger
divided by the applicable exchange ratio (i.e., 0.512 in the case of
options to purchase common stock of ICN, 1.000 in the case of options to
purchase common stock of SPI, 0.499 in the case of options to purchase
common stock of Viratek and 0.197 in the case of options to purchase common
stock of Biomedicals) (rounded upward to the nearest full cent). Assuming
that the Merger was consummated on June 30, 1994, on a pro forma basis
there were outstanding options to purchase 5,333,039 shares of Common
Stock. See "Executive Compensation and Related Matters."
22
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA FOR THE PREDECESSOR COMPANIES
Set forth below are selected historical financial data of the Predecessor
Companies. The annual data have been derived from the audited historical
consolidated financial statements as of and for the years ended November 30,
1989 and 1990 and December 31, 1991, 1992 and 1993 of the four Predecessor
Companies. The data for the six month periods ended June 30, 1993 and 1994 have
been derived from the unaudited consolidated condensed financial statements of
the four Predecessor Companies which, in the opinion of management, reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of interim financial data. Operating results for the six month
period ended June 30, 1994 are not necessarily indicative of the results for the
full year ending December 31, 1994. The following data should be read in
conjunction with the consolidated financial statements of the four Predecessor
Companies and "Management's Discussion and Analysis of Financial Position and
Results of Operations of the Predecessor Companies" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SPI
YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, YEAR ENDED DECEMBER 31, JUNE 30,
------------------- -------------------------------- -------------------
1989 1990 1991(1)(2) 1992 1993 1993 1994
-------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales(3)........................... $124,007 $140,716 $364,358 $476,118 $403,957 $186,058 $151,094
Cost of sales.......................... 52,551 56,101 173,554 208,745 211,923 95,953 77,783
-------- -------- ---------- -------- -------- -------- --------
Gross profit........................... 71,456 84,615 190,804 267,373 192,034 90,105 73,311
Selling, general and administrative
expenses............................. 51,472 55,437 99,942 170,313 131,069 65,705 43,997
Royalties to affiliates, net........... (1,603) 3,781 4,377 5,511 6,121 2,164 3,749
Research and development costs......... 1,660 1,162 4,901 7,836 11,516 5,262 2,476
Translation and exchange (gains)
losses, net.......................... 295 936 6,697 25,039 (3,282) (597) 2,254
Interest (income) expense, net......... (905) (1,658) 5,287 3,386 15,717 7,674 840
Other expense, net(4)(5)(6)............ 4,330 2,095 16,757 2,082 3,826 1,648 1,099
-------- -------- ---------- -------- -------- -------- --------
Income before provision for income
taxes and minority interest.......... 16,207 22,862 52,843 53,206 27,067 8,249 18,896
Provisions for income taxes............ 3,294 7,942 10,852 9,095 5,368 1,578 4,854
Minority interest...................... -- -- 11,865 9,608 189 (156) 433
-------- -------- ---------- -------- -------- -------- --------
Net income............................. $ 12,913 $ 14,920 $ 30,126 $ 34,503 $ 21,510 $ 6,827 $ 13,609
======== ======== ========== ======== ======== ======== ========
PER SHARE DATA:
Net income(7).......................... $ 0.74 $ 0.86 $ 1.55 $ 1.74 $ 1.07 $ 0.34 $ 0.65
======== ======== ========== ======== ======== ======== ========
Cash dividends paid.................... $ 0.06 $ 0.07 $ 0.88 $ 0.77 $ 0.23 $ 0.12 $ 0.13
======== ======== ========== ======== ======== ======== ========
Weighted average common shares
outstanding(7)....................... 17,417 17,431 19,380 19,848 20,157 19,998 20,815
======== ======== ========== ======== ======== ======== ========
Ratio of earnings to fixed
charges(8)........................... 15.09x 17.93x 6.89x 5.07x 2.14x 1.82x 7.20x
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
------------------- -------------------------------- JUNE 30,
1989 1990 1991 1992 1993 1994
-------- -------- ---------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital........................ $ 46,533 $ 40,630 $123,367 $120,942 $127,259 $104,151
Total assets........................... 122,475 152,326 336,905 333,218 302,017 305,131
Long-term debt, less current
maturities........................... 6,039 11,257 16,519 21,016 16,980 16,154
Stockholders' equity................... 80,467 95,935 88,134 135,427 155,879 165,400
</TABLE>
- ---------------
(1) SPI changed its fiscal year end from November 30 to December 31 effective
December 31, 1991. For financial statement purposes, SPI's separate results
of operations for the month of December 1990 are not reflected in the
Statement of Income but have been included in retained earnings at December
31, 1991.
(2) Financial data for 1991 includes the results of Galenika from the effective
date of acquisition, May 1, 1991.
23
<PAGE> 24
(3) Galenika's sales have been adversely affected since the imposition in May
1992 of United Nations sanctions on Yugoslavia.
(4) During 1991, SPI wrote off goodwill, inventory and other assets totalling
$13,124,000, of which $10,878,000 relates to the domestic nutritional group.
During 1991, SPI continued to reassess its domestic nutritional business
which experienced a sales decline of 78% from 1988 to 1991. Additionally,
SPI recorded expenses of $2,198,000 related to relocation costs at its
Spanish subsidiary.
(5) During 1990, SPI recorded non-recurring gains of $3,688,000 related to the
sale and relocation of SPI's Spanish facility.
(6) During 1993, SPI recorded costs of $1,000,000 associated with the planned
layoff of employees at its Spanish subsidiary.
(7) On June 26, 1989 SPI's Board of Directors issued a 20% stock dividend, which
has been accounted for as a six-for-five stock split. In March and July
1991, SPI issued 10% and 15% stock distributions, respectively, which
resulted in a 26% stock split. In January 1993, SPI issued a fourth quarter
1992 stock dividend of 2%. During 1993, SPI issued additional stock
dividends which totaled 6%. In January and May 1994, SPI declared a first
and second quarter 1994 stock dividend of 1.4% and 1.3%, respectively. All
per share amounts have been restated to reflect these stock splits and
dividends.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before provision for income taxes and minority interest
plus fixed charges. Fixed charges consist of interest expense and the
portion of rent expense that is representative of the interest factor. SPI
incurred indebtedness to ICN of approximately $53,000,000 in connection with
the acquisition of Galenika in 1991, which resulted in a decrease in the
ratio of earnings to fixed charges. The ratio of earnings to fixed charges
has also decreased due to hyperinflationary levels of interest expense in
Yugoslavia and increased borrowings in Spain and Mexico.
24
<PAGE> 25
<TABLE>
<CAPTION>
ICN
SIX MONTH
YEAR ENDED PERIOD ENDED
NOVEMBER 30, YEAR ENDED DECEMBER 31, JUNE 30,
------------------- -------------------------------- -------------------
1989 1990 1991(1)(2) 1992(3) 1993 1993 1994
-------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales...................................... $185,489 $271,975 $460,365 $551,766 $ 62,556 $ 32,355 $ 32,843
Cost of sales.................................. 80,520 121,628 225,234 253,596 27,631 14,333 13,500
-------- -------- ---------- -------- -------- -------- --------
Gross profit................................... 104,969 150,347 235,131 298,170 34,925 18,022 19,343
Selling, general and administrative expenses... 80,584 108,178 152,947 224,235 43,690 18,202 20,554
Research and development costs................. 14,322 5,048 6,588 10,718 5,571 2,495 3,930
Write-off of goodwill.......................... 56,551 -- -- 15,362 -- -- --
Equity earnings in SPI......................... -- -- -- -- (11,646) (4,193) (6,683)
Gains on sales of subsidiaries stock........... -- -- (29,797) (37,744) (8,345) (3,732) --
Translation and exchange (gains) losses, net... -- 14,020 4,517 21,648 (1,292) (1,774) 3,380
Interest expense, net.......................... 17,524 27,075 34,321 25,563 18,962 9,418 8,734
Other expense, net(4).......................... 26,922 11,518 29,479 15,187 1,079 (321) 1,010
Restructuring costs(5)......................... -- -- 6,087 63,032 -- -- --
Unrealized (gains) losses on marketable
securities................................... (4,425) 614 (475) 446 (200) -- --
Provision (benefit) for income taxes........... 2,086 6,860 6,574 9,967 (474) 162 (32)
Minority interests............................. (1,898) 3,709 19,035 14,558 (523) 295 (173)
-------- -------- ---------- -------- -------- -------- --------
Income (loss) before extraordinary income...... (86,697) (26,675) 5,855 (64,802) (11,897) (2,530) (11,377)
Extraordinary income........................... 4,736 4,230 -- -- 627 627 --
-------- -------- ---------- -------- -------- -------- --------
Net income (loss).............................. $(81,961) $(22,445) $ 5,855 $(64,802) $(11,270) $ (1,903) (11,377)
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Income (loss) before extraordinary income...... $ (6.36) $ (2.28) $ .40 $ (4.67) $ (.60) $ (.13) $ (.55)
Extraordinary income........................... .35 .36 -- -- .03 .03 --
-------- -------- ---------- -------- -------- -------- --------
Net income (loss) applicable to common
stockholders................................. $ (6.01) $ (1.92) $ .40 $ (4.67) $ (.57) $ (.10) $ (.55)
======== ======== ======== ======== ======== ======== ========
Dividends paid................................. -- -- -- -- -- -- --
Weighted average common stock outstanding and
dilutive common stock equivalents............ 13,683 11,776 12,829 14,010 19,813 19,135 20,526
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
------------------- -------------------------------- JUNE 30,
1989 1990 1991 1992(1) 1993 1994
-------- -------- ---------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital(6)............................. $ 94,155 $ 46,844 $123,301 $ 5,597 $ 29,627 $ 8,126
Total assets................................... 436,439 408,214 575,086 223,568 207,856 188,640
Long-term debt, less current maturities........ 240,430 217,863 188,587 160,011 139,047 132,000
Stockholders' equity (deficit)................. 33,226 12,082 16,456 (21,757) 4,020 (8,025)
</TABLE>
- ---------------
(1) Financial data for 1991 includes the results of Galenika from the effective
date of acquisition, May 1, 1991.
(2) ICN changed its fiscal year end from November 30 to December 31, effective
December 31, 1991. For financial statement purposes, ICN's separate results
of operations for the month of December 1990 are not reflected in the
Statements of Operations but have been included in retained earnings at
December 31, 1991.
(3) As a result of the decline in ICN's percentage of ownership in SPI, the
balance sheet of SPI was deconsolidated, effective December 31, 1992, and,
thereafter, the investment is included as a long-term investment accounted
for using the equity method of accounting. Results of operations of SPI are
included for the entire 1992 year as ICN's ownership fell below 50% in
December of 1992. See Note 17 of Notes to Consolidated Financial Statements
of ICN.
(4) See Note 11 of Notes to Consolidated Financial Statements of ICN for
details.
(5) Relates to restructuring costs at Biomedicals, see Note 14 of Notes to
Consolidated Financial Statements of ICN for details.
(6) Includes cash and certificates of deposit of $17,698,000 and $11,564,000 as
of December 31, 1993 and June 30, 1994, respectively, which is to be used
exclusively by Viratek for research and development and its general working
capital requirements.
25
<PAGE> 26
<TABLE>
<CAPTION>
VIRATEK
YEAR ENDED SIX MONTH PERIOD
NOVEMBER 30, YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------- ------------------------------- -------------------
1989 1990 1991(1) 1992 1993 1993 1994
-------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues(2)........................... $ 2,609 $4,926 $4,498 $ 5,448 $ 5,903 $ 1,984 $ 3,570
Research and development costs.............. 8,192 1,198 -- 2,299 5,193 2,298 3,717
Net income (loss)........................... $(17,102) $1,339 $3,587 $ 1,817 $ (822) $ (822) $(1,331)
PER SHARE DATA(3):
Net income (loss) applicable to common
stockholders.............................. $ (1.76) $ .10 $ .24 $ .12 $ (.05) $ (.05) $ (.07)
======== ====== ====== ======= ======= ======= =======
Dividends paid.............................. -- -- -- -- -- -- --
======== ====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
------------------- ------------------------------- JUNE 30,
1989 1990 1991 1992 1993 1994
-------- ------ ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital(4).......................... $ 5,630 $ 146 $6,187 $ 8,828 $16,805 $10,415
Total assets(4)............................. 12,878 6,953 9,347 11,640 35,248 34,165
Advances from ICN and other long-term
liabilities............................... 19,860 658 299 270 260 255
Stockholders' equity (deficit)(5)........... (9,905) 3,434 8,871 10,803 34,075 32,735
</TABLE>
- ---------------
(1) Viratek changed its year end from November 30 to December 31, effective
December 31, 1991. For financial statement purposes, Viratek's separate
results of operations for the month of December 1990 are not reflected in
the Statements of Operations but have been included in retained earnings at
December 31, 1991.
(2) See Note 3 of Notes to Financial Statements of Viratek for December 31, 1993
regarding royalty arrangements with SPI.
(3) In December 1993, Viratek declared a fourth quarter 1993 stock distribution
of 5%. All share and per share amounts have been restated to reflect this
stock distribution.
(4) Working capital includes net amounts due (to) from affiliate of
($1,538,000), $6,343,000 and $9,325,000, as of November 30, 1990 and
December 31, 1991 and 1992, respectively. Total assets include amounts due
from ICN of $15,503,000 and $19,911,000 at December 31, 1993 and June 30,
1994, respectively.
(5) In February 1990, ICN exchanged $12,000,000 of advances due from Viratek for
4,705,882 shares of Viratek Common Stock.
26
<PAGE> 27
BIOMEDICALS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED PERIOD ENDED
NOVEMBER 30, YEAR ENDED DECEMBER 31, JUNE 30,
-------------------- ------------------------------- ------------------
1989 1990 1991(1) 1992 1993 1993 1994
-------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA):
Net sales..................................... $ 61,442 $131,259 $ 96,507 $ 75,648 $59,076 $31,224 $30,658
Cost of sales................................. 28,687 66,394 51,917 44,851 27,631 14,333 13,500
-------- -------- -------- -------- ------- ------- -------
Gross profit.................................. 32,755 64,865 44,590 30,797 31,445 16,891 17,158
Selling, general and administrative
expenses.................................... 21,347 43,358 39,922 43,509 28,455 13,277 13,750
Research and development costs................ 1,469 2,052 1,687 583 378 -- --
Amortization of goodwill and other
intangibles................................. 1,130 1,609 1,829 1,486 502 -- --
Interest expense, net......................... 84 3,773 7,073 4,567 2,250 1,266 1,066
Lease vacancy costs........................... -- -- -- -- 1,436 -- --
Restructuring costs and special charges(2).... -- -- 6,087 63,032 -- -- --
Other (income) expense, net................... 322 160 1,268 4,731 (2,399) (1,587) (1,394)
-------- -------- -------- -------- ------- ------- -------
Income (loss) before provision for income
taxes and extraordinary income.............. 8,403 13,913 (13,276) (87,111) 823 3,935 948
Provision (benefit) for income taxes.......... 2,762 5,111 (384) 309 (312) 162 (102)
-------- -------- -------- -------- ------- ------- -------
Income (loss) before extraordinary income..... 5,641 8,802 (12,892) (87,420) 1,135 3,773 1,050
Extraordinary income(4)....................... 506 -- -- -- 627 627 --
-------- -------- -------- -------- ------- ------- -------
Net income (loss)............................. $ 6,147 $ 8,802 $(12,892) $(87,420) $ 1,762 $ 4,400 $ 1,050
======== ======== ======== ======== ======= ======= =======
PER SHARE DATA(3):
Income (loss) before extraordinary income..... $ .52 $ .80 $ (1.09) $ (4.80) $ .07 $ .17 $ .12
Extraordinary income(4)....................... .05 -- -- -- .03 .03 --
-------- -------- -------- -------- ------- ------- -------
Net income (loss)............................. $ .57 $ .80 $ (1.09) $ (4.80) $ .10 $ .20 $ .12
======== ======== ======== ======== ======= ======= =======
Dividends per common share(5)................. $ .13 $ .18 $ .15 $ .17 $ .17 $ .085 $ --
======== ======== ======== ======== ======= ======= =======
Weighted average shares outstanding(6)........ 10,697 10,963 11,790 18,224 17,464 22,440 9,128
Shares outstanding at end of period(6)........ 10,538 11,250 15,305 19,183 9,034 22,402 9,034
======== ======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
------------------- ----------------------------- JUNE 30,
1989 1990 1991(1) 1992 1993 1994
-------- -------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital........................................ $ 40,359 $ 26,235 $ 19,294 $ 8,676 $10,756 $ 13,659
Total assets........................................... 177,913 179,857 152,658 63,342 51,831 52,195
Long-term debt and capital lease obligations, less
current maturities................................... 51,322 40,076 18,315 11,709 10,567 10,768
Total stockholders' equity(6).......................... 45,358 60,800 66,863 3,816 12,641 12,911
</TABLE>
- ---------------
(1) Biomedicals changed its year end from November 30 to December 31, effective
December 31, 1991. For financial statement purposes, Biomedicals' separate
results of operations for the month of December 1990 are not reflected in
the Statements of Operations but have been included in retained earnings at
December 31, 1991.
(2) See Note 12 of Notes to Consolidated Financial Statements of Biomedicals for
a discussion of the 1991 and 1992 restructuring plans.
(3) All per share information has been restated to reflect the 20% stock
dividend, accounted for as a six-for-five stock split, paid on July 31,
1989.
(4) Extraordinary income in 1993 of $627,000, or $.03 per share, results from
negotiated settlements with certain suppliers and banks. Extraordinary
income in 1989 pertains to gains resulting from the purchase of a portion of
the 5 1/2% Swiss Franc Exchangeable Certificates.
(5) Reflects annual cash dividends for each of the years presented. During the
one-month ended December 31, 1990, Biomedicals declared a one-time special
dividend of $.035, in addition to the regular
27
<PAGE> 28
quarterly dividend. This dividend was actually paid in January 1991 and is
included in the annual total of $.15 at December 31, 1991.
(6) On August 30, 1993, Biomedicals issued to ICN 300,000 shares of a new series
"A" of Biomedicals' non-convertible, nonvoting, preferred stock valued
pursuant to a fairness opinion, at $30,000,000. In exchange, ICN delivered
4,983,606 shares of Biomedicals Common Stock that ICN owned and exchanged
intercompany debt owed to ICN by Biomedicals in the amount of $11,000,000.
In addition, on August 30, 1993, Biomedicals issued to ICN 390,000 shares of
new series "B" of Biomedicals' nonconvertible, non-voting, preferred stock
valued pursuant to a fairness opinion, at $32,000,000. In exchange, ICN
delivered to Biomedicals 8,384,843 shares of Biomedicals common stock that
ICN owned.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE PREDECESSOR COMPANIES
SPI
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30, 1993
Net Sales. Net sales for the six months ended June 30, 1994 were
$151,094,000 compared to $186,058,000 for the same period in 1993. This decrease
in net sales of $34,964,000, or 19%, is primarily a result of lower sales at
Galenika during the first quarter of 1994 compared to the same period in 1993.
Net sales at Galenika were $63,826,000 for the six months ended June 30, 1994
compared to $108,964,000 for the same period in 1993. The decline in Galenika
sales of $45,138,000, or 41%, is primarily due to a 27% decline in unit sales
resulting from the impact of United Nations sanctions on Yugoslavia.
Additionally, the sales of Galenika have been adversely affected by the size and
timing of devaluations in the first quarter of 1994 compared to the first
quarter of 1993, which has been partially offset by an improvement in second
quarter Galenika sales compared to last year's second quarter. Net sales in
SPI's Spanish subsidiary also decreased $3,447,000, or 27%, during the first six
months of 1994 as compared to the first six months of 1993 primarily due to
government mandated price controls and changes in government health insurance
reimbursement policies. This decrease in overall net sales was partially offset
by sales increases of $10,174,000 in SPI's operating units excluding Galenika
and the Spanish subsidiary. This increase is primarily due to increased sales of
Virazole(R) (resulting from a combination of price increases and increased unit
sales), and the myasthenia gravis and dermatological product lines.
Gross Profit. Gross profit as a percentage of sales was 49% for the six
months ended June 30, 1994, compared to 48% for the same period in 1993. The
increase in the gross profit margin for the six months ended June 30, 1994,
reflects improved gross margins in most of SPI's subsidiaries located outside of
Yugoslavia. The gross margin in SPI's United States operations increased from
80% to 84% primarily due to increased sales of Virazole(R). At Galenika, the
gross profit margin was 22% for the six months ended June 30, 1994, compared to
38% for the same period in 1993. The decrease in gross profit margin at Galenika
is primarily due to higher inventory costs in Yugoslavia.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales were 29% for the six months
ended June 30, 1994, compared to 35% for the same period in 1993. Selling,
general and administrative expenses have decreased $21,708,000, or 33%, for the
six months ended June 30, 1994 as compared to the same period in 1993, due
primarily to expense reductions at Galenika resulting from a lower provision for
bad debts, lower wages and the impact of differences in the exchange rates.
Royalties to Affiliates, Net. For the six months ended June 30, 1994,
Virazole(R) royalties to Viratek were $3,570,000 compared to royalties of
$1,984,000 for the same period in 1993. The increase in royalties is due to
increased sales of Virazole(R) in the United States.
Translation and Exchange Losses, Net. Translation and exchange (gains)
losses, net, for the six months ended June 30, 1994 were $2,254,000 compared to
$(597,000) for the same period in 1993. The increase in losses for the six
months ended June 30, 1994 is primarily due to translation and exchange losses
at Galenika resulting from the devaluations of the dinar prior to the
implementation of the Yugoslavian monetary stabilization program discussed under
"-- Liquidity and Capital Resources -- Galenika's Operations" below.
Interest Expense. Interest expense for the six months ended June 30, 1994
was $3,046,000, compared to $10,098,000 for the same period in 1993. The
decrease in interest expense is due to lower interest rates in Yugoslavia
resulting from the efforts of the Yugoslavian government to control inflation
and lower levels of debt in the United States.
Research and Development. Research and development costs for the six months
ended June 30, 1994, decreased $2,786,000, or 53%, compared to the same period
in 1993, due to reductions in expenses at Galenika resulting from lower wages
and differences in exchange rates in 1994 compared to 1993. Research and
29
<PAGE> 30
development costs at Galenika were $1,245,000 for the six months ended June 30,
1994 compared to $3,719,000 for the same period in 1993.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net Sales. Net sales for 1993 declined to $403,957,000 from $476,118,000
for 1992, primarily due to lower sales at Galenika. Sales at Galenika were
$239,832,000 for 1993 compared to sales of $325,903,000 for 1992. The United
Nations sanctions imposed on Yugoslavia and price controls imposed by the
Yugoslavian government have impacted the sales at Galenika, both in terms of a
decrease in unit sales and a change in product mix. Additionally, sales were
adversely impacted by higher inflation and by larger and more frequent
devaluations in 1993 compared to the prior year. The raw materials that Galenika
imports are primarily used in the production of human prescription drugs. Due to
restrictions on Galenika's ability to obtain these materials, Galenika has
shifted its production and sales efforts to its veterinary and non-prescription
product lines. For 1993, sales of human prescription drugs represented 73% of
Galenika's total sales compared to 81% in the prior year.
Sales in SPI's operating units, excluding Galenika, increased $13,910,000,
or 9%, in 1993 to $164,125,000 compared to the prior year sales of $150,215,000.
SPI's United States operations reported increased sales of $8,906,000, or 17%,
for the year compared to 1992, primarily due to increased sales of
dermatological products. SPI's Mexican subsidiaries recorded an increase in
sales of $9,129,000 or 19%, for the year compared to 1992, primarily due to
increased unit sales and price increases for its injectable vitamin, Bedoyecta,
along with increased sales of Virazole(R). SPI's Spanish subsidiary recorded a
decrease in sales or $3,153,000, or 12%, primarily due to a 23% devaluation of
the Spanish Peseta against the U.S. dollar, which was partially offset by
increased unit sales.
Gross Profit. Gross profit as a percentage of sales was 48% for 1993
compared to 56% in 1992. The decrease in the gross profit margin primarily
reflects the impact of price controls in Yugoslavia and higher labor costs per
unit at Galenika. The decrease in gross margins at Galenika was partially offset
by the aggregate improvement in the gross profit margins of SPI's subsidiaries
outside Yugoslavia. The combined gross margins of the subsidiaries outside
Yugoslavia were 66% for 1993 compared to 62% for 1992.
At Galenika, gross profit as a percentage of sales was 35% in 1993 compared
to 53% for 1992. The overall rate of inflation in Yugoslavia has exceeded the
rate at which Galenika could increase selling prices. This was compounded by
more frequent currency devaluations, which together resulted in lower revenues
and gross profits when stated in U.S. dollars. Additionally, the cost of
manufacturing inventory has increased as a result of declining unit production
while maintaining the same work force that existed before sanctions began.
United Nations sanctions have contributed to shortages of raw materials and a
deteriorating business environment, resulting in unit production in 1993 that
was 49% of what was produced the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales were 32% for 1993 compared to
36% for 1992. The 1992 results include provisions at Galenika for training
employees, redundancy and early retirement costs of $21,065,000. Excluding these
provisions, selling, general and administrative costs for 1992 were 31% of net
sales. The resulting increase in 1993 selling, general and administrative
expenses as a percentage of net sales is primarily a result of lower sales at
Galenika combined with overall increases in operating expenses due to
inflationary pressures in Yugoslavia, partially offset by lower provisions for
doubtful accounts.
In countries experiencing hyperinflation, such as Yugoslavia, a devaluation
results in a reduction of accounts receivable and a proportionate reduction in
the accounts receivable allowance. The reduction of accounts receivable is
recorded as a foreign currency translation loss, and the reduction of the
allowance is recorded as a translation gain. Shortly after a devaluation, the
level of accounts receivable will rise as a result of subsequent price
increases. In conjunction with the rise in receivables, additions to the
allowance for receivables will be made for existing doubtful accounts. This
process will repeat itself for each devaluation that occurs during the year. The
effect of this process results in a high level of bad debt expense that does not
necessarily reflect credit risk or difficulties in collecting receivables. For
1993, Galenika recorded provisions for doubtful accounts of $10,968,000 compared
to $48,279,000 for 1992. The timing of devaluations has a
30
<PAGE> 31
material impact on the size of the provision for doubtful accounts. The decrease
in the 1993 provision is primarily a result of devaluations occurring more
frequently in 1993, smaller price increases in 1993 compared to 1992 and lower
levels of accounts receivable in 1993 compared to the prior year. The reduction
of the accounts receivable allowance from devaluation resulted in a translation
gain of $9,118,000 and $40,191,000 resulting in a net expense from bad debts and
bad debt translation gain of $1,850,000 and $8,088,000 for 1993 and 1992,
respectively.
Royalties to Affiliates, Net. Royalties to affiliates, net, were $6,121,000
for 1993 compared to $5,511,000 for 1992. The increase in royalties was
primarily due to increased sales in Mexico resulting from the introduction of
ribavirin cream used for the treatment of herpes and increased worldwide sales
due to additional marketing efforts by SPI in 1993, which included offering
volume discounts.
Research and Development Costs. Research and development costs rose from
$7,836,000 in 1992 to $11,516,000 in 1993, or by 47% due to expanded research
and development efforts at Galenika.
Translation and Exchange (Gains) Losses, Net. In 1993, SPI recognized
translation and exchange gains of $3,282,000 compared to translation and
exchange losses of $25,039,000 in 1992. In 1993, SPI recognized foreign exchange
gains of $3,143,000 at SPI's Spanish subsidiary and reduced translation losses
at Galenika by $27,790,000 as a result of planned reduction in its monetary
exposure.
Interest Expense. Interest expense for 1993 was $23,750,000 compared to
$13,065,000 for 1992. The increase in interest in 1993 was principally a result
of Galenika's strategy to manage its monetary position by maintaining higher
levels of short-term debt compared to the prior year. During 1993, Galenika was
charged interest at hyperinflationary rates. The high level of interest expense
in 1993 does not necessarily reflect a high level of debt burden on SPI or a
high level of cash paid for interest. From the time that Galenika accrues its
hyperinflationary interest expense liability to the time that it actually pays
the interest, significant devaluation in the translation rate will occur. The
devaluation will result in a payment of interest stated in U.S. dollars that is
significantly below what was originally accrued. In 1993, Galenika had
$16,774,000 of interest expense and interest payments of $7,149,000 resulting in
estimated translation gains on accrued interest devaluations of $9,625,000.
Other Expense, Net. A summary of certain other items included in other
(income) expense is as follows:
<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
Litigation settlements and damages(1)............... $ 447,000 $ 988,000
Profit sharing plan expense in Mexico............... 419,000 557,000
Amortization of goodwill............................ 677,000 248,000
Employee severance in Spain(2)...................... -- 1,000,000
(Gain) loss on sale of fixed assets................. 151,000 (194,000)
Unrealized loss on marketable securities............ -- 1,312,000
Other, net.......................................... 388,000 (85,000)
---------- ----------
Other expense, net................................ $2,082,000 $3,826,000
========= =========
</TABLE>
- ---------------
(1) The 1993 litigation costs represent an accrual for estimated damages
relating to a breach of contract suit. See "Business -- Litigation,
Government Investigations and Other Matters." The 1992 litigation costs
relate primarily to damages assessed against Viratek in a breach of contract
suit against which SPI indemnified Viratek under its licensing agreement for
Virazole(R).
(2) During 1993, SPI provided for costs associated with the planned layoff of
employees at its Spanish subsidiary.
Provision for Income Taxes. SPI's effective income tax rates were 20% and
17% for 1993 and 1992, respectively. SPI's effective tax rates in 1993 and 1992
were significantly less than the U.S. statutory rate primarily due to the
utilization of foreign and alternative minimum tax credits and other deferred
tax benefits for which a valuation reserve existed at January 1, 1993.
31
<PAGE> 32
YEAR ENDED DECEMBER 31, 1992 COMPARED TO YEAR ENDED DECEMBER 31, 1991
Net Sales. Net sales for 1992 rose to $476,118,000, an increase of
$111,760,000, or 31%, over 1991. The majority of this increase, $101,121,000,
was due to inclusion of a full year of Galenika results in 1992 compared to only
eight months in 1991. In addition, most of SPI's subsidiaries recorded improved
sales in 1992 compared to 1991. Sales in Mexico increased $6,963,000, or 17%,
primarily resulting from improved sales of its injectable vitamin,
Bedoyecta-Tri(R), and other significant products. Sales in Spain increased
$3,526,000, or 16%, in 1992 over the prior year primarily due to the
introduction of new product lines.
Gross Profit. Gross profit as a percentage of net sales increased to 56% in
1992 from 52% in 1991. While SPI experienced gross profit increases in all of
its major subsidiaries, the largest increase was recorded at Galenika whose
gross profit increased to 53% in 1992 from 47% in 1991. The 1991 Galenika gross
profit was adversely impacted by the increase in cost of sales resulting from a
purchase accounting adjustment to inventory. Excluding this adjustment,
Galenika's gross profit percentage remained constant in 1992 and 1991 at 53%.
Excluding the results of Galenika, gross profit increased to 62% in 1992 from
60% in 1991 primarily due to an improved product mix resulting from increased
Virazole(R) sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net sales were 36% in 1992 compared
to 27% in 1991. The increased expenses for 1992 were a result of provisions for
doubtful accounts of $48,279,000 (described above) and termination of employees
and early retirement costs at Galenika of $21,065,000. Excluding these
provisions, selling, general and administrative expenses in 1992 were 31% of net
sales.
Royalties to Affiliates, Net. Royalties to affiliates, net, were $5,511,000
for 1992 compared to $4,377,000 for 1991. The increase in royalties was
primarily due to increased sales of Virazole(R) in the United States.
Research and Development Costs. Research and development costs rose from
$4,901,000 in 1991 to $7,836,000 in 1992, principally due to increased research
and development expenditures at Galenika resulting from the inclusion of a full
year of operations in 1992 compared to eight months of operations in 1991.
Translation and Exchange (Gains) Losses, Net. In 1992, SPI recognized
translation and exchange gains of $25,039,000 compared to translation losses of
$6,697,000 in 1991. Translation and exchange (gains) losses, net, increased
$18,342,000 in 1992 due to Galenika operating in a highly inflationary economy,
coupled with reductions in the level of hard currency as a result of sanctions
and the political and economic unrest.
Interest Expense. The increase in interest expense to $13,065,000 in 1992
from $8,965,000 in 1991 is primarily due to the increased intercompany debt due
to ICN from SPI, partially offset by lower levels of debt outstanding at
Galenika.
Other Expense, Net. A summary of certain other items included in other
(income) expense is as follows:
<TABLE>
<CAPTION>
1991 1992
----------- ----------
<S> <C> <C>
Litigation costs, settlements and damages.......... $ 621,000 $ 447,000
Profit sharing plan expenses in Mexico............. 222,000 419,000
Amortization of goodwill........................... 818,000 677,000
Write-downs and other costs for domestic
nutritionals group(1)............................ 10,878,000 --
(Gain) loss on sale of fixed assets................ (356,000) 151,000
Write-off of prepaid royalties of discontinued
products......................................... 1,503,000 --
Facility relocation expenses in Spain.............. 2,198,000 --
Other, net......................................... 873,000 388,000
----------- ----------
Other expense, net............................... $16,757,000 $2,082,000
========== =========
</TABLE>
- ---------------
(1) During 1992, SPI reassessed its domestic nutritional business, which had a
sales decline of 78% from 1988 to 1991. As a result, SPI wrote off
$10,878,000 of assets, principally goodwill and intangibles.
32
<PAGE> 33
Provision for Income Taxes. SPI's effective tax rates were 17% and 21% for
1992 and 1991, respectively. SPI's effective tax rates for 1992 and 1991 were
significantly less than the U.S. statutory rate due to an increase in SPI's
accumulated foreign earnings which were taxed at relatively low effective
foreign rates.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Balance sheet changes. During the first six months of 1994, working capital
decreased by $23,108,000 to $104,151,000. The decrease is primarily due to SPI
reclassifying its bond investments as long-term assets compared to its
short-term classification at December 31, 1993. On January 1, 1994, SPI adopted
SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity
Securities"). Based on the guidelines in this new pronouncement and the expected
working capital requirements of SPI in 1994, SPI's bond investments have been
categorized as investments that are "available for sale," and, correspondingly,
are classified as long-term assets. Additionally, inventory decreased primarily
at Galenika resulting from the sale of older inventory with high unit costs
which is being replaced with inventory with lower unit costs.
The decrease in working capital is partially offset by increases in cash
and accounts receivable at Galenika due to the positive effects of the
stabilization program and the absence of large and frequent devaluations.
Prepaid expenses also increased primarily at Galenika due to commitments for
purchases of raw materials from suppliers.
Working capital increased $6,317,000 in 1993 compared to 1992. The increase
was primarily due to the increase in inventory balances at Galenika resulting
from the higher costs of obtaining raw materials from foreign suppliers,
partially offset by lower levels of accounts receivable at Galenika caused by
the effects of changes in the remeasurement rate and shorter collection periods
on the receivables.
Working capital decreased $2,425,000 in 1992 compared to 1991, principally
due to reductions in receivables at Galenika caused by currency devaluations,
sanctions and price controls, which were partially offset by the sale of SPI
stock by Galenika.
The increase in inflation levels in Yugoslavia has impacted the manner in
which Galenika conducts its business. Galenika has shortened its accounts
receivable terms and, in some cases, requires cash payment upon delivery of its
products. Its dinar cash balances are kept at low levels through a combination
of immediate purchases of inventory, hard currency and plant expansion. The
decreases in receivables and dinar cash balances from the beginning of 1993 are
a result of these actions to deal with inflation. During 1993, Galenika used
approximately $2,670,000 of its dinar cash balances for facility improvements.
Depending on available dinar cash balances, Galenika expects to continue to
invest excess cash in facility improvements and modernization.
During 1992, Galenika sold 1,200,000 shares of SPI stock for proceeds of
$30,822,000. Those shares had been contributed to Galenika on May 1, 1991 as
part of the original acquisition purchase price. Net of amounts attributable to
minority interest, the sale of the stock increased paid-in capital and reduced
treasury stock by $28,628,000.
Capital expenditures totaled $8,431,000 in 1993, $11,610,000 in 1992 and
$19,051,000 in 1991. The expenditures in 1993 primarily relate to plant
expansion in Mexico and facility improvements in Yugoslavia. The expenditures in
1992 primarily relate to facility improvements of $2,556,000 at Galenika and
plant expansion of $4,700,000 at SPI's Mexican subsidiaries. The expenditures in
1991 primarily related to the purchase and improvement of SPI's Spanish
subsidiary's facility.
Investment Policy. Effective December 1, 1986, ICN adopted an investment
policy covering intercompany advances and interest rates, and the types of
investments (such as acquisitions, marketable equity securities and high yield
bonds) to be made by ICN and its subsidiaries. As a result of this policy,
excess cash held by SPI would be transferred to ICN and, in turn, cash advances
have been made by ICN to SPI to fund acquisitions and other transactions. ICN
charges interest at the prime rate plus 1/2% and credits interest at the prime
rate less 1/2% on the amounts invested or advanced. ICN has also agreed to
reimburse SPI at higher
33
<PAGE> 34
market interest rates for lines of credit drawn in Mexico and Canada, for funds
advances to ICN, and for an $11,000,000 loan from SPI's Spanish subsidiary. In
October 1993, SPI issued 200,000 shares of its common stock as payment of debt
on SPI's liability to ICN in the amount of $3,075,000. During the six months
ended June 30, 1994, SPI reduced its liability to ICN by $13,088,000, net of
dividends declared, resulting in a remaining payable to ICN (which is classified
as short-term) of $5,225,000 at June 30, 1994.
Investment in Russia. On October 21, 1992, SPI announced that it has
concluded an agreement with the Leningrad Industrial Chemical and Pharmaceutical
Association ("Oktyabr") to form a pharmaceutical joint venture in Russia,
Oktyabr, in which SPI has a 75% interest. See "Investment
Considerations -- Acquisition Plans"; and "Business -- Acquisition Strategy."
Effects of Possible Increased Demand for Virazole.(R) On June 1, 1994,
Viratek submitted a NDA to the FDA for the approval of Virazole(R) for the
treatment of chronic hepatitis C. If approved, SPI expects a significant
increase in sales of Virazole(R) which will require SPI to expend funds to
produce and market Virazole(R). SPI intends to finance these efforts internally,
and through joint venture agreements with third party manufacturers.
GALENIKA'S OPERATIONS
SANCTIONS
Virtually all of Galenika's business is conducted in Yugoslavia. On May 30,
1992, the United Nations adopted a resolution that imposed economic sanctions on
Yugoslavia and on April 17, 1993, the United Nations adopted a resolution that
imposed additional economic sanctions on Yugoslavia. On April 26, 1993, a United
States executive order was issued which implemented the additional sanctions
pursuant to the United Nations resolution. The sanctions specifically exempt
certain medical supplies for humanitarian purposes, a portion of which are
distributed by Galenika.
Galenika continues to apply for, and has received, import licenses under
the sanctions. Compliance with the sanctions will continue to impose
administrative burdens that will slow the shipments of licensed raw materials to
Yugoslavia. Shipments of imported raw materials declined in 1993 to 38% of prior
year levels. The sanctions have also contributed to an overall deteriorating
business environment in Yugoslavia in which Galenika must operate.
The sanctions also provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of sanctions restricts
Galenika's use of its cash holdings that are maintained with a financial
institution outside Yugoslavia. These funds have been, and management believes
will continue to be, available for drawdowns on lines of credit for payment for
shipments of certain products and materials which are specifically licensed
under the sanctions. As a result of continuing political and economic
instability within Yugoslavia, including the long-term impact of the sanctions,
wage and price controls and devaluations, there may be further limits on the
availability of hard and local currency and, consequently, an adverse impact on
the future operating results of Galenika and SPI.
At December 31, 1992, Galenika had cash and cash equivalents of
$44,700,000, of which $15,200,000 was restricted as to use and invested with a
major financial institution outside Yugoslavia. These funds have been used for
letters of guarantee on Galenika's raw material purchases and to collateralize
the payment of dividends. During the first quarter of 1993, $731,000 was
withdrawn under the letters of guarantee. Before the implementation of
additional sanctions in April 1993, approximately $9,885,000 was withdrawn under
the letters of guarantee. In October 1993, Galenika acquired marketable debt
securities with these funds in order to maximize the interest earned. All of
these marketable securities are maintained at the same financial institution. As
of December 31, 1993, Galenika had $834,000 in hard currency deposits and
$32,587,000 in marketable debt securities at this institution. As of June 30,
1994, Galenika had $9,273,000 in hard currency deposits and $29,826,000 in
marketable debt securities at this institution. A portion of these securities
are being used to collateralize a $10,000,000 note payable to the financial
institution.
34
<PAGE> 35
HYPERINFLATION AND PRICE CONTROLS
Since price controls were imposed in July 1992 by the government of
Yugoslavia, Galenika has been unable to increase selling prices in an
unrestricted manner in anticipation of inflation. Rather, price increases must
be approved by the government prior to implementation. The imposition of price
controls along with the effect of sanctions and recurring currency devaluations
resulted in reduced sales levels since the middle of 1992. Reduced sales levels
are expected to continue as long as sanctions are in place. As a result of
decreased sales levels, management expects that profit margins will decrease and
overall operating expenses as a percentage of sales will increase.
As a result of the hyperinflation in Yugoslavia, the Yugoslavian government
devalued the dinar on several occasions during 1993 and, on October 1, 1993,
changed the denomination of the currency. The effect of the devaluations,
adjusted for the change in currency denominations, was to increase the exchange
rate from significantly less than one dinar per $1 U.S. at the beginning of 1993
to over one trillion dinars per $1 U.S. at the end of 1993. In anticipation of
devaluations in 1993, SPI implemented a plan, described below, to minimize its
monetary exposure. In 1993, annual inflation was over one billion percent. As a
result of the devaluations and subsequent exchange losses from obtaining hard
currencies, Galenika experienced net translation losses of $173,000. While SPI
cannot predict with any certainty the actual remeasurement and exchange gains or
losses that may occur in 1994, such amounts may be substantial. At December 31,
1993, and June 30, 1994, Galenika had a net monetary liability position of
$2,093,000 and a net monetary asset position of $14,000,000, respectively. The
change in Galenika's net monetary position from the liability position at
December 31, 1993, to a net asset position at June 30, 1994, is a result of the
Yugoslavian stabilization program that was initiated in January of 1994 (which
is described below) along with absence of large and frequent devaluations since
the stabilization program began. The increase in the accounts receivable and
cash balances from the beginning of 1994 reflect an increase in Galenika's net
monetary asset position. Galenika's net monetary asset exposure would be subject
to foreign exchange loss if a devaluation of the dinar were to occur.
SPI is taking actions to generate the dinar cash needed to acquire hard
currency to reduce its monetary exposure. Galenika has access to short-term
borrowings at interest rates below the level of inflation. Galenika plans to
maximize its borrowings under these arrangements and use the proceeds to acquire
hard currency for the purchase of inventory or the payment of hard currency
debt. This strategy is intended to provide hard currency, accelerate the
purchase of inventory to minimize the effects of inflation and reduce future
translation losses. This strategy is also intended to increase Galenika's
monetary liabilities and lower its risk of loss from devaluations. However, this
strategy has resulted in increased interest expense in 1993 and may result in
high levels of interest expense in 1994.
In conjunction with a currency devaluation on July 23, 1993, the
Yugoslavian government announced that businesses in Yugoslavia can no longer buy
and sell hard currency in privately negotiated transactions. All purchases of
hard currency must be made through the National Bank of Yugoslavia based on
government-approved allocations. This action could possibly limit the
availability of hard currency in the future for Galenika. However, if the
government is controlling access to hard currency, SPI's operations in
Yugoslavia may benefit through increased allocations of hard currency in view of
the strategic nature of pharmaceutical drugs in Yugoslavia. For 1993, Galenika
received $12,744,000 in hard currency allocations as compared to $30,200,000 in
1992.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavian government guarantees the conversion of dinars to Deutsche
marks by exercising restraint in the amount of dinars that it prints, thereby
restricting cash in circulation to correspond to hard currency reserves in
Yugoslavia. Since the inception of this program, the exchange rate of dinars to
Deutsche marks has remained stable. The trading of dinars at other than official
rates has been virtually eliminated and inflation and interest rates have
declined from over one billion percent a year to an estimated annualized rate of
approximately 14 percent from January 24, 1994 through June 30, 1994, based on
information available to SPI. SPI believes that the period of time that the
stabilization program has been
35
<PAGE> 36
operating successfully is significant given that past attempts at monetary
control by the Yugoslavian government have generally been short-lived. In the
near term, the effects of the stabilization program could be reversed, and a
return to prior levels of hyperinflation could occur. The success of this
stabilization program is dependent upon improvement in the Yugoslavian economy,
which is in part dependent upon the lifting of United Nations sanctions.
As required by generally accepted accounting principles, SPI translates
Galenika financial results at the dividend payment rate established by the
National Bank of Yugoslavia. To the extent that changes in this rate lag behind
the level of inflation, sales and expenses will, at times, tend to be inflated.
Future sales and expenses can substantially increase if the timing of future
devaluations falls significantly behind the level of inflation. Since the impact
of sanctions, price controls and devaluations on future sales and net income
cannot be determined with certainty, they may, in the present political and
economic environment, result in an adverse impact.
The current political and economic conditions in Yugoslavia could continue
to deteriorate to the point that SPI's investment in Galenika would be
threatened. Worsening political and economic conditions could also result in a
situation where the Company may be unable to exercise control over Galenika's
operations or be prohibited by Yugoslavian law from receiving dividends from
Galenika. Under these conditions, SPI would be required to deconsolidate
Galenika for financial reporting purposes and account for its investment using
the cost method of accounting. The investment in Galenika would be carried at
the lower of cost or realizable value and this could result in a substantial
writedown of the carrying value of the assets of Galenika.
For additional information regarding the impact of Galenika on SPI's
results of operations and financial condition, see Note 12 of Notes to
Consolidated Financial Statements of SPI.
INFLATION, CURRENCY FLUCTUATIONS AND CHANGING PRICES
SPI is subject to certain risks as a result of currency fluctuations in the
countries in which SPI operates. The foreign subsidiaries of SPI maintain U.S.
dollar denominated intercompany balances that represent unhedged monetary assets
and liabilities. At December 31, 1993, SPI's Mexican subsidiary had a net
intercompany liability of $1,007,000. SPI's Spanish and Canadian subsidiaries
have net intercompany receivables of $17,680,000 and $2,237,000, respectively,
at December 31, 1993.
The effects of inflation are experienced by SPI through increases in the
costs of labor, service and raw materials. In general, other than in Yugoslavia,
these costs have been offset and/or anticipated by periodic increases in the
prices of its products sold. This policy applies to all geographical areas in
which SPI is operating.
36
<PAGE> 37
QUARTERLY FINANCIAL DATA OF SPI (UNAUDITED):
Following is a summary of quarterly financial data for the years ended
December 31, 1992 and 1993 and the first six months of 1994 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- --------
<S> <C> <C> <C> <C>
1992
Net Sales...................................... $121,106 $150,911 $94,621 $109,480
Gross profit................................... 64,298 84,165 56,051 62,859
Net Income..................................... 7,691 8,132 9,733 8,947
======== ======== ======= ========
Net Income per share(1)........................ $ .40 $ .42 $ .48 $ .44
======== ======== ======= ========
1993
Net sales(2)................................... $119,636 $ 66,422 $70,214 $147,685
Gross Profit................................... 58,946 31,159 41,322 60,607
Net Income..................................... 5,736 1,091 6,918 7,765
======== ======== ======= ========
Net income per share(1)........................ $ .29 $ .05 $ .34 $ .39
======== ======== ======= ========
1994
Net sales...................................... $ 72,167 $ 78,927
Gross Profit................................... 39,552 33,759
Net Income..................................... 8,364 5,245
======== ========
Net Income per share(1)........................ $ .40 $ .25
======== ========
</TABLE>
- ---------------
(1) Net income per share has been restated to reflect a fourth quarter 1992
stock dividend of 2%, 1993 quarterly stock dividends which totaled 6%, a
first quarter 1994 dividend of 1.4% and a second quarter 1994 dividend of
1.3%.
(2) The decrease in sales from the first quarter of 1993 to the second quarter
of 1993 and the increase in sales from the third quarter 1993 to the fourth
quarter 1993 are primarily due to changes in sales levels at Galenika
resulting from the timing of devaluations and price increases and the level
of inflation during these quarters. The changes in sales levels for these
quarters do not represent significant decreases or increases in unit sales
from quarter to quarter.
37
<PAGE> 38
ICN
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30, 1993
Introduction. ICN reported net losses of $11,377,000 and $1,903,000 for the
six months ended June 30, 1994 and 1993, respectively. The net loss for the six
months ended June 30, 1994 included a non-cash, foreign exchange translation
loss of $3,380,000 compared to translation gains of $1,774,000 for the same
period in 1993. Additionally, included in 1993, was a gain on sale of SPI common
stock of $3,732,000, which did not recur in 1994.
Net Sales. Net sales for Biomedicals were $30,658,000 for the six months
ended June 30, 1994 compared to $31,224,000 for the same period in 1993. Sales
declined 2% in the first half of 1994 compared to the first half of 1993.
Net Royalties. Net royalties from the sale of Virazole(R) by SPI were
$3,570,000 for the six months ended June 30, 1994 compared to $1,984,000 for the
same period in 1993. The increase was primarily due to increased sales in the
United States, resulting from a combination of price increases and increased
unit sales of Virazole(R).
Cost of Sales. Product cost for Biomedicals as a percentage of sales
decreased to 44% from 46% for the six months ended June 30, 1994 and 1993.
Biomedicals continues to focus on the elimination of low margin products and on
improving purchasing and manufacturing processes.
Gross Profit. Gross profit as a percentage of sales for Biomedicals was 56%
for the six months ended June 30, 1994 compared to 54% for the same period in
1993. The discontinuance of low margin products and the introduction of new
products with higher margins have contributed to the improvement in gross profit
margins.
Equity Earnings in SPI. Equity earnings in SPI increased to $6,683,000 for
the six months ended June 30, 1994 compared to $4,193,000 for the same period in
1993. The increase in net income at SPI resulting in increased equity earnings
by ICN is primarily due to increased sales of Virazole(R) in the United States
and higher income at Galenika primarily realized through decreases in selling,
general and administrative expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the Biomedicals group were $13,750,000, or 45% of
net sales, for the six months ended June 30, 1994 compared to $13,277,000, or
43% of net sales, for the same period in 1993. The increase in expenses in 1994
primarily reflects the impact of catalogue amortization costs, partially offset
by certain reserve reevaluations. Management is continuing its efforts to reduce
selling, general administrative expenses (both in dollar value and as a
percentage of sales through consolidation of operations) and cost controls.
Selling, general and administrative expenses for the pharmaceutical group and
corporate for the six months ended June 30, 1994 increased $1,879,000 over the
same period in 1993. The increase was primarily due to an increase in legal fees
associated with the defense of a class action lawsuit, proxy fight expenses and
higher central services expenses.
Research and Development Costs. Research and development costs increased
$1,435,000 for the six months ended June 30, 1994 compared to the same period in
1993. The increase related to the higher costs incurred by Viratek for the
chronic hepatitis C clinical trials and submission of the NDA in 1994, and the
additional research and development activities which involve a new
pharmaceutical discovery program aimed at developing therapeutic drugs to
inhibit disease-causing genes. See "-- Viratek -- Results of Operations -- Six
Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993."
Translation and Exchange (Gains) Losses, Net. Translation and exchange
(gains) losses, net, were $3,380,000 for the six months ended June 30, 1994
compared to $(1,774,000) for the same period in 1993. The translation loss
recognized for the six months ended June 30, 1994 resulted primarily from the
conversion of ICN's Swiss Franc and Dutch Guilder denominated debts to a
weakening U.S. dollar equivalent.
38
<PAGE> 39
Interest Expense, Net. Interest expense, net, was $8,734,000 for the six
months ended June 30, 1994 compared to $9,418,000 for the same period in 1993.
The decrease resulted primarily from the reduction in outstanding long-term debt
of ICN.
Extraordinary Income. During the second quarter of 1993, Biomedicals'
Italian operation negotiated settlements with certain of its suppliers and
banks, resulting in extraordinary income of $627,000, or $.03 per share.
Other, Net. A summary of other (income) and expense is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1993 1994
----------- ----------
<S> <C> <C>
Realized (gains) losses on marketable
securities..................................... $ (139,000) $ 24,000
Amortization of goodwill......................... 1,024,000 1,037,000
Gain on lease terminations....................... (938,000) --
Favorable settlements on accrued liabilities..... (1,000,000) --
Other, net....................................... 732,000 (51,000)
----------- ----------
$ (321,000) $1,010,000
========== =========
</TABLE>
Gain on Lease Terminations. During 1993, Biomedicals' Italian operation
realized a gain on the favorable termination of certain leasing contracts.
Favorable Settlements on Accrued Liabilities. During 1993, Biomedicals
recognized a gain on the settlements of certain liabilities accrued during 1992
which were settled for less than the original estimate.
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
INTRODUCTION
General. Effective December 31, 1992, ICN's ownership percentage of SPI
fell below 50% resulting in the deconsolidation of SPI in ICN's consolidated
financial statements effective as of December 31, 1992. The investment in SPI is
currently accounted for using the equity method of accounting. The prior year's
results of operations have not been restated. Unless otherwise indicated, all
references in this discussion to 1992 and 1991 include the consolidated results
of operations of SPI.
ICN has reported net losses for 1993 and 1992 of $11,270,000 and
$64,802,000, respectively, and net income for 1991 of $5,855,000. The loss in
1993 was lower than in 1992 primarily as a result of a restructuring charge
taken in 1992. The net loss in 1992 compared to net income in 1991 was primarily
due to restructuring charges of $63,032,000 in 1992 related to the write-off of
intangibles associated with the acquisition of Flow Laboratories, Inc. and Flow
Laboratories B.V. (together with their respective subsidiaries "Flow") and other
acquisitions and other charges associated with the Biomedicals restructuring,
including the increase in 1992 over 1991 of foreign translation losses of
$17,131,000.
39
<PAGE> 40
Following are the 1993 results of operations and a pro forma ICN statement
of operations for 1992 as if SPI had been accounted for using the equity method
of accounting:
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Net sales....................................... $ 78,328,000 $ 62,556,000
Cost of sales................................... 44,851,000 27,631,000
------------ ------------
Gross profit.................................... 33,477,000 34,925,000
Selling, general and administrative expenses.... 53,859,000 43,690,000
Restructuring costs............................. 63,032,000 --
Research and development costs.................. 2,882,000 5,571,000
Interest expense, net........................... 22,776,000 18,962,000
Translation and exchange gains.................. (3,391,000) (1,292,000)
Equity earnings in SPI.......................... (20,773,000) (11,646,000)
Gains on sale of subsidiaries common stock...... (37,744,000) (8,345,000)
Write off of goodwill........................... 15,362,000 --
Other expense, net.............................. 13,552,000 879,000
------------ ------------
Loss before income taxes, minority interest and
extraordinary income.......................... (76,078,000) (12,894,000)
Provision (benefit) for income taxes............ 872,000 (474,000)
Minority interest............................... (12,148,000) (523,000)
Extraordinary income............................ -- 627,000
------------ ------------
Net loss........................................ $(64,802,000) $(11,270,000)
=========== ===========
</TABLE>
The following discussion of the results of operations gives effect to the
deconsolidation of SPI as if it had occurred at January 1, 1992.
Equity Earnings in SPI. The equity earnings in SPI decreased to $11,646,000
in 1993 compared to $20,773,000 in 1992. This reduction was due to a reduction
in SPI's net income in 1993 compared to 1992 of $12,993,000 coupled with a
reduction in ICN's ownership interest in SPI, from 48% at December 31, 1992 to
39% at December 31, 1993. The reduction in the net income of SPI in 1993 was
primarily due to lower income at Galenika. The income before provision for
income taxes and minority interest of Galenika was $310,000 in 1993 compared to
$38,518,000 in 1992. The United Nations sanctions on Yugoslavia and price
controls imposed by the Yugoslavian government have impacted the sales at
Galenika, both in terms of a decrease in unit sales and a change in product mix.
Additionally, sales have been adversely impacted by inflation and by larger and
more frequent devaluations in 1993 compared to the prior year. The raw materials
that Galenika imports are primarily used in the production of drugs. Due to
shortages of these materials, Galenika has shifted its production and sales
efforts to its veterinary and OTC product lines. For the year ended December 31,
1993, sales of drugs represented 73% of Galenika total sales compared to 81% in
the prior year. Additionally, cost of sales and other expenses at Galenika have
increased as a percentage of sales due to the impact of price controls in
Yugoslavia, higher labor costs and hyperinflation. Consolidated net sales for
1992 rose to $476,118,000, an increase of $111,760,000, or 31%, over 1991. The
majority of this increase, $101,121,000, was due to a full year of operations
for Galenika compared to only eight months of operations in 1991. During 1991
and the first half of 1992, Galenika was able to increase its prices in
anticipation of inflation and currency devaluations, resulting in higher sales
levels when compared to the levels of inflation in Yugoslavia. Thus, during this
period, Galenika sales on a dollar basis were not significantly impacted.
However, beginning in the second half of 1992, sales at Galenika were depressed
due to the effects of sanctions and price controls in Yugoslavia. See Note 17 of
Notes to Consolidated Financial Statements of ICN. During 1992, most of SPI's
subsidiaries recorded improved sales over the prior year. Sales in Mexico
increased $6,963,000, or 17%, compared to 1991, primarily resulting from
improved sales of its injectable vitamin, Bedoyecta-Tri(R), and other key
products. Sales in Spain increased $3,526,000, or 16%, compared to 1991, due
primarily to the introduction of new product lines. Gross profit as a percentage
of SPI net sales increased to 56% in 1992 from 52% in 1991. While SPI
experienced gross profit increases in all of its major subsidiaries, the
40
<PAGE> 41
largest increase was recorded at Galenika whose gross profit increased to 53% in
1992 from 47% in 1991. The 1991 Galenika gross profit was adversely impacted by
the increase in cost of sales resulting from a purchase accounting adjustment to
inventory. Without this item, Galenika's gross profit percentage remained
constant in 1992 and 1991 at 53%. Excluding the results of Galenika, the gross
profit increased to 62% in 1992 from 60% in 1991 due primarily from improved
product mix resulting from increased Virazole(R) sales.
Net Royalties. Net royalties from the sales of Virazole(R) by SPI were
$5,903,000 for the year 1993 compared to $5,448,000 for the year 1992. The
increase in royalty income was due to increased sales in Mexico resulting from
the introduction of ribavirin cream used for the treatment of herpes and
increased worldwide sales due to additional marketing efforts by SPI in 1993,
which included offering volume discounts.
BIOMEDICALS
At the time of the 1989 acquisition of Flow, Biomedicals believed that the
distribution outlets acquired would substantially increase Biomedicals' ability
to compete in international markets where it had no significant direct
representation. Following the acquisition, Biomedicals attempted to centralize
the European marketing and distribution, discontinue certain low margin product
lines and shut down excess manufacturing and distribution facilities. These
efforts continued in 1992, at which time Biomedicals completed a major
restructuring plan. See Restructuring Costs and Special Charges, below.
During the latter part of 1992 and throughout 1993, Biomedicals realigned
its European operations including the distribution network and manufacturing,
resulting in reductions in selling, general and administrative costs.
Integration of Biomedicals' higher margin "core" product lines and elimination
of lower gross margin products have contributed to the increase in the overall
gross profit margins; however, such actions have not fully mitigated the
continuing decline in European sales. As a result, 1993 income (loss) before the
provision for income taxes and extraordinary item attributable to the European
operations was $(2,831,000) as compared to $(35,582,000). Biomedicals' North
American sales have remained stable.
The Company is actively working on the introduction of new products for its
Biomedicals division, primarily related to its diagnostic product line and will
be introducing its Dosimetry product line in Europe and Canada. Although the
introduction of these product lines was originally scheduled for Europe in 1993,
longer than anticipated timeframes for product development delayed such
introduction to 1994. Absent improvements in the 1994 European operating
results, this division will need to reassess its business strategy and prospects
for its European business.
Net Sales. Net sales were $59,076,000, $75,648,000, and $96,507,000 in
1993, 1992 and 1991, respectively. Net sales were 22% lower in 1993 than in 1992
and 22% lower in 1992 than in 1991. The continuing decline in sales can be
attributed primarily to Biomedicals' European operations. This declining trend
is due to a variety of factors including the transition from a marketing effort
focused on an agency/distributor network to one based upon catalogue
distribution, discontinuance of low gross profit margin product lines,
competitive pressures, delays in getting new products to markets due to longer
than anticipated timeframes for product development and a continuing weakness in
government funding for capital equipment purchases.
Cost of Sales. Product cost as a percentage of sales decreased to 47% in
1993 from 59% in 1992 and 54% in 1991. The decrease in product costs in 1993
reflects actions taken by Biomedicals to reduce costs beginning in the latter
part of 1992, as discussed further in Restructuring Costs and Special Charges,
below. Additionally during 1993, high cost products with lower margins were
eliminated, certain production facilities were consolidated or sold, other
excess manufacturing facilities were closed down and Biomedicals continued to
focus on improving purchasing and manufacturing processes. The increase in
product costs in 1992 as compared to 1991 is the result of a writedown of slow
moving inventory due to lower than anticipated sales volume. In addition, during
1992 the Biomedicals' production facilities and warehousing costs were spread
over a reduced sales volume thereby increasing cost of sales as a percentage of
sales.
Gross Profit. Gross profit as a percentage of sales was 53%, 41% and 46% in
1993, 1992 and 1991, respectively. Actions taken by Biomedicals in 1992, as
described above, resulted in an increase in gross profit
41
<PAGE> 42
as a percentage of sales during 1993. The impact of declining sales increasing
product costs, and a writedown of slow moving inventory, as described above,
reduced gross profit in 1992 as compared to 1991.
Restructuring Costs and Special Charges. During 1991, Biomedicals initiated
a restructuring program designed to reduce costs and improve operating
efficiencies. Accordingly, restructuring costs of $6,087,000 were recorded in
1991. The program included, among other items, the consolidation, relocation and
closure of certain manufacturing and distribution facilities, primarily in
Milan, Italy and Costa Mesa, California. Those measures, including a 15%
reduction in work force, were initiated in 1991 and continued through 1992.
Biomedicals' sales continued to decline during the first three quarters of
1992 over the same periods in 1991 despite the restructuring program initiated
in 1991. The significant decreases were primarily due to operations in Italy and
other European subsidiaries acquired as part of the Flow acquisition. A further
decline in sales of 19.3%, or $4,009,000, occurred in the fourth quarter of 1992
compared to the fourth quarter of 1991.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused, to a major extent, on
the European operations, as Biomedicals had only a limited presence in Europe
prior to the Flow acquisition. Biomedicals considered the expected operating
income of the European operations in evaluating the recoverability of the Flow
goodwill.
During the fourth quarter of 1992, as a result of the continuing decline in
sales and other factors, Biomedicals reassessed its business plan and prospects
for 1993 and beyond which included, among other things, the decision to sell the
last remaining major European manufacturing facility and to restructure the
previously acquired distribution network and European operations in line with
the revised sales estimates. Consequently, based upon the continuing decline in
European revenue and profitability relating to Flow, Flow facility closures and
an ineffective distribution network, Biomedicals' management concluded that
there was no current or expected future benefit associated from the Flow
acquisition. Accordingly, Biomedicals wrote off goodwill and other intangibles,
primarily from the Flow acquisition, in the amount of $37,714,000.
In addition, Biomedicals determined that future benefit could be realized
if the distribution activities in Irvine, Scotland, Brussels, Belgium,
Cleveland, Ohio, and Horsham, Pennsylvania were consolidated with other
distribution centers in Europe and the United States, as these operations did
not support the costs of maintaining separate facilities. Estimated costs
associated with this consolidation effort were included in lease termination
costs of $1,434,000, employee termination costs of $1,961,000, facility shut
down costs of $357,000 and writedowns to net realizable value totalling
$1,106,000 of facilities held for disposition.
The Irvine, Scotland, facility was vacated in March 1993 and subsequently
sold for a gain of $278,000. During the first quarter of 1993 the Horsham,
Pennsylvania, and Cleveland, Ohio, facilities moved to Aurora, Ohio.
Additionally, Biomedicals reviewed the ability of the Flow product lines to
be effectively integrated into Biomedicals' "core" product lines and vice versa.
As a result, it was concluded that Flow's distribution network, product lines
and business operations were not effectively integrated into Biomedicals' global
strategy. Low margin product lines such as cell biology and instruments had
become technologically obsolete given the other competitive products on the
market. As sales continued to decline, the amount of slow moving and potentially
obsolete inventory increased. Accordingly in the fourth quarter in 1992,
Biomedicals recorded a provision for abnormal writedowns of inventory to
estimated realizable value of $9,924,000 and discontinued products of
$3,377,000.
In addition, Biomedicals determined that the unamortized costs of the
catalogue marketing program would not be recovered within a reasonable period of
time, therefore, costs totaling $6,659,000 were written off in the fourth
quarter of 1992. Despite the general shortfall in catalogue related sales, the
catalogue marketing approach has established Biomedicals' "core" products in the
European and Asian-Pacific markets. During 1993, Biomedicals' strategy to
redefine the form and use of the catalogue to specifically customer focused or
"product-line" catalogues is believed to be more effective in light of current
market conditions. Additionally, radiochemical and cell biology "mini"
catalogues have been developed. During 1993 and 1994, the Biomedicals division
of the Company used and will continue to use general catalogues and associated
direct mail programs for sales activities in biochemical, enzyme
immunobiological products and reagents for
42
<PAGE> 43
electrophoresis, but with more focus on product movement and customer needs. The
diagnostic instrument and reagent lines will be promoted by media advertising
and direct sales activities.
ICN
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $43,690,000 (70% of net sales), $224,235,000 (41%
of net sales) and $152,947,000 (33% of net sales) for 1993, 1992 and 1991,
respectively. Selling, general and administrative expenses (not including SPI)
decreased from $53,859,000 in 1992 to $43,690,000 in 1993. The decrease reflects
Biomedicals' efforts to reduce expenses through consolidation of operations and
distribution centers and cost controls. This was partially offset by the
increased legal costs in defense of the consolidated class action suit and costs
associated with a proxy fight initiated in 1993. The increased expenses for 1992
(including SPI) compared to 1991 were primarily a result of provisions for
doubtful accounts of $48,279,000 (described below) and termination of employees
and early retirement costs at Galenika of $21,065,000. Excluding these
provisions, selling, general and administrative costs in 1992 were 28% of net
sales. This decrease is primarily due to the lower selling costs and wages at
Galenika.
In countries experiencing hyperinflation, such as Yugoslavia, a devaluation
will result in a reduction of accounts receivable and a proportionate reduction
in the accounts receivable allowance. The reduction of accounts receivable is
recorded as a foreign currency translation loss and the reduction of the
allowance is recorded as a translation gain. After a devaluation the level of
accounts receivable will rise as a result of subsequent price increases. In
conjunction with the rise in receivables, additions to the allowance for
receivables will be made for existing doubtful accounts. This process will
repeat itself for each devaluation that occurs during the year. The effect of
this process results in a high level of bad debt expense that does not
necessarily reflect credit risk or difficulties in collecting receivables. In
1992, general and administrative expenses increased significantly due primarily
to provisions for doubtful accounts at Galenika of $48,279,000. The reduction of
the accounts receivable allowance from devaluations resulted in a translation
gain of $40,191,000 resulting in a net expense from bad debts and bad debt
translation gain of $8,088,000.
Research and Development Costs. Research and development costs were
$5,571,000, $10,718,000 and $6,588,000 for 1993, 1992 and 1991, respectively.
Research and development costs increased from $2,882,000 (not including SPI) in
1992 to $5,571,000 in 1993. The increase relates to the higher costs incurred
for the chronic hepatitis C clinical trials during 1993 and the additional
research and development activities which involve a new pharmaceutical discovery
program aimed at developing therapeutic drugs to inhibit disease-causing genes.
Research and development costs rose in 1992 (including SPI) compared to 1991 due
to expanded research at Galenika and, in 1992, the phase III clinical trials of
Viratek relating to chronic hepatitis C.
Write-off of Goodwill. During 1992, based upon the continuing evaluation of
the carrying value of goodwill, ICN made the determination to write off pre
November 1970 goodwill, relating primarily to Biomedicals, of $12,062,000. In
addition, as a result of the continuing decline in sales at Biomedicals, ICN
made the determination to write off $3,300,000 of goodwill relating to purchased
subsidiaries.
Gain on Sales of Subsidiaries Stock. During 1993, ICN sold 1,618,200 shares
of SPI common stock and 272,500 shares of Viratek common stock for an aggregate
sales price of $19,995,000 and $3,325,000, respectively, in open market and
privately negotiated transactions which resulted in a gain of $8,345,000. During
1992, ICN sold 1,890,000 shares of SPI common stock and 348,000 shares of
Viratek common stock for an aggregate sales price of $44,608,000 and $5,243,000,
respectively, in open market and privately negotiated transactions which
resulted in a gain of $37,744,000. During 1991, ICN sold 2,978,250 shares of SPI
common stock and 200,000 shares of Viratek common stock for an aggregate sales
price of $50,863,000 and $2,790,000, respectively, in open market and privately
negotiated transactions which resulted in a gain of $29,797,000.
Translation and Exchange (Gains) Losses, Net. Translation (gains) losses,
net, were $(1,292,000), $21,648,000 and $4,517,000 in 1993, 1992 and 1991,
respectively. Translation and exchange gains were $1,292,000 in 1993 compared to
$3,391,000 (without SPI) in 1992. The decrease is due primarily from ICN's
conversion of Swiss Franc, Dutch Guilder and ECU debt. During 1992, translation
and exchange losses, net
43
<PAGE> 44
(including SPI) increased $17,131,000 over 1991 due to Galenika operating in a
highly inflationary economy, coupled with reductions in the level of hard
currency as a result of sanctions and political and economic unrest.
Interest income and expense.
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest income......................... $(1,550,000) $(6,844,000) $ (627,000)
Interest expense........................ 35,871,000 32,407,000 19,589,000
----------- ----------- -----------
Interest expense, net................... $34,321,000 $25,563,000 $18,962,000
========== ========== ==========
</TABLE>
Interest expense decreased from $23,406,000 (not including SPI) in 1992 to
$19,589,000 in 1993. The decrease resulted from a reduced level of outstanding
debt. Interest expense, remained fairly constant between 1992 and 1991
(including SPI) as a result of a decrease in debt at ICN and Biomedicals offset
by an increase in debt at SPI. Interest income (not including SPI) in 1992 was
$630,000 which was consistent with 1993. Interest income increased in 1992 from
1991 (including SPI) due primarily to Galenika's cash on deposit outside of
Yugoslavia.
Extraordinary Income. During the second quarter of 1993, Biomedicals'
Italian operation negotiated settlements with certain of its suppliers and banks
resulting in extraordinary income of $627,000 or $.03 per share.
Other, net. A summary of other (income) and expense is as follows (1991 and
1992 include SPI):
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Realized (gains) losses from sale of
marketable securities, net............ $ 354,000 $ (228,000) $ (139,000)
Amortization of goodwill................ 3,944,000 4,216,000 2,102,000
Litigation settlements.................. 7,143,000 1,247,000 --
Write-down of assets and intangibles.... -- 2,000,000 --
Write-off of prepaid royalties.......... 1,503,000 -- --
Write-downs and other costs for domestic
nutrition group....................... 10,878,000 -- --
Facility relocation expenses in Spain... 2,198,000 -- --
Gain on lease termination............... -- -- (938,000)
Favorable settlement of a foreign
non-income tax related tax dispute and
accrued liabilities................... -- -- (1,680,000)
License fees............................ -- 2,187,000 --
Lease vacancy costs..................... -- -- 1,436,000
Other, net.............................. 3,459,000 5,765,000 298,000
----------- ----------- -----------
Other expense, net...................... $29,479,000 $15,187,000 $ 1,079,000
========== ========== ==========
</TABLE>
Litigation. Litigation settlement costs were $1,247,000 in 1992 and
$7,143,000 in 1991. The 1992 costs relate to an arbitration award to the Baylor
College of Medicine of $466,000 and additional costs of another arbitration
award. The 1991 charge is attributed to an arbitration award against ICN of
$7,143,000.
Write-Down of Assets. ICN consolidated certain of its operations which
resulted in ICN having several idle facilities which ICN intends to sell. The
facilities have been written down to their estimated net realizable value which
resulted in a charge to operations of $1,000,000 in 1992. In addition, in 1992
due to declining sales relating to Brown Pharmaceutical products, ICN wrote off
$1,000,000 relating to the Brown trademark.
Write-downs and Other Costs for Domestic Nutritional Group. During 1991,
SPI continued to reassess its domestic nutritional business, which had a sales
decline of 78% from 1988 to 1991. As a result, SPI wrote off $10,878,000 of
assets, principally goodwill and intangibles.
44
<PAGE> 45
Gain on Lease Termination. During 1993, Biomedicals' Italian operation
realized a gain of $938,000 on the favorable termination of certain leasing
contracts.
Favorable Settlement of a Foreign Non-Income Tax Related Tax Dispute and
Accrued Liabilities. During 1993, Biomedicals recognized a gain of $430,000
representing a favorable settlement of a foreign non-income tax related tax
dispute and a gain of $1,250,000 relating to certain liabilities accrued during
1992 which were settled for less than the original estimate.
Lease Vacancy Costs. During 1993, Biomedicals vacated its High Wycombe
facility in England and moved to a facility more suitable to Biomedicals'
operating needs in Thames, England. Biomedicals pursued various subleasing
agreements, none of which were completed as of December 31, 1993. Consequently,
Biomedicals accrued approximately $1,200,000 which represents management's best
estimate of the net present value of future leasing costs to be incurred for
High Wycombe. During 1993, Biomedicals expensed an additional $236,000 of
leasing costs related to High Wycombe.
Other, Net. Other, net, for 1992, includes nonrecurring costs related to
Biomedicals' foreign non-income related taxes of $1,171,000, an equity
investment write-off of Biomedicals of $1,031,000 and accrued expenses for
cleanup costs for certain property held for sale of $1,000,000.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash and Marketable Securities. At June 30, 1994 and December 31, 1993, ICN
had cash, cash equivalents and restricted cash of $14,526,000 and $24,170,000,
respectively. Included in cash at June 30, 1994 was $11,564,000 which is to be
used exclusively by Viratek for research and development and general working
capital requirements. These restrictions will not apply after the consummation
of the Merger. At June 30, 1994, ICN had $5,010,000 of margin borrowings
collateralized by stock of ICN's subsidiaries owned by ICN. Subsequent to June
30, 1994, ICN entered into an additional margin borrowing collateralized by
common stock of SPI owned by ICN with a foreign bank in the initial principal
amount of $5,067,500 (increased to $6,067,500 in November 1994), which loan
matures on March 12, 1995. The margin borrowings had an average interest rate of
8.3% as of June 30, 1994 and are payable on demand. Since the stock of ICN's
subsidiaries which collateralized these borrowings will be cancelled under the
terms of the Merger Agreement, these borrowings will be refinanced prior to the
time the Merger is consummated. To the extent not previously repaid, these
borrowings will be repaid out of the net proceeds of the Offering (and are
included in "Use of Proceeds" under miscellaneous indebtedness to be repaid out
of the net proceeds of the Offering). See "Use of Proceeds." During the six
months ended June 30, 1994, ICN received cash payments from SPI totalling
$16,419,000 for repayment of advances. During the six months ended June 30,
1994, ICN's primary uses of cash were the reduction of long-term debt, interest
expense and Viratek's research and development costs.
At December 31, 1993 and 1992, ICN had cash, including restricted cash and
certificates of deposit, and marketable securities of $24,170,000 and
$2,622,000, respectively, included in current assets. Included in cash at
December 31, 1993 is $17,698,000 which is to be used exclusively by Viratek for
research and development and its general working capital requirements. In
addition, included in non-current assets at December 31, 1993 and 1992 are
investments in non-current marketable securities of $201,000 and $198,000,
respectively. At December 31, 1993, ICN had $5,823,000 of margin borrowings
collateralized by stock of the ICN's subsidiaries owned by ICN.
On September 12, 1994, ICN sold 50,000 shares of common stock of SPI held
by ICN in a private placement transaction for gross proceeds of $1,231,250, of
which approximately $600,000 will be used by SPI to purchase an interest in
Oktyabr, the Company's recently privatized joint venture partner in Russia. See
"Business -- Acquisition Strategy." During 1993, ICN sold 1,618,200 shares of
SPI common stock for an aggregate sales price of $19,995,000. During 1992, ICN
sold 690,400 shares of its SPI common stock and Galenika sold 1,200,000 shares
of SPI common stock, received by Galenika in 1991, for an aggregate sales price
of $44,608,000, resulting in a net gain to ICN of $32,952,000. During 1993 and
1992, ICN sold 272,500
45
<PAGE> 46
and 348,000 shares of Viratek common stock for an aggregate sales price of
$3,325,000 and $5,243,000, respectively, resulting in a gain of $2,647,000 and
$4,792,000, respectively.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of $8,897,000. Each unit consisted of one
share of common stock and one warrant to purchase one share of common stock at
$10.075. In March 1993, the underwriters exercised their option to purchase the
overallotment (206,250 units) in connection with the public offering for net
proceeds of $1,368,000. Viratek has used a substantial portion of the net
proceeds for research and development activities to fund phase III clinical
trials and related project costs to evaluate Virazole(R) in the treatment of
chronic hepatitis C and to continue development of certain other anti-cancer and
immune-stimulatory compounds. The additional research and development involves a
new pharmaceutical discovery program aimed at developing therapeutic drugs to
inhibit disease-causing genes. This research activity is based on antisense
technology and is focused on designing new pharmaceuticals to combat cancer,
viral diseases and skin disorders. The warrants became separately transferable
on July 29, 1993 and were exercisable until August 30, 1993 and redeemable by
ICN on August 31, 1993 at $.05 per warrant, if not previously exercised. Of the
total outstanding warrants, 1,366,642 were exercised resulting in net proceeds
to ICN of $13,472,000. Of the total net proceeds of the offering of the units
and the exercise of the warrants, $11,201,000 has been spent on research and
development through June 30, 1994.
During 1993 and 1992, ICN issued 3,000,000 and 4,198,000 shares of its
common stock for net proceeds of $21,861,000 and $30,608,000, respectively.
During 1993 and 1992, ICN received cash payments from SPI totalling
$13,662,000 and $14,987,000, respectively, for repayment of advances.
During 1993, ICN's primary uses of cash were for the reduction of long-term
debt ($32,087,000), interest on its publicly traded debt ($15,628,000), legal
and proxy fight expenses ($7,136,000), payments to Biomedicals ($6,783,000),
representing Biomedicals' operating cash deficiency and Viratek's research and
development costs discussed above.
Capital Expenditures. Capital expenditures for property, plant and
equipment totaled $2,548,000 in 1993, $12,554,000 (including SPI) in 1992 and
$21,046,000 (including SPI) in 1991. The expenditures in 1992 primarily relate
to facility improvements of $2,556,000 at Galenika and facility expansion of
$4,700,000 at SPI's Mexican subsidiary. The expenditures in 1991 are primarily
related to the purchase and improvement of SPI's facility in Spain. ICN does not
expect significant capital expenditures through the end of 1994.
Taxes. ICN has not been required to pay regular federal income taxes in
recent years due to the availability of tax loss carryforwards. However, in
1992, ICN was required to pay alternative minimum tax ("AMT") due to limitations
on the utilization of net operating loss carryforwards for AMT purposes. See
Note 8 to Consolidated Financial Statements of ICN. ICN files its federal tax
return on a stand-alone basis. In prior years, ICN filed on a consolidated basis
with its subsidiaries until the following dates:
<TABLE>
<CAPTION>
1991 1992
------------- -------------
<S> <C> <C>
SPI............................................ Until 8-13-91 --
Biomedicals.................................... -- --
Viratek........................................ Entire Year Until 2-1-92
</TABLE>
Product Liability Insurance. In December 1985, after reviewing costs,
availability and related factors, management decided not to continue to maintain
product liability insurance in the United States subsequent to that time. While
ICN has never experienced a material adverse claim for personal injury resulting
from allegedly defective products, a substantial claim, if successful, could
have a material adverse effect on ICN's liquidity and financial performance.
INFLATION AND CHANGING PRICES
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, fluctuations in
the relative values of currencies, political instability and other restrictive
governmental actions. Changes in the relative value of currencies occur from
time to time and may, in certain instances, materially affect ICN's results of
operations.
46
<PAGE> 47
FOREIGN CURRENCY TRANSLATION
ICN's Consolidated Statements of Operations reflect translation (gains)
losses of $(1,292,000), $21,648,000, and $4,517,000, in 1993, 1992 and 1991,
respectively, which are a result of ICN's foreign currency denominated
borrowings and investments and relative changes in the value of the U.S. Dollar
versus various European currencies. In addition to these currencies, 1992 and
1991 included the translation effects of the Yugoslavian Dinar.
QUARTERLY FINANCIAL DATA OF ICN (UNAUDITED)
Following is a summary of quarterly financial data for the years ended
December 31, 1992 and 1993 and the first six months of 1994 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1992(1)
Net sales..................................... $142,328 $170,136 $113,003 $126,299
Gross profit.................................. 74,120 93,403 64,326 66,321
Net income (loss)(2).......................... 6,590 3,206 (9,652) (64,946)
======== ======== ======== ========
Per share information:
Net income (loss)........................... $ .46 $ .21 $ (.69) $ (4.03)
======== ======== ======== ========
1993
Net sales..................................... $ 16,632 $ 15,723 $ 15,815 $ 14,386
Gross profit.................................. 9,256 8,766 9,307 7,596
Income (loss) before extraordinary income..... 1,063 (3,593) (2,343) (7,024)
Extraordinary income.......................... -- 627 -- --
-------- -------- -------- --------
Net income (loss)............................. 1,063 (2,966) (2,343) (7,024)
======== ======== ======== ========
Per share information:
Income (loss) before extraordinary income... .06 (.18) (.11) (.34)
Extraordinary income........................ -- .03 -- --
-------- -------- -------- --------
Net income (loss)........................... $ .06 $ (.15) $ (.11) $ (.34)
======== ======== ======== ========
1994
Net sales..................................... $ 17,202 $ 15,641
Gross profit.................................. 10,362 8,981
Net loss...................................... (4,545) (6,832)
======== ========
Per share information:
Net loss.................................... $ (.22) $ (.33)
======== ========
</TABLE>
- ---------------
(1) Consolidated results reflect the operations of SPI which was deconsolidated
effective December 31, 1992. Subsequent to that date, ICN accounted for SPI
on the equity method of accounting.
(2) Includes a pre-tax restructuring charge of $63,032,000 in the fourth quarter
1992.
47
<PAGE> 48
VIRATEK
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30, 1993
Royalties. Effective December 1, 1990, SPI and Viratek entered into a
royalty agreement. Under this agreement, SPI acts as Viratek's exclusive
distributor of ribavirin, and pays Viratek a royalty of 20% on sales worldwide.
During the six months ended June 30, 1994, the royalties earned from SPI were
$3,570,000 compared to $1,984,000 for the same period in 1993. The increase in
royalties was primarily due to increased Virazole(R) sales in the United States,
resulting from a combination of price increases and increased unit sales of
Virazole(R).
General and Administrative Expenses. General and administrative expenses
increased for the six months ended June 30, 1994 over the same period in 1993 by
$972,000. The increases relate primarily to increased legal costs in defense of
the class action lawsuit and the higher central services and rent allocation
from affiliates in 1994, due to expanded research and development activities.
Research and Development Costs. Research and development costs increased
for the six months ended June 30, 1994 over the same period in 1993 by
$1,419,000. During the second quarter 1994, Viratek completed a review of data
from phase III multicenter trials and on June 1, 1994, Viratek submitted a New
Drug Application ("NDA") to the U.S. Food and Drug Administration for
Virazole(R) capsules for the treatment of chronic hepatitis C. The NDA includes
five clinical studies of Virazole(R) capsules, three phase III and two phase II
trials; two human pharmacokinetic studies and eleven new animal toxicity
studies, in addition to other required data. The increases relate to the higher
costs incurred for the chronic hepatitis C clinical trials and submission of the
NDA during 1994 and the additional research and development activities which
involve a new pharmaceutical discovery program aimed at developing therapeutic
drugs to inhibit disease-causing genes.
Interest Income, Net. Interest income, net, increased for the six months
ended June 30, 1994 over the same period in 1993 by $453,000 as a result of the
higher average outstanding receivable from ICN and the interest earned on the
cash received from Viratek's public offering and warrants exercised.
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
Royalties. Royalties from SPI were $4,263,000, $5,448,000 and $5,903,000,
for 1991, 1992 and 1993. Included in royalties for 1991, 1992 and 1993, are
royalties earned on foreign sales by SPI totalling $1,189,000, $1,472,000 and
$2,017,000, respectively.
The increase in royalty income in 1993 compared to 1992 is due to increased
sales in Mexico resulting from the introduction of ribavirin cream used for the
treatment of herpes and additional marketing efforts by SPI in 1993, which
included offering volume discounts. The increase in royalty income in 1992
compared to 1991, is due to increased sales of Virazole(R) in the United States.
General and Administrative Expenses. General and administrative expenses
increased in 1993 compared to 1992 by $1,200,000. The increase relates primarily
to increased legal costs in defense of the consolidated class action suit.
General and administrative expenses increased in 1992 compared to 1991 by
$571,000. The increase results from an increased level of operations in 1992,
increased legal fees associated with the consolidated class action suit and
additional costs of stockholders' communications.
Research and Development Costs. The research and development activities of
Viratek were substantially reduced in 1990. As a result, there were no research
and development expenses incurred in 1991. In 1992, Viratek made a decision to
increase research and development activities which included developing
pharmaceutical products derived from nucleic acids and the development of in
vitro commercial diagnostic products. The 1993 research and development expenses
include $4,201,000 for phase III clinical trials relating to chronic hepatitis
C, $793,000 for other biomedical product development and $192,000 for new
pharmaceu-
48
<PAGE> 49
tical discovery programs aimed at developing therapeutic drugs to inhibit
disease-causing genes. The 1992 research and development expenses included
$1,785,000 for phase III clinical trials relating to chronic hepatitis C and
$514,000 for other product development resulting from the transfer of
Biomedicals' research and development to Viratek.
Interest Income, Net. Interest income increased in 1993 compared to 1992 by
$663,000. The increase was the result of the higher average outstanding
receivable from ICN and the interest earned on the cash received from Viratek's
public offering and warrants exercised. Interest income, net, in 1992 and 1991
represents interest on amounts due from ICN.
Other Income, Net. In 1991, other (income) expense included a $325,000
contribution to the University of California, San Diego, for the unrestricted
support of Dr. Roland Robins' research at the U.C.S.D. School of Medicine and a
$200,000 reversal of an accrual for certain patent and trademarks legal fees and
governmental investigations. Dr. Robins was a director of Viratek.
A summary of other (income) expense is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
<S> <C> <C> <C>
Contribution to the UC San Diego........ $ 325,000 $ -- $ --
Equipment rental income................. (120,000) (240,000) (240,000)
Legal expense reversal.................. (200,000) -- --
Other................................... (57,000) (45,000) 8,000
--------- --------- ---------
$ (52,000) $(285,000) $(232,000)
========= ========= =========
</TABLE>
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
The amount of funds available for research and development was dependent,
to a large extent, on the amount of funds received from SPI in connection with
the royalty agreements as well as funding from ICN. In addition to such funding,
the level of research and development activities has been and will be dependent
upon Viratek's ability to seek additional financing through the sale of its
securities, licensing and joint venture agreements and other arrangements in
order to complete the pursuit of governmental approval or to sustain business
operations pending approval of Viratek's products for sale. Viratek intends to
review the advantages of cooperative research and development arrangements with
other parties and may elect to obtain partners for its products and product
areas when it appears that product development, marketing or other operating
advantages may result.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of $8,897,000. Each unit consisted of one
share of common stock and one warrant to purchase one share of common stock at
$10.075. In March 1993, the underwriters exercised their option to purchase the
overallotment (206,250 units) in connection with the public offering for net
proceeds of $1,368,000. Viratek has used a substantial portion of the net
proceeds for research and development activities to fund phase III clinical
trials and related project costs to evaluate Virazole(R) in the treatment of
chronic hepatitis C and to continue development of certain other anti-cancer and
immune-stimulatory compounds. The additional research and development involves a
new pharmaceutical discovery program aimed at developing therapeutic drugs to
inhibit disease-causing genes. This research activity is based on antisense
technology and is focused on designing new pharmaceuticals to combat cancer,
viral diseases and skin disorders. The warrants became separately transferable
on July 29, 1993 and were exercisable until August 30, 1993 and redeemable by
ICN on August 31, 1993 at $.05 per warrant, if not previously exercised. Of the
total outstanding warrants, 1,366,642 were exercised resulting in net proceeds
to ICN of $13,472,000. Of the total net proceeds of the offering of the units
and the exercise of the warrants, $11,201,000 has been spent on research and
development through June 30, 1994.
Management believes that the proceeds from the offering, noted above, and
revenues from operations will be sufficient to fund currently planned clinical
trials and development projects relating to the evaluation of Virazole(R) in the
treatment of chronic hepatitis C and normal working capital requirements through
1994.
49
<PAGE> 50
During 1991, 1992 and 1993, ICN advanced to Viratek $1,006,000, $580,000
and $254,000, respectively. As of December 31, 1993 and June 30, 1994, Viratek
had a demand receivable from ICN of $15,528,000 and $19,911,000, respectively.
Interest is credited on outstanding balances at prime (7 1/4% at June 30, 1994)
plus 1/2%.
Viratek's effective tax rate was 0%, 3% and (2)% for 1991, 1992, and 1993,
respectively. The income tax benefit in 1993 of $14,000 is primarily
attributable to the difference between the 1992 provision for income taxes
accrued in the financial statements and the liability as finally determined upon
filing of Viratek's 1992 tax return. Viratek's effective rate for 1992 and 1991
was significantly less than the U.S. statutory rate due to the utilization of
net operating loss ("NOL") carryforwards. Viratek has net operating loss
carryforwards of $47,500,000 which expire in varying amounts from 1995 through
2005. The NOL carryforwards include $10,900,000 of stock option deductions. For
financial statement purposes, the tax benefit from the utilization of stock
option deductions are credited to paid-in capital. Viratek has research and
development tax credit carryovers of $800,000 which expire in varying amounts
from 1996 to 2002.
Capital expenditures totaled $889,000 and $207,000 for the six months ended
June 30, 1994 and year ended December 31, 1993, respectively. There were no
capital expenditures for property, plant and equipment in 1992 and 1991.
During 1985, after reviewing costs, availability and related factors,
management decided not to continue to maintain product liability insurance.
While to date no material adverse claim for personal injury resulting from
allegedly defective products, including Virazole(R), has been successfully
maintained against Viratek, a substantial claim, if successful, could have a
material adverse effect on Viratek. SPI has agreed to indemnify Viratek from
product liability claims, including attorney's fees, arising from the
manufacture and sale of ribavirin, pursuant to the license and royalty agreement
dated December 1, 1990.
QUARTERLY FINANCIAL DATA OF VIRATEK (UNAUDITED):
Following is a summary of quarterly financial data for the years ended
December 31, 1992 and 1993 and for the first six months of 1994 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1992 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ---- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 1,993 $ 265 $ 1,948 $1,242
Research and development expenses and
other, net.......................... 605 113 1,269 1,644
------- -------- ------- -------
Net income (loss)..................... $ 1,388 $ 152 $ 679 $ (402)
======= ======== ======= =======
Net income (loss) per share(1)........ $ .09 $ .01 $ .04 $ (.03)
======= ======== ======= =======
1993
- ----
Revenues.............................. $ 1,444 $ 540 $ 2,048 $1,871
Research and development expenses and
other, net.......................... 1,157 1,649 1,799 2,119
------- -------- ------- -------
Net income (loss)..................... $ 287 $ (1,109) $ 249 $ (249)
======= ======== ======= =======
Net income (loss) per share(1)........ $ .02 $ (.07) $ .01 $ (.01)
======= ======== ======= =======
1994
- ----
Revenues.............................. $ 2,812 $ 758
Research and development expenses and
other, net.......................... 1,660 2,079
------- --------
Net income (loss)..................... $ 471 $ (1,802)
======= ========
Net income (loss) per share........... $ .03 $ (.10)
====== =========
</TABLE>
- ---------------
(1) Net income (loss) per share has been restated to reflect a fourth quarter
1993 stock distribution of 5%.
50
<PAGE> 51
BIOMEDICALS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30, 1993
Net Sales. Net sales were $30,658,000 for the six months ended June 30,
1994, compared to $31,224,000 for the same period in 1993. As compared to 1993,
sales have declined 2% for the six months ended June 30, 1994.
Cost of Sales. Product cost as a percentage of sales decreased to 44% from
46% for the six months ended June 30, 1994 and 1993, respectively. Biomedicals
continues to focus on the elimination of high cost products and on improving
purchasing and manufacturing processes.
Gross Profit. Gross profit as a percentage of sales was 56% for the six
months ended June 30, 1994 compared to 54% for the same period in 1993. The
discontinuance of low gross profit margin products and the introduction of new
products with higher margins have contributed to the improvement in gross profit
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13,750,000, or 45%, of net sales for the six
months ended June 30, 1994, compared to $13,277,000, or 43%, of net sales for
the same period in 1993. The increase in expenses in 1994 reflects primarily the
impact of catalogue amortization costs, partially offset by certain reserve
reevaluations.
Interest Expense, Net. Interest expense, net, was $1,066,000 for the six
months ended June 30, 1994, compared to $1,266,000 for the same period in 1993.
The net decrease for the six months ended June 30, 1994 compared to the same
period in 1993 resulted primarily from the reduction in short and long term debt
of Biomedicals.
Foreign Currency Translation Losses (Gains). Translation losses (gains)
were $802,000 for the six months ended June 30, 1994 and $(328,000) for the six
months ended June 30, 1993. Biomedicals has a SFr. liability of SFr. 11,488,000
($8,615,000), which is not hedged and subject to foreign exchange translation
gains or losses during the year.
Other (Income) Expense, Net. Other (income) expense, net, was $592,000 for
the six months ended June 30, 1994, compared to $(1,259,000) for the same period
in 1993.
Other (income) expense, net, for the six months ended June 30, 1994
includes a $(210,000) gain on settlement of an escrow account related to the
sale of Biomedicals' Irvine, Scotland facility in 1993, costs incurred in
connection with the closure of a foreign facility of $204,000, amortization of
goodwill of $251,000, severance and termination costs of $250,000, and
reevaluation of certain foreign allowances, primarily related to accounts
receivable of $(300,000).
Other (income) expense for the six months ended June 30, 1993, includes a
gain of $(938,000) realized by Biomedicals' Italian operation on the favorable
termination of certain leasing contracts, a gain of $(1,000,000) representing
certain liabilities accrued during 1992 which were settled for less than the
original estimate and a gain of $(278,000) on the sale of Biomedicals' Irvine,
Scotland facility.
Extraordinary Income. During the second quarter of 1993, Biomedicals'
Italian operation negotiated settlements with certain of its suppliers and
banks, resulting in extraordinary income for the six months ended June 30, 1993
of $627,000, or $.03 per share.
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
Introduction. At the time of the 1989 acquisition of Flow Laboratories,
Inc. and Flow Laboratories B.V., (together with their respective subsidiaries
"Flow"), Biomedicals believed that the distribution outlets acquired would
substantially increase Biomedicals' ability to compete in international markets
where it had no significant direct representation. Following the acquisition,
Biomedicals attempted to centralize the European marketing and distribution,
discontinue certain low margin product lines and shut down excess manufacturing
51
<PAGE> 52
and distribution facilities. These efforts continued into 1992, at which time
Biomedicals completed a major restructuring plan. (See Restructuring Costs and
Special Charges, below).
During the latter part of 1992 and throughout 1993, Biomedicals realigned
its European operations including the distribution network and manufacturing,
resulting in reductions in selling, general and administrative costs.
Integration of Biomedicals' higher margin "core" product lines and elimination
of lower gross margin products have contributed to the increase in the overall
gross profit margins; however, such actions have not fully mitigated the
continuing decline in European sales. As a result, the 1993 income (loss) before
provision for income taxes and extraordinary item attributable to the European
operations was $(2,831,000) as compared to $(35,582,000) in 1992. Biomedicals'
North American sales have remained stable.
Biomedicals is actively working on the introduction of new products,
primarily related to its diagnostic and instrumentation product lines and will
be introducing its Dosimetry product line in Europe and Canada. Although the
introduction of these product lines was originally scheduled for Europe in 1993,
longer than anticipated timeframes for product development delayed such
introduction to 1994. Absent improvements in the 1994 European operating
results, Biomedicals will need to reassess its business strategy and prospects
for its European business.
Net Sales. Net sales were $96,507,000, $75,648,000 and $59,076,000 in 1991,
1992 and 1993, respectively. Net sales were 22% lower in 1992 than in 1991 and
22% lower in 1993 than in 1992. The continuing decline in sales can be
attributed primarily to Biomedicals' European operations. This declining trend
is due to a variety of factors including the transition from a marketing effort
focused on an agency/distributor network to one based upon catalogue
distribution, discontinuance of low gross profit margin product lines,
competitive pressures, delays in getting new products to markets due to longer
than anticipated timeframes for product development and a continuing weakness in
government funding for capital equipment purchases.
Cost of Sales. Product cost as a percentage of sales was 54% in 1991, 59%
in 1992 and 47% in 1993. The decrease in product costs in 1993 reflects actions
taken by Biomedicals to reduce costs beginning in the latter part of 1992, as
discussed further in Restructuring Costs and Special Charges, below.
Additionally, during 1993, high cost products with lower margins were
eliminated, certain production facilities were consolidated or sold, other
excess manufacturing facilities were closed down and Biomedicals continued to
focus on improving purchasing and manufacturing processes. The increase in
product costs in 1992 as compared to 1991 is the result of a writedown of slow
moving inventory due to lower than anticipated sales volume. In addition, during
1992, Biomedicals' production facilities and warehousing costs were spread over
a reduced sales volume thereby increasing cost of sales as a percentage of
sales.
Gross Profit. Gross profit as a percentage of sales was 46%, 41% and 53% in
1991, 1992 and 1993, respectively. Actions taken by Biomedicals in 1992, as
described above, resulted in an increase in gross profit as a percentage of
sales during 1993. The impact of declining sales, increasing product costs and a
writedown of slow moving inventory, as described above, reduced gross profit in
1992 as compared to 1991.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales were 41%, 58% and 48% in 1991,
1992 and 1993, respectively. The decrease in 1993 reflects management's
continuing efforts to reduce expenses through consolidation of operations and
distribution centers and other cost controls. Additionally, during 1993,
Biomedicals renegotiated certain common services allocations from ICN, which
reduced selling, general and administrative expense by $969,000 compared to
1992. The increase in expenses in 1992 over 1991 was due, in part, to increased
allowances for estimated uncollectible accounts plus other costs related to
increased level of catalogue amortization and accruals for legal expenses. The
increase in these costs as a percentage of sales was due primarily to a
significantly greater decline in sales in the markets related to the Flow
acquisition than in the markets in which Biomedicals has traditionally done
business. Costs in 1994 will reflect increased catalogue expenses of at least
$2,295,000.
Research and Development Costs. Research and development costs were
$1,687,000, $583,000 and $378,000 during 1991, 1992 and 1993, respectively.
Effective January 1, 1992, Biomedicals entered into an agreement with Viratek
whereby Biomedicals transferred to Viratek right, title and interest in certain
of its research and development projects. Biomedicals retains a right of first
refusal to the marketing and distribution
52
<PAGE> 53
rights for any product developed in accordance with the agreement. Viratek
conducts biomedical research related to the development of non-isotopic
diagnostic test kits and associated hardware. Biomedicals continues to perform
research and development activities for diagnostic reagents and the instrument
product line manufactured in Huntsville, Alabama.
Amortization of Goodwill and Other Intangibles. Amortization expense was
$1,829,000, $1,486,000 and $502,000, in 1991, 1992 and 1993, respectively. The
reduction in goodwill amortization in 1993, reflects the write-off of a major
portion of Biomedicals' goodwill during the fourth quarter of 1992, as described
below under Restructuring Costs and Special Charges. Biomedicals continually
evaluates the continued carrying value and amortization periods for goodwill and
other intangibles.
Interest (Income) Expense, Net. Interest (income) expense, net, is
comprised of the following:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest expense............................... $7,585,000 $4,779,000 $2,256,000
Interest income................................ (512,000) (212,000) (6,000)
---------- ---------- ----------
Interest expense, net.......................... $7,073,000 $4,567,000 $2,250,000
========= ========= =========
</TABLE>
The net interest expense decline in 1991 compared to 1992 and 1992 compared
to 1993 results from a reduced level of outstanding debt both to third parties
and ICN.
Lease Vacancy Costs. During 1993, Biomedicals vacated its High Wycombe
facility in England and moved to a facility more suitable to Biomedicals'
operating needs in Thame, England. Biomedicals pursued various subleasing
agreements, none of which were completed as of December 31, 1993. Consequently,
Biomedicals accrued approximately $1,200,000 which represents management's best
estimate of the net present value of future leasing costs to be incurred for
High Wycombe. During 1993, Biomedicals expensed an additional $236,000 of
leasing costs related to High Wycombe.
Other (Income) Expense, Net. Other (income) expense, net, was $1,268,000,
$4,731,000 and $(2,399,000) in 1991, 1992 and 1993, respectively. In 1993, Other
(income) expense, net, includes a gain of $430,000 representing a favorable
settlement of a foreign non-income tax related tax dispute, a gain of $278,000
on the sale of Biomedicals' Irvine, Scotland facility, a gain of $938,000
realized by Biomedicals' Italian operation on the favorable termination of
certain leasing contracts, and a gain of $1,250,000 relating to certain
liabilities accrued during 1992 which were settled for less than the original
estimates. In 1992, Biomedicals expensed $2,187,000 for a non-exclusive license
fee for the purpose of marketing certain laboratory equipment in the U.S.,
Canada and South America. Other charges in 1992 include certain foreign
non-income related taxes and an equity investment write-off totaling $2,202,000.
Other (income) expense, net in 1991 included $1,286,000 of costs relating to the
introduction of Biomedicals' catalogue.
Provision for Income Taxes. Biomedicals' effective income tax rate was
(3)%, 1% and (38)% for 1991, 1992 and 1993, respectively. Biomedicals' effective
tax rate for 1991 and 1992 was significantly less than the U.S. statutory rate
due to the utilization of net operating losses. Biomedicals' effective rate of
(38)% in 1993 was due primarily to a reduction in the estimate of required U.S.
and foreign tax contingency allowances. Such contingency allowances were
established in prior years to cover certain tax exposures in the U.S. and
certain foreign jurisdictions.
Restructuring Costs and Special Charges. During 1991, Biomedicals initiated
a restructuring program designed to reduce costs and improve operating
efficiencies. Accordingly, restructuring program costs of $6,087,000 were
recorded in 1991. The program included, among other items, the consolidation,
relocation and closure of certain manufacturing and distribution facilities,
primarily in Milan, Italy and Costa Mesa, California. Those measures, including
a 15% reduction in work force, were initiated in 1991 and continued through
1992.
Sales continued to decline during the first three quarters of 1992 over the
same periods in 1991 despite the restructuring program initiated in 1991. The
significant decreases were primarily due to operations in Italy
53
<PAGE> 54
and other European subsidiaries acquired as part of the Flow acquisition. A
further decline in sales of 19.3%, or $4,009,000, occurred in the fourth quarter
of 1992 compared to the fourth quarter of 1991.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused on the European
operations, as Biomedicals had only a limited presence in Europe prior to the
Flow acquisition. Accordingly, Biomedicals used the expected operating income of
the European operations in evaluating the recoverability of the Flow goodwill.
During the fourth quarter of 1992, as a result of the continued decline in
sales and other factors, Biomedicals reassessed its business plan and prospects
for 1993 and beyond which included, among other things, the decision to sell the
last remaining major European manufacturing facility and to restructure the
previously acquired distribution network and European operations in line with
the revised sales estimates. Consequently, based upon the continuing decline in
European revenue and profitability relating to Flow, Flow facility closures and
an ineffective distribution network, management concluded that there was no
current or expected future benefit associated from the Flow acquisition.
Accordingly, Biomedicals wrote off goodwill and other intangibles, primarily
from the Flow acquisition of $37,714,000.
In addition, Biomedicals determined that future benefit could be realized
if the distribution activities in Irvine, Scotland, Brussels, Belgium,
Cleveland, Ohio, and Horsham, Pennsylvania, were consolidated with other
distribution centers in Europe and the United States, as these operations did
not support the costs of maintaining separate facilities. Estimated costs
included in the 1992 results associated with this consolidation effort were
included in lease termination costs of $1,434,000, employee termination costs of
$1,961,000, facility shut down costs of $357,000 and writedowns to net
realizable value totaling $1,106,000 of facilities held for disposition.
The Irvine, Scotland facility was vacated in March 1993 and subsequently
sold for a gain of $278,000. During the first quarter of 1993, the Horsham,
Pennsylvania and Cleveland, Ohio facilities moved to Aurora, Ohio.
Additionally, Biomedicals reviewed the ability of the Flow product lines to
be effectively integrated into Biomedicals' "core" product lines and vice versa.
As a result, it was concluded that Flow's distribution network, product lines
and business operations were not effectively integrated into Biomedicals' global
strategy. Low margin product lines such as cell biology and instruments had
become technologically obsolete given the other competitive products on the
market. As sales continued to decline, the amount of slow moving and potentially
obsolete inventory increased. Accordingly, during the fourth quarter of 1992,
Biomedicals recorded a provision for abnormal writedowns of inventory to
estimated realizable value of $9,924,000 and discontinued products of
$3,377,000.
In addition, Biomedicals determined that the unamortized costs of the
catalogue marketing program would not be recovered within a reasonable period of
time, therefore, catalogue costs totaling $6,659,000 were written off in the
fourth quarter of 1992. Despite the general shortfall in catalogue related
sales, the catalogue marketing approach has firmly established Biomedicals'
"core" products in the European and Asian-Pacific markets. During 1993,
Biomedicals' strategy to redefine the form and use of the catalogue to
specifically customer focused or "product-line" catalogues is believed to be
more effective in light of current market conditions. Additionally,
radiochemical and cell biology "mini" catalogues have been developed. During
1994, Biomedicals will continue to use general catalogues and associated direct
mail programs for sales activities in biochemical, enzyme immunobiological
products and reagents for electrophoresis, but with more focus on product
movement and customer needs. The diagnostic instrument and reagent lines are
promoted by media advertising and direct sales activities.
Extraordinary Income. During the second quarter of 1993, Biomedicals'
Italian operation negotiated settlements with certain of its suppliers and banks
resulting in extraordinary income of $627,000, or $.03 per share.
54
<PAGE> 55
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. Working capital was $13,659,000 at June 30, 1994, an
increase of $2,903,000 from December 31, 1993. The increase is primarily due to
an increase in accounts receivable and a reduction in accounts payable and
accrued liabilities, partially offset by reductions in other current assets.
Debt. Total debt (current maturities, notes payable and long-term debt)
during the six month period ending June 30, 1994 decreased to $13,867,000 from
$13,872,000 on December 31, 1993, a result of principal payments, which were
offset by an increase of $844,000 due to foreign exchange, on Biomedicals' Swiss
Franc debt.
Product Liability Insurance. Biomedicals and certain of its subsidiaries do
not maintain product liability insurance. While Biomedicals has never
experienced a material adverse claim for personal injury resulting from
allegedly defective products, a successful claim could have a material adverse
effect on the Biomedicals' liquidity and financial performance.
Cash and cash equivalents decreased from $2,204,000 at December 31, 1992 to
$509,000 at December 31, 1993. Cash and cash equivalents were $850,000 at June
30, 1994.
Net cash used in operations increased from $6,207,000 in 1992 to $6,676,000
in 1993. The slight increase in net cash used in operations can be attributed
primarily to Biomedicals' payments of trade payables and accrued liabilities in
the normal course of business and an increase in inventory available for sale,
partially offset by a decrease in trade receivables.
Net cash (used in) provided by investing activities was $(821,000) in 1992
compared to $2,308,000 in 1993. The increase in cash provided by investing
activities is a result of the sale of Biomedicals' Irvine, Scotland facility,
which occurred in April 1993.
Net cash provided by financing activities was $7,445,000 in 1992 compared
to $2,627,000 in 1993. The decrease is primarily attributed to less cash
received from ICN and less cash proceeds from issuance of long-term debt and
notes payable.
Cash and cash equivalents increased from $2,005,000 at December 31, 1991 to
$2,204,000 at December 31, 1992.
Net cash (used in) provided by operations was $8,357,000 in 1991 as
compared to $(6,207,000) in 1992. The increase in cash used in operations in
1992 compared to 1991 can be attributed to a decrease in sales and higher
operating expenses. Additionally, lower collection on trade receivables in 1992
as compared to 1991 were partially offset by decreases in inventory over the
same periods.
Net cash (used in) provided by investing activities was $1,275,000 in 1991
compared to $(821,000) in 1992. During 1991, Biomedicals sold ICN debentures for
approximately $3,503,000 which were acquired for investment purposes.
Net cash (used in) provided by financing activities was $(8,004,000) in
1991 compared to $7,445,000 in 1992. During 1992, Biomedicals made principal
payments on long-term debt and notes payable of $11,736,000 which were offset by
borrowings from ICN and issuance of other long-term debt and notes payable.
During 1991, Biomedicals made principal payments on long-term debt and notes
payable of $38,765,000 which were partially offset by borrowings from ICN and
issuance of other long-term debt and notes payable, however, such borrowings did
not fully fund total principal payments on long-term debt and notes payable.
Management believes that cash generated from operations, reductions in
working capital, and, if needed, additional borrowings from ICN will provide
sufficient cash to meet its normal operating requirements.
Biomedicals has obtained a written agreement from ICN that ICN is prepared,
if needed, to provide financial support to Biomedicals in order to meet its
financial obligations through April 15, 1995.
55
<PAGE> 56
Other
Included in total debt is $8,441,000 of debt related to the issuance of
5 1/2% Swiss Franc Exchangeable Certificates (the "Certificates"). Each
Certificate is exchangeable into 334 shares of Biomedicals' Common Stock at an
exchange price of $10.02 per share, based on a fixed exchange rate of SFr. 1.49
per $1.00. (These terms are as adjusted in April 1990. See Note 6 of Notes to
Consolidated Financial Statements of Biomedicals.) The Certificates, if
converted, would result in the issuance of 2,608,241 shares of Biomedicals'
common stock, and an increase in marketable securities of approximately
$13,605,000, resulting in an increase in stockholders' equity of approximately
$21,582,000.
Effective December 1, 1986, ICN and its affiliates adopted an investment
policy covering intercompany advances and interest rates, and the type of
investments (acquisitions, marketable equity securities, high yield bonds, etc.)
to be made by ICN and its affiliates. As a result of this policy, excess cash
held by Biomedicals is transferred to ICN and, in turn, cash advances have been
made by ICN to Biomedicals to fund acquisitions and other transactions. ICN
charges interest at the prime rate plus 1/2% and credits interest at the prime
rate less 1/2% on the amounts invested or advanced. ICN provided $6,783,000 of
cash to Biomedicals during 1993. Total loans and advances from ICN were
$5,932,000 as of December 31, 1993. Such advances have been classified as a
long-term payable.
On August 30, 1993, Biomedicals issued to ICN 300,000 shares of a new
series "A" of Biomedicals' non-convertible, non-voting, preferred stock valued,
pursuant to a fairness opinion, at $30,000,000. In exchange, ICN delivered
4,983,606 shares of Biomedicals' common stock that ICN owned and exchanged
intercompany debt owed to ICN by Biomedicals in the amount of $11,000,000.
In addition, on August 30, 1993, Biomedicals issued to ICN 390,000 shares
of a new series "B" of Biomedicals' non-convertible, non-voting, preferred stock
valued, pursuant to a fairness opinion, at $32,000,000. In exchange, ICN
delivered to Biomedicals 8,384,843 shares of Biomedicals' common stock that ICN
owned. Subsequent to the exchange, Biomedicals had 9,033,623 common shares
issued and outstanding.
Subject to declaration by Biomedicals' Board of Directors, the new series
"A" preferred stock pays an annual dividend of $8 per share, noncumulative,
payable quarterly and the new series "B" preferred stock pays an annual dividend
of $10 per share, noncumulative, payable quarterly. Both series "A" and "B"
preferred stock become cumulative in respect to dividends upon certain events
deemed to be a change in control, as defined by the certificates of designation.
The series "B" preferred dividends are subject to the prior rights of the
holders of the series "A" preferred stock and any other preferred stock ranking
prior to the series "B" preferred.
The series "A" preferred stock is senior in ranking to the series "B"
preferred stock and the series "B" preferred stock is senior to Biomedicals'
common stock as to voluntary or involuntary liquidation, dissolution or winding
up of the affairs of Biomedicals, after payment or provision for payment of the
debts and other liabilities of Biomedicals. The holders of the series "A"
preferred shares are entitled to receive an amount in cash or in property,
including securities of another corporation, equal to $100 per share in
involuntary liquidation or $104.50 per share in voluntary liquidation prior to
August 31, 1995, which amount declines ratably each year to $100 per share after
August 31, 1998, plus dividends, in the event dividends have become cumulative.
The holders of the series "B" preferred shares are entitled to receive an amount
in cash or in property, including securities of another corporation equal to
$100 per share in voluntary or involuntary liquidation, plus dividends, in the
event dividends have become cumulative.
The series "A" and "B" preferred shares are redeemable, for cash or
property, including securities of another corporation, in whole or in part, at
the option of Biomedicals only, subject to approval by a vote of a majority of
the independent directors of Biomedicals. The series "A" preferred shares are
redeemable at $104.50 per share prior to August 31, 1995, which amount declines
ratably each year to $100 after August 31, 1998, plus dividends, in the event
dividends have become cumulative. The series "B" shares are redeemable at $100
per share, plus dividends, in the event dividends have become cumulative.
There were no dividends declared on the Series "A" or Series "B" preferred
stock during 1993.
56
<PAGE> 57
Under the terms of the Flow purchase agreement, Biomedicals issued 100,000
shares of its common stock to the seller, which shares have a guaranteed value
of $20 per share on November 8, 1994. If the fair value, as defined, of
Biomedicals' common stock is less than $20 per share on that date, Biomedicals
must pay the difference in cash. Biomedicals may redeem such shares for the $20
guaranteed value prior to November 8, 1994. At August 31, 1994, Biomedicals
would have paid $1,562,500 to honor the guarantee.
Biomedicals has a purchase commitment with a major supplier for which the
remaining purchase of inventory under agreement was due in June 1994 in the
amount of approximately $1,727,000 (Finnish Markka 10,000,000).
Biomedicals is also a guarantor on a note payable to the same supplier for
which ICN is primarily liable. On June 30, 1993, ICN filed a claim in
arbitration alleging breach of agreement entered with such supplier and withheld
final payment due on that date of approximately $1,295,000 (Finnish Markka
7,500,000). In addition, ICN is seeking declaration and award that Biomedicals
is not obligated to honor the aforementioned purchase commitment or installments
on the note. An arbitration hearing was held on October 4, 1994 and the decision
of the arbitrator is pending.
Net property, plant and equipment increased from $13,155,000 at December
31, 1992 to $15,728,000 at December 31, 1993. The transfer of the Opera, Italy
facility from assets held for disposition to property, plant and equipment for
$3,816,000 accounted for the increase which was partially offset by depreciation
of approximately $2,790,000. Capital expenditures for property, plant and
equipment totaled $1,978,000 in 1991, $911,000 in 1992 and $2,235,000 in 1993.
Biomedicals does not anticipate any significant capital expenditures through the
end of 1994.
INFLATION AND CHANGING PRICES
Foreign operations are subject to certain risks inherent to conducting
business abroad, including price and currency exchange control, fluctuations in
the relative value of currencies, political instability and restrictive
governmental actions. Changes in the relative value of currencies occur from
time to time and may, in certain instances, materially affect Biomedicals'
results of operations. Biomedicals does not hedge foreign currency risks. The
effects of these risks are difficult to predict.
The effects of inflation are experienced by Biomedicals through increases
in the cost of labor, services and raw materials. In general, these costs have
been offset and/or anticipated, by periodic increases in the prices of its
products sold.
57
<PAGE> 58
QUARTERLY FINANCIAL DATA OF BIOMEDICALS (UNAUDITED):
Following is a summary of quarterly financial data for the years ended
December 31, 1992 and 1993 and the first six months of 1994 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1992
Net sales..................... $21,222 $ 19,225 $18,382 $ 16,819
Gross profit.................. 9,822 9,238 8,275 3,462
------- -------- ------- -------
Net loss...................... $ (781) $ (669) $(7,550) $(78,420)
======= ======== ======= ========
Per share information:
Net loss.................... $ (.05) $ (.03) $ (.39) $ (4.09)
======= ======== ======= ========
1993
Net sales..................... $15,809 $ 15,415 $14,607 $ 13,245
Gross profit.................. 8,433 8,458 8,099 6,455
Net income (loss) before
extraordinary income........ 1,016 2,757 866 (3,504)
Extraordinary income.......... -- 627 -- --
------- -------- ------- --------
Net income (loss)............. $ 1,016 $ 3,384 $ 866 $ (3,504)
======= ======== ======= ========
Per share information:
Income (loss) before
extraordinary income..... $ .05 $ .12 $ .05 $ (.38)
Extraordinary income........ -- .03 -- --
------- -------- ------- --------
Net income (loss)........ $ .05 $ .15 $ .05 $ (.38)
======= ======== ======= =======
1994
Net sales..................... $15,487 $ 15,171
Gross profit.................. 8,647 8,511
------- --------
Net income.................... $ 514 $ 536
======= ========
Per share information:
Net income.................. $ .06 $ .06
======= ========
</TABLE>
58
<PAGE> 59
BUSINESS
INTRODUCTION
New ICN is an international pharmaceutical company that develops,
manufactures, distributes and sells pharmaceutical and nutritional products,
research chemicals and diagnostic products. The Company pursues a strategy of
international expansion which includes (i) the research and development of
proprietary products with the potential to be significant contributors to the
Company's global operations; (ii) the penetration of major pharmaceutical
markets by means of targeted acquisitions; and (iii) the expansion in these
major markets through the development or acquisition of pharmaceutical products
that meet the particular needs of each market.
The Company distributes and sells a broad range of prescription and OTC
pharmaceutical and nutritional products in over 60 countries worldwide,
primarily in North America, Latin America, Western Europe and Eastern Europe.
These pharmaceutical products treat viral and bacterial infections, diseases of
the skin, myasthenia gravis, cancer, cardiovascular disease, diabetes and
psychiatric disorders. The Company's leading product is the broad spectrum
antiviral agent ribavirin, which is marketed in the United States, Canada and
most of Europe under the name Virazole(R). Virazole(R) is currently approved for
commercial sale in over 40 countries for one or more of a variety of viral
infections, including RSV, herpes simplex, influenza, chicken pox, hepatitis and
HIV. The Company has manufacturing and distribution operations in the United
States, Canada, Mexico, Spain, The Netherlands and Yugoslavia and has entered
into a letter of intent to form a joint venture to manufacture Virazole(R) in
China.
The Company believes it has substantial opportunities to realize growth
from its internally developed compounds. These compounds are the result of
significant investments in its research and development activities related to
nucleic acids conducted over three decades. On June 1, 1994, a NDA was filed
with the FDA for the use of Virazole(R) for the treatment of chronic hepatitis C
in the United States. Similar applications for approval to market Virazole(R)
for chronic hepatitis C were filed in July, 1994 in the European Union and in
August, 1994 with the Health Protection Branch (HPB) in Canada. Additional
applications have been filed to date in Sweden, Norway, Finland, Australia and
New Zealand. The Company believes that the approval of Virazole(R) for the
treatment of chronic hepatitis C would be important to the Company because of
the potential size of the chronic hepatitis C market both in the United States
and abroad. The Company has been notified by the Committee for Proprietary
Medicinal Products of the European Union that Virazole(R) will be reviewed as a
treatment for chronic hepatitis C under the "Concertation Procedure" for high
technology products as a List B product for marketing in the European Union. In
order to qualify as a List B product, a drug must show promising treatment
potential for disease states of significant therapeutic interest. The
Concertation Procedure involves a European Union-wide simultaneous review, which
may provide for up to 10 years of protection for certain submitted documentation
(including results of clinical tests) from manufacturers of generic brands if
Virazole(R) is ultimately approved for treatment of chronic hepatitis C. The
Company is also engaged in, among other things, later stage clinical trials in
the United States for Tiazole(TM) for the treatment of chronic myelogenous
leukemia and end-stage ovarian carcinoma. There can be no assurance, however,
that any required governmental approvals will be obtained.
The Company believes it is positioned to expand its significant presence in
the pharmaceutical market in Eastern Europe. In 1991, a 75% interest was
acquired in Galenika, which is a large drug manufacturer and distributor in
Yugoslavia. This acquisition added new products and significantly expanded the
sales volume of the Company. With the investment in Galenika, the Company became
one of the first Western pharmaceutical companies to establish a direct
investment in Eastern Europe. Galenika continues to be a significant part of the
Company's operations although its sales and profitability have been
substantially diminished owing principally to the imposition of sanctions on
Yugoslavia by the United Nations. See "Investment Considerations -- Operations
in Yugoslavia." In pursuing its expansion strategy, the Company has also
recently entered into agreements to develop an affiliation with one of the
largest pharmaceutical companies in the Russian Republic.
In addition to its pharmaceutical operations, the Company also develops,
manufactures and sells a broad range of research chemical products, biomedical
instrumentation, diagnostic reagents and radiation monitoring services. The
Company markets these products internationally to major scientific, academic,
health care and governmental institutions through catalogue and direct mail
marketing programs.
59
<PAGE> 60
PRODUCTS
The following table sets forth on a pro forma basis 1993 net sales of the
Company by product category, by (i) the Company excluding Galenika, (ii)
Galenika and (iii) the total Company:
<TABLE>
<CAPTION>
COMPANY EXCLUDING
GALENIKA GALENIKA TOTAL COMPANY
------------------ ------------------ ------------------
SALES % SALES SALES % SALES SALES % SALES
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HUMAN PHARMACEUTICALS
Anti-infectives........................ $ 47,606 21.3% $ 78,282 32.6% $125,888 27.2%
Other Ethicals......................... 79,925 36.0% 79,967 33.4% 159,892 34.5%
-------- ------- -------- ------- -------- -------
Total Ethical Pharmaceuticals........ 127,531 57.3% 158,249 66.0% 285,780 61.7%
Medicated Nutritionals and Vitamins.... 24,913 11.0% 11,585 4.8% 36,498 7.9%
Vision Care Products................... 6,681 3.0% 1,655 0.7% 8,336 1.8%
Other Over-the-Counter Products........ 5,000 2.2% 44,281 18.5% 49,281 10.6%
-------- ------- -------- ------- -------- -------
Total OTC Products................... 36,594 16.2% 57,521 24.0% 94,115 20.3%
Total Human Pharmaceuticals.......... 164,125 73.5% 215,770 90.0% 379,895 82.0%
VETERINARY PRODUCTS.................... -- -- 24,062 10.0% 24,062 5.2%
RESEARCH PRODUCTS
Research Chemicals..................... 34,722 15.5% -- -- 34,722 7.5%
Instruments............................ 11,710 5.3% -- -- 11,710 2.5%
Diagnostics............................ 8,042 3.6% -- -- 8,042 1.8%
Dosimetry.............................. 4,602 2.1% -- -- 4,602 1.0%
-------- ------- -------- ------- -------- -------
Total Research Products.............. 59,076 26.5% -- -- 59,076 12.8%
-------- ------- -------- ------- -------- -------
Total............................. $223,201 100.0% $239,832 100.0% $463,033 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
HUMAN PHARMACEUTICALS.
Anti-infectives: Anti-infective drugs treat bacterial and viral infections.
The Company sells approximately 65 antibacterial products. At the present time,
the Company believes that there are fewer than ten antiviral product lines
marketed in the world, one of which is Virazole(R), the only antiviral product
line currently sold by the Company. Antivirals are rare and difficult to produce
relative to antibacterials because of the nature of bacteria compared to
viruses. Whereas bacteria live outside of cells, viruses live inside cells.
Thus, while antibacterials can focus simply on killing bacteria, antivirals,
ideally, must eliminate viruses without killing the host cell or adversely
affecting the host organism. An important feature of Virazole(R) is that it
inhibits the reproduction of viruses rather than killing viruses.
Antibacterials: The following table sets forth the Company's five largest
selling antibacterial products in 1993:
<TABLE>
<CAPTION>
% OF
ANTIBACTERIALS
TRADE NAME GENERIC NAME LICENSOR SALES ($000) SALES
- ----------- ------------- -------------------------- ------------ --------------
<S> <C> <C> <C> <C>
Jugocillin(R) Penicillin Proprietary $ 12,413 13%
Pentrexyl(R) Ampicillin Bristol-Myers Squibb 12,379 13%
Longaceph(R) Ceftriaxoin Roche Holding 9,512 10%
Palitrex(R) Cefalexin Eli Lilly 8,356 9%
Bactrim(R) Trimexazol Proprietary 5,218 5%
-------- ---
Total Top 5 $ 47,878 50%
Other 48,495 50%
-------- ----
Total Antibacterials $ 96,373 100%
======== ====
</TABLE>
60
<PAGE> 61
Most of the antibacterials sold by the Company (excluding Galenika) are
proprietary, whereas most of the antibacterial products manufactured and sold by
Galenika are licensed from other manufacturers, principally under exclusive
licenses for specific geographical areas, primarily Yugoslavia. Jugocillin(R)
and Pentrexyl(R) belong to the penicillin group of medications used in a wide
variety of bacterial infections including urinary and upper respiratory tract
infections. Longaceph(R) and Palitrex(R) belong to the cefalesporin group of
medications used to treat afflictions that may not be responsive to penicillin
treatment. Bactrim(R) is a combination product that is used in the treatment of
urinary tract infections. All of the top five products listed above are products
sold by the Company only through Galenika.
Antivirals: Virazole(R), which accounted for approximately $30 million in
1993 sales, is the Company's only antiviral product and is one of fewer than ten
antiviral lines currently marketed in the world. The majority of the Virazole(R)
sales are to the North American market. Virazole(R) is currently approved for
sale in various pharmaceutical formulations in over 40 countries for the
treatment of several different human viral diseases. In North America,
Virazole(R) has 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 ("SPAG"), a system that permits direct delivery of
Virazole(R) to the site of the infection. In 1993, the American Academy of
Pediatrics issued new treatment guidelines for RSV recommending Virazole(R) for
use in all high risk critically ill infants with RSV lung infection, thereby
making Virazole(R) the standard of care for this infection. Similar approvals
for Virazole(R) for use in the treatment of RSV have been granted by
governmental authorities in 22 other countries.
RSV is a seasonal disease which occurs primarily during the months of
November through April and is a common cause of respiratory infection in infants
and young children. Virtually all young children are exposed to the virus and
most exhibit relatively mild symptoms at some time; however, in some cases the
resulting infection becomes more severe, causing lower respiratory tract
diseases such as bronchiolitis and pneumonia. In the United States, the
resulting infection is sufficiently severe to require hospitalization of an
estimated 100,000 children annually.
On June 1, 1994, Viratek submitted a NDA to the FDA for the approval of
Virazole(R) for commercial sale in the treatment of chronic hepatitis C in the
United States. Similar applications for approval to market Virazole(R) for
chronic hepatitis C were filed in July, 1994 in the European Union and in
August, 1994 with the Health Protection Branch (HPB) in Canada. Additional
applications have been filed to date in Sweden, Norway, Finland, Australia and
New Zealand. The Company believes that the approval of Virazole(R) for the
treatment of chronic hepatitis C would be important to the Company because of
the potential size of the chronic hepatitis C market. However, there is no
assurance that governmental approval will be obtained. See "Business -- Research
and Development."
The Virazole(R) trademark is used in North America and certain European
countries. Ribavirin is sold as Vilona(R) and Virazid(R) in Latin America, and
Virazid(R) in Spain, where it is commercially available and is approved for the
treatment of hepatitis, herpes infections, influenza and exhanthemous viral
diseases such as measles and chicken pox, as well as RSV. References to the sale
of Virazole(R) in this Prospectus include sales made under the trademarks
Vilona(R) and Virazid(R).
61
<PAGE> 62
Other Ethicals: The following table sets forth the Company's five largest
selling ethical products (excluding anti-infectives) in 1993:
<TABLE>
<CAPTION>
% OF
OTHER
SALES ETHICALS
TRADE NAME GENERIC NAME PRODUCT TYPE ($000) SALES
-------------------- ----------------------- ------------------------ -------- ------
<S> <C> <C> <C> <C>
Oxsoralen-ultra(R) Methoxsalen Dermatologicals/Psoriasis $ 9,398 6%
Mestinon(R) Pyridostigmine bromide Anticholinesterases 9,269 6%
Bensidin(R) Diazepam Central Nervous System 9,059 6%
Insulin Insulin Hormone 8,220 5%
Albumina Albumina Human Plasma Derivate 5,643 3%
-------- ------
Total Top 5 $ 41,589 26%
Other 118,303 74%
-------- ------
Total Other Ethicals $159,892 100%
======== =====
</TABLE>
The Company manufactures and/or markets a wide variety of other ethical
pharmaceuticals, including analgesics, anticholinesterases, antirheumatics,
cardiovasculars, dermatologicals, endocrine agents, gastrointestinals, hormones
and psychotropics. No one individual product accounted for over approximately 2%
of total pro forma 1993 Company net sales. The Company's largest selling ethical
pharmaceutical, excluding anti-infectives, is a dermatological product called
Oxsoralen-ultra(R). The Company manufactures and markets approximately 75
dermatological products, primarily in North America and Eastern Europe.
Dermatological products include, in addition to Oxsoralen-ultra(R), Solaquin(R),
Trisoralen(R) and Eldoquin(R), which are principally used for intractable
psoriasis and pigmentation disorders, hypopigmentation (the skin losing its
color) and hyperpigmentation (the skin getting darker than normal). The
Company's second largest selling other ethical product is Mestinon(R), an
anticholinesterase. The Company markets three anticholinesterase product lines
in North America under the trade names Mestinon(R), Prostigmin(R) and
Tensilon(R). These products, manufactured by and licensed from Roche Holding AG,
are used in treating myasthenia gravis, a progressive neuromuscular disorder,
and in reversing the effects of certain muscle relaxants. Bensiden(R),
Galenika's fourth largest selling product in 1993, is a tranquilizer
manufactured by Galenika and is used in the treatment of psychological and
emotional disorders. The Company also sells insulin for the treatment of
diabetes. Albumina is sold in Spain and Mexico for use in emergency treatment of
shock due to burns, trauma, operations and infections, and conditions where the
restoration of blood volume is urgent.
Medicated Nutritionals and Vitamins: The following table sets forth the
Company's five largest selling medicated nutritionals and vitamins in 1993:
<TABLE>
<CAPTION>
% OF
MEDICATED
SALES NUTRITIONALS AND
TRADE NAME PRODUCT TYPE ($000) VITAMIN SALES
- ------------------- ----------------------------- ------- ----------------
<S> <C> <C> <C>
Bedoyecta-Tri(R) Vitamin B injectable $19,906 54%
RichLife(R), et al. Vitamins 2,153 6%
Oligovit(R) Multi-vitamin 1,775 5%
Beviplex B vitamin complex 1,402 4%
Bedoxin B-6 vitamin 1,402 4%
------- ----
Total Top 5 $26,638 73%
Other 9,860 27%
------- -----
Total Medicated Nutritionals
and Vitamins $36,498 100%
======= ====
</TABLE>
The Company manufactures, subcontracts and markets approximately 870
nutritional and vitamin products in North America, Latin America, Western Europe
and Eastern Europe. In Mexico, the Company manufactures and markets injectable
and oral multi-vitamins and supplements under the Bedoyecta-Tri(R),
Dextrevit(R), M.V.I.(R) and Vi-Syneral(R) trade names. Bedoyecta-Tri(R) is the
Company's largest selling vitamin
62
<PAGE> 63
and medicated nutritional, representing approximately 54% of total medicated
nutritionals and vitamin net sales by the Company. In the United States,
the Company currently markets nutritional and vitamin products under the
RichLife(R), Plus(R), Nutra-dyn(R) and Dartell(R) trade names. Galenika
manufactures and markets Oligovit(R), Beviplex and Bedoxin.
Vision Care Products: The Company manufactures and markets it Exel(R) and
Unicare(R) lines of contact lenses and lens care products primarily in Latin
America and Western Europe (principally in The Netherlands). The Company's
largest vision care product line, its Exel(R) line of contact lenses, accounted
for approximately $3.7 million, or 44%, of vision care sales in 1993.
Other Over-The-Counter Products: Other over-the-counter products, which
encompass a broad range of ancillary products sold through the Company's
existing distribution channels, accounted for approximately $49.3 million of pro
forma net sales in 1993. Approximately 90% of these product lines, which include
such items as bandages, adhesive tape, candy and instant beverages, are
manufactured by Galenika. Only one product, the Company's "Ming C" line of
instant drinks, accounted for more than 5% of other over-the-counter product
sales in 1993, with sales of approximately $4.0 million.
VETERINARY PRODUCTS.
The following table sets forth the Company's five largest selling
veterinary products in 1993:
<TABLE>
<CAPTION>
% OF
VETERINARY
TRADE NAME PRODUCT TYPE SALES ($000) SALES
- ------------------ ------------------- ------------ ----------
<S> <C> <C> <C>
Galomix STF Mineral/Vitamin $ 3,085 13%
Galokombin Antibiotic 1,676 7%
Piperazinadipat Antibiotic 599 3%
Galomix C Mineral/Vitamin 352 1%
Neonastonal Antibiotic 283 1%
-------- ----
Total Top 5 $ 5,995 25%
Other 18,067 75%
-------- ----
Total Veterinary $ 24,062 100%
======== ====
</TABLE>
The Company's veterinary products are produced only at Galenika and
accounted for approximately 10% of Galenika's sales and 5% of total pro forma
sales of the Company in 1993.
RESEARCH PRODUCTS.
The following table sets forth the Company's research products in 1993:
<TABLE>
<CAPTION>
% OF RESEARCH
PRODUCT SALES ($000) PRODUCT SALES
------------------------------------------------ ------------ --------------
<S> <C> <C>
Research Chemicals
Radiochemicals................................ $ 11,065 19%
Biochemicals.................................. 6,758 11%
Cell Biology.................................. 6,684 11%
Other......................................... 10,215 17%
------------ ------
Total Research Chemicals................... 34,722 58%
Instruments..................................... 11,710 20%
Diagnostics..................................... 8,042 14%
Dosimetry....................................... 4,602 8%
------------ ------
Total Research Products.................... $ 59,076 100%
========= ===========
</TABLE>
Research Chemicals: The Company services biotechnology researchers
throughout the world through a catalogue sales operation. The Company's
catalogue lists approximately 55,000 products which are used by medical and
scientific researchers involved in molecular biology, cell biology, immunology
and biochemistry.
63
<PAGE> 64
A majority of these products are purchased from third party manufacturers and
distributed by the Company. Over 3,000 new products were added to the catalogue
in 1993. Products include biochemicals, immunobiologicals, radiochemicals,
tissue culture products and organic and rare and fine chemicals.
Instruments: The Company's new fully automated QuadFlex(R) system can
handle a number of microtiter plate applications for use in neonatal screening
laboratories. The Company also manufactures gamma counters for laboratory use. A
non-binding letter of intent has been entered into with a third party to sell
the instruments business subject to numerous conditions to be enumerated in a
definitive contract.
Diagnostics: Among the diagnostics marketed by the Company are instruments
and reagents that are routinely used by physicians and medical laboratories to
diagnose accurately and quickly hundreds of patient samples for a variety of
disease conditions. The Company manufactures both enzyme and radio-immunoassay
kits, which it markets under the ImmuChemTM 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, podiatrists, hospitals, universities, government
institutions and nuclear power plants.
RESEARCH AND DEVELOPMENT
The Company's research and development activities utilize the expertise
accumulated by the Company and its predecessors in over 30 years of nucleic
acids research. In addition, the Company develops innovative products targeted
to address the specific needs of the Company's local markets. The Company's
predecessors include one of the first firms to engage in broad based nucleic
acid research, and the Company's research activities have allowed it to compile
a library of over 5,000 nucleotide-based compounds. The Company's long-term
research efforts are geared toward development of therapeutics and diagnostics
for diseases related to DNA and RNA structure such as viral infections, cancer
and skin diseases.
The Company believes that a benefit of the Merger will be a closer
coordination of the more basic research activities formerly performed by Viratek
with the shorter-term product development activities focused on the Company's
local markets.
LONG-TERM RESEARCH AND DEVELOPMENT.
The Company's long-term research and development activities are targeted on
the development of therapeutic and diagnostic agents for use against chronic
viral diseases, cancer and diseases of the skin, and, as such, complement the
Company's current product line and nearer-term development efforts.
One important area of research for the Company has been the use of
"antisense" technologies. This approach seeks to block genetic material causing
diseases such as cancer, viral infections and psoriasis by constructing longer
sequences of nucleotides (oligonucleotides) that selectively bond to the
disease-causing nucleic acid sequences. In this research, the Company makes use
of its extensive library of nucleotide compounds. The Company is using similar
technologies to develop diagnostic techniques used to screen for genetic
diseases, viral infections and various forms of cancer.
MEDIUM-TERM RESEARCH AND DEVELOPMENT.
The Company's medium-term research and development efforts involve the
preclinical and clinical testing of certain nucleotide compounds with broader
market applications that have shown the most promise of successful
commercialization. These compounds include:
Virazole(R) (Ribavirin): During the second quarter 1994, Viratek completed
a review of data from phase III multicenter trials and on June 1, 1994, Viratek
submitted a New Drug Application ("NDA") to the FDA for Virazole(R) capsules for
the treatment of chronic hepatitis C in the United States. The NDA includes five
clinical studies of Virazole(R) capsules, three phase III and two phase II
trials; two human pharmacokinetic studies and eleven new animal toxicity
studies, in addition to other required data. Similar applications for approval
to market Virazole(R) for chronic hepatitis C were filed in July in the European
Union and in August with the Health Protection Branch (HPB) in Canada.
Additional applications have been filed to date in
64
<PAGE> 65
Sweden, Norway, Finland, Australia and New Zealand. If the drug is approved for
that indication in the United States and elsewhere, as to which there can be no
assurance, the Company expects to engage actively in marketing and selling
Virazole(R) for the treatment of chronic hepatitis C in the United States and
all other markets in which it is approved.
Hepatitis is a family of diseases characterized by inflammation of the
liver. Although there are several causes of hepatitis, some of the most frequent
and difficult to manage are of viral origin. Presently, there are five distinct
viruses known to cause hepatitis. These have been designated hepatitis A, B, C,
D and E. The disease caused by hepatitis types A and E is acute, while types B,
C and D can be either acute or chronic. Acute hepatitis caused by type B, C and
D viruses often progresses to the chronic form of the disease. The prognosis in
these cases is much more severe, particularly in the case of hepatitis C, in
which 15%-25% of the patients develop cirrhosis of the liver and a significant
but presently unknown percentage advance to hepatocellular carcinoma ("HCC"), a
form of liver cancer. The progression of chronic hepatitis C is slow; as many as
20 years may elapse between initial infection and the development of severe
life-threatening conditions, such as cirrhosis of the liver or HCC, and during
most of this period the patient may be completely asymptomatic.
At present, the only products known by the Company to be approved in the
United States, Japan and Europe for treatment of chronic hepatitis C are several
forms of interferons. Several manufacturers have received approval to market
their respective brands of interferon for treatment of chronic hepatitis C in
various countries, however, in the United States, the only approved interferon
known to the Company is alpha interferon. See "-- Competition." Interferon is
not universally effective against chronic hepatitis C and its use is limited by
side effects such as flu-like symptoms, fatigue, depression, bone marrow
suppression and autoimmune thyroid disease. Further, interferon must be
administered by subcutaneous injection three times weekly for six months or
more. On the other hand, Virazole(R) has minimal side effects and is
administered orally in the treatment of chronic hepatitis C. The Company
believes that such limitations make the development of a treatment with greater
safety, efficacy and ease of administration highly desirable.
Clinical studies have also been conducted with Virazole(R) in other
pharmaceutical formulations for treatment of several other viral diseases. Among
those diseases with respect to which clinical studies have been conducted and
for which at least one governmental health regulatory agency in various
countries other than the United States has approved commercialization of
Virazole(R) are herpes zoster, genital herpes, hemorrhagic fever with renal
syndrome, lassa fever, measles, chicken pox, influenza and HIV. The Company has
no plans to initiate new clinical studies for any of these indications. The
Company intends, where appropriate, to utilize the clinical data from these
studies as a basis for future submissions to additional governmental health
authorities to expand the use of Virazole(R).
Tiazole(TM) (Tiazofurin): The Company has maintained an active research
program centered on tiazofurin, which the Company is developing under the
tradename Tiazole(TM), is a nucleotide that is chemically similar to
Virazole(R). Tiazole(TM) has been demonstrated to be an inhibitor of
IMP-dehydrogenase, an enzyme whose presence in elevated concentrations is
associated with a number of cancers. The Company is in the process of completing
Phase II/III clinical documentation of Tiazole(TM) as a treatment for chronic
myelogenous leukemia. The Company is also conducting research into the
effectiveness of Tiazole(TM) as an anti-cancer agent when used in conjunction
with other basic anti-cancer compounds, such as taxol, in end-stage ovarian
carcinoma.
Adenazole(TM) (8-Cl-c-AMP): This nucleotide, which is in preclinical
research, has been shown to control cell proliferation and differentiation in
certain cancers. Human trials have been conducted by third parties in Scotland
and Italy. The Company is also planning to begin preclinical investigations of
the use of the drug against leukemia and is exploring the drug's potential use
as a topical treatment for psoriasis based on its ability to inhibit rapid cell
proliferation.
Oncozole(TM) (3-Deazaguanine): Research in animals has shown this compound
to be active against a range of solid tumors, including breast and colon tumors.
The Company is engaged in preclinical research of Oncozole(TM) as a treatment
for solid tumors.
65
<PAGE> 66
Selenazole(TM) (Selenazofurin): Selenazofurin, an anti-tumor nucleoside
licensed from Brigham Young University, is related to tiazofurin. Preclinical
studies suggest that selenazofurin combines in treatment protocols with other
well known agents against both leukemia and solid tumors.
Growth Hormones: Viratek is currently negotiating to acquire from Fujisawa
USA, Inc. its rights in certain compounds of Human Growth Hormone Releasing
Factor, under license from The Salk Institute for Biological Studies and
Hoffmann-La Roche Inc. The testing of these compounds in growth retardation is
in phase III clinical trials.
SHORT-TERM PRODUCT DEVELOPMENT.
At the current time, a majority of the Company's staff of research
professionals are located at the Company's facilities in Mexico, Spain,
Yugoslavia and The Netherlands. The Company's local research activities are
oriented toward the development of products which have been identified by the
Company as having particular promise in local markets. In general, these
products involve the use of known compounds for new indications, are customized
to meet the specific needs or preferences of the targeted local market and can
be brought to market in less than 12 months. For example, the Company recently
received authorization in Spain to produce and market nasal calcitonin in
monodose form. The Company believes that this product, which is administered
nasally and used in the treatment of post-menopausal osteoporosis, may prove
more popular than alternative treatments now available in the market, certain of
which require periodic injections. In Mexico, the Company has been successful in
introducing metronidazole, a topical antibiotic for the treatment of acne
rosacea, a skin infection that affects the nose and face. The Company believes
metronidazole is more effective than alternative treatments such as oral
tetracyclines. Galenika has developed a wide range of pharmaceuticals,
diagnostics, veterinary and over-the-counter drugs and has developed value-added
versions of well known therapeutic compounds.
There can be no assurance with regard to the results of the Company's
research and development efforts or the commercial success of any of its
products under development.
ACQUISITION STRATEGY
For more than ten years, the Company has pursued a strategy of targeted
expansion into regional markets which it considers to have significant potential
for the sale of pharmaceutical products. This strategy has been implemented in
large part through the acquisition of compatible businesses and product lines
and the formation of strategic alliances and joint ventures in markets such as
Mexico, Spain, Yugoslavia and Germany. The Company intends to continue this
strategy and to expand its manufacturing and marketing potential for Virazole(R)
through joint ventures.
Galenika Acquisition: The Company views Eastern Europe as a potentially
significant pharmaceutical market. Effective May 1, 1991, a 75% interest was
acquired in Galenika. Galenika, which is a leading pharmaceutical company in
Yugoslavia, markets and manufactures over 450 pharmaceutical, veterinary, dental
and other products and constitutes a material component of the Company's
business.
Until the imposition of United Nations sanctions in May 1992, Galenika made
a significant contribution to the sales and net income of SPI. Approximately 15%
of such sales were exports from Yugoslavia, primarily to republics of the former
Soviet Union, the Middle East and certain Balkan nations. The imposition of
sanctions, including the prohibition of exports, has had a material adverse
effect on the operations and profitability of Galenika. See "Investment
Considerations -- Operations in Yugoslavia" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of SPI -- Galenika's
Operations." The Company believes that, if economic stability returns in
Yugoslavia, Galenika has the potential to contribute substantially to the
Company's results of operations.
Oktyabr Joint Venture and Acquisition: Although Russia may, in time, evolve
into a large, free market oriented economy, because of the present unpredictable
political, social and economic factors in Russia, the Company intends to
penetrate this market in a gradual manner. In October 1992, an agreement was
signed with Oktyabr to form a Russian joint venture, ICN Oktyabr, in which the
Company has a 75% equity interest. Oktyabr, which was privatized under the
Russian privatization regulations, is one of the largest pharmaceutical
companies in Russia. Under the terms of the joint venture, it has been agreed
that Oktyabr will in the
66
<PAGE> 67
future contribute to the joint venture the output from its existing production
facilities while the Company's contribution to the joint venture is in the form
of management expertise, technology, equipment, intellectual property, training
and technical assistance. However, the Company will not be obligated, and does
not intend, to invest any substantial amounts of cash or assets in the joint
venture for the foreseeable future.
In March 1994, the City of St. Petersburg granted to the joint venture the
right to occupy and build upon approximately 25 acres of land in an area of the
city designated for industrial development. The joint venture anticipates
constructing on the site a pharmaceutical manufacturing facility built pursuant
to the FDA's good manufacturing practices ("GMP"). There can be no assurance as
to when or if the new facility will be constructed or as to its future success.
Prior to the Merger, SPI entered into an agreement with the City of St.
Petersburg to acquire 15% of the outstanding shares of the Company's recently
privatized joint venture partner, Oktyabr, for approximately $600,000. SPI has
also completed a transaction whereby SPI purchased 26% of the outstanding shares
of Oktyabr from the employees of Oktyabr in exchange for the right to acquire
shares of SPI common stock having a value at the date of issuance of $389,000.
In addition, the Company is preparing an investment plan in connection with
Oktyabr's government-approved privatization plan under which the Company would
acquire a controlling interest in Oktyabr.
Tuobin Chemicals Joint Venture: A preliminary agreement was entered into in
1994 to establish a joint venture with Tuobin Chemicals and Pharmaceuticals
General Corporation ("Tuobin"), a Chinese pharmaceuticals company located in
Shantou, in Guandong province, China (approximately 200 miles north of Hong
Kong), for the purposes of manufacturing and marketing Virazole(R) in China for
the treatment of chronic hepatitis C and other indications. If the transaction
were completed, the Company would own 60% of the equity interest in the joint
venture and Tuobin would own 40%. The Company would contribute equipment,
technology and management expertise, and Tuobin would contribute the land,
buildings and work force. It is anticipated that a new manufacturing facility
would be constructed by the joint venture. It is contemplated that this facility
would be built pursuant to the FDA's good manufacturing practices to enable the
joint venture to produce Virazole(R) for the Chinese market, in which the
Company believes chronic hepatitis C is a serious and growing health problem, as
well as for Western and other markets. A significant portion of the required
equipment is already owned by the Company in the United States and would be
transferred to the new facility in China.
Proposed Mexican Acquisition: SPI is currently negotiating to acquire
certain assets of a pharmaceutical company located in Mexico. The purchase price
is estimated to be approximately $13,000,000 in cash and Common Stock. This
acquisition, if consummated, will not represent the acquisition of a Significant
Subsidiary (as defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act").).
SALES, MARKETING AND CUSTOMERS
The Company markets its pharmaceutical and nutritional products in some of
the most developed pharmaceutical markets, including the United States, Canada
and Western Europe, as well as developing markets, including Latin America and
Eastern Europe. The Company adjusts its marketing strategies according to the
individual markets in which it operates. The Company believes its marketing
strategy is distinguished by flexibility, allowing the Company to market
successfully a wide array of pharmaceutical products within diverse regional
markets as well as certain drugs, notably Virazole(R), on a worldwide basis.
The Company has a marketing and sales staff of approximately 1,506 persons
for its pharmaceutical and nutritional products, including sales representatives
in North America, Latin America, Western Europe and Eastern Europe, who call on
physicians, pharmacists, distributors and other healthcare professionals. As
part of its marketing program for pharmaceuticals, the Company makes 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 marketing staff.
In the United States, the Company currently sells its pharmaceutical
products through drug wholesalers who, in turn, distribute them to drug stores
and hospitals. The nutritional product line is sold directly and through
distributors to various retail outlets and to certain healthcare professionals.
In Mexico, the Company serves pharmacies through a network of distributors and
sells directly to pharmacists and hospitals. In Western
67
<PAGE> 68
Europe, the Company markets vision care products in The Netherlands through
hospitals and pharmacies and to retail customers through optical shops. The
Company's Spanish subsidiary sells pharmaceutical products through its own sales
force to hospitals, retail outlets, pharmacies and wholesalers. In Canada, the
Company sells directly to hospitals, wholesalers and large drug store chains.
Galenika sells a broad range of pharmaceutical and other products in
Yugoslavia through approximately 30 wholesalers, six representative offices and
85 sales representatives. In the event that United Nations sanctions were
lifted, it is anticipated that Galenika would resume exporting certain of its
product lines to Russia and other Eastern European markets, Africa, the Middle
East and the Far East.
During 1993, approximately 68% of Galenika's sales, representing
approximately 35% of the Company's pro forma net 1993 sales, were to entities
subsidized by the Yugoslavian government. Future sales by Galenika could be
dependent on the ability of the Yugoslavian government to continue to subsidize
purchases of pharmaceutical products.
Sales and marketing methods of the Company's research products vary
according to product group and include direct sales through a field sales force,
catalogue sales, direct mail campaigns and independent agents/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 of approximately 230 persons for
its research products, approximately 130 persons in the United States and
Canada, approximately 95 in Europe and the balance in Australia.
If Virazole(R) is approved for the treatment of chronic hepatitis C in the
United States or elsewhere (for which there can be no assurance), the Company
believes that it would be advantageous for the Company to enter into a licensing
agreement with a pharmaceutical company having greater marketing resources than
the Company. The Company is presently in preliminary discussions with several
pharmaceutical companies to enter into such an agreement although there can be
no assurance whether any such agreement can be finalized.
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. Competitive factors vary by product line and
customer and include service, product availability and performance, price and
technical capabilities. The Company does business in an industry characterized
by extensive and ongoing research efforts. Others may succeed in developing
products that are more effective than those presently marketed or proposed for
development by the Company. Progress by other researchers in areas similar to
those explored by the Company may result in further competitive challenges.
The Company is aware of several ongoing research programs which are
attempting to develop new prophylactic and therapeutic products for treatment of
RSV. Although the Company will follow publicly disclosed developments in this
field, on the basis of currently available data it is unable to evaluate whether
the technology being developed in these programs poses a threat to its current
market position in the treatment of RSV or its revenue streams.
In the market segment relating to the treatment of chronic hepatitis C, the
Company expects, if Virazole(R) is approved for that indication, that it will
experience intense competition from several pharmaceutical manufacturers who
have previously received approval for products containing interferon. Such
manufacturers include Schering-Plough Corporation, Roche Holding AG, Wellcome
plc and Takeda Chemical Industries Ltd., all of which have substantially greater
resources at their disposal than does the Company and all of which have already
begun to market their respective brands of interferon products for treatment of
chronic hepatitis C. In addition, the Company believes that research programs
are ongoing at a number of laboratories, including government, industry and
private, to develop new prophylactic and therapeutic products for chronic
hepatitis C.
68
<PAGE> 69
Competitors of the Company's research products group include companies such
as Sigma-Aldrich Corporation, LKB Instruments, Abbott Laboratories, Diagnostic
Products Corporation and SmithKline Beecham in the diagnostic reagents market,
Life Technologies, Inc. and BioWhittaker, Inc. in the cell biology products
market and Labsystems, Dynatech and Biotek Instruments in the instrumentation
business.
FACILITIES
The following are the principal facilities of the Company and its
subsidiaries:
<TABLE>
<CAPTION>
OWNED OR SQUARE
LOCATION PURPOSE LEASED FOOTAGE
- --------------------------- --------------------------------------------- --------- --------
<S> <C> <C> <C>
Corporate headquarters and manufacturing
Costa Mesa, California facility Owned 197,000
Covina, California Offices and warehouse Owned 185,000
Mexico City, Mexico Offices and manufacturing facility Owned 146,000
Mexico City, Mexico Offices and manufacturing facility Owned 144,000
Montreal, Canada Offices and manufacturing facility Owned 97,000
Barcelona, Spain Offices and manufacturing facility Owned 100,000
Bryan, Ohio Warehouse and manufacturing facility Owned 37,000
The Hague, The Netherlands Offices and manufacturing facility Owned 25,000
Belgrade, Yugoslavia Offices and manufacturing facility Owned 781,000
Aurora, Ohio Manufacturing and repackaging facility Leased 68,000
Huntsville, Alabama Manufacturing facility Owned 60,000
Irvine, California Manufacturing facility Leased 27,000
Eschwege, Germany Manufacturing facility Owned 21,000
</TABLE>
During the third quarter of 1994, Galenika commenced a construction and
modernization program at its pharmaceutical complex outside Belgrade,
Yugoslavia. This program includes the construction of two new pharmaceutical
manufacturing plants (one to produce cephalosporins, which are broad spectrum
penicillin resistant antibiotics, and the other to produce steroids and
hormones), the modernization of the existing facility and the construction of a
quality control building and a research institute. It is estimated that this
program will have an aggregate cost of $136 million. It is anticipated that
financing will be arranged by Galenika.
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. For information concerning possible expansion of the Company's
capacity to manufacture Virazole(R) in the future, see "-- Production,
Manufacturing and Raw Materials."
MANUFACTURING AND RAW MATERIALS
The Company manufactures pharmaceuticals at seven facilities. Those
facilities are located in Bryan, Ohio; Mexico City, Mexico (at two locations);
Montreal, Canada; The Hague, The Netherlands; Barcelona, Spain; and Belgrade,
Yugoslavia. The Company believes it has sufficient manufacturing capacity to
meet its needs for the foreseeable future, subject to the potential need for
increased capacity to meet demand for Virazole(R) in the event it is approved
for the treatment of chronic hepatitis C. See "Investment Considerations
- -- Government Regulation." All of these manufacturing facilities which require
GMP approval from the FDA have obtained such approval.
In Montreal, Canada, the Company manufactures Virazole(R) and SPAG units
for the administration of Virazole(R) in the treatment of RSV, and other related
medical devices. At that facility, the Company manufactures a variety of topical
and oral pharmaceuticals including a line of generics to serve the Canadian and
United States markets. The Canadian facility also manufactures a full-line of
products using the controlled drug substance morphine for the management of pain
in cancer and post-surgical states. At the two facilities in Mexico City, the
Company manufactures a variety of pharmaceuticals in topical, oral and
injectable dosage forms to serve the Latin American market.
69
<PAGE> 70
In Bryan, Ohio, the Company manufactures topical and oral dosages of
several pharmaceutical products for the United States market. The facility is
undergoing renovation to support future production of Virazole(R) capsules. All
of the Company's dermatology products are formulated, packaged and distributed
from the Bryan, Ohio, facility. The Bryan, Ohio, facility also packages and
distributes Virazole(R) on a worldwide basis.
In The Netherlands, the Company manufactures contact lenses and vision care
products. In Spain, the Company manufactures and markets ethical pharmaceuticals
principally for distribution in Spain.
In Yugoslavia, Galenika manufactures over 450 pharmaceutical, veterinary,
dental and other products in topical, oral and injectable forms.
The Company subcontracts all of the manufacture of bulk ribavirin to third
party suppliers. Most of the finishing and packaging of Virazole(R) is done by
the Company and the balance by third party subcontractors. While the capacities
of these manufacturers are sufficient to meet current demand for Virazole(R), it
is anticipated that sales of the product for chronic hepatitis C, if approved,
would exceed currently available bulk ribavirin production capacity. In such
event, the Company anticipates that substantial funds to expand bulk ribavirin
production capacity will be required to meet future demand.
Manufacturing of the Company's research chemical products is chiefly
carried out in three domestic facilities and one foreign facility: Costa Mesa,
California (radioimmunoassay kits and immunobiologic products); Huntsville,
Alabama (diagnostic and microplate instrumentation); Irvine, California
(radiochemicals) and Eschwege, Germany (chromatography products). Some
manufacturing and repackaging is also carried out at the facility in Aurora,
Ohio.
In general, raw materials used by the Company in the manufacture of all of
its products are obtainable from multiple sources in the quantities desired.
However, the availability and costs of raw animal sera for distribution and for
manufacturing certain of its cell biology products may vary from time to time
and are largely beyond the Company's control. In the last decade, the number of
reactor sites producing radioactive raw materials has diminished. During 1992
and 1993, the United Nations and the United States government adopted certain
resolutions and executive orders that imposed economic sanctions on Yugoslavia.
The sanctions require that specific authorization in the form of a license must
be granted on a transaction-by-transaction basis from the country of origin and
the United Nations before the shipment of raw materials and finished goods can
be made into Yugoslavia. Few licenses have been granted for the import of raw
materials. Although licenses for finished goods are relatively easy to obtain,
licenses for the importation of raw materials are granted only in exceptional
cases. The denial of licenses for raw materials is intended to inhibit the
productive capacity of Yugoslavian industry. See Note 12 of Notes to
Consolidated Financial Statements of SPI.
EMPLOYEES
As of June 30, 1994, the Company and its subsidiaries employed
approximately 5,818 persons, of which approximately 777 were engaged in general
and administrative matters, 1,506 in marketing and sales, 295 in research and
development and 3,240 in production. Of these employees, approximately 3,847 are
employed by Galenika, including 497 engaged in general and administrative
matters, 682 in marketing and sales, 244 in research and development and 2,424
in production. All of the employees employed by Galenika, 357 employees of the
Company's Mexican subsidiaries and 274 employees of the Company's Spanish
subsidiary are covered by collective bargaining agreements. National labor laws
in some foreign countries in which the Company has substantial operations,
including Yugoslavia and Spain, govern the amount of wages paid to employees and
establish restrictions, severance provisions and related requirements that must
be satisfied prior to the termination of employees. In Mexico, the terms of the
collective bargaining agreements expire in February 1995. Neither the
Predecessor Companies nor the Company have experienced any work stoppage,
slowdown or other serious labor problems which have materially impeded their
business operations. In early 1994, there was a minor work stoppage at one of
the Company's Mexican subsidiaries, which was satisfactorily resolved. The
Company considers its relations with its employees to be satisfactory.
LICENSES, PATENTS AND TRADEMARKS
The Company may be dependent on the protection afforded by its patents
relating to Virazole(R) and no assurance can be given as to the breadth or
degree of protection which these patents will afford the Company.
70
<PAGE> 71
The Company has patent rights in the United States expiring in 1999 relating to
the use of Virazole(R) to treat specified human viral diseases. While the
Company has patents in certain foreign countries covering use of Virazole(R) in
the treatment of certain diseases, which coverage and expiration varies and
which patents expire at various times between 1995 and 2006. The Company has no,
or limited, patent rights with respect to Virazole(R) and/or its use in certain
foreign countries where Virazole(R) is currently, or in the future may be,
approved for commercial sale, including France, Germany and Great Britain. The
Company has been granted a review classification (Concertation Procedure) for
Virazole(R) as a treatment for chronic hepatitis C in all European Union
countries (including France, Germany and Great Britain). As a result, approval
of the application of Virazole(R) for treatment of chronic hepatitis C (if such
approval is granted) would, in the European Union, provide the Company up to ten
years of protection from the date of such approval of the application against
competitors relying upon the Company's submitted documentation, including the
results of clinical trials, to support such competitors' application to
manufacture, market or sell generic substitutes of Virazole(R) for treatment of
chronic hepatitis C. There can be no assurance that the loss of the Company's
patent rights with respect to Virazole(R) upon expiration of the Company's
patent rights in the United States, Europe and elsewhere will not result in
competition from other drug manufacturers or will not otherwise have a
significant adverse effect upon the business and operations of the Company.
Marketing approvals in certain foreign countries provide an additional level of
protection for products approved for sale in such countries. As a general
policy, the Company expects to seek patents, where available, on inventions
concerning novel drugs, techniques, processes or other products which it may
develop or acquire in the future. However, there can be no assurance that any
patents applied for will be granted, or that, if granted, they will have
commercial value or as to the breadth or the degree of protection which these
patents, if issued, will afford the Company. The Company intends to rely
substantially on its unpatented proprietary know-how, but there can be no
assurance that others will not develop substantially equivalent proprietary
information or otherwise obtain access to the Company's know-how. Patents for
pharmaceutical compounds are not available in certain countries in which the
Company markets its products.
Galenika manufactures and sells three of its top-selling antibacterial
products, Pentrexyl(R), Longaceph(R) and Palitrex(R), under licenses from
Bristol-Myers Squibb, Roche Holding AG and Eli Lilly, respectively. See
"-- Products."
Many of the names of the Company's products are registered trademarks in
the United States, Yugoslavia, Mexico, Canada, Spain, The Netherlands and other
countries. The Company anticipates that the names of future products will be
registered as trademarks in the major markets in which it will operate. Other
organizations may in the future apply for and be issued patents or own
proprietary rights covering technology which may become useful to the Company's
business. The extent to which the Company at some future date may need to obtain
licenses from others is not known.
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
71
<PAGE> 72
drug is safe and effective, the NDA is approved. No assurance can be given that
authorization for the commercial sale by the Company of any new drugs or
compounds for any application will be secured in the United States or any other
country, or that, if such authorization is secured, those drugs or compounds
will be commercially successful. The FDA in the United States and other
regulatory agencies in other countries also periodically inspect manufacturing
facilities.
LITIGATION, GOVERNMENT INVESTIGATIONS AND OTHER MATTERS
Litigation: The Predecessor Companies were parties to a number of pending
and threatened lawsuits. As a result of the Merger, the Company has assumed all
of the Predecessor Companies' liabilities with respect to such lawsuits and the
Company has become a party to the lawsuits summarized below and a number of
other pending or threatened lawsuits arising out of, or incident to, its
ordinary course of business. In the opinion of management, neither the lawsuits
discussed below nor various other pending lawsuits to which the Company has
become a party as a result of the Merger will have a material adverse effect on
the consolidated financial position or the operations of the Company.
ICN, SPI and Viratek and certain of their officers and directors
(collectively, the "ICN Defendants") were named defendants in certain
consolidated class actions pending in the United States District Court for the
Southern District of New York entitled In re Paine Webber Securities Litigation
(Case No. 86 Civ. 6776 (VLB)); In re ICN/Viratek Securities Litigation (Case No.
87 Civ. 4296 (VLB)). In the Third Amended Consolidated Class Action Complaint,
plaintiffs allege that the ICN Defendants made, or aided and abetted Paine
Webber in making, misrepresentations of material fact and omitted to state
material facts concerning the business, financial condition and future prospects
of ICN, Viratek and SPI in certain public announcements, Paine Webber, Inc.
("PaineWebber") research reports and filings with the Securities and Exchange
Commission (the "Commission"). The alleged misstatements and omissions primarily
concern developments regarding Virazole(R), including the efficacy, safety and
market for the drug. The plaintiffs allege that such misrepresentations and
omissions violate Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder and constitute common law fraud and misrepresentation. The ICN
Defendants filed their Answer, containing affirmative defenses, on February 15,
1993. Plaintiffs seek the certification of classes of persons who purchased ICN,
Viratek or SPI common stock during the period January 7, 1986 through April 15,
1987. In their memorandum of law, dated February 4, 1994, the ICN Defendants
argue that class certification may only be granted for purchasers of ICN common
stock for the period August 12, 1986 through February 20, 1987 and for
purchasers of Viratek common stock for the period December 9, 1986 through
February 20, 1987. The ICN Defendants assert that no class should be certified
for purchasers of the common stock of SPI for any period. Oral argument on
plaintiffs' motion for class certification was held on June 2, 1994. To date, no
decision has been rendered.
On October 20, 1993, plaintiffs informed the Court that they had reached an
agreement to settle with co-defendant PaineWebber. On May 6, 1994, plaintiffs
submitted their Stipulation of Settlement to the Court. The hearing on the
Stipulation of Settlement was held on July 27, 1994. The Court approved the
proposed settlement and requested additional information in connection with
Plaintiff's counsel's application for attorney fees and costs. Fact discovery is
complete and expert discovery is virtually complete. Plaintiffs' damages expert,
utilizing assumptions and methodologies that the ICN Defendants' damages experts
find to be inappropriate under the circumstances, has testified that assuming
that classes were certified for purchasers of ICN, Viratek and SPI common stock
for the entire class periods alleged by plaintiffs, January 7, 1986 through
April 15, 1987, and further assuming that all of the plaintiffs' allegations
were proven, potential damages against ICN, Viratek and SPI would, in the
aggregate, amount to $315,000,000. The ICN Defendants' four damages experts have
testified that damages are zero. On May 4, 1994, plaintiffs' counsel agreed to
stipulate to the dismissal of the aiding and abetting claim asserted against the
ICN Defendants and a formal stipulation will be submitted to the Court in the
near future. Management believes that, having extensively reviewed the issues in
the above referenced matters, there are strong defenses and the Company intends
to defend the litigation vigorously. While the ultimate outcome of these
lawsuits cannot be predicted with certainty, and an unfavorable outcome could
have a material adverse effect on the Company, at this time management does not
expect that these matters will have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
72
<PAGE> 73
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN Canada
Limited ("ICN Canada"), SPI, and ICN alleging breach of contract and related
claims arising out of a manufacturing contract between Gencon and ICN Canada.
ICN and SPI were dismissed from the action in March 1993 based on SPI's
agreement to guarantee any judgment against ICN Canada. Following trial in
October and November 1993, the judge granted judgment in favor of Gencon for
breach of contract in the amount of approximately $2,100,000 plus interest,
costs and attorneys' fees (which sums total approximately $650,000). ICN Canada
intends to prosecute vigorously its post-trial motions and any necessary appeal.
ICN Canada's appeal from this judgment is now pending. SPI's December 31, 1993
financial statements include an accrual in an amount equal to what the Company
believes is the maximum exposure with regard to this contingency.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware. Three of these lawsuits, entitled Helmut
Kling v. Milan Panic, et al., Jallath v. Milan Panic, et al., and Amy Hoffman v.
Milan Panic, et al., were filed by stockholders of SPI and, in the Jallath
lawsuit, of Viratek, against ICN, SPI, Viratek (in the Jallath lawsuit) and
certain directors and officers of ICN, SPI and/or Viratek (including Milan
Panic) and purport to be class actions on behalf of all persons who hold shares
of SPI common stock and, in the Jallath lawsuit, Viratek common stock. The
fourth lawsuit, entitled Joice Perry v. Nils O. Johannesson, et. al., was filed
by a stockholder of Viratek against ICN, Viratek and certain directors and
officers of ICN, SPI and Viratek (including Milan Panic) and purports to be a
class action on behalf of all persons who hold shares of Viratek common stock.
These suits allege that the consideration to be provided to the public
stockholders of SPI and/or Viratek (as applicable) in the Merger is unfair and
inadequate, and that the defendants have breached their fiduciary duties in
approving the proposed Merger and otherwise. The Company believes that these
suits are without merit and intends to defend them vigorously.
Government Investigations: In May 1991, ICN completed a civil settlement
with the United States Justice Department regarding a grand jury investigation
initiated in September 1988. The grand jury investigation, in which ICN and its
subsidiaries were targets, generally related to compliance by ICN and its
subsidiaries with applicable FDA statutes and regulations concerning the
marketing and sale of Virazole(R). In settling the matter, ICN entered into a
civil consent decree whereby it neither admitted nor denied any violations of
FDA statutes and regulations. In addition, ICN agreed that it and its affiliates
would abide by all FDA laws and regulations in the future and agreed to pay
$400,000 and to reimburse the FDA $200,000 for administrative costs. The consent
decree expired by its terms at the end of May 1994.
On October 7, 1991, ICN, Viratek, Milan Panic, Chairman of the Board,
President and Chief Executive Officer of the Company, and Dr. Weldon B. Jolley,
a director of ICN, entered into a settlement agreement in the form of a Consent
Decree with the Commission, ending the Commission's investigation of ICN and
Viratek which began in 1987 and generally concerned disclosures by ICN and
Viratek in 1986 and 1987 relating to the safety and efficacy of Virazole(R) in
treating certain AIDS-related conditions. Without admitting or denying any
violations of the securities laws, ICN, Viratek and the individuals agreed not
to violate securities laws in the future.
Product Liability: The Company could be exposed to possible claims for
personal injury resulting from allegedly defective products. The Company
generally self-insures against potential product liability exposure with respect
to its marketed products, including Virazole(R). While to date no material claim
for personal injury resulting from allegedly defective products, including
Virazole(R), has been successfully maintained against any of the Predecessor
Companies, a substantial claim, if successful, could have a material adverse
effect on the Company. See "Investment Considerations -- Potential Product
Liability Exposure and Lack of Insurance."
Environmental Matters: The Company has not experienced any material impact
on its capital expenditures, earnings or competitive position as a result of
compliance with any laws or regulations regarding the protection of the
environment. The Company believes it is in compliance in all material respects
with applicable laws relating to the protection of the environment.
73
<PAGE> 74
MANAGEMENT
Upon consummation of the Merger, the following individuals are expected to
be the members of the Board of Directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- ----------------------------------- --- ---------------------------------------------
<S> <C> <C>
Milan Panic 64 Chairman of the Board, Chief Executive
Officer and President
Norman Barker, Jr. 71 Director
Birch E. Bayh, Esq. 66 Director
Alan F. Charles 56 Director
Robert H. Finch, Esq. 68 Director
Roger Guillemin, M.D., Ph.D. 70 Director
Adam Jerney 52 Director, Executive Vice President -- Chief
Operating Officer
Weldon B. Jolley, Ph.D. 67 Director
Vernon Knight, M.D. 76 Director
Jean Francois Kurz 60 Director
Thomas H. Lenagh 73 Director
Charles T. Manatt 58 Director
James P. Miscoll 59 Director
Stephen Moses 59 Director
Michael Smith, Ph.D. 62 Director
Roberts A. Smith, Ph.D. 65 Director
Richard W. Starr 73 Director
John E. Giordani 52 Executive Vice President -- Chief Financial
Officer and Corporate Controller
Nils O. Johannesson, M.D., Ph.D. 49 Executive Vice President -- Research and
Development
Bill A. MacDonald 46 Executive Vice President -- Corporate
Development
John F. Phillips 53 Executive Vice President -- Administration
David C. Watt 41 Executive Vice President -- General Counsel
Jack Sholl 53 Senior Vice President -- Human Resources
</TABLE>
Each of the individuals expected to be directors of the Company is
currently a director of at least one of the Predecessor Companies. It is
expected that the members of the Board of Directors of New ICN, other than
officers of New ICN, will be paid an annual fee of $22,000, payable quarterly,
plus a fee of $500 for every Board meeting attended and an additional fee of
$500 for every committee meeting attended. Such fees would be consistent with
the fees currently paid to the ICN directors. See "Executive Compensation and
Related Matters -- Compensation of Directors of the Predecessor Companies." It
is also expected that New ICN will provide other compensation to the New ICN
directors substantially similar to the compensation presently provided to the
directors of Predecessor Companies.
Mr. Panic is employed under an Employment Agreement with ICN (which will be
assumed by the Company) which expires in November 1994. The Company through the
proposed Compensation and Benefits Committee of its Board of Directors and Mr.
Panic are presently discussing the terms of a new employment agreement to
replace the existing agreement upon its expiration. The Company will also
assume, from the Predecessor Companies, employment agreements with Messrs.
Jerney, Giordani, MacDonald, Phillips, Watt and Sholl. Each of these agreements,
which were entered into in March 1993, has an initial term of three years and is
automatically extended for one year terms unless either the employee or the
Company elects not to extend it. These agreements also provide for certain
payments if, after a change of control (as defined), the employee's employment
is terminated under certain circumstances. Executive officers are elected
annually.
74
<PAGE> 75
The Company has adopted a charter provision which limits the monetary
liability, under certain circumstances, of its directors and, as a matter of
policy, enters into indemnification agreements with certain of its officers and
directors to the fullest extent permitted under Delaware law.
The Company's charter provides that the Company's Board will be divided
into three classes of directors, as nearly equal in number as reasonably
possible, except for any directors elected separately by the shareholders of any
one or more series of New ICN Preferred Stock. The term of office of the first
class of directors will expire at the 1995 Annual Meeting of Stockholders, the
term of office of the second class of directors will expire at the 1996 Annual
Meeting of Stockholders, and the term of office of the third class of directors
will expire at the 1997 Annual Meeting of Stockholders. Of the initial
directors, Drs. Knight, Jolley and Roberts A. Smith, and Messrs. Finch, Lenagh
and Starr will serve until the 1995 Annual Meeting of Stockholders; Dr. Michael
Smith and Messrs. Barker, Bayh, Charles, Jerney and Moses will serve until the
1996 Annual Meeting of Stockholders; and Dr. Guillemin and Messrs. Kurz, Manatt,
Miscoll and Panic will serve until the 1997 Annual Meeting of Stockholders.
Starting with the 1995 Annual Meeting of Stockholders, one class of directors
will be elected each year for a three-year term.
Milan Panic, the founder of ICN, has been Chairman of the Board, Chief
Executive Officer and President of ICN since its inception in 1960; except for a
leave of absence from July 14, 1992 to March 4, 1993 while he was serving as
Prime Minister of Yugoslavia and a leave of absence from October 1979 to June
1980. Mr. Panic has also served as Chairman of the Board and Chief Executive
Officer of SPI, Viratek and Biomedicals since their respective inceptions
(except for such leaves of absence).
Norman Barker, Jr., has served as a director of ICN since 1992 and as a
director of SPI since 1988. Mr. Barker is the retired Chairman of the Board of
First Interstate Bank of California and Former Vice Chairman of the Board of
First Interstate Bancorp. Mr. Barker joined First Interstate Bank of California
in 1957 and was elected President and Director in 1968, Chief Executive Officer
in 1971 and Chairman of the Board in 1973. He retired as Chairman of the Board
at the end of 1985. Mr. Barker is also a director of Pacific American Income
Shares, Inc., Southern California Edison Company and TCW Convertible Securities
Fund, Inc.
Birch E. Bayh, Esq., has served as a director of ICN since 1992. Senator
Bayh is a partner in the law firm of Bayh, Connaughton, Fensterheim & Malone.
Senator Bayh was previously a partner of the Indianapolis, Indiana and
Washington, D.C. law firm of Bayh, Tabbert & Capehart from April 1981 through
June 1985. From 1963 to 1981, Senator Bayh served as United States Senator from
the State of Indiana. Senator Bayh is also a director of Acordia, Inc. and Simon
Property Group.
Alan F. Charles has served as a director of SPI since 1986. Mr. Charles was
Vice Chancellor of University Relations at the University of California, Los
Angeles from 1980 to 1993 and served in various administrative capacities at
that university since 1972.
Robert H. Finch, Esq., has served as a director of ICN since 1976 and as a
director of Viratek since 1980. Mr. Finch has been a partner in the Pasadena,
California law firm of Fleming, Anderson, McClung & Finch since 1976. Prior
thereto he was counsel to President of the United States from 1971 to 1972,
Secretary of the United States Department of Health, Education and Welfare from
1969 to 1972, and Lieutenant Governor of the State of California from 1967 to
1969. Mr. Finch is also a director of Nationwide Health Properties, Inc. and
Continental Graphics.
Roger Guillemin, M.D., Ph.D., has served as a director of SPI since 1989,
as a director of Viratek since 1992 and as a director of ICN since 1993. Dr.
Guillemin has been Distinguished Scientist at the Whittier Institute in La
Jolla, California since March 1989 and was Resident Fellow and Chairman of the
Laboratories for Neuroendocrinology at the Salk Institute in La Jolla,
California, and Adjunct Professor of Medicine at the Medical School of the
University of California at San Diego. Dr. Guillemin was awarded the Nobel Prize
in Medicine in 1977 and, in the same year, was presented the National Medal of
Science by the President of the United States. He was affiliated with the
Department of Physiology at Baylor College of Medicine in Houston, Texas from
1952 to 1970. Dr. Guillemin is a member of the National Academy of Sciences, and
a Fellow of the American Association for the Advancement of Science. Dr.
Guillemin has also served as President of the American Endocrine Society. Dr.
Guillemin is also a director of Erbamont N.V.
75
<PAGE> 76
Adam Jerney has served as a director of ICN, SPI, Viratek and Biomedicals
since 1992. Prior to the Merger, Mr. Jerney was President and Chief Operating
Officer of SPI. He served as Chairman of the Board and Chief Executive Officer
of ICN, SPI, Viratek and Biomedicals from July 14, 1992 to March 4, 1993 during
Milan Panic's leave of absence (as discussed below). Mr. Jerney joined ICN in
1973 as Director of Marketing Research in Europe and assumed the position of
General Manager of ICN Netherlands in 1975. In 1981, he was elected Vice
President -- Operations and in 1987 he assumed his current position. Prior to
joining ICN, he spent four years with F. Hoffmann-LaRoche & Company.
Weldon B. Jolley, Ph.D., has served as a director of ICN since 1960. Dr.
Jolley is President of Golden Opportunities and was President of the Nucleic
Acid Research Institute, a former division of ICN, from 1985 to 1989. Dr. Jolley
was a Vice-President of ICN until 1990. Prior to that, he was, for eleven years,
Professor of Surgery at the Loma Linda University School of Medicine in Loma
Linda, California and a physiologist at the Veterans Hospital in Loma Linda,
California.
Vernon Knight, M.D., has served as a director of Viratek since 1981. Dr.
Knight is Professor at Baylor College of Medicine ("Baylor") in Houston, Texas.
He has also served as a consultant to the United States Army Medical Research
Institute of Infectious Diseases and has served as a member of the National
Institutes of Health's Task Force on Immunization, Research and Development
Panel.
Jean-Francois Kurz has served as a director of Biomedicals since 1989. Mr.
Kurz was a member of the Board of Directors and the Executive Committee of the
Board of DG Bank Switzerland Ltd. from 1990 to 1992. In 1988 and 1989, Mr. Kurz
served as a General Manager of TDB American Express Bank of Geneva and, from
1969 to 1988, he was Chief Executive Officer of Banque Gutzwiller, Kurz,
Bungener in Geneva. Mr. Kurz is also Chairman of the Board and a director of
Banque Pasche S.A., Geneva.
Thomas H. Lenagh has served as a director of Biomedicals since 1983 and was
a director of ICN from 1979 to April 1989. Mr. Lenagh is an independent
financial advisor. He was Chairman of the Board of Greiner Engineering, Inc.
from 1982 to 1985. Mr. Lenagh served as Financial Vice President to the Aspen
Institute from 1978 to 1980, and since then as an independent financial
consultant. From 1964 to 1978 he was Treasurer of the Ford Foundation. Mr.
Lenagh is also a director of Adams Express Company, U.S. Life Corporation, SCI
Systems, Inc., Gintel Funds, Irvine Sensors, Inc., CML, Inc., Clemente Global
Funds, Franklin Quest, V Band Corp. and Styles On Video.
Charles T. Manatt has served as a director of SPI since 1992. Mr. Manatt is
a partner in the law firm of Manatt, Phelps & Phillips, of which he was a
founder in 1964. Mr. Manatt served as Chairman of the Democratic Party from 1981
to 1985. Mr. Manatt is also a director of Federal Express, GTE and Castle &
Cooke Homes.
James P. Miscoll has served as a director of SPI since 1992. Mr. Miscoll is
the retired Vice-Chairman of Bank of America, where he had served in a number of
positions since 1962. Mr. Miscoll is also a director of Coast Federal Financial
Inc., Rykoff Sexton, Inc. and the California Higher Education Loan Authority.
Stephen D. Moses has served as a director of SPI since 1988. Mr. Moses is
Chairman of the Board of Stephen Moses Interests. He was formerly Chairman of
the Board of National Investment Development Corporation and Brentwood Bank in
Los Angeles, California and a member of the National Advisory Board of the
Center for National Policy. Mr. Moses serves on the Board of Visitors of Hebrew
Union College as well as the Board of Trustees of Franklin and Marshall College
and the UCLA Foundation. From 1967 to 1971, Mr. Moses was an executive of the
Boise Cascade Corporation, serving in several capacities, including President of
Boise Cascade Home and Land Corporation. In the early 1970's, Mr. Moses was
President of Flagg Communities, Inc.
Michael Smith, Ph.D., has served as a director of ICN since 1994. Dr. Smith
is Director of the Biomedical Research Center, a privately funded research
institute at the University of British Columbia. In 1993, Dr. Smith received the
Nobel Prize in Chemistry. He has been a career investigator of the Medical
Research Council of Canada since 1979 and is a member of the American Endocrine
Society.
76
<PAGE> 77
Roberts A. Smith, Ph.D., has served as a director of ICN since 1960 and as
a director of Viratek since 1992. Dr. Smith was President of Viratek and Vice
President -- Research and Development of SPI through 1992. Dr. Smith was also a
director of the Nucleic Acid Research Institute from 1985 to 1989. For more than
eleven years, Dr. Smith was Professor of Chemistry and Biochemistry at the
University of California at Los Angeles. Dr. Smith is also a director of PLC
Systems.
Richard W. Starr has served as a director of ICN since 1983. Mr. Starr is
the retired Executive Vice President and Chief Credit Officer Worldwide of First
Interstate Bank of California. Mr. Starr spent 31 years with First Interstate
before retiring in 1983 and has over 44 years of experience in commercial
banking.
John E. Giordani joined ICN in June 1986 after serving as Vice President
and Corporate Controller of Revlon, Inc., in New York, New York since February
1982. Prior to the Merger, Mr. Giordani's primary duties were as Chief Financial
Officer of ICN. He devoted insubstantial time to Biomedicals and Viratek. From
1978 until February 1982, he held Deputy and Assistant Corporate Controller
positions with Revlon, Inc. He was with Peat, Marwick, Mitchell & Co. from 1969
to 1978.
Nils O. Johannesson, M.D., Ph.D., joined SPI in 1992. Prior to the Merger,
he was President of Viratek since 1993 and also Vice President of Research and
Development and New Products of SPI. Prior to joining SPI, he was Senior Vice
President, Research and Development at A.L. Laboratories, Inc. since 1990. From
1986 to 1990, he served as President of the pharmaceutical division of the
Danish company, Dumex, an A.L. Laboratories subsidiary, and from 1984 to 1985,
he headed research and development and production at Dumex. From 1979 through
1984, Dr. Johannesson was employed by Astra AB where he was responsible for
clinical trials and project management.
Bill A. MacDonald joined ICN in March 1982. Prior to the Merger, he was
President of Biomedicals since March 18, 1993. From 1980 to 1982, he served as
the Tax Manager of Pertec Computer Corporation. From 1973 to 1980, he was Tax
Manager and Assistant Treasurer of Republic Corporation.
John F. Phillips joined SPI in April 1988 as Senior Vice President and
Chief Financial Officer. Prior to the Merger, he was Executive Vice President
and Chief Financial Officer of SPI. He managed private assets and was a business
consultant from January 1986 to March 1988. From June 1984 through November
1985, he was Senior Vice President and Chief Financial Officer for Playboy
Enterprises, Inc. From 1978 through 1984, he was with Max Factor and Company as
Senior Vice President and Financial Officer.
David C. Watt joined ICN in March 1988 as Assistant General Counsel and
Secretary. He was elected Vice President -- Law and Secretary in December 1988.
In January 1992, Mr. Watt was promoted to Senior Vice President of ICN. On
February 1, 1994, Mr. Watt was elected Executive Vice President -- Corporate
Development of ICN. From 1986 to 1987, he was President and Chief Executive
Officer of Unitel Corporation. He also served as Executive Vice President and
General Counsel and Secretary of Unitel Corporation during 1986. From 1983 to
1986, he served with ICA Mortgage Corporation as Vice President, General Counsel
and Corporate Secretary. Prior to that time, he served with Central Savings
Association as Assistant Vice President and Associate Counsel from 1981 to 1983
and as Assistant Vice President from 1980 to 1981.
Jack A. Sholl joined ICN in August 1987 as Vice President, Public
Relations. Prior to the Merger, he was promoted to Senior Vice President. From
1979 to August 1987, he served as Director of Financial and Media Communications
with Warner-Lambert Company of Morris Plains, New Jersey, and from 1973 to 1979
as Manager, Department of Communications with Equibank, N.A. of Pittsburgh,
Pennsylvania. Prior to that time, he served on the Public Relations staff of the
New York Stock Exchange (1971-1973) and in editorial positions with The
Associated Press (1968-1971), the last as supervising Business and Financial
Editor in New York.
In October 1991, the Company's Chairman of the Board, Mr. Panic, without
admitting or denying allegations in a complaint filed by the Commission,
consented to the entry of a judgment which enjoins violations of the federal
securities laws. See "Business -- Litigation, Government Investigations and
Other Matters."
77
<PAGE> 78
It is anticipated that the Board of Directors of the Company will initially
have five standing committees. The members of the Executive Committee will
initially be Messrs. Panic, Finch, Moses and Dr. Roberts A. Smith, the members
of the Compensation and Benefits Committee will initially be Messrs. Barker,
Bayh, Moses and Charles, the members of the Audit Committee will initially be
Messrs. Starr, Miscoll and Finch, the members of the Finance Committee will
initially be Messrs. Miscoll, Barker, Kurz, Manatt and Lenagh and the members of
the Science and Technology Committee will be Drs. Guillemin, Michael Smith,
Roberts A. Smith, Jolley and Knight.
EXECUTIVE COMPENSATION AND RELATED MATTERS
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation
awarded to, earned by, or paid to the Chief Executive Officer of each of the
Predecessor Companies and the four most highly paid executive officers, other
than the Chief Executive Officer, of each of the Predecessor Companies who will
become executive officers of New ICN (which, because of overlap of position,
consist of only eight persons) (collectively, the "Named Executive Officers")
for services rendered to the Predecessor Companies in all capacities for 1993,
1992 and 1991.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- AWARDS
OTHER ------------
NAME AND ANNUAL SECURITIES ALL OTHER
PRINCIPAL POSITION COMPENSATION UNDERLYING COMPENSATION
WITH THE COMPANY YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)(2) ($)(3)
- ------------------------------ ---- --------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Milan Panic 1993 $ 535,000 $ -- $ -- 60,000(4) $ 49,245(5)
Chairman, President 1992 535,000 5,675,000 -- 900,000(4) 49,041(5)
and Chief Executive Officer 1991 535,000 150,000 -- -- 1,458
Adam Jerney 1993 380,000 38,100 -- 150,000(6) 18,730(8)
Executive Vice 1992 321,821 370,000(7) -- 450,000(6) 20,268(8)
President -- Chief 1991 244,799 156,000 -- 140,000(6) 6,421(8)
Operating Officer
Bill A. MacDonald 1993 200,000 -- -- 125,000(9) 13,496
Executive Vice 1992 168,322 90,000(7) -- 30,000(9) 15,125
President -- Corporate 1991 157,310 190,000 -- 25,000(9) 14,960
Development
John E. Giordani 1993 225,195 -- -- 65,000(10) 38,886
Executive Vice 1992 210,472 90,000(7) -- 30,000(10) 25,778
President -- Chief 1991 196,693 130,000 -- 25,000(10) 9,828
Financial Officer and
Corporate Controller
David C. Watt 1993 180,000 -- -- 55,000(11) 5,817(8)
Executive Vice 1992 134,825 169,200(7) -- 20,000(11) 1,320(8)
President -- General 1991 128,404 25,000 -- 32,500(11) 1,020(8)
Counsel
John F. Phillips 1993 190,000 -- -- 55,000(12) 7,617
Executive Vice 1992 140,000 228,600(7) -- 20,000(12) 4,200
President -- 1991 130,005 82,000 -- 23,000(12) 2,119
Administration
Nils O. Johannesson 1993 193,333 6,667 -- 15,000(13) --
Executive Vice 1992 120,697 74,480(7) -- 15,000(13) --
President -- Research 1991 -- -- -- -- --
and Development
Jack Sholl 1993 172,043 25,000 -- 15,000(14) 24,429(8)
Senior Vice President -- 1992 163,856 70,000(7) -- 10,000(14) 11,716(8)
Human Resources 1991 153,137 25,000 2,551 20,000(14) 2,551(8)
</TABLE>
78
<PAGE> 79
- ---------------
(1) Unless otherwise indicated, with respect to any individual named in the
above table, the aggregate amount of perquisites and other personal
benefits, securities or property was less than either $50,000 or 10% of the
total annual salary and bonus reported for the Named Executive Officer.
(2) Includes grants of options to purchase shares of common stock of ICN ("ICN
Common Stock"), common stock of SPI ("SPI Common Stock"), common stock of
Viratek ("Viratek Common Stock") and common stock of Biomedicals
("Biomedicals Common Stock").
(3) Except where otherwise indicated, the amounts in this column represent
matching contributions to ICN's 401(k) plan, amounts accrued under an
executive deferral plan and medical benefits and medical and life insurance
premiums.
(4) Mr. Panic was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1993...................... -- -- -- 60,000
1992...................... -- 400,000 200,000 300,000
1991...................... -- -- -- --
</TABLE>
(5) Includes $39,262 and $38,242 for legal services and miscellaneous fringe
benefits in 1993 and 1992, respectively.
(6) Mr. Jerney was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1993...................... 50,000 50,000 50,000 --
1992...................... 100,000 150,000 100,000 100,000
1991...................... 40,000 100,000 -- --
</TABLE>
(7) Includes 1991 performance bonus paid in 1992, bonus on the completion of
the Galenika transaction and the early payment of the 1992 performance
bonus in anticipation of the increase in federal income tax rates (which
bonus would have ordinarily been paid 1993).
(8) In the three year period 1993, 1992 and 1991, Mr. Jerney realized $359,541
and $2,280,698 on sales of ICN and SPI Common Stock, respectively. Mr. Watt
realized $69,375, $68,000 and $646,699 on sales of ICN, Viratek and SPI
Common Stock, respectively. Mr. Sholl realized $90,918 and $280,138 on
sales of ICN and SPI Common Stock. These stock option gains are not
reflected in the "All Other Compensation" column.
(9) Mr. MacDonald was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1993...................... 25,000 40,000 10,000 50,000
1992...................... -- 30,000 -- --
1991...................... 10,000 10,000 5,000 --
</TABLE>
(10) Mr. Giordani was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1993...................... 25,000 -- 10,000 30,000
1992...................... -- 30,000 -- --
1991...................... 10,000 10,000 5,000 --
</TABLE>
79
<PAGE> 80
(11) Mr. Watt was granted options to purchase the following shares of ICN Common
Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------- ------- ------- -----------
<S> <C> <C> <C> <C>
1993...................... 25,000 20,000 10,000 --
1992...................... -- 20,000 -- --
1991...................... 20,000 12,500 -- --
</TABLE>
(12) Mr. Phillips was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------ ------ ------- -----------
<S> <C> <C> <C> <C>
1993......................... 25,000 20,000 10,000 --
1992......................... -- 20,000 -- --
1991......................... -- 23,000 -- --
</TABLE>
(13) Dr. Johannesson was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------ ------ ------- -----------
<S> <C> <C> <C> <C>
1993......................... -- -- 15,000 --
1992......................... -- 15,000 -- --
1991......................... -- -- -- --
</TABLE>
(14) Mr. Sholl was granted options to purchase the following shares of ICN
Common Stock, SPI Common Stock, Viratek Common Stock and Biomedicals Common
Stock:
<TABLE>
<CAPTION>
ICN SPI VIRATEK BIOMEDICALS
------ ------ ------- -----------
<S> <C> <C> <C> <C>
1993......................... -- 10,000 5,000 --
1992......................... -- 10,000 -- --
1991......................... 20,000 -- -- --
</TABLE>
In July 1992, Milan Panic, Chairman of the Board, President and Chief
Executive Officer of ICN, with the approval of ICN's Board of Directors, became
Prime Minister of Yugoslavia and was granted a paid leave of absence from all
duties to ICN while retaining his title as Chairman of the Board. Mr. Panic and
ICN entered into a Leave of Absence and Reemployment Agreement which contained
mutual obligations, requiring, among other things, that ICN reemploy Mr. Panic
and that Mr. Panic return to his previous positions with ICN. Mr. Panic was
succeeded as Prime Minister on March 4, 1993, and pursuant to the Leave of
Absence and Reemployment Agreement, returned to his duties at ICN.
In addition to the salaries of Mr. Panic and certain ICN employees
assisting him during his leave of absence, ICN incurred certain other expenses
in connection with Mr. Panic's transition to and return from his leave of
absence. Mr. Panic reimbursed ICN for certain expenses paid by ICN but sought
reimbursement from ICN for certain of these expenses. ICN retained a recently
retired member of the California Superior Court to review the expenses. The
Judge prepared a report for the Audit Committees of ICN and SPI, which report
was reviewed and approved by these Audit Committees. Based on the recommendation
of these Audit Committees, the ICN and SPI Boards of Directors approved the
reimbursement to Mr. Panic for substantially all such expenses.
Mr. Panic has reimbursed certain withholding taxes due as of December 31,
1992, previously advanced by ICN, in connection with the exercise of stock
options, in the amount of $1,351,000. Mr. Panic paid these amounts in 1993, in
the form of cash in the amount of $678,000 and Viratek Common Stock in the
amount of $776,000 valued at fair market value.
On April 1, 1992, the Board of Directors granted Mr. Panic a bonus of
200,000 shares of SPI Common Stock for his extraordinary efforts in completing
the Galenika transaction. The value of these shares at the date of grant was
$5,375,000. Mr. Panic sold the shares during 1993 for a realized value of
$4,005,223.
80
<PAGE> 81
Additionally, in 1993, Mr. Panic realized $1,881,250 and $1,853,000 on other
sales of shares of ICN Common Stock and SPI Common Stock, respectively.
On December 20, 1990, with the approval of the Board of Directors of ICN,
Mr. Panic borrowed 200,000 shares of SPI Common Stock from ICN (which shares had
a market value as of that date of $1,935,000). Mr. Panic was obligated to return
these shares together with interest at the rate of two times SPI's then-current
dividend rate. No restrictions were imposed on the use of such shares and,
therefore, the shares could have since been used by Mr. Panic as collateral for
borrowing or could have been sold by him. All such shares of SPI Common Stock
have since been returned to ICN.
OPTION GRANTS
The following table sets forth information with respect to options to
purchase shares of ICN Common Stock, SPI Common Stock, Viratek Common Stock and
Biomedicals Common Stock granted in 1993 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE GRANT DATE
GRANTED EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE
NAME COMPANY (#) FISCAL YEAR ($/SH) DATE $(1)(2)
- --------------------- ----------- ---------- --------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Milan Panic Biomedicals 60,000 12.0% $ 3.250 4/15/03 $ 60,600
Adam Jerney ICN 50,000 30.1 6.375 1/13/03 245,500
SPI 50,000 7.2 10.375 1/12/03 325,731
Viratek 50,000 22.7 10.000 5/11/03 424,500
Bill A. MacDonald ICN 25,000 15.1 6.375 1/13/03 122,750
SPI 40,000 5.7 10.375 1/12/03 255,473
Viratek 10,000 4.5 10.000 5/11/03 84,900
Biomedicals 50,000 10.0 3.250 4/15/03 50,500
John E. Giordani ICN 25,000 15.1 6.375 1/12/03 122,750
Viratek 10,000 4.5 10.000 5/11/03 84,900
Biomedicals 30,000 6.0 3.250 4/15/03 30,300
David C. Watt ICN 25,000 15.1 6.375 1/13/03 122,750
SPI 20,000 2.9 10.375 1/12/03 130,289
Viratek 10,000 4.5 10.000 5/11/03 84,900
John F. Phillips ICN 25,000 15.1 6.375 1/13/03 122,750
SPI 20,000 2.9 10.375 1/12/03 130,289
Viratek 10,000 4.5 10.000 5/11/03 84,900
Nils O. Johannesson Viratek 15,000 12.5 10.000 1/12/03 127,350
Jack Sholl SPI 10,000 1.5 10.375 1/12/03 65,141
Viratek 5,000 2.3 10.000 5/11/03 42,450
</TABLE>
- ---------------
(1) The options granted have ten year terms. The options vest according to the
following schedule: 25% on the first anniversary of the date of grant and
25% on each of the next succeeding three anniversary dates of the grant
date. The options were granted with an exercise price equal to the fair
market value of the underlying shares on the date of grant.
(2) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to variables such as interest rates, stock price
volatility and future dividend yield.
81
<PAGE> 82
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each of the
Predecessor Companies regarding (i) stock option exercises by the Named
Executive Officers during 1993 and (ii) unexercised stock options held by the
Named Executive Officers at December 31, 1993:
AGGREGATED OPTION EXERCISES
IN 1993 AND DECEMBER 31, 1993 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1993 (#) AT DECEMBER 31, 1993 ($)(2)
ACQUIRED ON VALUE ------------------------------- -------------------------------
NAME COMPANY EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- ------------- ---------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Milan Panic
ICN 832,000 $5,436,000 -- -- $ -- $ --
SPI 284,054(3) 2,644,935 502,259 -- 601,891 --
Viratek 141,091(4) 1,461,306 488,908 -- 2,291,033 --
Biomedicals -- -- 400,000 260,000 -- 75,000
Adam Jerney
ICN 50,519 372,795 37,500 132,500 93,750 343,750
SPI 80,420 894,569 132,194 233,158 187,920 677,128
Viratek -- -- 26,250 131,250 68,750 243,750
Biomedicals -- -- 25,000 75,000 18,750 56,250
Bill A. MacDonald
ICN 6,608 39,114 6,250 23,750 15,625 62,500
SPI -- -- 28,659 62,475 91,969 156,532
Viratek -- -- 6,301 10,499 25,506 20,619
Biomedicals -- -- 9,900 52,500 -- 62,500
John E. Giordani
ICN 8,571 54,818 6,250 23,750 15,625 62,500
SPI 6,126 67,550 29,020 28,898 67,325 66,167
Viratek -- -- 5,251 10,499 16,881 20,619
Biomedicals -- -- 15,000 35,000 0 37,500
David C. Watt
ICN 2,500 20,000 16,250 28,750 46,875 78,125
SPI 11,990 172,700 26,949 43,601 107,076 109,757
Viratek 7,350 68,000 2,625 7,875 1,875 5,625
John F. Phillips
ICN -- -- 6,250 18,750 15,625 46,875
SPI 18,953 145,450 23,601 47,989 33,868 113,687
Viratek -- -- -- 10,000 -- 7,500
Nils O. Johannesson
SPI -- -- 4,116 12,350 -- --
Viratek -- -- 3,750 11,250 15,002 44,998
Jack Sholl
ICN 175 918 16,825 11,500 40,063 71,828
SPI -- -- 13,822 16,466 92,716 39,919
Viratek -- -- 5,250 3,750 35,438 2,813
Biomedicals -- -- 3,200 -- -- --
</TABLE>
- ---------------
(1) Difference between the fair market value of common stock of the respective
Predecessor Company at the date of exercise and the exercise price.
(2) Difference between the fair market value of the shares of common stock of
each of the Predecessor Companies on December 31, 1993 and the exercise
price.
(3) 227,191 of these shares were transferred to ICN in repayment of all expenses
related to a loan to Mr. Panic authorized by the Board of Directors.
(4) The options with respect to these shares were exercised in April 1993 and
transferred to ICN to reimburse ICN for certain expenses previously paid by
ICN on behalf of Mr. Panic.
COMPENSATION OF DIRECTORS OF THE PREDECESSOR COMPANIES
Members of the Board of Directors of ICN, other than employees, are paid an
annual fee of $22,000, payable quarterly, plus a fee of $500 for every Board
meeting attended and an additional fee of $500 for every committee meeting
attended. During 1993, Messrs. Bayh and Finch and Dr. Jolley, or firms with
which they are affiliated, received legal or consulting fees from ICN in the
amounts of $50,598, $20,958 and $55,464, respectively. Dr. Guillemin received
$6,000 from Viratek for consulting services rendered. Dr. Smith received $21,000
in 1993 from Viratek for consulting services rendered. In addition, nonemployee
directors on the first
82
<PAGE> 83
business day following each annual meeting of stockholders are granted options
to purchase 10,000 shares of ICN Common Stock pursuant to the 1992 ICN
Non-Qualified Plan.
Members of the Board of Directors of SPI, other than employees, are paid an
annual fee of $20,000 in 1993. In addition, all members other than Mr. Panic and
Mr. Jerney received fees in the amount of $500 per Board meeting and $500 per
committee meeting actually attended, and were reimbursed for their out-of-pocket
expenses in attending meetings. In addition, nonemployee directors on the first
business day following each annual meeting of shareholders are granted options
to acquire 10,000 shares of SPI Common Stock on such date pursuant to the 1992
SPI Non-Qualified Plan.
Members of the Board of Directors of Viratek, other than employees, are
paid an annual fee of $20,000, payable quarterly, plus a fee of $500 for every
Board meeting and $500 for every committee meeting actually attended, and are
reimbursed for their out-of-pocket expenses in attending meetings. Dr. Knight is
a professor at Baylor. ICN has a royalty agreement with Baylor (see "Certain
Transactions") and SPI paid a royalty of $422,000 in 1993. In addition,
nonemployee directors on the first business day following each annual meeting of
shareholders are granted options to acquire 10,000 shares of Viratek Common
Stock on such date pursuant to the Viratek 1992 Non-Qualified Plan.
Members of the Board of Directors of Biomedicals, other than employees, are
paid an annual fee of $20,000 in 1993. In addition, all members other than
employees received fees in the amount of $500 per Board meeting and $300 per
committee meeting actually attended, and were reimbursed for their out-of-pocket
expenses. In addition, nonemployee directors on the first business day following
each annual meeting of shareholders are granted options to acquire 10,000 shares
of Biomedicals Common Stock pursuant to the 1992 Biomedicals Non-Qualified Plan.
COMPENSATION PURSUANT TO STOCK OPTION PLANS OF THE PREDECESSOR COMPANIES
ICN
As of December 31, 1993, under ICN's 1981 Employee Incentive Stock Option
Plan (which terminated in 1991) options to acquire 35,878 shares of ICN Common
Stock were outstanding and exercisable (at prices ranging from $3.00 to $9.25).
There were options to acquire 30,256 shares of ICN Common Stock exercised during
1993 at $4.65 per share. There were options to acquire 2,250 shares of ICN
Common Stock exercised during 1992 at $3.00. There were options to acquire 5,000
shares of ICN Common Stock exercised during 1991 at an average price of $6.375.
Pursuant to non-qualified stock option agreements with key employees and
officers of ICN, options to acquire 215,863 shares of ICN Common Stock were
outstanding (at prices ranging from $3.00 to $5.75) of which options to acquire
126,863 shares of ICN Common Stock were exercisable at December 31, 1993. There
were options to acquire 153,808 shares exercised during 1993 at an average price
of $4.736. There were options to acquire 181,855 shares exercised during 1992 at
an average price of $3.55. There were options to acquire 348,007 shares of ICN
Common Stock exercised during 1991 at an average price of $3.00.
During 1992, the stockholders of ICN approved the 1992 ICN Non-Qualified
Stock Option Plan (the "1992 ICN Non-Qualified Plan") and the 1992 ICN Employee
Incentive Stock Plan (the "1992 ICN Incentive Plan"), reserving 500,000 shares
per plan of ICN Common Stock for issuance to employees and directors of ICN. ICN
has granted options for shares under both plans. Options under both plans are
exercisable over a period to be determined by the Compensation Committee, which
shall not exceed ten years from the date of grant and will expire at the end of
the option period.
As of December 31, 1993, options to acquire 85,000 shares of ICN Common
Stock were outstanding under the 1992 ICN Non-Qualified Plan (at prices ranging
from $6.375 to $22.875) of which 11,000 were exercisable at December 31, 1993.
Options to acquire 255,000 shares of ICN Common Stock were outstanding under the
1992 ICN Incentive Plan (at prices ranging from $6.375 to $9.50) of which 26,250
were exercisable at December 31, 1993. There were no options exercised under
either plan during 1993.
83
<PAGE> 84
SPI
As of December 31, 1993, under SPI's 1982 Incentive Stock Option Plan (the
"1982 ISO Plan") (which terminated in 1992) options to acquire 1,369 shares of
SPI Common Stock were outstanding and exercisable at a price of $4.77 per share.
There were no option exercises in 1993.
Pursuant to the 1982 Non-Qualified Stock Option Plan (the "1982 SPI
Non-Qualified Plan") as of December 31, 1993, there were options to acquire
856,232 shares of SPI Common Stock outstanding (at prices ranging from $4.20 to
$24.83 per share) of which 456,887 are currently exercisable. During 1993,
183,805 options were exercised at an average price of $5.03 per share of SPI
Common Stock.
As of December 31, 1993, under SPI's 1992 Incentive Stock Option Plan (the
"1992 SPI Incentive Plan") options to acquire 505,858 shares of SPI Common Stock
were outstanding (at prices ranging from $9.13 to $24.36 per share) of which
89,899 are currently exercisable. During 1993, there were no exercises.
As of December 31, 1993, under SPI's 1992 Non-Qualified Stock Option Plan
(the "1992 SPI Non-Qualified Plan"), options to acquire 1,483,007 shares of SPI
Common Stock were outstanding (at prices ranging from $9.45 to $29.49 per share)
of which 400,421 were granted subject to the approval of the stockholders of the
Amended and Restated 1992 SPI Non-Qualified Plan and of which 551,438 are
currently exercisable. During 1993, there were no exercises.
Viratek
As of December 31, 1993, under Viratek's 1980 Stock Option Plan and the
1982 Non-Qualified Stock Option Plan (the "1982 Viratek Non-Qualified Plan")
(which terminated in 1992) options for 310,222 shares were outstanding (at
prices ranging from $2.023 to $4.52 per share) of which 299,742 are currently
exercisable. During 1993, 164,698 shares were exercised at an average price of
$2.16 per share.
As of December 31, 1993 under Viratek's 1992 Incentive Stock Option Plan
(the "1992 Viratek ISO Plan") options to acquire 425,250 shares of Viratek
Common Stock were outstanding (at prices ranging from $7.61 to $21.19 per share)
of which 237,563 are currently exercisable. During 1993 there were no exercises.
As of December 31, 1993, under Viratek's 1992 Non-Qualified Stock Option
Plan (the "1992 Viratek Non-Qualified Plan") options to acquire 141,750 shares
of Viratek Common Stock were outstanding (at prices ranging from $6.42 to $13.21
per share) of which 5,250 are currently exercisable. During 1993, there were no
exercises.
Biomedicals
As of December 31, 1993, under Biomedicals' 1983 Incentive Stock Option
Plan (the "1983 Biomedicals ISO Plan") (which terminated in 1993) options to
acquire 393,040 shares of Biomedicals Common Stock were outstanding of which
201,470 were exercisable (at prices ranging from $0.83 to $10.50 per share).
There were no exercises in 1993.
Pursuant to the 1983 Non-Qualified Stock Option Plan (the "1983 Biomedicals
Non-Qualified Plan"), as of December 31, 1993 there were options to acquire
296,540 shares of Biomedicals Common Stock outstanding (at prices ranging from
$0.83 to $7.50 per share) of which 199,165 options are currently exercisable.
During 1993, options to acquire 4,800 shares of Biomedicals Common Stock were
exercised at an average price of $4.125 per share.
At December 31, 1993, under the Biomedicals 1992 Incentive Stock Option
Plan (the "1992 Biomedicals Incentive Plan") options to acquire 340,250 shares
of Biomedicals Common Stock were outstanding (at a price of $3.25 per share) of
which 10,000 options are currently exercisable. During 1993, there were no
exercises.
At December 31, 1993, under the Biomedicals 1992 Non-Qualified Stock Option
Plan (the "1992 Biomedicals Non-Qualified Plan"), options to acquire 490,000
shares of Biomedicals Common Stock were
84
<PAGE> 85
outstanding (at prices ranging from $3.25 to $7.00 per share) of which there are
currently 132,500 options exercisable. During 1993 there were no exercises.
Plan Amendments
At each of the Annual Meetings of Stockholders held to consider the Merger
Agreement, the stockholders of each of the Predecessor Companies approved
amended and restated Stock Option Plans. The amendments, among other things,
increased the amount of shares available for grant under the plans. ICN amended
its 1992 Non-Qualified Plan to increase the number of shares available for grant
thereunder from 500,000 to 1,250,000 and amended its 1992 Incentive Plan to
increase the number of shares available for grant thereunder from 500,000 to
750,000. SPI amended its 1992 Non-Qualified Plan to increase the number of
shares available for grant thereunder from 1,000,000 to 3,000,000 and amended
its 1992 Incentive Plan to increase the number of shares available for grant
thereunder from 500,000 to 1,000,000. Viratek amended its 1992 Non-Qualified
Plan to increase the number of shares available for grant thereunder from
500,000 to 1,000,000 and amended its 1992 ISO Plan to increase the number of
shares available for grant thereunder from 500,000 to 1,000,000. Biomedicals
amended its 1992 Non-Qualified Plan to increase the number of shares available
for grant thereunder from 500,000 to 1,000,000 and amended its 1992 Incentive
Plan to increase the number of shares available for grant thereunder from
500,000 to 1,000,000. Upon consummation of the Merger, New ICN will assume all
options outstanding under these Stock Option Plans. See "Principal
Stockholders."
CERTAIN EMPLOYMENT AGREEMENTS
On March 18, 1993, the Board of Directors of ICN adopted Employment
Agreements ("Employment Agreements") which contain "Change in Control" benefits
for six current key senior executive officers of ICN and its subsidiaries. The
executives include Messrs. Jerney, Giordani, MacDonald and Watt, officers of
ICN, and Messrs. Phillips and Sholl, officers of SPI. The Employment Agreements
will be assumed by New ICN upon the consummation of the Merger.
The Employment Agreements are intended to retain the services of these
executives and provide for continuity of management in the event of any actual
or threatened Change in Control. Each agreement has an initial term ending March
30, 1996 and is automatically extended for one year terms each year thereafter
unless either the executive or ICN elects not to extend it (provided that any
notice by ICN not to extend the agreement cannot cause the agreement to be
terminated prior to the expiration of the third anniversary of the date of any
Change in Control). These Employment Agreements provide that each executive
shall receive severance benefits equal to three times salary and bonus (and
certain other benefits) if the executive's employment is terminated without
cause, following a Change in Control of ICN or a subsidiary, as the case may be,
or if the executive terminates employment for certain enumerated reasons
(including a significant reduction in the executive's compensation, duties,
title or reporting responsibilities or a change in the executive's job location)
or the executive leaves ICN for any reason or without reason during a sixty day
period commencing six months after the Change in Control. The executive is under
no obligation to mitigate amounts payable under the Employment Agreements.
For purposes of the Employment Agreements, a "Change in Control" means any
of the following events: (i) the acquisition (other than from ICN) by any
person, subject to certain exceptions, of beneficial ownership, directly or
indirectly, of 20% or more of the combined voting power of ICN's then
outstanding voting securities; (ii) the existing Board of Directors cease for
any reason to constitute at least two-thirds of the Board, unless the election,
or nomination for election by ICN's stockholders, of any new director was
approved by a vote of at least two-thirds of the existing Board of Directors; or
(iii) approval by stockholders of ICN of (a) a merger or consolidation involving
ICN if the stockholders of ICN, immediately before such merger or consolidation,
do not, as a result of such merger or consolidation, own, directly or
indirectly, more than 80% of the combined voting power of the then outstanding
voting securities of the corporation resulting from such merger or consolidation
in substantially the same proportion as their ownership of the combined voting
power of the voting securities of ICN outstanding immediately before such merger
or consolidation, or (b) a complete liquidation or dissolution of ICN or an
agreement for the sale or other disposition of all or
85
<PAGE> 86
substantially all of the assets of ICN. Removal of ICN's Board of Directors
would also constitute a Change in Control under the Employment Agreements. If
the employment of such key senior executives is terminated under any of the
circumstances described above following a Change in Control, the executives
would be entitled to receive the following amounts (based upon present
compensation): Adam Jerney $2,092,623; John Giordani $1,238,277; Bill MacDonald
$1,179,486; John Phillips $1,180,251; David Watt $935,955 and Jack Sholl
$737,076. In addition, the vesting of certain options granted to the executives
would be accelerated. The value of the accelerated options would depend upon the
market price of the shares at that time.
In connection with the Merger, each of the senior executives has executed
an agreement waiving the effect under the Employment Agreements of any Change in
Control which may be deemed to arise as a result of the Merger.
PANIC EMPLOYMENT AGREEMENT
ICN and Milan Panic entered into an Employment Agreement effective October
1, 1988, which, as amended, terminates on November 30, 1994 (the "Panic
Employment Agreement"). The base amount of salary for Mr. Panic was determined
by the Compensation Committee of the Board of Directors of ICN in 1988. In
setting the base amount, the Compensation Committee took into consideration Mr.
Panic's then-current base salary, the base salaries of chief executives of
companies of similar scope and complexity and the Compensation Committee's
desire to retain Mr. Panic's services, given his role as founder of ICN. The
Panic Employment Agreement provides for an annual salary, currently $535,000,
with an annual 7% increase payable under certain circumstances. The Panic
Employment Agreement provides that during the period of his employment, Mr.
Panic will not engage in businesses competitive with ICN without the approval of
the Board of Directors. Under the Panic Employment Agreement, Mr. Panic agreed
to waive and eliminate retirement benefits contained in his prior employment
contract with ICN. Instead, Mr. Panic may, at his option, retire upon
termination of the Panic Employment Agreement.
Upon retirement, Mr. Panic has agreed to provide consulting services to ICN
for $120,000 per year, which amount is subject to annual cost-of-living
adjustments from the base year of 1967 until the date of retirement not to
exceed his salary at the date of retirement (currently estimated to be in excess
of $535,000 per year, as adjusted). Mr. Panic's agreement to provide consulting
services to ICN is a lifetime agreement. The consulting fee shall not at any
time exceed the highest annual compensation, as adjusted, paid to Mr. Panic
during his employment by ICN. Upon Mr. Panic's retirement, the consulting fee
shall not be subject to further cost-of-living adjustments. The Panic Employment
Agreement includes a severance compensation provision in the event of a Change
in Control of ICN. The Panic Employment Agreement provides that if within two
years after a Change in Control of ICN, Mr. Panic's employment with ICN is
terminated, except as a result of death, disability or illness, or if Mr. Panic
leaves the employ of ICN within such two-year period, then Mr. Panic will
receive as severance compensation, five times his annual salary, as adjusted,
and Mr. Panic will be deemed to have retired and will receive the same
consulting fees to which he would otherwise have been entitled under the Panic
Employment Agreement. A Change in Control of ICN would occur, for purposes of
the Panic Employment Agreement, if (i) a Change in Control shall occur of a
nature which would be required to be reported in response to Item 6(e) of
Schedule 14A under the Exchange Act (for purposes of that Item, "control" is
defined as the power to direct or cause the direction of the management and
policies of ICN, whether through the ownership of voting securities, by
contract, or otherwise) unless two-thirds of the Existing Board of Directors, as
defined below, decide in their discretion that no Change in Control has occurred
for purposes of the agreement; (ii) any person is or becomes the beneficial
owner, directly or indirectly, of securities of ICN representing 15% or more of
the combined voting power of ICN's then outstanding securities; (iii) the
persons constituting the Existing Board of Directors, as defined below, cease
for any reason to constitute a majority of ICN's Board of Directors; or (iv)
shares of ICN Common Stock cease to be registered under the Exchange Act.
"Existing Board of Directors" is defined in the Panic Employment Agreement as
those persons constituting the Board of Directors at the date of the Panic
Employment Agreement, together with each new director whose election or
nomination for election by ICN's stockholders was previously approved, or is
approved within thirty days of such election or nomination, by a vote of at
least two-thirds of the directors in office prior to such person's election as a
director. If Mr. Panic's
86
<PAGE> 87
employment is terminated under any of the circumstances described above
following such a Change in Control, in addition to the consulting fee as
described above, Mr. Panic would be entitled to receive (based upon present
compensation) $2,675,000.
In connection with the Merger, Mr. Panic has executed an agreement waiving
the effect under the Panic Employment Agreement of any Change in Control which
may be deemed to arise as a result of the Merger. Upon consummation of the
Merger, the Panic Employment Agreement will be assumed by New ICN. New ICN
through the proposed Compensation and Benefits Committee of its Board of
Directors and Mr. Panic are presently discussing the terms of a new employment
agreement to replace the existing agreement upon its expiration. No terms of the
new agreement have been determined as of the date hereof.
ICN MERGER CORP. 1994 STOCK INCENTIVE PLAN
It is expected that the Board of Directors of the Company will adopt a new
stock option plan (the "1994 Stock Incentive Plan"), subject to approval by
holders of a majority of the voting shares of the Company. The Company intends
to seek approval at its first annual meeting of stockholders occurring after the
consummation of the Merger. The terms of the 1994 Stock Incentive Plan have not
been determined as of the date hereof and will be determined by the Compensation
Committee of the Company and the full Board of Directors after consummation of
the Merger.
87
<PAGE> 88
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1994, certain information
regarding the beneficial ownership of ICN Common Stock, SPI Common Stock,
Viratek Common Stock, Biomedicals Common Stock and New ICN Common Stock
(assuming the Merger occurred on June 30, 1994) and the percent of shares owned
beneficially by: (i) all stockholders known by any of the Predecessor Companies,
based upon public filings, to have been beneficial owners of more than 5% of the
outstanding shares of Common Stock of the Company if the Merger had occurred on
June 30, 1994; (ii) each director of New ICN; (iii) each Named Executive
Officer; and (iv) all directors and executive officers of New ICN as a group:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AND SHARES AND SHARES AND SHARES AND
NATURE OF NATURE OF NATURE OF NATURE OF
BENEFICIAL BENEFICIAL BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP OWNERSHIP OF OWNERSHIP
OF ICN OF SPI BIOMEDICALS OF VIRATEK
IDENTITY OF OWNER COMMON PERCENTAGE COMMON PERCENTAGE COMMON PERCENTAGE COMMON PERCENTAGE
OR GROUP(1) STOCK OF CLASS STOCK OF CLASS STOCK OF CLASS STOCK OF CLASS
- ----------------------- ---------- ---------- ---------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Norman Barker, Jr...... 1,000 (2) 23,044 (3) (2) -- -- -- --
Birch E. Bayh, Jr...... 400 (2) -- -- -- -- 31,500(4) (2)
Alan F. Charles........ -- -- 8,980 (5) (2) -- -- -- (2)
Robert H. Finch........ 5,100 (6) (2) -- -- -- -- 7,875(7) (2)
Roger Guillemin, M.D.,
Ph.D.................. 1,000 (2) 29,438 (8) (2) -- -- 2,625(9) (2)
Adam Jerney............ 57,500 (10) (2) 208,382 (11) (2) 25,000(12) (2) 39,375(13) (2)
Weldon B. Jolley, Ph.D.... 115,000 (14) (2) 56,624 (15) (2) 30,000(16) (2) 26,250(17) (2)
Nils O. Johannesson.... -- -- 11,540 (18) (2) -- -- 3,938(19) (2)
Vernon Knight, M.D..... -- -- -- -- -- -- 30,846(20) (2)
Jean-Francois Kurz..... -- -- -- -- 9,500(21) (2) -- --
Thomas H. Lenagh....... -- -- -- -- 29,500(22) (2) -- --
Charles T. Manatt...... -- -- 8,210 (23) (2) -- -- -- --
James P. Miscoll....... -- -- 8,210 (24) (2) -- -- -- --
Stephen D. Moses....... -- -- 8,218 (25) (2) -- -- --
Milan Panic............ 533,008 2.60% 522,762 (26) 2.43% 423,867(27) 4.43% 394,408(28) 2.11%
Roberts A. Smith,
Ph.D.................. 78,096 (29) (2) 42,034 (30) (2) 30,000(31) (2) 49,350(32) (2)
Michael Smith, Ph.D.... -- -- -- -- -- -- -- --
Richard W. Starr....... 25,000 (33) (2) 4,200 (2) -- -- -- --
John E. Giordani....... 14,821 (34) (2) 22,241 (35) (2) 27,500(36) (2) 5,251(37) (2)
Bill A. MacDonald...... 12,858 (38) (2) 40,831 (39) (2) 16,400(40) (2) 6,301(41) (2)
John F. Phillips....... -- -- 81,794 (42) (2) -- -- -- --
Jack Sholl............. 17,000 (43) (2) 19,588 (44) (2) -- -- -- --
David C. Watt.......... 18,750 (45) (2) 34,386 (46) (2) -- -- 2,625(47) (2)
Directors and executive
officers of the
Company as a group (23
persons).............. 879,533 (48) 4.24% 1,130,482 (49) 5.25% 591,767(50) 6.18% 600,344(51) 3.21%
Invesco MIM, PLC....... 1,700,000 8.21% 1,541,763 7.17%
11 Devonshire Square,
London EC2M 7YR
England
<CAPTION>
NUMBER OF
SHARES AND
NATURE OF
BENEFICIAL
OWNERSHIP
OF NEW ICN
IDENTITY OF OWNER COMMON PERCENTAGE
OR GROUP(1) STOCK OF CLASS
- ----------------------- ----------- ----------
<S> <C> <C>
Norman Barker, Jr...... 23,556 (2)
Birch E. Bayh, Jr...... 15,923 (2)
Alan F. Charles........ 8,980 (2)
Robert H. Finch........ 6,541 (2)
Roger Guillemin, M.D.,
Ph.D.................. 31,260 (2)
Adam Jerney............ 262,395 (2)
Weldon B. Jolley, Ph.D. 134,513 (2)
Nils O. Johannesson.... 13,505 (2)
Vernon Knight, M.D..... 15,392 (2)
Jean-Francois Kurz..... 1,872 (2)
Thomas H. Lenagh....... 5,812 (2)
Charles T. Manatt...... 8,210 (2)
James P. Miscoll....... 8,210 (2)
Stephen D. Moses....... 8,218 (2)
Milan Panic............ 1,075,973 3.71%
Roberts A. Smith,
Ph.D.................. 112,555 (2)
Michael Smith, Ph.D.... -- --
Richard W. Starr....... 17,000 (2)
John E. Giordani....... 37,867 (2)
Bill A. MacDonald...... 53,789 (2)
John F. Phillips....... 81,794 (2)
Jack Sholl............. 28,292 (2)
David C. Watt.......... 45,296 (2)
Directors and executive
officers of the
Company as a group (23
persons).............. 1,996,953 6.88%
Invesco MIM, PLC....... 2,412,163 8.32%
11 Devonshire Square,
London EC2M 7YR
England
</TABLE>
- ---------------
(1) Except as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess sole
voting and investment power. However, under the laws of California and
certain other states, personal property owned by a married person may be
community property which either spouse may manage and control, and the
Company has no information as to whether any shares shown in this table are
subject to community property laws.
(2) Less than 1%.
(3) Includes 20,998 shares of SPI Common Stock which Mr. Barker has the right
to acquire upon the exercise of currently exercisable stock options.
88
<PAGE> 89
(4) Includes 31,500 shares of Viratek Common Stock which Mr. Bayh has the right
to acquire upon the exercise of currently exercisable stock options.
(5) Includes 8,210 shares of SPI Common Stock which Mr. Charles has the right
to acquire upon the exercise of currently exercisable stock options.
(6) Includes 5,000 shares of ICN Common Stock which Mr. Finch has the right to
acquire upon the exercise of currently exercisable stock options.
(7) Includes 7,875 shares of Viratek Common Stock which Mr. Finch has the right
to acquire upon the exercise of currently exercisable stock options.
(8) Includes 29,438 shares of SPI Common Stock which Dr. Guillemin has the
right to acquire upon the exercise of currently exercisable stock options.
(9) Includes 2,625 shares of Viratek Common Stock which Dr. Guillemin has the
right to acquire upon the exercise of currently exercisable stock options.
(10) Includes 37,500 shares of ICN Common Stock which Mr. Jerney has the right
to acquire upon the exercise of currently exercisable stock options.
(11) Includes 176,434 shares of SPI Common Stock which Mr. Jerney has the right
to acquire upon the exercise of currently exercisable stock options.
(12) Includes 25,000 shares of Biomedicals Common Stock which Mr. Jerney has the
right to acquire upon the exercise of currently exercisable stock options.
(13) Includes 39,375 shares of Viratek Common Stock which Mr. Jerney has the
right to acquire upon the exercise of currently exercisable stock options.
(14) Includes 105,000 shares of ICN Common Stock which Dr. Jolley has the right
to acquire upon the exercise of currently exercisable stock options.
(15) Includes 56,624 shares of SPI Common Stock which Dr. Jolley has the right
to acquire upon the exercise of currently exercisable stock options.
(16) Includes 30,000 shares of Biomedicals Common Stock which Dr. Jolley has the
right to acquire upon the exercise of currently exercisable stock options.
(17) Includes 26,250 shares of Viratek Common Stock which Dr. Jolley has the
right to acquire upon the exercise of currently exercisable stock options.
(18) Includes 8,340 shares of SPI Common Stock which Dr. Johannesson has the
right to acquire upon the exercise of currently exercisable stock options.
(19) Includes 3,938 shares of Viratek Common Stock which Dr. Johannesson has the
right to acquire upon the exercise of currently exercisable stock options.
(20) Includes 7,875 shares of Viratek Common Stock which Dr. Knight has the
right to acquire upon the exercise of currently exercisable stock options.
(21) Includes 9,000 shares of Biomedicals Common Stock which Mr. Kurz has the
right to acquire upon the exercise of currently exercisable stock options.
(22) Includes 9,500 shares of Biomedicals Common Stock which Mr. Lenagh has the
right to acquire upon the exercise of currently exercisable stock options.
(23) Includes 8,210 shares of SPI Common Stock which Mr. Manatt has the right to
acquire upon the exercise of currently exercisable stock options.
(24) Includes 8,210 shares of SPI Common Stock which Mr. Miscoll has the right
to acquire upon the exercise of currently exercisable stock options.
89
<PAGE> 90
(25) Includes 8,210 shares of SPI Common Stock which Mr. Moses has the right to
acquire upon the exercise of currently exercisable stock options.
(26) Includes 508,789 shares of SPI Common Stock which Mr. Panic has the right
to acquire upon the exercise of currently exercisable stock options.
(27) Includes 400,000 shares of Biomedicals Common Stock which Mr. Panic has the
right to acquire upon the exercise of currently exercisable stock options
and does not include 1,349 shares of Biomedicals Common Stock indirectly
held for which Mr. Panic disclaims ownership.
(28) Includes 383,908 shares of Viratek Common Stock which Mr. Panic has the
right to acquire upon the exercise of currently exercisable stock options.
(29) Includes 20,686 shares of ICN Common Stock which Dr. Smith has the right to
acquire upon the exercise of currently exercisable stock options.
(30) Includes 42,034 shares of SPI Common Stock which Dr. Smith has the right to
acquire upon the exercise of currently exercisable stock options.
(31) Includes 30,000 shares of Biomedicals Common Stock which Dr. Smith has the
right to acquire upon the exercise of currently exercisable stock options.
(32) Includes 49,350 shares of Viratek Common Stock which Dr. Smith has the
right to acquire upon the exercise of currently exercisable stock options.
(33) Includes 25,000 shares of ICN Common Stock which Mr. Starr has the right to
acquire upon the exercise of currently exercisable stock options.
(34) Includes 6,250 shares of ICN Common Stock which Mr. Giordani has the right
to acquire upon the exercise of currently exercisable stock options.
(35) Includes 22,241 shares of SPI Common Stock which Mr. Giordani has the right
to acquire upon the exercise of currently exercisable stock options.
(36) Includes 27,500 shares of Biomedicals Common Stock which Mr. Giordani has
the right to acquire upon the exercise of currently exercisable stock
options.
(37) Includes 5,251 shares of Viratek Common Stock which Mr. Giordani has the
right to acquire upon the exercise of currently exercisable stock options.
(38) Includes 6,250 shares of ICN Common Stock which Mr. MacDonald has the right
to acquire upon the exercise of currently exercisable stock options.
(39) Includes 37,590 shares of SPI Common Stock which Mr. MacDonald has the
right to acquire upon the exercise of currently exercisable stock options.
(40) Includes 9,900 shares of Biomedicals Common Stock which Mr. MacDonald has
the right to acquire upon the exercise of currently exercisable stock
options.
(41) Includes 6,301 shares of Viratek Common Stock which Mr. MacDonald has the
right to acquire upon the exercise of currently exercisable stock options.
(42) Includes 35,863 shares of SPI Common Stock which Mr. Phillips has the right
to acquire upon the exercise of currently exercisable stock options.
(43) Includes 16,825 shares of ICN Common Stock which Mr. Sholl has the right to
acquire upon the exercise of currently exercisable stock options.
(44) Includes 16,781 shares of SPI Common Stock which Mr. Sholl has the right to
acquire upon the exercise of currently exercisable stock options.
(45) Includes 16,250 shares of ICN Common Stock which Mr. Watt has the right to
acquire upon the exercise of currently exercisable stock options.
90
<PAGE> 91
(46) Includes 33,816 shares of SPI Common Stock which Mr. Watt has the right to
acquire upon the exercise of currently exercisable stock options.
(47) Includes 2,625 shares of Viratek Common Stock which Mr. Watt has the right
to acquire upon the exercise of currently exercisable stock options.
(48) Includes 238,761 shares of ICN Common Stock which certain directors and
officers have the right to acquire upon the exercise of currently
exercisable stock options.
(49) Includes 1,021,788 shares of SPI Common Stock which certain directors and
officers have the right to acquire upon the exercise of currently
exercisable stock options.
(50) Includes 540,900 shares of Biomedicals Common Stock which certain directors
and officers have the right to acquire upon the exercise of currently
exercisable stock options.
(51) Includes 566,873 shares of Viratek Common Stock which certain directors and
officers have the right to acquire upon the exercise of currently
exercisable stock options.
At the time the Merger becomes effective (the "Effective Time"), all stock
options then outstanding under the stock option plans of ICN, SPI, Viratek and
Biomedicals (the "Stock Option Plans") will remain outstanding and will be
assumed by New ICN. Each such stock option will be exercisable upon the same
terms and conditions as under the applicable Stock Option Plan and the
applicable option agreement issued thereunder, except that (a) each such stock
option will be exercisable for that whole number of shares of Common Stock (to
the nearest whole share) into which the number of shares of common stock of the
applicable Predecessor Company, under the unexercised portion of such stock
option, would be converted at the Effective Time and (b) the exercise price per
share of Common Stock will be an amount equal to the exercise price per share
subject to such stock option prior to the Effective Time divided by the
applicable exchange ratio (rounded upward to the nearest full cent).
DESCRIPTION OF NOTES
The Notes offered hereby are to be issued under an indenture (the
"Indenture") dated as of November 18, 1994, between the Company and American
Stock Transfer & Trust Company as trustee (the "Trustee"). The statements under
this caption are summaries and do not purport to be complete. The summaries make
use of terms defined in the Indenture and are qualified in their entirety by
reference to the Indenture, a copy of which is filed as an exhibit to the
Registration Statement on Form S-1 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") filed by the Company with
the Commission under the Securities Act of 1933, as amended (the "Securities
Act"). Article and Section references appearing below are to the Indenture.
Wherever reference is made to defined terms of the Indenture not otherwise
defined herein, such defined terms are incorporated herein by reference.
GENERAL
The Notes will be unsecured obligations of the Company, will be limited to
$115,000,000 aggregate principal amount (of which $15,000,000 shall be issuable
only upon exercise of the Underwriters' over-allotment option), and will mature
on November 15, 1999. The Notes will bear interest at the rate per annum stated
in their title from and including the date of issuance to maturity or earlier
redemption. Interest will be payable semi-annually on May 15 and November 15 of
each year, commencing May 15, 1995, to the persons in whose names the Notes are
registered at the close of business on the preceding May 1 and November 1, as
the case may be. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
The Notes will be issued only in fully registered form without coupons in
denominations of $1,000 in principal amount or any integral multiple thereof.
Notes may be presented for conversion at the office of the Conversion Agent and
for exchange or registration of transfer at the office of the Registrar. The
Trustee will initially act as the Conversion Agent and Registrar. The Notes are
exchangeable and transfers thereof will be registrable without charges therefor,
but the Company may require payment of a fee sufficient to cover any tax or
other governmental charge payable in connection therewith.
91
<PAGE> 92
The Notes have been approved for listing on the NYSE, subject to notice of
issuance. When issued, the Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of the
trading market for the Notes.
CONVERSION RIGHTS
The Notes will be convertible, at the option of the holder thereof, into
Common Stock at any time on or prior to November 15, 1999 (unless a Note or a
portion thereof shall have been called for redemption, in which case it will be
convertible if duly surrendered on or before, but not after, the close of
business on the fifth business day preceding the date fixed for redemption) at
the conversion price set forth on the cover page of this Prospectus, adjusted as
described below. (Section 5.01)
Except as provided below, no payment or adjustment shall be made upon any
conversion on account of any interest accrued on the Notes surrendered for
conversion or on account of any dividends on the Common Stock issued upon such
conversion. A Noteholder who surrenders a Note for conversion between any
Regular Record Date next preceding an interest payment date and such interest
payment date will receive the interest payable on such interest payment date;
however, any Note surrendered for conversion between any Regular Record Date and
the corresponding interest payment date (excluding Notes or portions thereof
called for redemption on a redemption date occurring after such Regular Record
Date and on or prior to the fifth business day following such interest payment
date) must be accompanied by payment of an amount equal to the interest to be
received in respect of any portion of the Note being converted (provided,
however, that if the Company shall default in the payment of said interest, such
payment shall be returned to the payor thereof). The interest payment with
respect to a Note (or portion of a Note) called for redemption on a redemption
date occurring after any Regular Record Date next preceding an interest payment
date and on or prior to the fifth business day following such interest payment
date will be payable on such interest payment date to the holder of such Note on
such Regular Record Date notwithstanding the conversion of such Note after such
Regular Record Date and on or prior to such interest payment date, and the
holder converting such Note will not be required to pay an amount equal to the
interest payable on such interest payment date upon surrender of such Note for
conversion. (Section 5.02)
The conversion price is subject to adjustment upon certain events,
including (i) the issuance of shares of Common Stock of the Company as a
dividend or distribution on the Common Stock; (ii) subdivisions, combinations or
reclassification of the Common Stock; (iii) the issuance to holders of the
Common Stock of certain rights or warrants to subscribe for Common Stock at less
than the then market price, as defined; (iv) the distribution to the holders of
Common Stock generally of evidences of indebtedness, assets (excluding cash
dividends or distributions) or rights or warrants to subscribe for securities of
the Company other than those mentioned above; or (v) the payment of cash
dividends or distributions on shares of Common Stock in an aggregate amount
that, together with all other cash dividends and distributions on shares of
Common Stock made within the preceding 12 months and in respect of which no
conversion price adjustment pursuant to this clause (v) has been made
previously, exceeds an amount equal to 15% of the Company's market
capitalization on the business day immediately preceding the day on which the
Company declares such dividend or distribution. The Company is not required to
make adjustments in the conversion price of less than 1%, but any adjustment
that would otherwise be required to be made will be taken into account in the
computation of any subsequent adjustment. (Section 5.04)
In case of any consolidation or merger to which the Company is a party,
other than a transaction in which the Company is the continuing corporation, or
in case of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, or in the case of any
statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), there will be no adjustment of the conversion price, but the holder of
each Note then outstanding will have the right thereafter to convert such Note
into the kind and amount of securities, cash or other property which the holder
would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had such Note been
converted immediately prior to the effective date of such consolidation, merger,
statutory exchange, sale or conveyance. (Section 5.10) In the case of a cash
merger of the Company with another corporation or any
92
<PAGE> 93
other cash transaction of the type mentioned above, the effect of these
provisions would be that the conversion features of the Notes would thereafter
be limited to converting the Notes at the conversion price in effect at such
time into the same amount of cash per share that such holder would have received
had such holder converted the Notes into Common Stock of the Company immediately
prior to the effective date of such cash merger or transaction. Depending upon
the terms of such cash merger or transaction, the aggregate amount of cash so
received on conversion could be more or less than the principal amount of the
Notes.
Fractional shares of Common Stock will not be issued upon conversion. A
person otherwise entitled to a fractional share of Common Stock upon conversion
shall receive cash equal to the closing market value of such fractional share on
the business day prior to conversion. (Section 5.03) Under certain
circumstances, a decrease in the conversion price of the Notes may be considered
as resulting in the distribution of a dividend to holders of the Notes for
Federal income tax purposes. The Company is entitled to make such reductions in
the conversion price as it may in its discretion determine to be advisable in
order that any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock made to its stockholders shall not be taxable.
The Company has covenanted under the Indenture to reserve and keep
available at all times out of its authorized but unissued Common Stock, for the
purpose of effecting conversions of Notes, the full number of shares of Common
Stock deliverable upon the conversion of all outstanding Notes. (Section 5.07)
OPTIONAL REDEMPTION
The Notes may not be redeemed by the Company prior to November 15, 1997 and
are redeemable on such date or thereafter, at the Company's option at any time,
in whole or from time to time in part, upon mailing a notice of redemption not
less than 30 nor more than 60 days prior to the date fixed for such redemption
to the holders of Notes at their last registered addresses, at the following
redemption prices (expressed in percentages of the principal amount), if
redeemed during the twelve-month period beginning on November 15 of the years
indicated, in each case together with accrued and unpaid interest to the date
fixed for redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------- ----------
<S> <C>
1997.............................. 102.125%
1998 and thereafter............... 100.000
</TABLE>
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes will
have the right to require the Company to repurchase, at such holder's option,
all or any part of such holder's Notes at a purchase price in cash equal to 100%
of the principal amount thereof, together with accrued and unpaid interest to
the date of repurchase, on a repurchase date that shall not be later than 40
business days after the occurrence of a Change of Control. (Section 6.09)
Within 15 business days after a Change of Control, the Company shall mail a
notice to the Trustee and each holder of Notes stating, among other things, (i)
that a Change of Control has occurred, and that such holder has the right to
require the Company to repurchase such holder's Notes in whole or in part, at a
purchase price in cash equal to 100% of the principal amount of the Notes,
together with accrued and unpaid interest, if any, to the date of repurchase;
(ii) the conversion price and any adjustments thereto; (iii) the date on which
the Company will repurchase Notes from electing holders (the "Repurchase Date");
(iv) the date until which holders of Notes may elect to have their Notes
repurchased; and (v) instructions for tendering Notes. (Section 6.09)
A "Change of Control" shall occur when (i) the stockholders of the Company
adopt a plan of liquidation with respect to the Company or the Company sells,
transfers, leases or otherwise disposes of, in one
93
<PAGE> 94
transaction or a series of related transactions, all or substantially all of its
assets; (ii) there shall be consummated any consolidation or merger of the
Company (1) in which the Company is not the continuing or surviving corporation
or (2) pursuant to which the Common Stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of the Company in which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
total voting power of all classes of capital stock of the continuing or
surviving corporation immediately after such consolidation or merger; (iii) a
majority of the Board of Directors are not Continuing Directors (as hereinafter
defined); or (iv) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliate thereof shall beneficially own (as defined in Rule 13d-3 of
the Exchange Act), at least 50% of the total voting power of all classes of
capital stock of the Company entitled to vote generally in the election of
directors of the Company.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
"Continuing Director" is defined in the Indenture as at any date a member
of the Board of Directors of the Company who (i) was a member of the Board of
Directors of the Company on the initial issuance date of the Notes or (ii) was
nominated for election or elected to the Board of Directors of the Company with
the affirmative vote of at least a majority of the directors who were Continuing
Directors at the time of such nomination or election (which may be done by
approval of the proxy statement in which such member was named as a nominee for
director of the Company).
If the right granted to the holders of Notes to require the repurchase of
the Notes upon the occurrence of a Change of Control is determined to constitute
a tender offer, the Company will comply with all applicable tender offer rules,
including Rules 13e-4 and 14e-1 under the Exchange Act, upon the occurrence of a
Change of Control.
Under the terms of the Indenture, neither the Board of Directors nor the
Trustee may waive the right of the holders of Notes to require the Company to
repurchase the Notes upon the occurrence of a Change of Control.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under an
instrument governing Senior Indebtedness of the Company and could result, absent
a waiver, in a payment blockage with respect to the Notes by the holders of such
Senior Indebtedness pursuant to the subordination provisions of the Indenture.
See "Description of Notes -- Subordination." Failure of the Company to
repurchase the Notes when required could result in an Event of Default with
respect to the Notes whether or not such repurchase is permitted by the
subordination provisions. Other than as disclosed herein, there are no change of
control provisions in the Indenture.
The foregoing provisions would not necessarily afford the holders of Notes
protection in the event of a highly leveraged or other transaction involving the
Company that could adversely affect the holders of Notes. In addition, the
foregoing provisions may in certain circumstances make more difficult or
discourage a takeover of the Company and, thus, the removal of incumbent
management. The Change of Control redemption feature, however, is not the result
of management's knowledge of any specific effort to obtain control of the
Company by means of a merger, tender offer, solicitation or otherwise. Instead,
the Change of Control purchase feature is a standard term contained in other
similar convertible debt offerings and the terms of such feature resulted from
negotiations between the Company and the Underwriters.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company may not merge or consolidate with, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets to
any other person, unless (i) either (a) the Company is the surviving entity, or
(b) the successor person (if other than the Company) formed by such
consolidation or into
94
<PAGE> 95
which the Company is merged or to which such assets are sold, assigned,
transferred, leased, conveyed or otherwise disposed is a corporation organized
and existing under the laws of the United States or a state thereof or the
District of Columbia and such corporation expressly assumes by supplemental
indenture all of the obligations of the Company under the Notes and the
Indenture; (ii) at the time of and immediately after giving effect to such
transaction no Default or Event of Default has occurred and is continuing; and
(iii) the Company has delivered to the Trustee an Officers' Certificate and
opinion of counsel stating that the transaction and supplemental indenture
comply with the Indenture. (Article 13)
SUBORDINATION
The payment of principal (and premium, if any) and interest on the Notes is
subordinated to the extent described below to the payment in full of all Senior
Indebtedness of the Company, whether now outstanding or incurred in the future.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, the
holders of all Senior Indebtedness then outstanding will be entitled to receive
payment in full of all amounts owing with respect to all Senior Indebtedness
before the holders of the Notes are entitled to receive any payment on or with
respect to the Notes, and until all Senior Indebtedness is paid in full, any
distribution to which the holders of the Notes would be entitled but for the
subordination provisions will be made to holders of Senior Indebtedness as their
interests may appear, except that the holders of the Notes may receive Permitted
Junior Securities (as hereinafter defined). Upon the occurrence of any default
in the payment of any obligation on or with respect to any Senior Indebtedness,
whether with respect to scheduled payments or to amounts due upon acceleration
(a "Payment Default"), then no payment or distribution of any assets of the
Company of any kind or character is permitted to be made by the Company on
account of principal of (or premium, if any) or interest on the Notes or on
account of the purchase, redemption or other acquisition of the Notes or any
obligations of the Company under the Notes unless and until such Payment Default
is cured or waived or has ceased to exist or such Senior Indebtedness has been
discharged or paid in full, immediately after which the Company must resume
making any and all required payments, including missed payments, in respect of
its obligations under the Notes. Upon (i) the occurrence of any default (other
than a Payment Default) relating to Senior Indebtedness which default, pursuant
to the instrument governing such Senior Indebtedness, entitles the holders (or a
specified portion of the holders) of such Senior Indebtedness to accelerate the
maturity of such Senior Indebtedness (a "Non-payment Default") and (ii) receipt
by the Trustee and the Company from a holder of such Senior Indebtedness or from
the trustee, agent or other representative designated in writing to the Trustee
of any class or issue of Senior Indebtedness (the "Senior Representative") of
written notice of such occurrence, no payment or distribution of any assets of
the Company of any kind or character is permitted to be made by the Company on
account of principal of (or premium, if any) or interest on the Notes or on
account of the purchase, redemption or other acquisition of the Notes or any
obligations of the Company under the Notes for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Trustee of such notice unless
and until the earlier to occur of the following events (subject to any blockage
of payments that may then be in effect due to a Payment Default on Senior
Indebtedness): (a) 179 days has elapsed since receipt of such written notice by
the Trustee (provided such Senior Indebtedness has theretofore not been
accelerated), (b) such Non-payment Default has been cured or waived in the
manner required by the instrument relating to such Senior Indebtedness or has
ceased to exist, (c) such Senior Indebtedness has been discharged or paid in
full or (d) such Payment Blockage Period has been terminated by written notice
to the Company or the Trustee from the Senior Representative initiating such
Payment Blockage Period, or the holders of at least a majority in principal
amount of such Senior Indebtedness, immediately after which, in the case of
clause (a), (b), (c), or (d), the Company must resume making any and all
required payments, including missed payments, in respect of its obligations
under the Notes. Only one Payment Blockage Period pursuant to such notice may be
commenced with respect to the Notes during any period of 360 consecutive days.
Successive Payment Blockage Periods based on successive Non-payment Defaults may
be commenced; provided that no Non-payment Default with respect to Senior
Indebtedness which existed or was continuing on the date of the commencement of
any Payment Blockage Period may be, or be made, the basis for the commencement
of any other Payment Blockage Period with respect to such Senior Indebtedness
unless such event of default has
95
<PAGE> 96
been cured or waived for a period of not less than 180 consecutive days. The
obligation of the Company to make payment of principal (and premium, if any) and
interest on the Notes will not otherwise be affected by the foregoing. If the
Company fails to make any payment of the Notes when due or within any applicable
grace period, whether or not on account of the subordination provisions referred
to above, such failure would constitute an event of default under the Indenture.
(Section 4.03)
"Senior Indebtedness" is defined in the Indenture as Indebtedness (as
hereinafter defined) of the Company whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed or guaranteed (including,
without limitation, interest that accrues on or after the filing of a petition
in bankruptcy or for reorganization, if a claim for post-petition interests is
allowed in such proceeding) except (i) any Indebtedness outstanding after the
date of the Indenture as to which, by the express terms of the instrument
creating or evidencing the same, it is provided that such Indebtedness is not
senior or superior in right of payment to the Notes, (ii) the Notes, (iii) any
Indebtedness incurred in connection with any repurchase, redemption or other
obligation in respect of Disqualified Capital Stock, (iv) any Indebtedness of
the Company to any of the Company's subsidiaries or to any affiliate of the
Company or any of the Company's subsidiaries, (v) Indebtedness incurred in
connection with the purchase of goods, assets, materials or services in the
ordinary course of business or representing amounts recorded as accounts
payable, trade payables or other current liabilities of the Company on the books
of the Company (other than the current portion of any long-term Indebtedness of
the Company that but for this clause (v) would constitute Senior Indebtedness),
(vi) any Indebtedness of or amount owed by the Company to employees for services
rendered to the Company, and (vii) any liability for federal, state, local or
other taxes owing or owed by the Company.
"Disqualified Capital Stock" means, with respect to any person, any capital
stock of such person that, by its terms (or by the terms of any security into
which it is convertible or for which it is exercisable, redeemable or
exchangeable), matures, or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the maturity of the Notes.
"Indebtedness" is defined in the Indenture as, with respect to any person,
any of the following (without duplication): (i) the principal of, premium, if
any, and interest on and all other amounts owing with respect to any
indebtedness (including any such indebtedness representing any deferred payment
obligation for the payment of the purchase price of property or assets) of such
person for money borrowed or evidenced by bonds, notes, debentures or similar
obligations, including any guaranty by such person of any indebtedness for money
borrowed of any other person, whether any such indebtedness or guaranty is
outstanding on the date of the Indenture or is thereafter created, assumed or
incurred, (ii) the principal of, premium, if any, and interest on and all other
amounts owing with respect to any indebtedness for money borrowed, incurred,
assumed or guaranteed by such person in connection with the acquisition by it or
any of its subsidiaries of any other businesses, properties or other assets,
(iii) lease obligations which such person capitalizes in accordance with
generally accepted accounting principles, (iv) any amounts payable by such
person under or in respect of letters of credit or bankers' acceptances issued
for the account of such person, any interest rate exchange agreement, interest
rate swap agreement or currency exchange or purchase agreements or other similar
agreement entered into in respect of all or any portion of the above and (v)
guarantees or assumptions by such person of indebtedness of others of any of the
kinds referred to in clauses (i) through (iv) above.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Indebtedness (other than the holders
of the Notes or other equally subordinated obligations) may recover less,
ratably, than the holders of Senior Indebtedness and may recover more, ratably,
than the holders of Notes.
The Notes will be effectively subordinated to all Indebtedness (including
trade payables) of the Company's subsidiaries. Any right of the Company to
receive assets of any such subsidiary upon the liquidation or reorganization of
any such subsidiary (and the consequent rights of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except if, and to the extent that the Company is
itself recognized as a creditor of such subsidiary, in which case the claims of
the Company would still be subordinated to the claims of secured creditors of
such subsidiary with
96
<PAGE> 97
respect to the assets securing such claims and any other indebtedness of such
subsidiary senior to that held by the Company.
At September 30, 1994, after giving effect to the Offering and the
application of the net proceeds therefrom, Senior Indebtedness and indebtedness
(including trade payables) of the Company's subsidiaries, to which the Notes are
effectively subordinated, would have been approximately $120,634,000 on a pro
forma basis. The Indenture will not restrict the incurrence of Senior
Indebtedness or other Indebtedness by the Company or any subsidiary of the
Company, and the incurrence of significant amounts of additional Indebtedness
could have an adverse impact on the Company's ability to service its
Indebtedness, including the Notes.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Events of Default are defined as: (i) default for a period of 30 days in
the payment of interest on the Notes, whether or not such payments are
prohibited by the subordination provisions of the Indenture; (ii) default in the
payment of principal of or premium, if any, on the Notes when due either at
maturity, upon redemption (including on a Repurchase Date) by declaration or
otherwise, whether or not such payments are prohibited by the subordination
provisions of the Indenture; (iii) failure to perform or observe any other
covenant or agreement of the Company contained in the Indenture or the Notes
which continues for the period and after the notice specified below; (iv)
failure by the Company or any of its Significant Subsidiaries to pay principal
at maturity of, or the occurrence and continuation of an event of default which
results in the acceleration of, any loan agreement, mortgage, indenture or other
instrument under which there is issued or by which there is secured or evidenced
any Indebtedness (other than the Notes) of the Company or any of its Significant
Subsidiaries, whether such Indebtedness exists on the date of the issuance of
the Notes or is created thereafter, and the principal amount of such
Indebtedness which, together with any such other Indebtedness so accelerated or
not paid at maturity, aggregates an amount equal to or greater than $10 million;
(v) the rendering of one or more judgments, orders or decrees against the
Company and/or a Significant Subsidiary of the Company in an aggregate amount
equal to or in excess of $10 million which are not vacated, satisfied,
discharged or execution thereof stayed within a period of 30 days from the entry
thereof; or (vi) certain events of bankruptcy, insolvency or reorganization
relating to the Company or any of its Significant Subsidiaries. (Section 8.01)
"Significant Subsidiary" means any Subsidiary (as defined in the Indenture)
of the Company that would be a "Significant Subsidiary" of the Company within
the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission as
in effect on the date of initial issuance of the Notes.
A default under clause (iii) above is not an Event of Default until the
Trustee or the holders of at least 25% in principal amount of the Notes then
outstanding notify the Company of the default and the Company does not cure the
default within 60 days after receipt of the notice. The notice must specify the
default, demand that it be remedied and state that the notice is a "Notice of
Default." If the holders of 25% in principal amount of the outstanding Notes
request the Trustee to give such notice on their behalf, the Trustee is required
to do so. (Section 8.01)
The Indenture provides that, if an Event of Default (other than those
relating to bankruptcy, insolvency and reorganization) shall have occurred and
be continuing, either the Trustee or the holders of not less than 25% in
principal amount of the Notes then outstanding may, by written notice to the
Company and, if applicable, to the Trustee, declare the unpaid principal of all
such Notes due and payable. If an Event of Default occurs by reason of certain
specified events of bankruptcy, insolvency and reorganization, all unpaid
principal of the Notes then outstanding shall automatically become immediately
due and payable. (Section 8.02)
The Indenture provides that the Trustee shall, within 90 days after a
Responsible Officer of the Trustee has actual knowledge of the occurrence of a
default (not including any grace period allowed), mail to the holders of the
Notes, as their names and addresses appear on the registration book, notice of
all uncured defaults known to it; provided that, except in the case of default
in the payment of principal and premium, if any, or interest on any of the
Notes, the Trustee shall be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interests of the
holders of Notes. (Section 9.05)
97
<PAGE> 98
The Indenture contains a provision entitling the Trustee to reasonable
security or indemnification by the Noteholders before proceeding to exercise any
right or power under the Indenture at the request of such Noteholders. (Section
8.06) The Indenture provides, subject to specified exceptions, that the holders
of a majority in principal amount of the outstanding Notes may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee. (Section
8.05)
The holders of a majority in principal amount of the outstanding Notes may
on behalf of the holders of all Notes waive certain past defaults or Events of
Default, except a default in payment of the principal of (or premium, if any) or
interest on any Notes or in respect of certain provisions of the Indenture which
cannot be modified or amended without the consent of the holder of each
outstanding Note affected thereby. (Section 8.04)
The Indenture includes a covenant that the Company will file annually with
the Trustee a Certificate of no default or a Certificate specifying any default
that exists. (Section 6.04)
MODIFICATIONS OF THE INDENTURE AND WAIVER
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding Notes, to execute supplemental indentures
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of any supplemental indenture or modifying in any
manner the rights of the holders of Notes, except that no such supplemental
indenture may (i) extend the fixed maturity of any Notes, or reduce the
principal amount thereof or any premium thereon, or reduce the rate or extend
the time of payment of interest thereon, or modify the provisions of the
Indenture with respect to the subordination of the Notes, or impair the right to
convert the Notes so affected or (ii) reduce the aforesaid percentage of Notes,
the holders of which are required to consent to any such supplemental indenture,
in each case without the consent of the holders of the affected Notes then
outstanding. (Section 12.02)
SATISFACTION AND DISCHARGE
The Indenture provides that the Company may terminate its obligations under
the Indenture at any time by delivering all outstanding Notes to the Trustee for
cancellation and paying any other sums payable under the Indenture or by
depositing with the Trustee, within not more than one year prior to the maturity
of the Notes, funds sufficient for the payment of the Notes. (Section 14.01)
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such State's
conflicts of law principles.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
New ICN's authorized capital stock presently consists of 100,000,000 shares
of Common Stock of which, based upon the number of shares of common stock of
ICN, SPI, Viratek and Biomedicals outstanding as of September 30, 1994, there
will be approximately 27,971,000 shares of Common Stock outstanding, 5,333,000
options to acquire shares of Common Stock and approximately 1,900,000 shares of
Common Stock reserved for issuance pursuant to outstanding convertible
securities other than the Notes. All such shares of Common Stock will be validly
issued, fully paid and non-assessable.
THE SHARES
The holders of shares of Common Stock are entitled to one vote for each
share on all matters voted on by stockholders, including the election of
directors and, except as otherwise required by law or provided in any resolution
adopted by the Board of Directors of the Company with respect to any series of
preferred stock,
98
<PAGE> 99
exclusively possess all voting power. The holders of shares of Common Stock do
not have any cumulative voting, conversion, redemption or preemptive rights.
Subject to any preferential rights of any outstanding series of preferred stock
designated by the Board of Directors of the Company from time to time, the
holders of shares of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company from funds
available therefor, and upon liquidation are entitled to receive pro rata all
assets of available for distribution to such holders. See "Dividend Policy."
PREFERRED STOCK
The Board of Directors of the Company is authorized to provide for the
issuance of shares of preferred stock, in one or more series, and to fix for
each such series such voting powers, designations, preferences and relative,
participating, optional and other special rights, and such qualifications,
limitations or restrictions, as are stated in the resolution adopted by the
Board of Directors of the Company providing for the issuance of such series and
as are permitted by Delaware Law. In connection with the Shareholder Rights Plan
adopted by the Company, the Certificate of Incorporation of the Company provides
for the issuance of a series of 1,000,000 shares of preferred stock designated
Series A Participating Preferred Stock (the "Series A Preferred Stock"). For a
description of the terms of the Series A Preferred Stock, see "Description of
Capital Stock -- Preferred Stock Purchase Rights."
PREFERRED STOCK PURCHASE RIGHTS
Prior to the consummation of the Merger, the Board of Directors of the
Company adopted a Shareholder Rights Plan and caused to be issued with each
share of Common Stock issued to the Predecessor Companies' stockholders in the
Merger one Preferred Stock Purchase Right (a "Right"). Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock at a price expected to be approximately $125 per one
one-hundredth of a share, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and a rights agent to be selected by the Company (the "Rights
Agent").
The Rights have certain anti-takeover effects. The Rights cause substantial
dilution to a person or group that attempts to acquire the Company without
conditioning the offer on the Rights being redeemed or a substantial number of
Rights being acquired. However, the Rights should not interfere with any tender
offer or merger approved by the Company (other than with an Acquiring Person (as
defined below)) because the Rights (i) do not become exercisable in the event of
a Permitted Offer (as defined below) and expire automatically upon the
consummation of a merger in which the form of consideration is the same as, and
the price is not less than the price paid in, the Permitted Offer and (ii) are
redeemable in connection with an approved merger in which all holders of Common
Stock are treated alike.
Initially, the Rights will be attached to all share certificates issued in
the Merger and thereafter issued prior to the Rights Distribution Date (as
defined below) and no separate Rights certificates will be distributed. Until
the earlier to occur of (i) the first date (the "Stock Acquisition Date") of a
public announcement that, a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire
beneficial ownership of securities having 15% or more of the voting power of all
outstanding voting securities of the Company or (ii) ten days (unless such date
is extended by the Board of Directors of the Company) following the commencement
of (or a public announcement of an intention to make) a tender offer or exchange
offer which would result in any person or group of related persons becoming an
Acquiring Person (in either case, except as a result of a Permitted Offer) (the
earlier of such dates being called the "Rights Distribution Date"), the Rights
will be evidenced by the Share certificates. Until the Rights Distribution Date,
the Rights may be transferred with and only with Share certificates. Share
certificates issued upon transfer or new issuance of shares of Common Stock will
contain a notation incorporating the Rights Agreement by reference. Until the
Rights Distribution Date (or earlier redemption or expiration of the Rights),
the surrender for transfer of any certificates for shares of Common Stock
outstanding as of the Merger also constitutes the transfer of the Rights
associated with the shares of Common Stock represented by such certificate. As
soon as practicable following the Rights Distribution Date, separate
certificates evidencing
99
<PAGE> 100
the Rights ("Rights Certificates") will be mailed to holders of record of the
Shares as of the close of business on the Rights Distribution Date, and the
separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Rights Distribution Date. The
Rights expire on the earliest of (i) November 1, 2004, (ii) consummation of a
merger transaction with a person or group who acquired shares of Common Stock
pursuant to a Permitted Offer, and is offering in the merger the same form of
consideration, and not less than the price per share of Common Stock, paid
pursuant to the Permitted Offer or (iii) redemption by the Company as described
below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities issuable, upon exercise of the Rights is subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of the Series A
Preferred Stock, (ii) upon the grant to holders of the Series A Preferred Stock
of certain rights or warrants to subscribe for Series A Preferred Stock, certain
convertible securities or securities having rights, privileges and preferences
the same as, or more favorable than, the Series A Preferred Stock at less than
the current market price of the Series A Preferred Stock or (iii) upon the
distribution to holders of the Series A Preferred Stock of evidences of
indebtedness, cash (excluding regular quarterly cash dividends out of earnings
or retained earnings), assets (other than a dividend payable in Series A
Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
In the event that, after the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, the
Company is involved in a merger or other business combination transaction in
which the shares of Common Stock are exchanged or changed (other than a merger
with a person or group who acquired shares of Common Stock pursuant to a
Permitted Offer and is offering in the merger not less than the price paid
pursuant to the Permitted Offer and the same form of consideration paid in the
Permitted Offer), or 50% or more of the Company's assets or earning power are
sold (in one transaction or a series of transactions), proper provision shall be
made so that each holder of a Right (other than such Acquiring Person) shall
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company (or, in the event that there is more than one acquiring
company, the acquiring company receiving the greatest portion of the assets or
earning power transferred) which at the time of such transaction would have a
market value of two times the exercise price of the Right (such right being
called the "Merger Right"). "Permitted Offer" means a tender offer or exchange
offer for all outstanding shares of Common Stock at a price and on terms
determined, prior to the purchase of shares under such tender offer or exchange
offer, by at least a majority of the members of the Board of Directors who are
not officers of the Company to be both adequate and otherwise in the best
interests of the Company, its stockholders (other than the person on whose
behalf the offer is being made) and other relevant constituencies.
In the event that an Acquiring Person becomes such, proper provision shall
be made so that each holder of a Right (other than such Acquiring Person) will
for a 60-day period thereafter have the right to receive upon exercise that
number of shares of Common Stock having a market value of two times the exercise
price of the Right, to the extent available, and then (after all authorized and
unreserved shares of Common Stock have been issued) a common stock equivalent
(such as Series A Preferred Stock or another equity security with at least the
same economic value as the shares of Common Stock) having a market value of two
times the exercise price of the Right, with Shares to the extent available being
issued first (such right being called the "Subscription Right").
The holder of a Right continues to have the Merger Right whether or not
such holder exercises the Subscription Right. Upon the occurrence of any of the
events giving rise to the exercisability of the Merger Right or the Subscription
Right, any Rights that are or were at any time owned by an Acquiring Person
shall become void insofar as they relate to the Merger Right or the Subscription
Right.
With certain exceptions, no adjustments in the Purchase Price is required
until cumulative adjustments require an adjustment of at least 1% in such
Purchase Price. No fractions of shares of Common Stock will be issued and, in
lieu thereof, an adjustment in cash will be made based on the market price of
the shares of Common Stock on the last trading date prior to the date of
exercise.
100
<PAGE> 101
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem
the Rights in whole, but not in part, at a price of $.01 in cash per Right (the
"Redemption Price"), which redemption shall be effective upon the action of the
Board of the Company in the exercise of its sole discretion. Additionally, the
Company may, following the Stock Acquisition Date, redeem the then outstanding
Rights in whole, but not in part, at the Redemption Price provided that such
redemption is (i) in connection with a merger or other business combination
transaction or series of transactions involving the Company in which all holders
of Shares are treated alike but not involving an Acquiring Person or any person
who was an Acquiring Person or (ii) following an event giving rise to, and the
expiration of the exercise period for, the Subscription Right if and for as long
as no person beneficially owns securities representing 15% or more of the voting
power of the Company's voting securities. Upon the effective date of the
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
Any of the provisions of the Rights Agreement may be amended by the Board
of the Company prior to the Rights Distribution Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board of the Company in order to cure any ambiguity, defect or inconsistency, or
to make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person).
The Series A Preferred Stock purchasable upon exercise of the Rights is
nonredeemable and junior to any other series of preferred stock the Company may
issue (unless otherwise provided in the terms of such stock). Each share of
Series A Preferred Stock has a preferential quarterly dividend in an amount
equal to 100 times the dividend declared on each share of Common Stock, but in
no event less than $1.00. In the event of liquidation, the holders of Series A
Preferred Stock will, subject to the availability of assets for distribution
(including the rights of securityholders of New ICN having priority in
liquidation to the holders of shares of Series A Preferred Stock), receive a
preferred liquidation payment equal to $100 per share, plus an amount equal to
accrued and unpaid dividends thereon to the date of such payment, and
thereafter, once holders of shares of Common Stock have received an equivalent
liquidation payment, the holders of shares of Series A Preferred Stock and
Common Stock will receive their ratable share of any remaining assets to be
distributed. Each share of Series A Preferred Stock will have 100 votes, voting
together with the Shares. In the event of any merger, consolidation or other
transaction in which Shares are exchanged, each share of Series A Preferred
Stock will be entitled to receive 100 times the amount and type of consideration
received per Share. The rights of the Series A Preferred Stock as to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions. Fractional shares of Series A
Preferred Stock will be issuable; however, the Company may elect to distribute
depositary receipts in lieu of such fractional shares. In lieu of fractional
shares other than fractions that are multiples of one one-hundredth of a share,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following discussion is a summary of the material federal income tax
consequences of holding and disposing of the Notes by U.S. Holders (as defined
below). This summary is based upon laws, regulations, rulings and judicial
decisions now in effect, all of which are subject to change (possibly on a
retroactive basis). This summary assumes that the Notes and Common Stock of the
Company will be held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). Further, this summary
does not discuss all aspects of federal income taxation that may be relevant to
investors in light of their personal circumstances or to certain types of
purchasers subject to special treatment under the federal income tax laws (for
example, dealers in securities, tax-exempt organizations, insurance companies,
financial institutions and foreign persons), and does not discuss the
consequences to a holder under state, local
101
<PAGE> 102
or foreign tax laws. Prospective investors are advised to consult their own tax
advisors regarding the federal, state, local and other tax considerations of
holding and disposing of the Notes.
For purposes hereof, a "U.S. Holder" is (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any state, or (iii)
an estate or trust the income of which is includible in gross income for United
States federal income tax purposes regardless of its source.
GENERAL
A U.S. Holder of a Note will be required to report as ordinary income for
federal income tax purposes interest earned on a Note in accordance with the
holder's method of tax accounting. Generally, principal payments on a Note will
be treated as a return of capital to the extent of a holder's basis therein.
The Company anticipates that the Notes will not be issued with original
issue discount within the meaning of the Code, and the Company does not intend
to take any original issue discount deductions with respect to the Notes.
CONVERSION OF NOTES
A U.S. Holder of a Note will not recognize any gain or loss upon the
conversion of a Note into Common Stock except with respect to cash (if any)
received in lieu of fractional shares. A holder receiving cash in lieu of a
fractional share will recognize capital gain or loss (subject to the discussion
of market discount set forth below) in an amount equal to the difference between
the amount of cash and the amount of the basis in the converted Note that is
allocable to the fractional share. Such gain or loss will be long-term capital
gain or loss provided the Note has been held for more than one year at the time
of conversion. A holder's aggregate tax basis in the Common Stock received upon
conversion will be equal to the holder's tax basis of the Note converted,
reduced by any amount allocable to fractional share interests. A holder's
holding period for the Common Stock received upon conversion of a Note will
include the holder's holding period for such Note.
CONVERSION PRICE ADJUSTMENT
The conversion price of the Notes will be adjusted if the Company makes
certain distributions to holders of Common Stock or in the event of certain
subdivisions, combinations or reclassifications of Common Stock. Such an
adjustment under certain circumstances could be treated as a constructive
distribution that is taxable to a U.S. Holder of a Note at the time of
adjustment under Sections 301 and 305 of the Code.
DISPOSITION OF NOTES OR COMMON STOCK
In general, a U.S. Holder of a Note or the Common Stock into which a Note
was converted will recognize gain or loss upon the sale, exchange or retirement
(including redemption but excluding conversion) of a Note or Common Stock in an
amount equal to the difference between the amount of cash and the fair market
value of any property received (other than in respect of accrued and unpaid
interest) and such holder's adjusted tax basis in the Note or Common Stock
(including any market discount previously included in income by the holder
thereof). Such gain or loss will be capital gain or loss except to the extent of
any accrued market discount (see "Market Discount" below), and will be long-term
capital gain or loss if the Note or Common Stock has been held for more than one
year at the time of sale, exchange or retirement.
MARKET DISCOUNT
"Market discount" is defined generally as the excess of the stated
redemption price at maturity of a debt instrument over the tax basis of the debt
instrument in the hands of the holder immediately after its acquisition. In
general, a Note in the hands of an original holder is not a market discount
bond. In addition, under a de minimis exception, there is no market discount if
the excess of the stated redemption price at maturity of a Note over the
holder's tax basis therein is less than 0.25% of the stated redemption price at
maturity of the Note multiplied by the number of complete years after the
acquisition date to the maturity
102
<PAGE> 103
date of the Note. Market discount generally will accrue ratably during the
period from the date of acquisition to the maturity date of the Note, unless the
holder elects to accrue such discount on the basis of the constant interest
method.
A U.S. Holder in whose hands a Note is a market discount bond generally
will be required to treat as ordinary income any gain recognized on the sale,
exchange, redemption or other disposition of the Note (excluding conversion
thereof) to the extent of accrued market discount. It is anticipated that
regulations will be issued that will provide that any accrued market discount on
a Note that is converted into Common Stock pursuant to the conversion feature
would be carried over into the Common Stock received and treated as ordinary
income of the holder upon disposition of the Common Stock. A U.S. Holder of a
Note acquired at market discount also may be required to defer the deduction of
all or a portion of the interest on any indebtedness incurred or maintained to
purchase or carry the Note until it is disposed of in a taxable transaction.
A U.S. Holder of a Note acquired at a market discount may elect to include
market discount in income as it accrues, in which case the foregoing rules would
not apply. This election would apply to all market discount bonds acquired by
the electing holder on or after the first day of the first taxable year to which
the election applies. The election may be revoked only with the consent of the
Internal Revenue Service (the "IRS").
BACKUP WITHHOLDING
Under federal income tax law, certain U.S. Holders of Notes or Common Stock
are required to provide the Company with such holder's correct taxpayer
identification number ("TIN"). If the holder is an individual, the TIN is his or
her social security number. If the Company is not provided with the correct TIN,
the holder may be subject to a $50 penalty imposed by the IRS. In addition,
payments that are made to such holder (such as interest on a Note) may be
subject to backup withholding. Certain U.S. Holders (including, among others,
corporations) are not subject to these backup withholding and reporting
requirements. If backup withholding applies, the Company is required to withhold
31% of any payment made to the holder. Backup withholding is not an additional
federal income tax. Rather, the federal income tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If backup
withholding results in an overpayment of federal income taxes, a refund may be
obtained from the IRS provided the required information is furnished. U.S.
Holders of Notes and Common Stock should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of Notes by holders who
are Non-U.S. Holders (as defined below). This summary discusses only Notes held
as "capital assets" (as defined in the Code) by the holders thereof. This
summary does not discuss all aspects of United States federal income and estate
taxation that may be relevant to a particular Non-U.S. Holder of Notes in light
of its individual investment circumstances. This discussion does not address the
tax consequences to shareholders, partners or beneficiaries in a Non-U.S.
Holder. Further, it does not consider Non-U.S. Holders subject to special tax
treatment under the federal income tax laws (including dealers in securities,
holders of securities held as part of a "straddle," hedge or "conversion
transaction," or situations in which the "functional currency" within the
meaning of Section 985(b) of the Code of a holder is not the United States
dollar).
The following discussion is based upon the Code, the applicable Treasury
regulations promulgated and proposed thereunder, judicial authority and current
administrative rulings and practices. All of the foregoing are subject to change
(possibly on a retroactive basis) and any such change could affect the
continuing validity of this discussion.
For purposes hereof, a "Non-U.S. Holder" means any person other than : (i)
a citizen or resident of the United States; (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state; or (iii) any estate or trust whose income is includible in
gross income for
103
<PAGE> 104
United States federal income tax purposes regardless of its source. For purposes
of the withholding tax on interest discussed below, a non-resident alien or
other non-resident fiduciary of an estate or trust will be considered a Non-U.S.
Holder.
For purposes of the following discussion, interest income and gain on the
sale, exchange or retirement of a Note will be "United States trade or business
income" if such income or gain is (i) effectively connected with a trade or
business carried on by the Non-U.S. Holder within the United States and (ii) if
a tax treaty applies, attributable to a permanent establishment (or in the case
of an individual, a fixed place of business) in the United States. United States
trade or business income would be taxed at regular United States federal income
tax rates. See, generally, "Certain United States Federal Income Tax
Considerations for U.S. Holders" above. In the case of a Non-U.S. Holder that is
a corporation, such United States trade or business income may also be subject
to the branch profits tax (which is generally imposed on a foreign corporation
on the actual or deemed repatriation from the United States of earnings and
profits attributable to United States trade or business income) at a 30% rate.
The branch profits tax may not apply (or may apply at a reduced rate) if the
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty.
INTEREST
Payments of interest to a Non-U.S. Holder that do not qualify for the
portfolio interest exception discussed below and which are not United States
trade or business income will be subject to withholding of United States federal
income tax at a rate of 30% unless a United States income tax treaty applies to
reduce the rate of withholding. To claim a treaty reduced rate or an exemption
from withholding because the interest is United States trade or business income,
the Non-U.S. Holder must provide a properly executed Form 1001 or Form 4224,
respectively, as applicable.
Generally, however, interest that is paid to a Non-U.S. Holder on a Note
that is not United States trade or business income will not be subject to United
States tax if the interest qualifies as "portfolio interest." Generally,
interest on the Notes that is paid by the Company will qualify as portfolio
interest if (i) the Non-U.S. Holder does not own, actually or constructively,
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote and is not a controlled foreign corporation that is
related to the Company through stock ownership for United States federal income
tax purposes; (ii) the Non-U.S. Holder is not a bank that is receiving the
interest on a loan made in the ordinary course of its trade or business; and
(iii) the Company, or its paying agent, receives a properly executed
certification signed under penalties of perjury that the beneficial owner is not
a "U.S. person" for U.S. federal income tax purposes and which provides the
beneficial owner's name and address.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Except as described below, any gain realized by a Non-U.S. Holder on the
sale, exchange or retirement of Notes, generally will not be subject to United
States federal income tax provided that (i) such gain is not United States trade
or business income; (ii) the Non-U.S. Holder is not an individual who is present
in the United States for 183 days or more in the taxable year of the disposition
and meets certain other requirements; and (iii) the Non-U.S. Holder is not
subject to tax pursuant to the provisions of United States tax law applicable to
certain United States expatriates. For the treatment of amounts received in
respect of accrued and unpaid interest, see discussion above under "Interest."
FEDERAL ESTATE TAX
Notes held (or treated as held) by an individual who is a Non-U.S. Holder
at the time of his or her death (or theretofore transferred subject to certain
retained rights or powers) will not be subject to United States federal estate
tax provided that any interest thereon would be exempt as portfolio interest if
such interest were received by the Non-U.S. Holder at the time of his or her
death. However, shares of Common Stock into which a Note was converted, held by
an individual at the time of his or her death, will be included in such holder's
gross estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
104
<PAGE> 105
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company generally must report annually to the IRS and to each Non-U.S.
Holder the amount of interest paid to, and the tax withheld, if any, with
respect to, each Non-U.S. Holder. These reporting requirements apply whether or
not withholding is reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides.
The United States backup withholding tax (in general, a tax imposed at the
rate of 31% on payments to persons that fail to furnish the information required
under the United States information reporting requirements) will generally not
apply to payments of interest that qualify as portfolio interest as described
above (provided that the Company has no actual knowledge that the holder is a
U.S. person).
Payments of the proceeds of the sale of Notes to or through a foreign
office of a "broker" (as defined in the pertinent regulations) will not be
subject to backup withholding (absent actual knowledge that the payee is a U.S.
person) but will be subject to information reporting if the broker is a U.S.
person, a controlled foreign corporation for United States federal income tax
purposes, or a foreign person 50% or more of whose gross income is from a United
States trade or business for a specified three-year period, unless the broker
has in its records documentary evidence that the holder is not a U.S. person and
certain conditions are met (including that the broker has no actual knowledge
that the holder is a U.S. person) or the holder otherwise establishes an
exemption. Payment of the proceeds of a sale to or through the United States
office of a broker is subject to backup withholding and information reporting,
unless the holder certifies that it is a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption.
Any amount withheld under the backup withholding rules from a payment to a
non-U.S. Holder will be allowed as a credit against, or refund of, such holder's
regular federal income tax liability, provided that certain information is
provided to the IRS.
105
<PAGE> 106
SHARES ELIGIBLE FOR FUTURE SALE
Based upon the shares of common stock of the Predecessor Companies
outstanding as of September 30, 1994, the Company will have approximately
27,971,000 shares of Common Stock outstanding immediately after consummation of
the Merger. All of the shares of Common Stock issued in the Merger will be
freely tradeable without restriction or further registration under the
Securities Act except for any shares issued to an "affiliate" (as that term is
defined under the Securities Act) of any of the Predecessor Companies which
shares will be subject to the resale limitations of Rule 145 promulgated under
the Securities Act.
In general, under Rule 145, a person is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of: (a)
one percent of the then outstanding shares of the Common Stock, or (b) an amount
equal to the average weekly reported trading volume in the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 145 are also
subject to certain manner of sale limitations, notice requirements and the
availability of current public information about the Company. Subsequent to the
second anniversary of the consummation of the Merger, any then non-affiliate of
the Company may sell Common Stock subject to Rule 145 without restriction
provided that current public information is available about the Company.
Subsequent to the third anniversary of the consummation of the Merger, any
person who has not been an affiliate of the Company for at least three months
may sell Common Stock subject to Rule 145 without restriction. Shares of Common
Stock properly sold in reliance on Rule 145 are thereafter freely tradeable
without restriction or registration under the Securities Act, unless thereafter
held by an affiliate of the Company.
The Company, its executive officers and directors have agreed not to issue,
transfer, sell or otherwise dispose of any securities of the Company for a
period of 90 days from the date of this Prospectus, without the prior written
consent of the Representative, subject to certain exceptions. See
"Underwriting".
Based upon securities of the Predecessor Companies convertible or
exerciseable into common stock of each such Predecessor Company outstanding as
of September 30, 1994 and after giving effect to the application of the net
proceeds of the Offering, the Company will have outstanding immediately after
consummation of the Merger, options to purchase 5,333,000 shares of Common
Stock, warrants to purchase 43,223 shares of Common Stock and 1,857,056 shares
of Common Stock issuable upon conversion of certain indebtedness. The holder of
the warrants has the right, under certain circumstances, to require the Company
to register the Common Stock into which the warrants are exerciseable.
106
<PAGE> 107
CERTAIN TRANSACTIONS
GENERAL
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with SPI. Certain officers of
ICN occupy similar positions with SPI, Biomedicals and Viratek. The Predecessor
Companies have engaged in certain transactions with each other.
An Oversight Committee consisting of one non-management director of each of
the Predecessor Companies and a non-voting chairman reviews transactions between
or among the Predecessor Companies to determine whether a conflict of interest
exists among the Predecessor Companies with respect to a particular transaction
and whether the transaction is fair and the manner in which such conflict can be
resolved. The Oversight Committee was formed in October 1984 and consisted of a
representative of each of ICN, SPI and Viratek. A representative of Biomedicals
joined the Oversight Committee in October 1986. The Oversight Committee has
advisory authority only and makes recommendations to the Boards of Directors of
each of the Predecessor Companies. The significant related party transactions
have been reviewed and recommended for approval by the Oversight Committee, and
approved by the respective Boards of Directors.
Effective December 1, 1990, SPI and Viratek entered into a new royalty
agreement with regard to Virazole(R). Under this agreement, SPI continued to act
as Viratek's exclusive distributor of Virazole(R) (which relationship had
existed since 1983) and agreed to pay Viratek a royalty of 20% on sales
worldwide for a term of 10 years with an option by either party to extend it for
an additional 10 years. Worldwide sales for Virazole(R) for 1993 were
$29,515,000, which generated royalties to Viratek of $5,903,000.
Under an agreement entered into in 1982 between ICN and Baylor, the
employer of Dr. Vernon Knight, a Viratek director, SPI is required to pay a 2%
royalty to Baylor on all sales of Virazole(R) in aerosolized form. Such
royalties for 1993 were $422,000.
Beginning December 1986, SPI began selling Brown Pharmaceuticals, Inc.
products under license from ICN. ICN charges SPI royalties at the rate of 8 1/2%
of net sales. During 1993, SPI paid ICN $218,000 in royalties under this
arrangement.
COST ALLOCATIONS
The Predecessor Companies occupy ICN's facility in Costa Mesa, California.
In 1993 ICN charged facility costs of $279,000, $310,000 and $30,000 to Viratek,
Biomedicals and SPI, respectively. The costs of common services such as
maintenance, purchasing and personnel are paid by SPI and allocated to ICN,
Biomedicals and Viratek based on services utilized. The total of such costs were
$2,584,000 in 1993, of which $1,733,000 were allocated to ICN, Viratek and
Biomedicals. Effective January 1, 1993, ICN reimburses Biomedicals for those
allocations which are in excess of the amounts determined by Biomedicals'
management using competitive data, as reviewed and recommended by the Oversight
Committee, that would have been incurred by Biomedicals if it operated in a
facility suited solely to its requirements. During 1993, such reimbursements
totaled $772,000. It is management's belief that the methods used and amounts
allocated for facility costs and common services are reasonable based upon the
usage by the respective companies.
During 1991, Viratek began renting certain office equipment to ICN for use
at the Costa Mesa facility. Rent is being charged at the rate of $20,000 per
month. During 1993, Viratek charged ICN $240,000.
INVESTMENT POLICY
Effective December 1, 1986, ICN and its affiliates adopted a policy
covering intercompany advances and interest rates, and the type of investments
(marketable equity securities, high-yield bonds, etc.) to be made by ICN and its
affiliates. As a result of this policy, excess cash held by SPI, Viratek and
Biomedicals is transferred to ICN, and cash advances are made by ICN to SPI,
Viratek and Biomedicals to fund short-term cash requirements, acquisitions and
certain other transactions. The affiliates are credited with interest income
based on prime (7 1/4% at June 30, 1994) less 1/2% and are charged interest at
the prime rate plus 1/2% on the amounts invested or advanced.
107
<PAGE> 108
In accordance with this investment policy, Biomedicals advanced the net
proceeds of Biomedicals' Bio Capital Holding Swiss Franc public offering,
completed in February 1987 to ICN. These advances are payable to Biomedicals by
ICN in Swiss Francs. At March 1, 1991, Biomedicals converted an advance due from
ICN of SFr 14,386,000 into $10,849,000. As a result of this change, Biomedicals
removed the hedge from its Swiss Franc liability. In 1993, Biomedicals recorded
a translation gain of $159,000 as a result of the conversion of the Swiss Franc
denominated liability to U.S. dollars.
Under the terms of the series "A" and "B" preferred stock discussed below,
Biomedicals is restricted from obtaining any additional borrowings without ICN's
permission.
SPI had outstanding borrowings from ICN in the amount of $5,225,000 and
$18,313,000 as of June 30, 1994 and December 31, 1993, respectively. During
1993, ICN charged SPI interest of $800,000. During 1993, SPI reclassified its
Biomedicals intercompany receivable of $2,333,000 and its Viratek intercompany
payable of $5,228,000, respectively, to SPI's ICN intercompany account resulting
in a net increase in SPI's liability to ICN of $2,895,000.
During 1993, Biomedicals reclassified its SPI intercompany payable of
$2,333,000 and its Viratek intercompany receivable of $272,000 to ICN, resulting
in a net increase in Biomedicals' liability to ICN of $2,061,000 and total
intercompany payables of $5,932,000 to ICN as of December 31, 1993. ICN charged
$420,000 to Biomedicals for interest on the average balance outstanding during
1993 at an average interest rate of approximately 6.5%.
During 1993, Viratek reclassified $272,000 of intercompany payables to
Biomedicals to ICN and reclassified $5,228,000 of intercompany receivables from
SPI to ICN, which resulted in a receivable of $15,528,000 due from ICN at
December 31, 1993. Viratek earned interest income of $714,000 from ICN on the
average balance outstanding during 1993.
OTHER
Certain outside directors have provided legal and other consultation
services to ICN for which they received an aggregate of approximately $154,000
during 1993.
During the first quarter 1993, Biomedicals transferred its Dublin, Virginia
facility to ICN in exchange for a reduction in the intercompany amounts due to
ICN of $586,000 representing the net book value at the date of the transfer.
On August 30, 1993, Biomedicals issued to ICN 300,000 shares of a new
series "A" of its non-convertible, non-voting preferred stock valued pursuant to
a fairness opinion, at $30,000,000. In exchange, ICN delivered 4,983,606 shares
of Biomedicals common stock that ICN owned and exchanged intercompany debt owed
to ICN by Biomedicals in the amount of $11,000,000. In addition, on August 30,
1993, Biomedicals issued to ICN 390,000 shares of a new series "B" of its
non-convertible, non-voting, preferred stock valued pursuant to a fairness
opinion, at $32,000,000. In exchange, ICN delivered to Biomedicals 8,384,843
shares of Biomedicals Common Stock that ICN owned. Subsequent to the exchange,
Biomedicals had 9,033,623 common shares issued and outstanding. Subject to
declaration by Biomedicals' Board of Directors, the new series "A" preferred
stock pays an annual dividend of $8 per share, noncumulative, payable quarterly,
and the new series "B" preferred stock pays an annual dividend of $10 per share,
noncumulative, payable quarterly. Both series "A" and "B" preferred stock become
cumulative in respect to dividends upon certain events deemed to be a change in
control, as defined by the certificates of designation. The series "B" preferred
dividends are subject to the prior rights of the holders of the series "A"
preferred stock and any other preferred stock ranking prior to the series "B"
preferred stock. The series "A" preferred stock is senior in ranking to the
series "B" preferred stock, and the series "B" preferred stock is senior to
Biomedicals common stock. As to voluntary or involuntary liquidation,
dissolution or winding up of the affairs of Biomedicals, after payment or
provision for payment of the debts and other liabilities of Biomedicals, the
holders of the series "A" preferred shares are entitled to receive an amount in
cash or in property, including securities of another corporation, equal to $100
per share in involuntary liquidation or $104.50 per share in voluntary
liquidation prior to August 31, 1995 and which amount declines ratably each year
to $100 per share after August 31, 1998, plus
108
<PAGE> 109
dividends, in the event dividends have become cumulative. The holders of the
series "B" preferred shares are entitled to receive an amount in cash or in
property, including securities of another corporation equal to $100 per share in
voluntary or involuntary liquidation, plus dividends, in the event dividends
have become cumulative. The series "A" and "B" preferred shares are redeemable
for cash or property, including securities of another corporation, in whole or
in part, at the option of Biomedicals only, subject to approval by a vote of a
majority of the independent directors of Biomedicals. The series "A" preferred
shares are redeemable at $104.50 per share prior to August 31, 1995 and which
amount declines ratably each year to $100 after August 31, 1998, plus dividends,
in the event dividends have become cumulative. The series "B" shares are
redeemable at $100 per share, plus dividends, in the event dividends have become
cumulative. There were no dividends declared on the series "A" or series "B"
preferred stock during 1993.
Effective January 1, 1992, Viratek and Biomedicals entered into an
agreement whereby Biomedicals agreed to transfer rights, title and interest in
certain of its research and development assets to Viratek. Biomedicals retains a
right of first refusal to the marketing and distribution rights for any product
developed from the transferred assets and pay a royalty to Viratek. Accordingly,
Viratek incurred $793,000 of expenses relating to biomedical research and
development for the years ended December 31, 1993.
On November 15, 1993, SPI issued 200,000 shares of SPI Common Stock to ICN
in exchange for reducing its debt outstanding to ICN by $3,075,000. The value of
the shares issued was based on the quoted share price on the transaction date.
Pursuant to an agreement between ICN and Viratek, all the expenses incurred
by the Predecessor Companies in connection with the class action lawsuits
described under "Business -- Litigation" are allocated equally between ICN and
Viratek.
Management of the Predecessor Companies believe that the foregoing
transactions among the Predecessor Companies and their affiliates have been
effected on terms no more or less favorable than could have been obtained from
third parties.
INCOME TAXES
Effective January 1, 1993, the Predecessor Companies adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The new statement supersedes the Predecessor Companies' previous policy of
accounting for income taxes under Statement of Financial Accounting Standards
No. 96, "Accounting for Income Taxes" (SFAS 96). Both statements require the use
of the liability method of accounting for income taxes, but the recognition of
deferred tax assets was limited under SFAS 96. Under SFAS 109, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The change in the method of accounting for income taxes from SFAS 96 to SFAS 109
resulted in no cumulative effect adjustment for any of the Predecessor
Companies.
Each of the Predecessor Companies files its federal income tax return on a
stand-alone basis. In years prior to 1993, tax sharing agreements allocated
taxes for periods when a subsidiary was included in ICN's consolidated tax
return. The following table indicates inclusion of subsidiaries in ICN's
consolidated tax return.
<TABLE>
<CAPTION>
1992 1991
------------- --------------
<S> <C> <C>
SPI............................ -- Until 8-13-91
Biomedicals.................... -- --
Viratek........................ Until 2-1-92 Entire year
</TABLE>
In accordance with the terms of tax-sharing agreements with SPI and
Viratek, respectively, SPI and Viratek were required to pay ICN for federal
taxes otherwise payable on a stand-alone basis. The federal tax-sharing
agreements and consolidated federal filing was terminated with SPI in August
1991 and was
109
<PAGE> 110
terminated with Viratek in January 1992, when ICN ownership of SPI and Viratek,
respectively, dropped below 80 percent.
Upon leaving the consolidated group, SPI was allocated $17,000,000 of net
operating loss carryforwards ("NOL") which represents SPI's share of the
consolidated NOL carryforward at the time of the deconsolidation. The allocated
NOL was utilized for book purposes in 1991 to reduce deferred tax liabilities
resulting in a reduction of income tax expense. For tax purposes, SPI's NOL at
December 31, 1993 is $4,279,000. The utilization of this NOL is limited to
$540,000 per year until the year 2003.
The Predecessor Companies conduct business in a number of different tax
jurisdictions. Accordingly, losses sustained in one jurisdiction generally
cannot be applied to reduce taxable income in another jurisdiction. The income
of certain foreign subsidiaries is not subject to U.S. income taxes, except when
such income is paid to the U.S. parent company or one of its domestic
subsidiaries. No U.S. taxes have been provided on the Predecessor Companies'
foreign subsidiaries, with the exception of SPI's Panamanian subsidiary (Alfa
Pharmaceuticals), since management intends to reinvest those amounts in foreign
operations. Included in consolidated retained earnings (deficit) of SPI and ICN
at December 31, 1993 is approximately $49,000,000 and $1,820,000, respectively,
of accumulated earnings of foreign operations that would be subject to U.S.
income taxes if and when repatriated.
ICN has NOLs of approximately $190,000,000 (of which $17,800,000 will be
credited to additional capital when utilized) at December 31, 1993, expiring at
various dates from 1994 through the year 2008.
Included in the $190,000,000 NOL is approximately $47,500,000 of NOL
attributable to Viratek expiring in various dates from 1995 to 2005. Of the
$47,500,000 NOL attributable to Viratek, $10,900,000 of stock option deductions
will be credited to paid-in capital when utilized. Viratek has research and
development tax credit carryovers of $800,000 which expire in varying amounts
from 1996 to 2002. Viratek's NOL can only be utilized by Viratek to offset
Viratek taxable income generated on a separate company basis.
Also included in the $190,000,000 NOL is approximately $39,000,000 of
domestic NOLs and $38,000,000 of foreign NOLs attributable to Biomedicals, of
which $458,000 will be credited to additional paid-in capital when utilized.
Biomedicals' NOLs are restricted to utilization by that company. In connection
with the acquisition of Flow, Biomedicals acquired Flow's domestic NOLs of
$9,771,000. Biomedicals has agreed to pay Flow the first $500,000 of any
benefits realized. In the event this amount is not realized by November 1994,
$500,000 will become due and payable to Flow including interest at 10%. Tax
benefits realized in excess of $500,000 will be shared equally with Flow. The
Company is withholding these payments pending the outcome of an arbitration
proceeding.
ICN is currently under examination by the IRS for the tax years ended
November 30, 1991, 1990, 1989 and 1988. While the proposed adjustments, if
upheld, would not result in a significant additional tax liability, they would
result in significant reductions in the NOLs available to the Company in the
future.
110
<PAGE> 111
UNDERWRITING
The Underwriters named below have severally agreed, subject to certain
conditions, to purchase from the Company the principal amount of Notes set forth
opposite their respective names:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
--------------------------------------------------------------- ------------
<S> <C>
Wertheim Schroder & Co. Incorporated........................... $ 33,334,000
Jefferies & Company, Inc....................................... 33,333,000
Kemper Securities, Inc......................................... 33,333,000
------------
Total................................................ $100,000,000
===========
</TABLE>
The Underwriting Agreement provides that the several Underwriters are
obligated to purchase all of the Notes offered hereby, if any are purchased.
Wertheim Schroder & Co. Incorporated, as representative (the "Representative")
of the several Underwriters, has advised the Company that the Underwriters
propose to offer the Notes to the public initially at the offering price set
forth on the cover page of this Prospectus; that the Underwriters propose
initially to allow a concession of not in excess of 2.0% of the principal amount
of the Notes to certain dealers, including the Underwriters; that the
Underwriters and such dealers may initially allow a discount of not in excess of
0.25% of the principal amount of the Notes to other dealers; and that the public
offering price and concession and discount to dealers may be changed by the
Representative after the initial public offering.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of the Underwriting Agreement,
to purchase up to an additional $15,000,000 aggregate principal amount of Notes
at the public offering price less underwriting discounts and commissions, all as
set forth on the cover page of this Prospectus. The Underwriters may exercise
the option only to cover over-allotments, if any, in the sale of Notes in this
offering. To the extent that the Underwriters exercise the option, each
Underwriter will be committed, subject to certain conditions, to purchase Notes
in an aggregate principal amount proportionate to such Underwriter's initial
commitment.
The Company, its executive officers and directors have agreed not to sell
or otherwise dispose of any shares of Common Stock, or securities convertible
into shares of Common Stock, for a period of 90 days after the date of this
Prospectus without the prior written consent of the Representative except for
the sale, issuance or grant by the Company of shares of Common Stock under
existing stock option plans and agreements, any grant of options under the 1994
Stock Incentive Plan (if adopted by the Compensation Committee and the Board of
Directors of the Company) consistent with past practice to directors, employees
or consultants of any of the Predecessor Companies or the Company hired or
retained on or after May 1, 1994 or the issuance of Common Stock upon the
conversion of any Notes or other convertible securities outstanding on the date
hereof, upon the exercise of warrants outstanding on the date hereof, pursuant
to the Rights Agreement or, under certain circumstances, in connection with
acquisitions.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Prior to this Offering, there has been no public market for the Notes or
the Common Stock. Consequently, the conversion price of the Notes has been
determined by negotiation among the Company and the Underwriters. The principal
determining factor was the market price of the SPI Common Stock because each
share of SPI Common Stock will be converted into one share of Common Stock in
the Merger.
In connection with the Merger, each of the Underwriters provided to one of
the Predecessor Companies a fairness opinion as to whether the applicable
exchange ratio was fair to the stockholders of such Predecessor Company. For
rendering such fairness opinion and, in the case of Wertheim Schroder & Co.
Incorporated, for certain other advisory services rendered in connection with
the Merger, the following fees have been paid to the Underwriters:
Wertheim Schroder & Co. Incorporated provided a fairness opinion to SPI and
rendered certain other advisory services to SPI in connection with the Merger.
In consideration therefor, Wertheim Schroder & Co. Incorporated has received to
date $600,000 plus their out-of-pocket expenses (including reasonable fees and
expenses of its legal counsel) from SPI. In addition, Wertheim Schroder & Co.
Incorporated will receive an
111
<PAGE> 112
additional $500,000 upon consummation of the Merger. In addition, Wertheim
Schroder & Co. Incorporated served as financial advisor to ICN in its successful
defense of a proxy contest to replace the current Board of Directors of ICN at
ICN's 1993 Annual Meeting. Wertheim Schroder & Co. Incorporated received
$250,000 plus reimbursement of out-of-pocket expenses in connection with such
services.
Jefferies & Company, Inc. provided a fairness opinion to Biomedicals in
connection with the Merger and received $350,000 plus disbursements and
out-of-pocket expenses (including fees and disbursements of counsel, which fees
and disbursements may not exceed $50,000 without Biomedicals' prior consent) for
its services rendered in connection therewith. Jefferies & Company, Inc. also
acted in September 1994 as placement agent in connection with the sale of 50,000
shares of SPI Common Stock by ICN, for which it received a customary sales
commission.
Kemper Securities, Inc. provided a fairness opinion to Viratek in
connection with the Merger and received $275,000 for its services rendered in
connection therewith.
Each of the Predecessor Companies has also agreed to indemnify the
Underwriter which has advised it in connection with the Merger and certain
related persons of such Underwriter against certain liabilities, including
liabilities under the securities laws.
At September 30, 1994, the Company had outstanding an aggregate of $585,263
of margin borrowings from Kemper Securities, Inc. This loan was repaid in
October 1994. The loan was collateralized by common stock of SPI owned by ICN.
LEGAL OPINIONS
The legality of the Notes offered hereby will be passed upon for the
Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), One New York Plaza, New York, New York 10004.
Certain legal matters in connection with the sale of the Notes offered hereby
will be passed upon for the Underwriters by Fulbright & Jaworski L.L.P., 666
Fifth Avenue, New York, New York 10103.
EXPERTS
The consolidated financial statements and financial statement schedules of
SPI, ICN, Viratek and Biomedicals as of December 31, 1992 and 1993 and for each
of the three years in the period ended December 31, 1993 included in the
Registration Statement or in this Prospectus which is a part of the Registration
Statement, have been audited by Coopers & Lybrand, independent auditors, as
stated in their reports appearing herein, which reports express an unqualified
opinion and include an emphasis of a matter paragraph related to certain
transactions between the Predecessor Companies and, as it relates to ICN,
includes an explanatory paragraph referring to the change to the equity method
of accounting for a previously consolidated subsidiary, and have been so
included in reliance upon the report of such firm given their authority as
experts in accounting and auditing.
With respect to the unaudited interim financial information for ICN only
for the six months ended June 30, 1993 and 1994 which is included in the
Registration Statement or in this Prospectus which is part of the Registration
Statement, Coopers & Lybrand, L.L.P. have applied limited procedures in
accordance with professional standards for a review of such information.
However, as stated in their report included in ICN's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Coopers & Lybrand,
L.L.P. are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their report on the unaudited interim financial
information because this report is not a "report" or a "part" of the
Registration Statement or this Prospectus prepared or certified by an accountant
within the meaning of Sections 7 and 11 of the Act.
112
<PAGE> 113
AVAILABLE INFORMATION
The Predecessor Companies are, and the Company will be, subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
the Predecessor Companies file, and the Company will file, periodic reports,
proxy materials and other information with the Commission. Such reports, proxy
materials and other information filed by the Predecessor Companies and to be
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, 7 World Trade Center, New York, New York 10048 and Chicago
Regional Office, 500 West Madison Street, Chicago, Illinois 60661, at prescribed
rates. In addition, similar information can be inspected concerning ICN at the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, and
concerning SPI, Viratek and Biomedicals at the American Stock Exchange, Inc., 86
Trinity Place, New York, New York 10006.
This Prospectus constitutes a part of the Registration Statement filed by
the Company with the Commission under the Securities Act. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Notes, reference is hereby made to the Registration Statement. Statements
contained herein concerning the provisions of any document are not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
113
<PAGE> 114
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SPI PHARMACEUTICALS, INC.
Index to Financial Statements Covered by Report of Independent Auditors:
Report of Independent Auditors..................................................... F-3
Consolidated Balance Sheets as of December 31, 1992 and 1993....................... F-4
Consolidated Statements of Income for the Years Ended December 31, 1991, 1992 and
1993............................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1991, 1992 and 1993............................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993........................................................................ F-7
Notes to Consolidated Financial Statements -- December 31, 1993.................... F-8
Index to Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of December 31, 1993 and June 30, 1994.... F-30
Consolidated Condensed Statements of Income for the three and six months ended June
30, 1993 and 1994............................................................... F-31
Consolidated Condensed Statements of Cash Flows for the six months ended June 30,
1993 and 1994................................................................... F-32
Notes to Consolidated Condensed Financial Statements -- June 30, 1994.............. F-33
ICN PHARMACEUTICALS, INC.
Index to Financial Statements Covered by Report of Independent Auditors:
Report of Independent Auditors..................................................... F-37
Consolidated Balance Sheets as of December 31, 1992 and 1993....................... F-38
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992
and 1993........................................................................ F-39
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1991, 1992 and 1993................................................ F-40
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993........................................................................ F-41
Notes to Consolidated Financial Statements -- December 31, 1993.................... F-42
Index to Financial Statements (Unaudited):
Review Report of Independent Auditors.............................................. F-73
Consolidated Condensed Balance Sheets as of December 31, 1993 and June 30, 1994.... F-74
Consolidated Condensed Statements of Operations for the three and six months ended
June 30, 1993 and 1994.......................................................... F-75
Consolidated Condensed Statements of Cash Flows for the six months ended June 30,
1993 and 1994................................................................... F-76
Notes to Consolidated Condensed Financial Statements -- June 30, 1994.............. F-77
</TABLE>
F-1
<PAGE> 115
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VIRATEK, INC.
Index to Financial Statements Covered by Report of Independent Auditors:
Report of Independent Auditors..................................................... F-83
Balance Sheets as of December 31, 1992 and 1993.................................... F-84
Statements of Operations for the Years Ended December 31, 1991, 1992 and 1993...... F-85
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1991,
1992 and 1993................................................................... F-86
Statements of Cash Flows for the Years Ended December 31, 1991, 1992 and 1993...... F-87
Notes to Financial Statements -- December 31, 1993................................. F-88
Index to Financial Statements (Unaudited):
Condensed Balance Sheets as of December 31, 1993 and June 30, 1994................. F-97
Condensed Statements of Operations for the three and six months ended June 30, 1993
and 1994........................................................................ F-98
Condensed Statements of Cash Flows for the six months ended June 30, 1993 and
1994............................................................................ F-99
Notes to Condensed Financial Statements -- June 30, 1994........................... F-101
ICN BIOMEDICALS, INC.
Index to Financial Statements Covered by Report of Independent Auditors:
Report of Independent Auditors..................................................... F-105
Consolidated Balance Sheets as of December 31, 1992 and 1993....................... F-106
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992
and 1993........................................................................ F-107
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1991, 1992 and 1993............................................................. F-108
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993........................................................................ F-109
Notes to Consolidated Financial Statements -- December 31, 1993.................... F-110
Index to Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of December 31, 1993 and June 30, 1994.... F-127
Consolidated Condensed Statements of Operations for the three and six months ended
June 30, 1993 and 1994.......................................................... F-128
Consolidated Condensed Statements of Cash Flows for the six months ended June 30,
1993 and 1994................................................................... F-129
Notes to Consolidated Condensed Financial Statements -- June 30, 1994.............. F-131
</TABLE>
F-2
<PAGE> 116
REPORT OF INDEPENDENT AUDITORS
To SPI Pharmaceuticals, Inc.:
We have audited the consolidated balance sheets of SPI Pharmaceuticals,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992,
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company has had certain transactions with its parent and Affiliated
Corporations as more fully described in Notes 1, 3 and 4 to the consolidated
financial statements. Whether the terms of these transactions would have been
the same had they been between wholly unrelated parties cannot be determined.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SPI Pharmaceuticals, Inc. and subsidiaries as of December 31, 1993 and 1992, the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND
Los Angeles, California
February 24, 1994, except
for Note 15, as to which
the date is March 24, 1994
F-3
<PAGE> 117
SPI PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
ASSETS
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................... $ 38,054,000 $ 14,777,000
Restricted cash............................................... 15,200,000 --
Marketable securities (used to collateralize
$10,000,000 note payable).................................. -- 32,587,000
Receivables, net.............................................. 78,032,000 43,277,000
Inventories, net.............................................. 91,109,000 107,196,000
Prepaid expenses and other current assets..................... 13,568,000 10,925,000
------------ ------------
Total current assets....................................... 235,963,000 208,762,000
Property, plant and equipment, net.............................. 81,494,000 78,718,000
Other assets.................................................... 13,749,000 12,873,000
------------ ------------
Goodwill........................................................ 2,012,000 1,664,000
------------ ------------
$333,218,000 $302,017,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................. $ 16,322,000 $ 14,360,000
Current portion of long-term debt............................. 4,292,000 3,866,000
Trade payables................................................ 37,526,000 13,951,000
Accrued liabilities........................................... 23,581,000 17,700,000
Current portion of payable to ICN............................. 20,160,000 18,313,000
Income taxes payable.......................................... 13,140,000 13,313,000
------------ ------------
Total current liabilities.................................. 115,021,000 81,503,000
Long-term debt, less current portion.......................... 21,016,000 16,980,000
Payable to ICN, less current portion.......................... 10,273,000 --
Other liabilities and deferred income taxes................... 10,241,000 6,226,000
Minority interest............................................. 41,240,000 41,429,000
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value; 38,000,000 shares authorized;
17,890,000 and 20,101,000 shares issued and outstanding at
December 31, 1992 and 1993, respectively................... 179,000 202,000
Additional capital............................................ 62,403,000 91,449,000
Retained earnings............................................. 74,787,000 70,973,000
Foreign currency translation adjustment....................... (1,942,000) (6,745,000)
------------ ------------
Total stockholders' equity................................. 135,427,000 155,879,000
------------ ------------
$333,218,000 $302,017,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 118
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $364,358,000 $476,118,000 $403,957,000
Cost of sales.................................... 173,554,000 208,745,000 211,923,000
------------ ------------ ------------
Gross profit................................ 190,804,000 267,373,000 192,034,000
Selling, general and administrative expenses..... 99,942,000 170,313,000 131,069,000
Royalties to affiliates, net..................... 4,377,000 5,511,000 6,121,000
Research and development costs................... 4,901,000 7,836,000 11,516,000
Translation and exchange (gains) losses, net..... 6,697,000 25,039,000 (3,282,000)
Interest income.................................. (3,678,000) (9,679,000) (8,033,000)
Interest expense................................. 8,965,000 13,065,000 23,750,000
Other expense, net............................... 16,757,000 2,082,000 3,826,000
------------ ------------ ------------
Income before provision for income taxes and
minority interest........................... 52,843,000 53,206,000 27,067,000
Provision for income taxes....................... 10,852,000 9,095,000 5,368,000
Minority interest................................ 11,865,000 9,608,000 189,000
------------ ------------ ------------
Net income....................................... $ 30,126,000 $ 34,503,000 $ 21,510,000
------------ ------------ ------------
Net income per share............................. $ 1.57 $ 1.76 $ 1.08
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 119
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- FOREIGN CURRENCY
NUMBER OF ADDITIONAL TRANSLATION
SHARES AMOUNT CAPITAL RETAINED EARNINGS ADJUSTMENTS TOTAL
----------- -------- ------------ ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1990........ 15,638,000 $156,000 $ 50,062,000 $ 43,652,000 $ 2,065,000 $ 95,935,000
December 1990 net loss.............. -- -- -- (50,000) -- (50,000)
Proceeds from the exercise of stock
options........................... 594,000 6,000 3,086,000 -- -- 3,092,000
Translation adjustments............. -- -- -- -- (78,000) (78,000)
Temporary treasury stock holdings in
connection with the acquisition of
ICN Galenika...................... (1,101,000) (11,000) (35,627,000) -- -- (35,638,000)
Common stock issued in connection of
ICN Galenika ..................... 1,200,000 12,000 8,988,000 -- -- 9,000,000
Acquisition of intangibles from an
affiliate......................... -- -- (1,600,000) -- -- (1,600,000)
Tax benefit of stock options
exercised......................... -- -- 2,308,000 -- -- 2,308,000
Cash dividends ($.89 per share)..... -- -- -- (14,961,000) -- (14,961,000)
Net income.......................... -- -- -- 30,126,000 -- 30,126,000
---------- -------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1991........ 16,331,000 163,000 27,217,000 58,767,000 1,987,000 88,134,000
Proceeds from the exercise of stock
options........................... 327,000 3,000 2,175,000 -- -- 2,178,000
Translation adjustments............. -- -- -- -- (3,929,000) (3,929,000)
Sale of temporary treasury stock
holdings in connection with the
acquisition of ICN Galenika....... 900,000 9,000 28,619,000 -- -- 28,628,000
Tax benefit of stock options
exercised......................... -- -- 956,000 -- -- 956,000
Cash dividends ($.78 per share)..... -- -- -- (15,043,000) -- (15,043,000)
Effect of stock dividend issued in
January 1993...................... 332,000 4,000 3,436,000 (3,440,000) -- --
Net income.......................... -- -- -- 34,503,000 -- 34,503,000
---------- -------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1992........ 17,890,000 179,000 62,403,000 74,787,000 (1,942,000) 135,427,000
Proceeds from the exercise of stock
options........................... 461,000 5,000 2,410,000 -- -- 2,415,000
Translation adjustments............. -- -- -- -- (4,803,000) (4,803,000)
Tax benefit of stock options
exercised......................... -- -- 727,000 -- -- 727,000
Cash dividends ($.25 per share)..... -- -- -- (4,690,000) -- (4,690,000)
Effect of 1993 quarterly stock
dividends......................... 1,121,000 11,000 16,106,000 (16,117,000) -- --
Effect of stock dividend issued in
January 1994...................... 276,000 3,000 4,514,000 (4,517,000) -- --
Common stock issued for payment of
ICN debt.......................... 200,000 2,000 3,073,000 -- -- 3,075,000
Common stock issued for
acquisition....................... 153,000 2,000 2,216,000 -- -- 2,218,000
Net income.......................... -- -- -- 21,510,000 -- 21,510,000
---------- -------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1993........ 20,101,000 $202,000 $ 91,449,000 $ 70,973,000 $(6,745,000) $155,879,000
========== ======== ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 120
SPI PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 30,126,000 $ 34,503,000 $ 21,510,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 7,928,000 6,770,000 8,513,000
Allowance for losses on accounts receivable................. 6,740,000 48,312,000 11,261,000
Write-off of goodwill and intangibles....................... 9,102,000 -- --
Write-off of fixed assets................................... 1,664,000 -- --
Foreign exchange (gains) losses, net........................ 6,697,000 14,739,000 (3,282,000)
(Gain) loss on sale of fixed assets......................... (356,000) 151,000 (194,000)
Increase in inventory allowances............................ 2,608,000 2,456,000 4,252,000
Income taxes contributed by ICN............................. 2,308,000 -- --
Other non-cash losses....................................... 95,000 -- 1,312,000
Minority interest........................................... 11,865,000 9,608,000 189,000
Change in assets and liabilities net of effects from
purchase of acquired companies:
Receivables................................................. (74,017,000) 19,151,000 19,968,000
Inventories................................................. 10,192,000 (37,491,000) (15,388,000)
Prepaid expenses and other current assets................... (13,591,000) (4,640,000) 3,164,000
Deferred income taxes....................................... 16,560,000 1,741,000 (1,673,000)
Trade payables and accrued liabilities...................... 37,966,000 (25,448,000) (29,331,000)
Income taxes payable........................................ 342,000 5,711,000 1,795,000
Other liabilities........................................... 566,000 (45,845,000) (3,889,000)
------------ ------------ ------------
Net cash provided by operating activities................... 56,795,000 29,718,000 18,207,000
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures.......................................... (19,051,000) (11,610,000) (8,431,000)
Proceeds from sale of fixed assets............................ 801,000 1,252,000 1,131,000
Purchase of marketable securities............................. -- -- (33,899,000)
Utilization of net operating loss carryforwards from
acquired subsidiaries....................................... 1,174,000 -- --
(Increase) decrease in restricted cash........................ -- (15,200,000) 15,200,000
Payments for purchase of acquired companies and product
lines....................................................... (14,453,000) -- --
Other, net.................................................... (104,000) 222,000 205,000
------------ ------------ ------------
Net cash used in investing activities....................... (31,633,000) (25,336,000) (25,794,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in borrowings under line of
credit arrangements......................................... 5,860,000 4,270,000 (1,487,000)
Proceeds from issuance of long-term debt...................... 1,891,000 9,588,000 4,207,000
Payments on long-term debt.................................... (322,000) (7,285,000) (4,644,000)
Payments to ICN............................................... (19,278,000) (14,987,000) (13,662,000)
Proceeds from stock issuances................................. 3,092,000 32,994,000 2,415,000
Dividends paid to minority stockholders....................... (4,180,000) (7,525,000) (2,531,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... (12,937,000) 17,055,000 (15,702,000)
------------ ------------ ------------
Effect of exchange rate changes on cash......................... (322,000) (54,000) 12,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............ 11,903,000 21,383,000 (23,277,000)
Cash and cash equivalents at beginning of year.................. 4,768,000 16,671,000 38,054,000
------------ ------------ ------------
Cash and cash equivalents at end of year........................ $ 16,671,000 $ 38,054,000 $ 14,777,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 121
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., ICN BIOMEDICALS, INC. AND
VIRATEK, INC.:
SPI Pharmaceuticals, Inc. ("SPI" or the "Company") was incorporated on
November 30, 1981, as a wholly-owned subsidiary of ICN Pharmaceuticals, Inc.
("ICN") and is 39%-owned by ICN at December 31, 1993. ICN Biomedicals, Inc.
("Biomedicals") is 69%-owned by ICN and Viratek, Inc. ("Viratek") is 63%-owned
by ICN at December 31, 1993.
During 1992, ICN sold 690,000 shares of the Company's common stock for an
aggregate sales price of $13,786,000 in open market transactions and privately
negotiated sales and in 1991 used 1,468,000 shares in the formation of ICN
Galenika, of which 1,200,000 shares were sold for cash during 1992 by ICN
Galenika. During 1993, ICN sold 1,618,200 shares of the Company's common stock
for an aggregate sales price of $19,995,000 in open market transactions and
privately negotiated sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications
Certain prior year items have been reclassified to conform with the current
year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries after elimination of all significant
intercompany account balances and transactions. ICN Galenika has been
consolidated since the effective date of acquisition, May 1, 1991 (see Note 11
of Notes to Consolidated Financial Statements).
Goodwill
The difference between the purchase price and the fair value of net assets
purchased at the date of acquisition is included in the accompanying
Consolidated Balance Sheets as Goodwill. Goodwill amortization periods are five
years for single product line businesses acquired through November 30, 1986, and
10 to 23 years for certain businesses acquired in 1987, which have other
intangibles (patents, trademarks, etc.), and whose values and lives can be
reasonably estimated. The Company periodically evaluates the carrying value of
goodwill including the related amortization periods. The Company determines
whether there has been impairment, if any, by comparing the anticipated
undiscounted future operating income of the acquired entity with the carrying
value of the goodwill. In 1991, goodwill was reduced by $1,174,000 due to the
utilization for federal income tax purposes of net operating loss ("NOL")
carryforwards from domestic subsidiaries acquired in 1987 (see Note 4 of Notes
to Consolidated Financial Statements).
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1992 and 1993, includes
$45,362,000 and $1,247,000, respectively, of commercial paper and bonds, both of
which have maturities of three months or less. For purposes of the Statements of
Cash Flows, the Company considers highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount of
those assets approximates fair value due to the short-term maturity of these
instruments. Of the above cash and cash equivalents at December 31, 1992,
$15,200,000 was utilized to guarantee ICN Galenika's raw material purchases and
to collateralize notes payable, and is reflected as restricted cash.
F-8
<PAGE> 122
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Marketable Securities
Marketable securities, which consist of bond investments, are stated at the
lower of cost of market, based upon quoted market prices. Unrealized gains and
losses on marketable securities are charged to income. Realized gains or losses
are determined on the specific identification method and are reflected in
income. Marketable securities had an aggregate cost at December 31, 1993, of
$33,899,000. A valuation allowance in the amount of $1,312,000 has been recorded
to reduce the carrying amount of the portfolio to fair value, which represents
the net unrealized loss included in the determination of net income for 1993.
These investments are used to collateralize a note payable of $10,000,000.
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
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 5-15 years, furniture and fixtures from 5-10 years, and leasehold
improvements are amortized over their useful lives, limited to the life of the
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.
Notes Payable
The Company classifies bank borrowings with initial terms of one year or
less as Notes Payable. At December 31, 1993, these notes had average interest
rates of 10% in Spain and 4% to 25% in Yugoslavia. The comparatively low
year-end interest rates in Yugoslavia are a result of the favorable effect on
variable interest rates arising from the Yugoslavian "Stabilization Program"
that was started in January 1994. See Note 12 of Notes to Consolidated Financial
Statements for information on the "Stabilization Program." The carrying amount
of notes payable approximates fair value due to the short-term maturity of these
instruments.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations, except
those in highly inflationary economies, are translated at the end of period
exchange rates. Revenues and expenses are translated at the average exchange
rates prevailing during the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated in Stockholders' equity. The monetary assets and
liabilities of foreign subsidiaries in highly inflationary economies are
remeasured into U.S. dollars at the year-end exchange rates and non-monetary
assets and liabilities at historical rates. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
the Company has included in operating income all foreign exchange (gains) and
losses arising from foreign currency transactions and the effects of foreign
exchange rate fluctuations on subsidiaries operating in highly inflationary
economies. The (gains) losses included in operations from foreign exchange
translation and transactions for 1991, 1992 and 1993, were $6,697,000,
$25,039,000, and ($3,282,000), respectively.
F-9
<PAGE> 123
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Income Taxes
In January 1993, the Company adopted SFAS 109, Accounting for Income Taxes.
SFAS 109 requires an asset and liability approach be used in 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.
Per Share Information
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents. Common equivalent
shares represent shares issuable for outstanding options, on the assumption that
the proceeds would be used to repurchase shares in the open market.
In March and July 1991, the Company declared 10% and 15% stock
distributions, respectively, which resulted in a 26% stock split. In January
1993, the Company issued a fourth quarter 1992 stock dividend of 2%. During
1993, the Company issued quarterly stock dividends which totaled 6%. In January
1994, the Company declared a first quarter 1994 stock dividend of 1.4%. All
share and per share amounts used in computing earnings per share have been
restated to reflect these stock splits and dividends. The number of shares used
in the per share computations were 19,131,000 in 1991, 19,594,000 in 1992, and
19,898,000 in 1993.
3. RELATED PARTY TRANSACTIONS:
General
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with the Company. Certain
officers of ICN occupy similar positions with SPI, Biomedicals and Viratek and
are affiliated with the Company. ICN, SPI, Biomedicals and Viratek
(collectively, the "Affiliated Corporations") have engaged in, and will continue
to engage in, certain transactions with each other.
An Oversight Committee of the Boards of Directors of ICN, SPI, Biomedicals
and Viratek reviews transactions between or among the affiliated corporations to
determine whether a conflict of interest exists with respect to a particular
transaction and the manner in which such a conflict can be resolved. The
Oversight Committee has advisory authority only and makes recommendations to the
Boards of Directors of each of the Affiliated Corporations. The Oversight
Committee consists of one non-management director of each Affiliated Corporation
and a non-voting chairman. The significant related party transactions have been
reviewed and recommended for approval by the Oversight Committee, and approved
by the respective Boards of Directors.
Royalty Agreements
Effective December 1, 1990, the Company entered into a royalty agreement
with Viratek whereby a royalty of 20% on all sales of Virazole is paid to
Viratek. Sales of Virazole for 1991, 1992 and 1993 were $21,315,000, $27,240,000
and $29,515,000, respectively, which generated royalties to Viratek for 1991,
1992 and 1993 of $4,263,000, $5,448,000 and $5,903,000, respectively.
During 1991, the Company purchased $235,000 of Virazole from Viratek and
received $2,943,000 of Virazole from Viratek at its cost.
Under an agreement between ICN and the employer of a director of Viratek,
the Company is required to pay a 2% royalty to the employer on all sales of
Virazole in aerosolized form. Such royalties for 1991, 1992 and 1993 were
$313,000, $430,000 and $422,000, respectively.
F-10
<PAGE> 124
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Company markets products under license from ICN for the treatment of
myasthenia gravis, a disease characterized by muscle weakness and atrophy. ICN
charged the Company royalties at the rate of 9% of net sales. Effective
September 1, 1990, SPI prepaid royalties to ICN in the amount of $9,590,000,
which has been recorded in Other Assets and is being amortized using the
straight-line method over fifteen years. There are no future royalties due to
ICN for these products.
Beginning in December 1986, the Company began selling Brown
Pharmaceuticals, Inc. products under license from ICN. ICN charges the Company
royalties at the rate of 8 1/2% of net sales. During 1991, 1992 and 1993, the
Company paid ICN $93,000, $65,000 and $218,000, respectively, in royalties under
this agreement.
Cost Allocations
The Affiliated Corporations occupy ICN's facility in Costa Mesa,
California. The accompanying consolidated statements of income include charges
for rent and property taxes from ICN of $279,000 for each of the last three
years. In addition, the costs of common services such as maintenance, purchasing
and personnel are incurred by the Company and allocated to ICN, Viratek and
Biomedicals based on services utilized. The total of such costs were $2,617,000
in 1991, $2,556,000 in 1992 and $2,584,000 in 1993 of which $1,568,000,
$1,679,000 and $1,733,000, were allocated to the Affiliated Corporations,
respectively. It is Management's belief that the methods used and amounts
allocated for facility costs and common services are reasonable based upon the
usage by the respective companies.
Investment Policy
ICN and the Company have a policy covering intercompany advances and
interest rates, and the types of investments (marketable equity securities, high
yield bonds, etc.) to be made by ICN and its subsidiaries. Under this policy
excess cash held by ICN's subsidiaries is transferred to ICN and, in turn, cash
advances are made to ICN's subsidiaries to fund certain transactions. ICN
charges or credits interest based on the amounts invested or advanced, current
interest rates and the cost of capital. During 1991, 1992 and 1993, the Company
was (charged) or credited interest of $2,486,000, ($1,195,000), and ($800,000)
respectively. During 1992 and 1993, the Company reclassified its Biomedicals
intercompany receivable of $3,631,000 and $2,333,000 and its Viratek
intercompany payable of $6,332,000 and $5,228,000, respectively, to the
Company's ICN intercompany account resulting in a net increase in the Company's
liability to ICN of $2,701,000 and $2,041,000, respectively.
Debt and Equity Transactions
In accordance with its investment policy, ICN has advanced funds to the
Company for acquisitions, certain investments and to provide working capital.
Interest is charged on these advances at prime (6% at December 31, 1993) plus
1/2%.
On November 15, 1993, the Company issued 200,000 shares of common stock to
ICN in exchange for reducing its debt outstanding to ICN by $3,075,000. The
value of the shares issued was based on the quoted share price on the
transaction date.
On December 31, 1991, in connection with the ICN Galenika agreement, ICN,
on behalf of the Company, contributed 1,468,000 shares of common stock of the
Company to ICN Galenika. The transfer of the stock resulted in a liability of
the Company to ICN based on the stock's fair value of $38,528,000. ICN's cost
basis in the stock of $11,555,000 was used to record the Company's investment in
ICN Galenika. In consolidation, the Company recorded 1,101,000 shares of stock
for $8,665,000 as treasury stock which represents its 75% interest in ICN
Galenika. The remaining 367,000 shares for $2,890,000 were recorded as a
F-11
<PAGE> 125
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
component of minority interest and are considered issued and outstanding.
Pending sale of the stock to third parties, the $26,973,000 difference between
the fair value of the stock and the predecessor basis (ICN's cost) was recorded
as a reduction of paid-in capital. As the stock is sold, the excess of the stock
proceeds over the predecessor basis represents an additional investment by SPI,
resulting in an increase in paid-in capital. During 1992, ICN Galenika sold
1,200,000 shares of SPI stock for proceeds of $30,822,000. Net of amounts
attributable to minority interest, the sale of the stock increased paid-in
capital and decreased treasury stock by $28,628,000.
Other
During 1991, the Company's Mexican subsidiary purchased inventory from
Biomedicals for approximately $500,000 which was returned to Biomedicals for
credit in 1992.
During 1991, the Company acquired a manufacturing facility in Mississippi
from ICN at ICN's cost of $3,114,000.
During 1991, the Company acquired various licenses and patents from ICN and
Viratek which it has contributed to ICN Galenika as part of the acquisition
agreement. The Company incurred a liability to ICN and Viratek totaling
$1,600,000 and a corresponding reduction of paid-in-capital.
Following is a summary of transactions, as described above, between the
Company and ICN and its subsidiaries for 1991, 1992 and 1993 (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
-------- ------- -------
<S> <C> <C> <C>
Transactions
Cash payments to ICN, net.......................... $ 19,278 $14,987 $13,662
Royalties to affiliates, net....................... (4,377) (5,511) (6,121)
Purchases of Virazole from Viratek................. (235) -- --
Allocation of common service costs to ICN and its
subsidiaries.................................... 1,568 1,679 1,733
Rent and property taxes charged by ICN............. (279) (279) (279)
Interest income (expense) with affiliates.......... 2,486 (1,195) (800)
Dividends payable to ICN........................... (10,781) (7,518) (1,857)
Transfer of Mississippi plant from ICN............. (3,114) -- --
Debt to ICN arising from ICN Galenika
transaction..................................... (52,831) -- --
Transfer of intangibles and inventory from ICN and
Viratek......................................... (4,543) -- --
Return (purchase) of inventory from Biomedicals.... (500) 500 --
Purchase of equipment from Viratek................. (333) -- --
Common stock issued for payment of ICN debt........ -- -- 3,075
Federal income taxes payable to ICN................ (876) -- --
Payments of Viratek royalties...................... -- 819 --
Allocation of payroll costs........................ 754 507 --
December 1990 transactions, net.................... (865) -- --
Other, net......................................... 2,251 465 2,707
-------- ------- -------
$(52,397) $ 4,454 $12,120
======== ======= =======
</TABLE>
F-12
<PAGE> 126
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The average balances due to (from) ICN were $(18,326,000), $29,289,000, and
$26,439,000 for 1991, 1992 and 1993, respectively.
4. INCOME TAXES:
In January 1993, the Company adopted SFAS 109, Accounting for Income Taxes.
SFAS 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. In estimating future tax consequences, SFAS 109 generally considers all
expected future events other than enactment of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. The adoption of SFAS 109 did not
result in a cumulative effect adjustment in the consolidated statements of
income.
Pretax income from continuing operations before minority interest for the
years ended December 31 consists of the following:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.................................... $(1,246,000) $ 6,371,000 $17,322,000
Foreign..................................... 54,089,000 46,835,000 9,745,000
----------- ----------- -----------
$52,843,000 $53,206,000 $27,067,000
=========== =========== ===========
The income tax provisions consist of the following:
Current
Foreign................................... $ 2,809,000 $ 1,493,000 $ 1,929,000
Federal................................... 4,331,000 5,876,000 4,197,000
State..................................... 150,000 100,000 100,000
----------- ----------- -----------
7,290,000 7,469,000 6,226,000
Deferred
Foreign................................... 472,000 1,185,000 (858,000)
Federal................................... 3,090,000 441,000 --
State..................................... -- -- --
3,562,000 1,626,000 (858,000)
----------- ----------- -----------
Total............................. $10,852,000 $ 9,095,000 $ 5,368,000
=========== =========== ===========
</TABLE>
The current federal tax provision has not been reduced for the tax benefit
associated with the exercise of employee stock options. The tax benefit from the
exercise of employee stock options was credited to paid-in capital in 1991,
1992, and 1993, in the amounts of $2,308,000, $956,000, and $727,000,
respectively.
The 1991 federal deferred tax provision relates primarily to U.S. taxes
provided on the undistributed earnings of ICN Galenika. The 1993 foreign
deferred tax provision benefit relates primarily to the tax effect or litigation
reserves.
During 1991, the Company provided U.S. deferred tax on the undistributed
earnings of ICN Galenika due to the Company's intention to repatriate (rather
than permanently reinvest) the earnings of this foreign subsidiary. However in
1992, the Company reversed the previously provided U.S. deferred tax. The U.S.
deferred tax on the undistributed earnings of ICN Galenika was reversed due to
the Company's intention to use these earnings to fund the Company's planned
Eastern European expansion. In the future, U.S. tax will
F-13
<PAGE> 127
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
only be provided on ICN Galenika's earnings when such earnings are repatriated
via dividend or are deemed distributed to the Company under U.S. tax law.
In 1987, the Company acquired certain domestic corporations with existing
net operating loss ("NOL") carryforwards. On November 30, 1989, these
corporations were merged into the Company and the NOL carryforwards from these
subsidiaries were utilized by the Company to partially offset domestic taxable
income for 1991 and 1990. The federal tax benefit of $1,174,000 related to the
utilization of the NOL for 1991 was credited to goodwill.
The primary components of the Company's net deferred tax liability at
December 31, 1993, and January 1, 1993, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 JANUARY 1, 1993
------------------ ----------------
<S> <C> <C>
Deferred tax assets:
Inventory and other reserves............... $ 1,421 $ 1,830
Compensation not currently deductible...... 330 242
Foreign tax credit carryover............... 700 1,400
Alternative minimum tax credit carryover... -- 413
Reserve for litigation loss................ 368 --
Promotional expenditures................... 528 --
Work force reductions...................... 345 --
Other...................................... 733 1,080
Valuation reserve.......................... (2,307) (4,682)
------- -------
Total deferred tax asset................ 2,118 283
Deferred tax liabilities:
Inventory temporary differences............ 1,500 2,401
Unrealized currency gains.................. 1,100 --
Other...................................... 988 616
------- -------
Total deferred tax liability............... 3,588 3,017
------- -------
Net deferred tax liability................. $ 1,470 $ 2,734
======= =======
</TABLE>
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
<TABLE>
<CAPTION>
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................. 34% 34% 35%
Foreign source income taxed at lower effective rates............ (18) (23) (5)
Foreign dividend distributions.................................. -- 10 --
Utilization of foreign NOL...................................... (1) (2) (1)
Recognition of fully reserved deferred tax debits............... -- -- (2)
Utilization of foreign/AMT credits.............................. -- (1) (4)
Favorable audit settlement...................................... -- -- (3)
Amortization of goodwill........................................ 4 -- --
Other, net...................................................... 2 (1) --
--- --- ---
Effective rate.................................................. 21% 17% 20%
=== === ===
</TABLE>
F-14
<PAGE> 128
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Company files its federal tax return on a stand-alone basis. Prior to
August 1991, the Company filed a consolidated tax return with ICN and was
subject to a tax sharing agreement. In accordance with the terms of the tax
sharing agreement, the Company was required to pay ICN for federal taxes
otherwise payable on a stand-alone basis. The federal tax sharing agreement and
consolidated federal filing terminated in August 1991 when ICN's ownership of
the Company dropped below 80 percent.
Upon leaving the consolidated group, the Company was allocated $17,000,000
of NOLs which represents the Company's share of the consolidated NOL
carryforward at deconsolidation. The allocated NOL was utilized for book
purposes in 1991 to reduce deferred tax liabilities resulting in a reduction of
income tax expense. For tax purposes, the Company's net operating loss
carryforward at December 31, 1993, is $4,279,000. The utilization of this NOL
carryforward is limited to $540,000 per year until the year 2003.
During 1993, 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 Pharmaceutical, since
Management intends to reinvest those amounts in the foreign operations. Included
in consolidated retained earnings at December 31, 1993, is approximately
$49,000,000 of accumulated earnings of foreign operations that would be subject
to U.S. income or foreign withholding taxes if and when repatriated.
5. DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Bank loans payable in Yugoslavian dinars due in
1994
with interest ranging from 13% to 170%.......... $ 90,000 $ 77,000
Interest-free option payable in Spanish pesetas
to Spanish government, due in 1994.............. 1,483,000 599,000
Mortgage payable in Spanish pesetas, with interest
at
14.25% adjusted annually, interest and
principal payable monthly through 2000.......... 3,340,000 2,461,000
Bank credit lines and long-term loans with
interest at
14%-16% adjusted annually, payable in Spanish
pesetas, principal due in installments through
1999............................................ 14,460,000 12,221,000
Mortgage payable to bank in Dutch guilders with
interest
at 9.4%, due in 2001............................ 744,000 615,000
Bank loan payable in Mexican pesos with a variable
interest rate currently at 27%, interest and
principal
payable monthly through 1998.................... 3,753,000 3,530,000
U.S. mortgage with interest at 8.125%, interest
and
principal payable monthly through 2003.......... 1,382,000 1,295,000
Industrial revenue bond, with interest at 10%,
interest and principal payable annually through
1999............................................ 56,000 48,000
----------- -----------
25,308,000 20,846,000
Less current portion.............................. 4,292,000 3,866,000
----------- -----------
Total........................................ $21,016,000 $16,980,000
=========== ===========
</TABLE>
Annual aggregate maturities of long-term debt, subsequent to December 31,
1993, are as follows: 1994 -- $3,866,000; 1995 -- $3,628,000;
1996 -- $4,604,000; 1997 -- $1,996,000; 1998 -- $1,084,000 and $5,668,000
thereafter.
F-15
<PAGE> 129
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Spanish mortgage and bank credit lines and long-term loans totaling
$14,682,000, which approximates fair value, are collateralized by accounts
receivable totaling $3,909,000 and land and building with a net book value
totaling $11,252,000.
The mortgage payable of $615,000 in Dutch guilders is collateralized by
land and buildings with a net book value of $895,000. The fair value of this
note payable at December 31, 1993, was $736,000. The Mexican bank variable
interest rate loan payable of $3,530,000 is collateralized by fixed assets with
a net book value of $11,432,000. The U.S. mortgage of $1,295,000 is
collateralized by land and buildings with a net book value of $3,590,000. The
U.S. mortgage amount of $1,295,000 represents its fair value.
The fair value of the Company's debt is estimated based on current rates
available to the Company for debt of the same remaining maturities. The carrying
amount of all short-term and variable interest rate borrowings approximates fair
value.
Subsidiaries of the Company have short and long-term lines of credit
aggregating $17,147,000, of which $7,220,000 was outstanding at December 31,
1993.
6. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York entitled
In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (VLB); In re
ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)). The plaintiffs
represent alleged classes of persons who purchased ICN, Viratek or SPI common
stock during the period January 7, 1986 to and including April 15, 1987. In
their memorandum of law, dated February 4, 1994, the ICN defendants argue that
class certification may only be granted for purchasers of ICN common stock for
the period August 12, 1986 through February 20, 1987 and for purchasers of
Viratek common stock for the period December 9, 1986 through February 20, 1987.
The ICN defendants assert that no class should be certified for purchasers of
common stock of SPI for any period. The plaintiffs allege that during such
period the defendants made, or aided and abetted other defendants in making,
misrepresentations of material fact and omitted to state material facts
concerning the business, financial condition and future prospects of ICN,
Viratek and SPI in certain public announcements, Paine Webber, Inc. research
reports and filings with the Commission. The alleged misstatements and omissions
primarily concern developments regarding Virazole, including the efficacy and
safety of the drug and the market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder
and constitute common law fraud and misrepresentation. The plaintiffs seek an
unspecified amount of monetary damages, together with interest thereon, and
their costs and expenses incurred in the action, including reasonable attorneys'
and experts' fees. The ICN defendants moved to dismiss the consolidated
complaint in March 1988, for failure to state a claim upon which relief may be
granted and for failure to plead the allegations of fraud and misrepresentation
with sufficient particularity. In June 1991, the Court granted the ICN
defendants' motion to dismiss the Amended Consolidated Complaint and provided
the plaintiffs 30 days to replead. In July 1991, plaintiffs filed a Third
Amended Complaint which contained the same substantive allegations as the
Amended Consolidated Complaint. In September 1991, the ICN defendants moved to
dismiss the Third Amended Complaint on the same grounds as stated above, and
also moved for summary judgment. On September 18, 1992, the Court denied the ICN
defendants' motion to dismiss and for summary judgment. The ICN defendant's
filed their answer on February 19, 1993. On October 20, 1993, plaintiffs
informed the Court that they had reached an agreement to settle with
co-defendant Paine Webber, Inc. and that they would submit a proposed settlement
stipulation to the Court. Expert discovery, which commenced in September 1993,
is expected to conclude by
F-16
<PAGE> 130
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
the end of April 1994. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN defendants' damages experts find inappropriate under
the circumstances has testified that, assuming that classes were certified for
purchasers of ICN, Viratek and SPI common stock for the entire class periods
alleged by plaintiffs, January 7, 1986 through April 15, 1987, and further
assuming that all the plaintiff's allegations were proven, potential damages
against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000.
The ICN defendants' four damages experts have testified that damages are zero.
Management believes, having extensively reviewed the issues in the above
referenced matters, that there are strong defenses and that the Company intends
to defend the litigation vigorously. While the ultimate outcome of these
lawsuits cannot be predicted with certainty and an unfavorable outcome could
have an adverse effect on the Company, at this time Management does not expect
that these matters will have a material adverse effect on the financial
position, results of operations or liquidity of the Company. All of the
Company's attorney fees and other costs of this litigation are borne by ICN
pursuant to an agreement between ICN and Viratek.
In August 1992, an action was filed in United States District Court for the
Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc. (Case
No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product liability,
negligence and strict liability in tort, alleged that birth defects in an infant
were caused by the mother's exposure to Virazole during pregnancy. The case was
placed on the court's "suspense calendar" pending completion of the parties'
investigation of the underlying facts. Based on such investigation, the case was
dismissed without prejudice pursuant to stipulation by the parties in December
1993. Per the License Agreement, SPI has indemnified Viratek and ICN for
lawsuits involving the use of Virazole.
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN Canada
Limited ("ICN Canada"), its parent, the Company, and ICN alleging breach of
contract and related claims arising out of a manufacturing contract between
Gencon and ICN Canada. ICN and the Company were dismissed from the action in
March 1993 based on the Company's agreement to guarantee any judgment against
ICN Canada. Following trial in October and November 1993, the judge signed a
decision granting judgment in favor of Gencon for breach of contract in the
amount of approximately $2,100,000 plus interest, costs and attorney's fees.
Trial counsel has advised the Company that the decision contains serious errors
of law and fact. ICN Canada intends to prosecute vigorously its post-trial
motions and any necessary appeal. The Company's December 31, 1993 financial
statements includes an accrual amount equivalent to what the Company believes is
the maximum exposure with regard to this contingency.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the opinion
of Management, neither the lawsuits discussed above nor various other pending
lawsuits will have a material adverse effect on the consolidated financial
position or operations of the Company.
Product Liability Insurance
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products. While to date no material adverse
claim for personal injury resulting from allegedly defective products has been
successfully maintained against the Company, a substantial claim, if successful,
could have a material adverse effect on the Company.
7. COMMON STOCK:
At December 31, 1993, 1,369 shares of common stock were reserved for
issuance to officers, directors and key employees under the Company's 1982
Employee Incentive Stock Option Plan. The option price may not be less than fair
market value at date of grant and may not have a term exceeding 10 years. At
December 31,
F-17
<PAGE> 131
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
1993, options for 1,369 shares were outstanding under this plan (at a price of
$4.84 per share), of which 1,369 shares were exercisable. The number of shares
exercised were: 1991 -- 7,000 and 1992 -- 2,322 at average prices of $5.27 and
$5.16, respectively. No shares were exercised during 1993.
In addition, at December 31, 1993, a total of 856,232 shares of common
stock were reserved for issuance to officers, directors, key employees,
scientific advisors and consultants under the Company's 1982 Non-Qualified Stock
Option Plan. The option price may not be less than fair market value at date of
grant and may not have a term exceeding 10 years. At December 31, 1993, options
for 856,232 shares were outstanding under this plan (at an average price of
$11.59), of which 456,887 shares were exercisable. The number of shares
exercised were: 1991 -- 587,000; 1992 -- 229,153; 1993 -- 180,446, at average
prices of $5.16, $7.16, and $5.10, respectively.
At December 31, 1993, 541,292 shares of common stock were reserved for
issuance to officers, directors and key employees under the Company's 1992
Employee Incentive Stock Option Plan. The option price may not be less than fair
market value at date of grant and may not have a term exceeding 10 years. At
December 1993, 505,838 shares were outstanding under this plan (at an average
price of $16.78 per share), of which 89,899 shares were exercisable.
In addition, at December 31, 1993, a total of 1,483,007 shares of common
stock had been granted to officers, directors, key employees, scientific
advisors and consultants under the Company's 1992 Non-Qualified Stock Option
Plan. The option price per share may not be less than the fair value at date of
grant and may not have a term exceeding 10 years. Of these shares, a total of
1,082, 586 shares were reserved and outstanding under this plan and 400,421
shares were not reserved and outstanding under this plan at the time of grant,
but were granted to key employees pursuant to authorization by the Board of
Directors, subject to the approval of the shareholders at the next meeting of
shareholders' to be held in 1994. At December 31, 1993, the average price per
share of the shares granted was $21 and 551,438 options were exercisable.
In addition to those shares reserved for the above noted plans, 342,422
shares were reserved for certain officers of the Company. At December 31, 1993,
options for 62,290 were outstanding and exercisable at an average price of
$4.84. The number of shares exercised were: 1992 -- 102,000 and 1993 -- 280,132,
at an average price of $5.13 and $4.84, respectively.
On January 13, 1993, the Company's Board of Directors approved a fourth
quarter 1992 stock dividend of 2%. During 1993, the Company issued quarterly
stock dividends which totaled 6%. In January, 1994, the Company declared a first
quarter 1994 stock dividend of 1.4%. Accordingly, all numbers of common shares,
except shares authorized, stock option data and per share data have been
restated to reflect the dividends. Fractional shares resulting from the
dividends will be settled in cash.
F-18
<PAGE> 132
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
8. DETAIL OF CERTAIN ACCOUNTS:
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
RECEIVABLES, NET:
Trade accounts receivable..................... $ 81,331,000 $ 47,956,000
Other receivables............................. 6,889,000 2,954,000
------------ ------------
88,220,000 50,910,000
Allowance for doubtful accounts............... (10,188,000) (7,633,000)
------------ ------------
$ 78,032,000 $ 43,277,000
============ ============
INVENTORIES, NET:
Raw materials and supplies.................... $ 27,297,000 $ 57,148,000
Work-in-process............................... 11,284,000 12,541,000
Finished goods................................ 52,528,000 37,507,000
------------ ------------
$ 91,109,000 $107,196,000
============ ============
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................... $ 5,392,000 $ 4,891,000
Buildings..................................... 47,955,000 46,477,000
Machinery and equipment....................... 41,521,000 44,385,000
Furniture and fixtures........................ 6,995,000 7,403,000
Leasehold improvements........................ 1,127,000 1,269,000
Construction in progress...................... 3,052,000 4,490,000
------------ ------------
106,042,000 108,915,000
Accumulated depreciation and amortization..... (24,548,000) (30,197,000)
------------ ------------
$ 81,494,000 $ 78,718,000
============ ============
OTHER ASSETS:
Prepaid royalties............................. $ 6,883,000 $ 6,395,000
Patents and trademarks, net of accumulated
amortization............................... 2,139,000 2,346,000
Other......................................... 4,727,000 4,132,000
------------ ------------
$ 13,749,000 $ 12,873,000
============ ============
ACCRUED LIABILITIES:
Payroll and related items..................... $ 9,045,000 $ 8,278,000
Professional fees............................. 758,000 387,000
Royalties..................................... 828,000 810,000
Interest...................................... 1,935,000 111,000
Taxes......................................... 1,786,000 139,000
Other......................................... 9,229,000 7,975,000
------------ ------------
$ 23,581,000 $ 17,700,000
============ ============
</TABLE>
F-19
<PAGE> 133
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
1992 1993
----------- ----------
<S> <C> <C>
OTHER LIABILITIES AND DEFERRED
INCOME TAXES:
Deferred income taxes.......................... $ 2,734,000 $1,470,000
Redundancy cost................................ 4,854,000 --
Accrued litigation settlements and damages..... -- 988,000
Other.......................................... 2,653,000 3,768,000
----------- ----------
$10,241,000 $6,226,000
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST:
Interest (income)................. $ (41,000) $(6,599,000) $(5,983,000)
Interest (income) -- affiliates... (3,637,000) (3,080,000) (2,050,000)
----------- ----------- -----------
$(3,678,000) $(9,679,000) $(8,033,000)
=========== =========== ===========
Interest expense.................. $ 7,814,000 $ 8,790,000 $20,900,000
Interest expense -- affiliates.... 1,151,000 4,275,000 2,850,000
----------- ----------- -----------
$ 8,965,000 $13,065,000 $23,750,000
=========== =========== ===========
</TABLE>
It is the Company's policy to segregate significant non-operating items and
report them separately as Other expense, net, as follows:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ---------- ----------
<S> <C> <C> <C>
Litigation settlements and
damages........................... $ 621,000 $ 447,000 $ 988,000
Profit sharing plan expense in
Mexico............................ 222,000 419,000 557,000
Amortization of goodwill............ 818,000 677,000 248,000
Employee severance in Spain......... -- -- 1,000,000
Write-down and other costs for
domestic Nutritional Group........ 10,878,000 -- --
(Gain) loss on sale of fixed
assets............................ (356,000) 151,000 (194,000)
Write-off of prepaid royalties...... 1,503,000 -- --
Facility relocation expenses in
Spain............................. 2,198,000 -- --
Unrealized loss on marketable
securities........................ -- -- 1,312,000
Other, net.......................... 873,000 388,000 (85,000)
----------- ---------- ----------
$16,757,000 $2,082,000 $3,826,000
=========== ========== ==========
</TABLE>
F-20
<PAGE> 134
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
9. GEOGRAPHIC DATA:
The Company operates in the pharmaceutical industry, which includes the
production and marketing of proprietary pharmaceutical products, nutritional
supplements and optical products.
The following tables set forth the amounts of net sales, income before
provision for income taxes and minority interest and identifiable assets of the
Company by geographical areas for 1991, 1992 and 1993 (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
SALES
United States(1)............................... $ 51,543 $ 53,102 $ 62,008
Yugoslavia..................................... 224,782 325,903 239,832
Mexico......................................... 41,691 48,654 57,782
Western Europe................................. 31,353 34,290 30,601
Canada......................................... 14,989 14,169 13,734
-------- -------- --------
Total.................................. $364,358 $476,118 $403,957
======== ======== ========
INCOME (LOSS) BEFORE INTEREST, PROVISION FOR
INCOME TAXES AND MINORITY INTEREST
United States.................................. $ 3,045(2) $ 17,593 $ 25,756
Yugoslavia..................................... 57,190 37,692 11,828
Mexico......................................... 1,249(3) 3,772 7,371
Western Europe................................. 513(4) 3,871 4,079
Canada......................................... 1,427 1,869 851
Corporate(5)................................... (5,294) (8,205) (7,101)
-------- -------- --------
Income before interest, provision for income
taxes and minority interest................. 58,130 56,592 42,784
Net interest expense........................... 5,287 3,386 15,717
-------- -------- --------
Income before provision for income
taxes and minority interest.......... $ 52,843 $ 53,206 $ 27,067
======== ======== ========
IDENTIFIABLE ASSETS:
United States.................................. $ 44,203 $ 34,775 $ 38,764
Yugoslavia..................................... 217,330 215,282 180,055
Mexico......................................... 21,535 32,085 33,874
Western Europe................................. 45,519 40,719 33,284
Canada......................................... 8,318 6,818 6,155
Corporate...................................... -- 3,539 9,885
-------- -------- --------
Total.................................. $336,905 $333,218 $302,017
======== ======== ========
</TABLE>
- ------------------------
(1) Export sales shipped from the United States for 1991, 1992 and 1993 were
$3,576,000, $4,824,000, and $6,166,000, respectively.
(2) During 1991, the Company wrote off goodwill, inventory and other assets
totaling $13,124,000, of which $10,878,000 relates to the domestic
nutritional group.
(3) During 1991, the Mexico subsidiary wrote off $909,000 of inventory.
(4) During 1991, the Western European group wrote off $1,051,000 in inventory
and receivables.
F-21
<PAGE> 135
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
(5) Corporate includes corporate general and administrative expenses and other
non-operating income and expense. Corporate identifiable assets are not
determinable for 1991.
During the year ended December 31, 1993, approximately 68% of ICN
Galenika's sales were to the Federal Republic of Yugoslavia or government
sponsored entities. At December 31, 1993, there were no significant receivables
from the Yugoslavian government, however future sales of ICN Galenika could be
dependent on the ability of the Yugoslavian government to generate cash to
purchase pharmaceuticals and the continuation of its current policy to buy
products from ICN Galenika. No other customer accounts for more than 10% of the
Company's net sales.
10. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Non-cash Transactions
In September 1993, the Company issued 200,000 shares of common stock to ICN
in exchange for reducing its debt outstanding to ICN by $3,075,000.
During 1992 and 1993, the Company issued common stock dividends of
$3,440,000 and $20,634,000, respectively.
Cash and non-cash financing activities consisted of the following in 1991
(in thousands):
ICN GALENIKA
<TABLE>
<S> <C>
Assets................................................. $ 162,581
Liabilities and minority interest...................... (104,280)
---------
58,301
Stock contributed by ICN............................... (11,555)
Obligation to ICN Galenika............................. (13,550)
Fees and expenses...................................... (3,000)
Issuance of stock to employees......................... (9,000)
Other consideration.................................... (6,743)
---------
Cash paid.................................... $ 14,453
=========
</TABLE>
The following table sets forth the amounts of interest and income taxes
paid during 1993, 1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------ ------ -------
<S> <C> <C> <C>
Interest paid........................... $6,729 $5,565 $11,203
====== ====== =======
Income taxes paid....................... $2,324 $1,730 $ 3,156
====== ====== =======
</TABLE>
11. ACQUISITION:
Effective May 1, 1991, SPI formed a new joint company with Galenika
Pharmaceuticals headquartered in Belgrade, Yugoslavia. The joint company, ICN
Galenika, is 75%-owned by the Company and 25%-owned by Galenika Holding
("Galenika Holding"). Galenika, the leading pharmaceutical company in
Yugoslavia, produces, markets and distributes over 450 pharmaceutical,
veterinary, dental and other products in Yugoslavia, Eastern Europe and Russia.
In connection with the agreement, the Company contributed assets totaling
$58,301,000, consisting of $14,453,000 cash, an obligation to pay $13,550,000
and 1,200,000 unregistered shares of common stock of the
F-22
<PAGE> 136
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Company issued to the employees ("owners" in Socialist Yugoslavia) of Galenika
Holding with a fair value of $9,000,000. On December 31, 1991, ICN, on behalf of
SPI, contributed: 1,468,000 shares of SPI common stock to ICN Galenika with a
cost basis of $11,555,000; the minority interest share of the excess of the fair
value of the common stock of the Company contributed by ICN and ICN's cost basis
equaling $6,743,000; and acquisition costs of $3,000,000. Under the terms of the
ICN Galenika agreement, SPI had an obligation to contribute, in part,
$50,000,000 in cash and either 1,200,000 shares of SPI stock or $12,000,000 in
cash. However, the agreement was subsequently changed in December 1991 whereby
ICN, on behalf of SPI, contributed shares of SPI stock in lieu of the
$40,000,000 (after a cash payment of $10,000,000) and SPI issued 1,200,000
shares of SPI stock in lieu of cash, to comply with the original intent of the
parties.
The ICN Galenika transaction has been accounted for by the purchase method
of accounting, and accordingly, the Company's investment has been allocated,
based on the Company's ownership percentage, to the assets acquired and the
liabilities assumed based on the estimated fair values at the effective date of
formation, May 1, 1991. Assuming that the acquisition of ICN Galenika occurred
at the beginning of the year, the Company's 1991 pro forma revenues for the full
year ended December 31, 1991, would have been $452,460,000 with net income of
$44,096,000. The pro forma information presented does not purport to be
indicative of the results that would have been obtained if the operations were
combined during the year presented and is not intended to be a projection of
future results or trends.
In connection with the ICN Galenika transaction, the Company changed its
fiscal year end from November 30 to December 31, which conforms to ICN
Galenika's year end. The Company's separate results of operation for the month
of December 1990, therefore, are not reflected in the statement of income but
have been charged directly to retained earnings.
F-23
<PAGE> 137
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
12. ICN GALENIKA:
The summary balance sheets of ICN Galenika as of December 31, 1992 and
1993, and the summary income statements for the eight months ended December 31,
1991 and the years ended December 31, 1992 and 1993, are presented below.
ICN GALENIKA SUMMARY BALANCE SHEETS
AS OF DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Cash................................................... $ 34,787 $ 7,542
Restricted cash........................................ 15,200 --
Marketable securities (used to collateralize
$10,000,000 note payable)............................ -- 32,587
Receivables, net....................................... 41,549 7,650
Inventories, net....................................... 74,033 88,392
Other current assets................................... 25,305 21,120
Long-term assets....................................... 39,202 38,264
-------- --------
$230,076 $195,555
======== ========
Current liabilities.................................... $ 41,258 $ 18,400
Non-current liabilities................................ 53,034 40,802
Stockholders' Equity................................... 135,784 136,353
-------- --------
$230,076 $195,555
======== ========
</TABLE>
ICN GALENIKA SUMMARY STATEMENTS OF INCOME
BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1991 AND
YEARS ENDED DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Sales...................................... $224,782 $325,903 $239,832
Cost of sales.............................. 118,456 151,918 156,189
-------- -------- --------
Gross profit............................... 106,326 173,985 83,643
Operating expenses......................... 49,134 107,504 83,160
Translation and exchange losses, net....... 6,434 27,963 173
-------- -------- --------
Income before provision for income taxes
and minority interest.................... $ 50,758 $ 38,518 $ 310
======== ======== ========
</TABLE>
Sanctions
A substantial majority of ICN Galenika's business is conducted in the
Federal Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the
UNSC adopted a resolution that imposed economic
F-24
<PAGE> 138
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
sanctions on the Federal Republic of Yugoslavia and on April 17, 1993, the UNSC
adopted a resolution that imposed additional economic sanctions on the Federal
Republic of Yugoslavia. On April 26, 1993, the United States issued an executive
order that implemented the additional sanctions pursuant to the United Nations
resolution. The new sanctions continue to specifically exempt certain medical
supplies for humanitarian purposes, a portion of which are distributed by ICN
Galenika.
ICN Galenika continues to apply for, and has received, licenses under the
new sanctions. The renewed efforts to enforce sanctions will create additional
administrative burdens that will slow the shipments of licensed raw materials to
Yugoslavia. Shipments of imported raw materials declined in 1993 to 38% of prior
year levels. Additionally, the new sanctions have contributed to an overall
deteriorating business environment in which ICN Galenika must operate.
The new sanctions provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of new sanctions may
create a restriction on ICN Galenika's cash holdings that are maintained in a
bank outside of Yugoslavia. Management believes, however, that these funds will
be available for drawdowns on lines of credit for shipments specifically
licensed under the new and prior sanctions. As a result of continuing political
and economic instability within Yugoslavia, including the long-term impact of
the sanctions, wage and price controls, and devaluations, there may be further
limits on the availability of hard and local currency and consequently, an
adverse impact on the future operating results of the Company.
At December 31, 1992, ICN Galenika had cash and cash equivalents of
$44,700,000, of which $15,200,000 was restricted as to use, invested with a
financial institution outside of Yugoslavia. These funds have been used for
letters of guarantee on ICN Galenika's raw material purchases and to
collateralize the payment of dividends. During the first quarter 1993, $731,000
was withdrawn under the letters of guarantee. Before the implementation of
additional sanctions in April 1993, approximately $9,885,000 was withdrawn under
the letters of guarantee. In October 1993, ICN Galenika acquired marketable
securities with these funds in order to maximize their interest earned. The
marketable securities are maintained at the same financial institution. As of
December 31, 1993, at this institution, ICN Galenika had $834,000 of hard
currency and $32,587,000 of marketable securities which are used to
collateralize a $10,000,000 note payable.
In order to conserve operating cash, the wages of all ICN Galenika
employees were reduced to Yugoslavian minimum wage levels beginning in the
fourth quarter 1993. To help alleviate the burden of sanctions and wage
reductions, the Company intends to expend funds for humanitarian aid in the form
of food assistance for ICN Galenika employees. This aid will be subject to
approval and licensing required by UNSC sanctions. In the first quarter 1994,
the Company obtained licenses for approximately $280,000 of aid. The expenditure
of future aid will be dependent on the conditions in Yugoslavia and will be
subject to obtaining approval and licenses under UNSC sanctions.
Hyperinflation and Price Controls
Under existing Yugoslavian price controls imposed in July 1992, ICN
Galenika can no longer continue the unrestricted practice of increasing selling
prices in anticipation of inflation. Rather, price increases must be approved by
the government prior to implementation. The imposition of price controls along
with the effect of sanctions and recurring currency devaluations resulted in
reduced sales levels in the last half of 1992 and for 1993. This trend of
reduced sales levels is expected to continue as long as sanctions are in place.
As a result of decreased sales levels, Management expects that profit margins
will decrease and overall operating expenses as a percentage of sales will
increase.
As a result of the hyperinflation in Yugoslavia, the Yugoslavian government
devalued the dinar on several occasions during 1993 and, on October 1, 1993,
changed the denomination of the currency. The effect of the
F-25
<PAGE> 139
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
devaluations, adjusted for the change in currency denomination, was to increase
the exchange rate from less than one dinar per $1 U.S. at the beginning of 1993
to over one trillion dinars per $1 U.S. at the end of 1993. In anticipation of
devaluations in 1993, the Company implemented a plan described below, to
minimize its monetary exposure. As a result of the devaluations and subsequent
exchange losses from obtaining hard currencies, ICN Galenika experienced
translation losses of $173,000. While the Company cannot predict with any
certainty the actual remeasurement and exchange gains or losses that may occur
in 1994, such amounts may be substantial. Annual inflation is very high with
some estimates of over 1 billion percent. Future devaluations are likely in the
near term. At December 31, 1993, ICN Galenika's net monetary liability exposure
was $2,093,000. As a result of the non-tradability of the dinar, the Company is
unable to effectively hedge against the loss from devaluation.
The Company is taking action to generate the dinar cash needed to acquire
hard currency to reduce its monetary exposure. ICN Galenika has access to
short-term borrowings at interest rates below the level of inflation. ICN
Galenika plans to maximize its borrowings under these arrangements and use the
proceeds to acquire hard currency for the purchase of inventory. This strategy
will provide hard currency, accelerate the purchase of inventory to minimize the
effects of inflation, and reduce future transaction losses. This strategy will
also increase ICN Galenika's monetary liabilities, and lower its risk of loss
from devaluations. This strategy, however, has resulted in increased interest
expense in 1993 and may result in high levels of interest expense in 1994.
In conjunction with a currency devaluation on July 23, 1993, the
Yugoslavian government announced that businesses in Yugoslavia can no longer buy
and sell hard currency in privately negotiated transactions. All purchases of
hard currency must be made through the National Bank of Yugoslavia based on
government approved allocations. This action could possibly limit the
availability of hard currency in the future for ICN Galenika. However, if the
government is successful in controlling access to hard currency, the Company's
operations in Yugoslavia may benefit through increased allocations of hard
currency. Due to the strategic nature of pharmaceutical drugs in Yugoslavia, ICN
Galenika has, in the past, received relatively favorable allocations of hard
currency from the government. For the year ended December 31, 1993, ICN Galenika
received $12,744,000 in currency allocations.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavian government guarantees the conversion of dinars to Deutsche
marks and is able to do so by exercising restraint in the amount of dinars that
it prints. Since the inception of this program the exchange rate of dinars to
Deutsche marks has remained stable. The impact of this change on the future
operations of ICN Galenika is uncertain.
As required by GAAP, the Company translates ICN Galenika financial results
at the dividend payment rate established by the National Bank of Yugoslavia. To
the extent that changes in this rate lag behind the level of inflation, sales
and expenses will, at times, tend to be inflated. Future sales and expenses can
substantially increase if the timing of future devaluations falls significantly
behind the level of inflation. While the impact of sanctions, price controls,
and devaluations on future sales and net income cannot be determined with
certainty, they may, under the present political and economic environment,
result in an adverse impact in the future.
At December 31, 1993, ICN Galenika has U.S. $33,421,000 invested with a
financial institution outside of Yugoslavia. These funds came from the initial
cash investment made by the Company of $14,453,000 and from the sale of the
Company's stock transferred to ICN Galenika by ICN, also in conjunction with the
acquisition. Under the terms of the acquisition agreement, these funds were
originally intended to finance business expansion. However, in light of the
current economic conditions in Yugoslavia, these funds are used
F-26
<PAGE> 140
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
for letters of guarantee on ICN Galenika's raw material purchases and to
collateralize the payment of dividends. These funds are encumbered by a letter
of guarantee for raw material purchases, of which $5,200,000 was outstanding at
December 31, 1992, and no amount was outstanding at December 31, 1993, and as
collateral for $10,000,000 of loans, included in Notes Payable bearing interest
at 4.5% that were issued to pay the 1992 dividend of the same amount. Other uses
of these funds in the future, such as capital investment, additional letters of
guarantee, or future dividends are subject to review and licensing under the
UNSC sanctions. At December 31, 1992, these funds were included in cash with
$15,200,000 reflected as restricted cash. At December 31, 1993, these funds have
been invested in bonds and are recorded as marketable securities which are used
to collateralize a $10,000,000 notes payable.
As noted above, ICN Galenika paid a $10,000,000 dividend in 1992 of which
the Company received 75% or $7,500,000. Yugoslavian law allows free distribution
of earnings whether to domestic (Yugoslavian) or international investors. ICN
Galenika is allowed to pay dividends out of earnings calculated under
Yugoslavian Accounting Practices ("YAP"), not earnings calculated under GAAP. As
a result of the current level of inflation, the accumulated YAP earnings of ICN
Galenika are insignificant when stated in dollars. Future dividends from ICN
Galenika will depend heavily on future earnings. Under GAAP, ICN Galenika had
accumulated earnings, which are not available for distributions, of
approximately $61,787,000 at December 31, 1993. However, additional repatriation
of cash could be declared from contributed capital as provided for in the
original purchase agreement. In 1992, the Company made the decision to no longer
repatriate the earnings of ICN Galenika and instead will use these earnings for
local operations and reduction of debt.
The current political and economic conditions in Yugoslavia could continue
to deteriorate to the point that the Company's investment in ICN Galenika would
be threatened. Worsening political and economic conditions could also result in
a situation where the Company may be unable to exercise control over ICN
Galenika's operations or be unable to receive dividends from ICN Galenika. Under
these conditions, the Company would no longer be able to continue to consolidate
the financial information of ICN Galenika. In this situation the Company would
be required to deconsolidate ICN Galenika and account for its investment using
the cost method of accounting and the investment in ICN Galenika would be
carried at the lower of cost or realizable value.
13. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of cash deposits.
The Company places its cash deposits with respected financial institutions and
limits the amount of credit exposure to any one financial institution, however,
in connection with the acquisition of ICN Galenika, the cash contributed to ICN
Galenika was required, under the terms of the agreement, to be placed on deposit
in a single high credit quality financial institution outside of Yugoslavia. At
December 31, 1993, ICN Galenika had hard currency of $834,000 and marketable
securities of $32,587,000 on deposit with this financial institution.
14. INVESTMENT IN RUSSIA
On October 21, 1992, the Company announced that it had concluded an
agreement with the Leningrad Industrial Chemical and Pharmaceutical Association
("Oktyabr") to form a pharmaceutical joint venture in Russia, ICN Oktyabr, in
which the Company will have a 75% interest. The new joint venture was registered
with the Russian Federation on March 9, 1993. The joint venture represents a new
business, and not the acquisition of the existing business or assets of Oktyabr.
Business operations of the joint venture will commence on the completion of a
business plan. Oktyabr, which recently was privatized, will contribute output
from its current production facilities. The Company's contribution will be
management expertise, technology, equipment, intellectual property, training and
technical assistance to the new joint venture.
F-27
<PAGE> 141
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Because of the transition of the Russian economy into a free market oriented
economy, the Company plans for a gradual phase-in of the joint venture in 1994
and 1995. During this phase-in period, the joint venture will develop training
and marketing strategies and begin constructing a new manufacturing facility in
1995 that is scheduled to be fully operational in 1996. Because of this phase-in
period, the Company does not expect any current material effects on it operating
results, as well as, its capital resources and liquidity.
15. SUBSEQUENT EVENT
In addition to the joint venture in Russia, on March 24, 1994, SPI entered
into an Agreement with the City of St. Petersburg to acquire 15% of the
outstanding shares of its joint venture partner, Oktyabr, in exchange for
approximately 30,000 shares of the Company's stock. As part of this Agreement,
SPI may qualify to receive newly issued shares of Oktyabr pursuant to Russian
privatization regulations that will raise its total investment in Oktyabr to
43%. The issuance of these additional shares is subject to approval and
completion of an "investment plan." The completion of the investment plan will
not require any additional financial resources of the Company. The Company has
also extended an offer to the employees of Oktyabr to exchange their Oktyabr
shares for SPI shares. The Oktyabr employees currently own approximately 33% of
the outstanding shares, however, the number of employees that will exchange
their shares is uncertain. In the event that SPI qualifies under the investment
plan to raise its investment to 43%, it is possible that a sufficient number of
employees might exchange their Oktyabr shares for SPI shares so that the total
SPI investment in Oktyabr would exceed 50%. If this event occurs, the Company
would be required to consolidate the financial results of Oktyabr into the
financial statements of the Company.
F-28
<PAGE> 142
(This page intentionally left blank)
F-29
<PAGE> 143
SPI PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND JUNE 30, 1994
(000'S OMITTED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1994
1993 UNAUDITED
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 14,777 $ 19,238
Marketable securities (used to collateralize $10,000 note
payable)........................................................ 32,587 --
Receivables, net................................................... 43,277 50,279
Inventories, net................................................... 107,196 91,883
Prepaid expenses and other current assets.......................... 10,925 17,465
-------- --------
Total current assets....................................... 208,762 178,865
Marketable securities (used to collateralize $10,000 note
payable)........................................................ -- 29,826
Property, plant and equipment, net................................. 78,718 80,183
Goodwill, net...................................................... 1,664 1,571
Other assets....................................................... 12,873 14,686
-------- --------
$302,017 $305,131
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables..................................................... $ 13,951 $ 15,277
Payable to ICN..................................................... 18,313 5,225
Accrued liabilities................................................ 17,700 20,827
Notes payable...................................................... 14,360 15,006
Current portion of long-term debt.................................. 3,866 4,207
Income taxes payable............................................... 13,313 14,172
-------- --------
Total current liabilities.................................. 81,503 74,714
Long-term debt, less current portion............................... 16,980 16,154
Other liabilities and deferred income taxes........................ 6,226 7,001
Minority interest.................................................. 41,429 41,862
Stockholders' equity:
Common stock, $.01 par value; 38,000 shares authorized; 20,101 and
20,494 shares outstanding at December 31, 1993 and June 30,
1994, respectively.............................................. 202 204
Additional capital................................................. 91,449 97,496
Retained earnings.................................................. 70,973 77,389
Unrealized loss on marketable securities, net...................... -- (2,761)
Foreign currency translation adjustments........................... (6,745) (6,928)
-------- --------
Total stockholders' equity................................. 155,879 165,400
-------- --------
$302,017 $305,131
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-30
<PAGE> 144
SPI PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1993 1994 1993 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales......................................... $66,422 $78,927 $186,058 $151,094
Cost of sales..................................... 35,263 45,168 95,953 77,783
------- ------- -------- --------
Gross profit............................ 31,159 33,759 90,105 73,311
Selling, general and administrative expenses...... 27,492 22,916 65,705 43,997
Royalties to affiliates, net...................... 720 842 2,164 3,749
Research and development costs.................... 1,743 1,630 5,262 2,476
Translation and exchange (gains) losses, net...... (1,598) (245) (597) 2,254
Interest income................................... (1,586) (1,241) (2,424) (2,206)
Interest expense.................................. 3,549 1,623 10,098 3,046
Other expense, net................................ 730 335 1,648 1,099
------- ------- -------- --------
Income before provision for income taxes
and minority interest................. 109 7,899 8,249 18,896
Provision for income taxes........................ 14 2,395 1,578 4,854
Minority interest................................. (996) 259 (156) 433
------- ------- -------- --------
Net income.............................. $ 1,091 $ 5,245 $ 6,827 $ 13,609
------- ------- -------- --------
PER SHARE INFORMATION:
Net income per share............................ $ .05 $ .25 $ .34 $ .65
======= ======= ======== ========
Shares used in per share computation............ 20,114 20,978 19,998 20,815
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-31
<PAGE> 145
SPI PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1993 1994
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 6,827 $ 13,609
Adjustments to reconcile net income to net cash provided by operating
activities:
Allowances for losses on accounts receivable....................... 7,212 2,996
Depreciation and amortization...................................... 3,853 3,770
Translation and exchange (gains) losses, net....................... (597) 2,254
Change in assets and liabilities...................................... (9,332) 4,243
------- --------
Net cash provided by operating activities.......................... 7,963 26,872
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (8,750) (3,846)
Decrease in restricted cash........................................... 5,200 --
------- --------
Net cash used in investing activities.............................. (3,550) (3,846)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net issues (payments) under line of credit arrangements............... (4,501) 570
Net payments of long-term debt........................................ (36) (1,690)
Net payments to ICN................................................... (2,900) (16,419)
Proceeds from exercise of stock options............................... 849 374
Dividends paid to minority shareholders............................... (1,259) (1,435)
------- --------
Net cash used in financing activities.............................. (7,847) (18,600)
------- --------
Effect of exchange rate changes on cash................................. (44) 35
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (3,478) 4,461
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 38,054 14,777
------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.......................... $34,576 $ 19,238
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-32
<PAGE> 146
SPI PHARMACEUTICALS, INC.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results to be expected
for a full year. Although the Company believes that all adjustments (consisting
only of normal, recurring adjustments) necessary for a fair presentation of the
interim period presented are included and that the disclosures are adequate to
make the information presented not misleading, these consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus for the year
ended December 31, 1993.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1994
(UNAUDITED)
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., ICN BIOMEDICALS, INC. AND
VIRATEK, INC.
SPI Pharmaceuticals, Inc. ("SPI" or the "Company") was incorporated on
November 30, 1981, as a wholly-owned subsidiary of ICN Pharmaceuticals, Inc.
("ICN") and was 38%-owned by ICN at June 30, 1994. ICN Biomedicals, Inc.
("Biomedicals") was 69%-owned by ICN, and Viratek, Inc. ("Viratek") was
63%-owned by ICN at June 30, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated condensed financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany account balances and transactions have been eliminated.
Per Share Information
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents. Common equivalent
shares represent shares issuable for outstanding options computed using the
treasury stock method. This method assumes that the proceeds from stock options
are used to repurchase shares on the open market.
On January 13, 1994, the Company's Board of Directors declared a first
quarter cash dividend of $.065 per share and a stock dividend of 1.4%, payable
on February 28, 1994, to shareholders of record on February 1, 1994. On May 20,
1994, the Company's Board of Directors declared a second quarter cash dividend
of $.065 per share and a stock dividend of 1.3%, payable on June 15, 1994, to
shareholders of record on June 1, 1994. All relevant share and per share data
have been restated to reflect these stock dividends.
Reclassifications
Certain prior year items have been reclassified to conform with the current
year presentation.
F-33
<PAGE> 147
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Inventories
Inventories, net, consists of the following components: (000's omitted)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ --------
<S> <C> <C>
Raw materials and supplies............................ $57,148 $34,331
Work-in-process....................................... 12,541 13,379
Finished goods, net................................... 37,507 44,173
-------- -------
$107,196 $91,883
======== =======
</TABLE>
3. RELATED PARTY TRANSACTIONS
Royalty Agreements
During the three and six months ended June 30, 1994, the Company sold
$3,790,000 and $17,850,000 of Virazole(R), respectively, generating royalties to
Viratek of $758,000 and $3,570,000, respectively. For the same periods in 1993,
the Company sold $2,700,000 and $9,920,000 of Virazole(R), respectively,
generating royalties to Viratek of $540,000 and $1,984,000, respectively. These
royalties are based on a royalty agreement whereby 20% of net sales of
Virazole(R) are payable to Viratek.
Cost Allocations
ICN, SPI, Viratek and Biomedicals occupy ICN's facility in Costa Mesa,
California. ICN charged facility costs to the Company of $69,000 per quarter in
1994 and 1993. The costs of common services such as maintenance, purchasing and
personnel are incurred by the Company, a portion of which are allocated to ICN,
Viratek and Biomedicals based on services utilized. These common services costs
were $1,377,000 for the six months ended June 30, 1994, of which $955,000 was
allocated to ICN, Viratek and Biomedicals. During the same period in 1993,
common services costs were $1,299,000, of which $832,000 was allocated to the
same group.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes was $3,915,000 for the six months ended June 30,
1994, and $1,949,000 for the same period in 1993.
Cash paid for interest was $1,803,000 for the six months ended June 30,
1994, and $7,044,000 for the same period in 1993.
5. RESULTS EXCLUDING ICN GALENIKA
The results of ICN Galenika and the results of the Company excluding ICN
Galenika, for the six months ended June 30, 1993 and 1994 are presented below:
(000's omitted)
<TABLE>
<CAPTION>
SPI WITHOUT
ICN GALENIKA ICN GALENIKA
------------------- --------------------
1993 1994 1993 1994
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales.............................. $77,094 $87,268 $108,964 $63,826
Gross Profit....................... 48,935 58,951 41,170 14,360
Net income (loss).................. $ 7,294 $12,311 $ (467) $ 1,298
</TABLE>
F-34
<PAGE> 148
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
The results of ICN Galenika and the results of the Company, excluding ICN
Galenika, for the three months ended June 30, 1993 and 1994 are presented below:
(000's omitted)
<TABLE>
<CAPTION>
SPI WITHOUT
ICN GALENIKA ICN GALENIKA
------------------- -------------------
1993 1994 1993 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales............................. $37,766 $41,256 $28,656 $37,671
Gross Profit...................... 23,922 26,537 7,237 7,222
Net income (loss)................. $ 3,879 $ 4,468 $(2,788) $ 777
</TABLE>
6. ICN GALENIKA
ICN Galenika operates in a highly inflationary economy and uses the dollar
as the functional currency rather than the Yugoslavian dinar. At December 31,
1993, the rate used to remeasure ICN Galenika's results was over one trillion
dinars per $1 U.S. On January 1, 1994, the Yugoslavian government changed the
denomination of its currency by dropping nine zeros. The effect of this
redenomination on the Yugoslavian dinar resulted in an exchange rate of 1,053
dinars to $1 U.S. Subsequent to the redenomination and prior to the enactment of
the stabilization program described below, the dinar had devalued to 12,563,000
dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavian government guarantees the conversion of dinars to Deutsche
marks by exercising restraint in the amount of dinars that it prints, thereby
restricting cash in circulation to correspond to hard currency reserves in
Yugoslavia. Since the inception of this program the exchange rate of dinars to
Deutsche marks has remained stable. The trading of dinars at other than official
rates has been virtually eliminated and inflation and interest rates have
declined from over 1 billion percent a year to a current annual rate of
approximately 14% since January 24, 1994, based on information currently
available to the Company. The Company believes that the period of time that the
stabilization program has been operating successfully is significant given that
past attempts at monetary control by the Yugoslavian government have generally
been temporary. In the near term, the positive effects of the stabilization
program could reverse and a return to prior levels of hyperinflation could
occur. The success of this stabilization program is dependent upon improvement
in the Yugoslavian economy, which is in part dependent upon the lifting of
United Nations sanctions.
7. JOINT VENTURE IN RUSSIA
The Company has recently entered into an agreement with the City of St.
Petersburg to acquire 15% of the outstanding shares of the Company's recently
privatized joint venture partner, Oktyabr, for approximately $600,000. Under the
terms of the agreement, the Company has the option to pay for the shares by
using privatization vouchers or cash. As a result of this investment, and as
part of the privatization of Oktyabr, the Company submitted an "investment plan"
which, if approved, will allow the Company to purchase additional outstanding
shares of Oktyabr. These shares along with the shares purchased from the City of
St. Petersburg would increase the Company's ownership to 43%. The "investment
plan" does not contemplate any significant additional cash investment by the
Company but gives effect to the Company's past assistance provided to Oktyabr.
The Company has also recently completed a transaction whereby the Company
purchased 26% of the outstanding shares from the employees of Oktyabr in
exchange for rights to acquire SPI common stock. Should the Company complete the
transaction to acquire 43% of the outstanding shares of Oktyabr together
F-35
<PAGE> 149
SPI PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
with the 26% acquired from the employees, the Company would own 61% of the
outstanding shares of Oktyabr, in which case the Company may be required to
consolidate the financial statements of Oktyabr with those of the Company.
8. MARKETABLE SECURITIES
In January 1994, the Company adopted SFAS No. 115 ("Accounting for Certain
Investments in Debt and Equity Securities"). This statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified as either held-to-maturity, trading securities,
or available-for-sale. The Company has classified its investment in corporate
bond securities, with maturities ranging from 1999 to 2003, as
available-for-sale. Unrealized holding gains and losses are calculated on the
specific identification method. Changes in market values of equity securities
are reflected as unrealized gains or losses directly in Shareholders' Equity, as
required, and accordingly have no effect on net income. The adoption of SFAS No.
115 did not result in a cumulative effect adjustment in the consolidated
statements of income.
9. SUBSEQUENT EVENTS
On August 1, 1994, the Company and its three affiliated corporations (ICN
Pharmaceuticals Inc., Viratek, Inc. and ICN Biomedicals, Inc.) entered into a
merger agreement to combine the four companies into a newly formed corporation
(which will be renamed ICN Pharmaceuticals, Inc.) or in the case of Biomedicals,
into a wholly-owned subsidiary of New ICN (the "Merger"). Under the terms of the
merger agreement, all outstanding shares of common stock of the four companies
(other than shares held by ICN) will be exchanged for shares of common stock of
the new company pursuant to the following exchange ratios: ICN: 1 to .512; SPI:
l to l; Viratek: l to .499; and Biomedicals: 1 to .197. The proposed Merger is
subject to various conditions, including approval by the stockholders of each of
the four companies, issuance of $150 million of convertible debentures to
refinance a substantial portion of the long-term indebtedness of the four
companies (a waivable condition), appropriate regulatory approvals and certain
other conditions. Assuming these conditions are satisfied, the transaction is
expected to close during the fall of 1994.
Three lawsuits have been filed by stockholders of SPI and, in one lawsuit,
Viratek, with respect to the Merger in the Court of Chancery of the State of
Delaware against ICN, SPI, Viratek (with respect to one of such lawsuits) and
certain directors and officers of ICN, SPI and/or Viratek (including Milan
Panic). The lawsuits, entitled Helmut Kling v. Milan Panic, et al., Jallath v.
Milan Panic, et al., and Amy Hoffman v. Milan Panic, et al. purport to be class
actions on behalf of all persons who hold shares of SPI common stock and, in one
lawsuit, Viratek common stock. These suits allege that the consideration to be
provided to the public stockholders of SPI and Viratek (with respect to one of
such lawsuits) in the Merger is unfair and inadequate, and the defendants have
breached their fiduciary duties in approving the proposed Merger and otherwise.
The Company believes that these suits are without merit.
F-36
<PAGE> 150
REPORT OF INDEPENDENT AUDITORS
To ICN Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of ICN
Pharmaceuticals, Inc. (a Delaware Corporation) and subsidiaries as of December
31, 1993 and 1992, the related consolidated statements of operations,
Stockholders' Equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1993. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company has had certain transactions with its majority owned
subsidiaries and affiliates as more fully described in Notes 2, 3, 4, 5 and 6 to
the consolidated financial statements. Whether the terms of these transactions
would have been the same had they been between wholly unrelated parties cannot
be determined.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ICN
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 1, effective December 31, 1992, the Company changed to
the equity method of accounting for a previously consolidated subsidiary.
COOPERS & LYBRAND
Los Angeles, California
March 30, 1994
F-37
<PAGE> 151
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
ASSETS
<TABLE>
<CAPTION>
1992 1993
--------------- -------------
(NOTE 1 AND 17)
---------------
<S> <C> <C>
Current assets:
Cash................................................................... $ 2,333,000 $ 14,652,000
Restricted cash........................................................ 262,000 1,518,000
Certificates of deposit................................................ -- 8,000,000
Receivables, less allowances of $3,353,000 in 1992 and $2,400,000 in
1993................................................................. 18,620,000 12,122,000
Receivables from SPI................................................... 20,160,000 18,313,000
Other receivables...................................................... 8,704,000 --
Inventories, net....................................................... 13,499,000 15,601,000
Prepaid expenses and other current assets.............................. 15,366,000 4,479,000
------------- -------------
Total current assets.............................................. 78,944,000 74,685,000
Property, plant and equipment, net, at cost............................ 34,113,000 36,243,000
Receivables from SPI, less current portion............................. 10,273,000 --
Marketable securities.................................................. 198,000 201,000
Investment in SPI...................................................... 72,569,000 71,671,000
Investment in other equity securities.................................. 4,273,000 4,230,000
Other assets and deferred charges...................................... 9,607,000 7,594,000
Goodwill related to purchased businesses............................... 2,933,000 2,580,000
Goodwill related to publicly traded subsidiaries....................... 10,658,000 10,652,000
------------- -------------
$ 223,568,000 $ 207,856,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable.......................................................... $ 15,277,000 $ 4,226,000
Current maturities of long-term debt................................... 12,499,000 12,093,000
Accounts payable....................................................... 13,055,000 7,342,000
Accrued liabilities.................................................... 32,516,000 21,397,000
------------- -------------
Total current liabilities......................................... 73,347,000 45,058,000
Long-term debt, less current maturities:
Convertible into ICN common stock.................................... 39,507,000 22,023,000
Publicly-traded debentures and other long-term debt.................. 120,504,000 117,024,000
Other liabilities and deferred income taxes............................ 9,348,000 7,014,000
Minority interests..................................................... 2,619,000 12,717,000
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; 3,000,000 shares authorized, none
outstanding.......................................................... -- --
Common stock, $1.00 par value; 100,000,000 shares authorized,
16,452,313 at December 31, 1992 and 20,519,431 shares outstanding at
December 31, 1993.................................................... 16,452,000 20,519,000
Additional capital..................................................... 145,928,000 180,897,000
Accumulated deficit.................................................... (182,441,000) (193,711,000)
Foreign currency translation adjustments............................... (1,696,000) (3,685,000)
------------- -------------
Total stockholders' equity (deficit).............................. (21,757,000) 4,020,000
------------- -------------
$ 223,568,000 $ 207,856,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 152
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................................... $460,365,000 $551,766,000 $ 62,556,000
Cost of sales............................................... 225,234,000 253,596,000 27,631,000
------------ ------------ ------------
Gross profit................................................ 235,131,000 298,170,000 34,925,000
Selling, general and administrative expenses................ 152,947,000 224,235,000 43,690,000
Research and development costs.............................. 6,588,000 10,718,000 5,571,000
Interest expense............................................ 35,871,000 32,407,000 19,589,000
Interest income............................................. (1,550,000) (6,844,000) (627,000)
Translation and exchange (gains) losses, net................ 4,517,000 21,648,000 (1,292,000)
Restructuring costs and special charges..................... 6,087,000 63,032,000 --
Other expense, net.......................................... 29,479,000 15,187,000 1,079,000
Equity earnings in SPI...................................... -- -- (11,646,000)
Gains on sales of subsidiaries stock........................ (29,797,000) (37,744,000) (8,345,000)
Write-off of goodwill....................................... -- 15,362,000 --
Unrealized (gains) losses on marketable securities.......... (475,000) 446,000 (200,000)
------------ ------------ ------------
Income (loss) before provision for income taxes, minority
interest and extraordinary income......................... 31,464,000 (40,277,000) (12,894,000)
Provision (benefit) for income taxes........................ 6,574,000 9,967,000 (474,000)
Minority interests.......................................... 19,035,000 14,558,000 (523,000)
------------ ------------ ------------
Income (loss) before extraordinary income................... 5,855,000 (64,802,000) (11,897,000)
Extraordinary income........................................ -- -- 627,000
Net income (loss)........................................... $ 5,855,000 $(64,802,000) $(11,270,000)
============ ============ ============
Per share information:
Income (loss) before extraordinary income................. $.40 $(4.67) $(0.60)
Extraordinary income........................................ -- -- 0.03
---- ------ ------
Net income (loss)........................................... $.40 $(4.67) $(0.57)
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 153
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON ADDITIONAL ACCUMULATED TRANSLATION
STOCK CAPITAL DEFICIT ADJUSTMENTS TOTAL
---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 30, 1990.................. $11,707,000 $117,059,000 $(120,060,000) $ 3,376,000 $ 12,082,000
Net loss for month of December,
1990............................... -- -- (3,434,000) -- (3,434,000)
Translation adjustments.............. -- -- -- (159,000) (159,000)
Proceeds from exercise of stock
options............................ 353,000 706,000 -- -- 1,059,000
Subsidiaries' stock transactions..... -- 1,053,000 -- -- 1,053,000
Net income........................... -- -- 5,855,000 -- 5,855,000
----------- ------------ ------------- ----------- ------------
BALANCE AT
DECEMBER 31, 1991.................. 12,060,000 118,818,000 (117,639,000) 3,217,000 16,456,000
Translation adjustments.............. -- -- -- (4,913,000) (4,913,000)
Proceeds from exercise of stock
options............................ 184,000 469,000 -- -- 653,000
Issuance of stock.................... 4,198,000 26,410,000 -- -- 30,608,000
Conversion of long-term debt......... 10,000 105,000 -- -- 115,000
Subsidiaries' stock transactions..... -- 126,000 -- -- 126,000
Net loss............................. -- -- (64,802,000) -- (64,802,000)
----------- ------------ ------------- ----------- ------------
BALANCE AT
DECEMBER 31, 1992.................. 16,452,000 145,928,000 (182,441,000) (1,696,000) (21,757,000)
Translation adjustments.............. -- -- -- (1,989,000) (1,989,000)
Proceeds from exercise of stock
options............................ 1,067,000 2,235,000 -- -- 3,302,000
Issuance of stock.................... 3,000,000 18,861,000 -- -- 21,861,000
Subsidiaries' stock transactions..... -- 13,873,000 -- -- 13,873,000
Net loss............................. -- -- (11,270,000) -- (11,270,000)
----------- ------------ ------------- ----------- ------------
BALANCE AT
DECEMBER 31, 1993.................. $20,519,000 $180,897,000 $(193,711,000) $(3,685,000) $ 4,020,000
=========== ============ ============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 154
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992, AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 5,855,000 $(64,802,000) $(11,270,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 16,166,000 17,610,000 7,362,000
Loss on sales of fixed assets............................ 575,000 1,335,000 14,000
Gains on sale of subsidiaries' stock..................... (29,797,000) (37,744,000) (8,345,000)
Write-off of goodwill, intangibles and assets............ 1,664,000 17,362,000 --
Other realized and unrealized (gains) losses............. (121,000) 218,000 (339,000)
Extraordinary income..................................... -- -- (627,000)
Provision for losses on accounts receivable.............. 6,760,000 50,563,000 168,000
Minority interests....................................... 19,035,000 14,558,000 (523,000)
Exchange (gains) losses.................................. 4,517,000 11,348,000 (1,292,000)
Restructuring costs and other charges.................... 6,087,000 63,032,000 --
Equity in earnings of SPI................................ -- -- (11,646,000)
Lease vacancy costs...................................... -- -- 1,200,000
Gain on settlement of certain lease contracts............ -- -- (938,000)
Gain on settlement of certain liabilities for less than
original estimate...................................... -- -- (1,250,000)
Other non-cash items..................................... 345,000 (125,000) (855,000)
Change in assets and liabilities net of effects from
deconsolidation of subsidiary:
(Increase) decrease in receivables....................... (61,183,000) 14,684,000 13,271,000
(Increase) decrease in inventory......................... 18,935,000 (24,154,000) (2,102,000)
(Increase) decrease in prepaid and other current
assets................................................. (12,592,000) (9,461,000) (739,000)
Increase (decrease) in accounts payable and accrued
expenses............................................... 24,277,000 (70,076,000) (17,897,000)
----------- ------------ ------------
Net cash provided by (used in) operating activities...... 523,000 (15,652,000) (35,808,000)
----------- ------------ ------------
Cash flows from investing activities:
Capital expenditures........................................ (21,046,000) (12,554,000) (2,548,000)
Proceeds from sale of assets................................ 805,000 1,342,000 5,207,000
Sale of subsidiaries' stock................................. 53,653,000 49,851,000 23,319,000
Issuance of subsidiary stock................................ 3,771,000 2,552,000 24,098,000
Purchase of certificate of deposit.......................... -- -- (8,000,000)
Marketable securities sold, net............................. 4,147,000 733,000 139,000
Payment received from SPI................................... -- -- 13,662,000
Equity investment........................................... -- (53,254,000) --
Other, net.................................................. (799,000) 2,853,000 (219,000)
----------- ------------ ------------
Net cash provided by (used in) investing activities...... 40,531,000 (8,477,000) 55,658,000
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings.................................... 19,843,000 26,665,000 954,000
Principal payments on debt.................................. (50,257,000) (42,235,000) (32,087,000)
Proceeds from stock issuances............................... 1,059,000 31,261,000 25,163,000
Dividends paid to minority shareholders..................... -- (8,062,000) (351,000)
Increase in restricted cash................................. -- -- (1,256,000)
Other, net.................................................. 4,221,000 -- --
----------- ------------ ------------
Net cash provided by (used in) financing activities...... (25,134,000) 7,629,000 (7,577,000)
----------- ------------ ------------
Effect of exchange rate on cash............................... 159,000 (272,000) 46,000
----------- ------------ ------------
Net increase (decrease) in cash............................... 16,079,000 (16,772,000) 12,319,000
Cash at beginning of year..................................... 3,026,000 19,105,000 2,333,000
----------- ------------ ------------
Cash at end of year........................................... $19,105,000 $ 2,333,000 $ 14,652,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 155
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Principles of consolidation
The accompanying consolidated financial statements include ICN
Pharmaceuticals, Inc. ("ICN"), its 69%-owned subsidiary ICN Biomedicals, Inc.
("Biomedicals"), its 63%-owned subsidiary Viratek, Inc. ("Viratek") and its
39%-owned equity investment in SPI Pharmaceuticals, Inc. ("SPI"). The sale of
approximately 9% of SPI's common stock by ICN throughout 1992 reduced ICN's
ownership interest in SPI and resulted in the deconsolidation of SPI at December
31, 1992, the approximate time at which ICN's ownership fell below 50%. The
continuing investment in SPI was classified as a long-term asset in the
consolidated balance sheet and income or loss was, commencing January 1, 1993,
recognized using the equity method of accounting. Prior year results have not
been restated (see Note 17). All significant intercompany account balances and
transactions have been eliminated.
Goodwill
The difference between the purchase price and the fair value of net assets
purchased at the date of acquisition is included in the accompanying
consolidated balance sheets as Goodwill. Goodwill amortization periods range
from 5 to 40 years for acquired businesses and from 10 to 20 years for its
publicly-traded subsidiaries and is based on an estimate of future periods to be
benefitted. The Company periodically evaluates the carrying value of goodwill
including the amortization periods. The Company determines whether there has
been permanent impairment in goodwill, as well as, the amount of such
impairment, if any, by comparing the anticipated undiscounted future operating
income of the acquired entity with the carrying value of the Goodwill. During
1992, the Company wrote off a substantial portion of its goodwill, primarily
related to the acquisition by Biomedicals of Flow, as more fully described in
Note 14. In addition, on certain portions of goodwill, the amortization period
was reduced to primarily five years, which reflects the estimated recovery
period.
Accumulated amortization for goodwill related to purchased businesses was
$2,548,000 and $2,901,000 at December 31, 1992 and 1993, respectively.
Accumulated amortization for goodwill related to publicly traded subsidiaries
was $3,413,000 and $4,625,000 at December 31, 1992 and 1993, respectively.
Cash
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amount of those assets approximates fair value due to
the short-term maturity of these instruments. Included in cash and certificates
of deposit at December 31, 1993, is $9,698,000 and $8,000,000, respectively,
which is to be used exclusively by Viratek for research and development and its
general working capital requirements.
Marketable securities
Marketable securities, which consist of investments in common stocks and
bonds, are carried at the lower of aggregate cost or market. The Company
realized net (gains) losses of $354,000, $228,000, and $(139,000) related to
marketable securities sold during 1991, 1992 and 1993, respectively. Unrealized
(gains) losses of $(475,000), $446,000 and $(200,000) were recorded in 1991,
1992 and 1993, respectively.
F-42
<PAGE> 156
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Inventories
Inventories, which include material, direct labor and factory overhead, are
stated at the lower of cost or market. Cost is determined based on a first-in,
first-out (FIFO) basis.
Catalog Costs
The initial costs of design, production and distribution of the Company's
product catalog are deferred and amortized over its service life, approximately
one year. However, for the year ended December 31, 1992, due to the lower than
expected sales results, Biomedicals wrote-off these costs in the fourth quarter
of 1992. (See Note 14.)
Property, plant and equipment
The Company uses primarily the straight-line method for depreciating
property, plant and equipment over their estimated useful lives. Buildings and
related improvements are depreciated from 20-40 years, machinery and equipment
over 2-10 years, furniture and fixtures over 1-10 years, and leasehold
improvements, including property under capital leases, are amortized over their
useful lives limited to the life of the lease.
The Company follows the policy of capitalizing expenditures that
significantly increase the life of the related assets and charging 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.
Notes Payable
The Company classifies bank borrowings with initial terms of one year or
less as Notes Payable. These notes bear interest at rates of 6.0% to 16.2%. The
carrying amount of Notes Payable approximates fair value due to the short-term
maturity of these instruments.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations, except
those in highly inflationary economies, are translated at the end of period
exchange rates. Revenues and expenses are translated at the average exchange
rates prevailing during the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated in stockholders' equity. The monetary assets and
liabilities of foreign subsidiaries in highly inflationary economies are
remeasured into U.S. dollars at the year-end exchange rates and non-monetary
assets and liabilities at historical rates. In accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation," the
Company has included in operating income all foreign exchange gains and losses
arising from foreign currency transactions and the effects of foreign exchange
rate fluctuations on subsidiaries operating in highly inflationary economies.
The (gains) losses included in operations from foreign exchange translation and
transactions for 1991, 1992 and 1993 were $4,517,000 (including SPI),
$21,648,000 (including SPI), and $(1,292,000), respectively.
Income Taxes
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, (SFAS 109) "Accounting for Income Taxes". SFAS 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. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or
F-43
<PAGE> 157
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
rates. Previously, the Company used the SFAS 96 asset and liability approach
that gave no recognition to future events other than the recovery of assets and
settlement of liabilities at their carrying amounts. The adoption of SFAS 109
did not result in a cumulative effect adjustment in the statement of operations.
Per share information
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents (12,829,000 in 1991,
14,010,000 in 1992 and 19,813,000 in 1993). Common share equivalents in 1991
represent shares issuable for outstanding options and warrants, on the
assumption that the proceeds would be used to repurchase shares in the open
market. Shares issuable for outstanding options and warrants in 1992 and 1993
were excluded since the effect would have been antidilutive. For purposes of
calculating per share information, ICN's share of the income of subsidiaries has
been reduced to give effect to the dilution in earnings which would result upon
the exercise of options and warrants currently outstanding to purchase
subsidiaries' common shares.
2. SPI PHARMACEUTICALS, INC.
SPI develops, manufactures, sells and distributes pharmaceutical and
nutritional products and services in the United States, Yugoslavia, Canada,
Mexico and Western Europe.
During 1991, ICN sold 2,978,250 shares of SPI common stock for an aggregate
sales price of $50,863,000, resulting in a net gain of $27,239,000 and used
1,468,000 shares in the acquisition of Galenika (see Note 6). During 1992, ICN
sold 690,400 shares of SPI common stock and Galenika sold 1,200,000 shares of
SPI common stock, transferred in 1991, for an aggregate sales price of
$44,608,000, resulting in a net gain of $32,952,000. During 1993, ICN sold
1,618,200 shares of SPI common stock for an aggregate sales price of
$19,995,000, resulting in a net gain of $5,698,000. The above noted 1992 and
1993 sales of SPI stock have reduced ICN's ownership of SPI from 57% at December
31, 1991 to 48% at December 31, 1992 and 39% at December 31, 1993. As a result,
effective December 31, 1992, SPI is accounted for by using the equity method of
accounting.
At December 31, 1993, the investment in SPI exceeded the equity in net
assets of SPI by $11,024,000, which amount, is being amortized over 40 years.
On November 15, 1993, SPI exchanged $3,075,000 of debt owed to ICN for
200,000 shares of SPI's common stock issued to ICN at a price of $15.38 per
share which represented the closing market price of SPI's stock on that date.
SPI has granted options for the purchase of 2,508,315 shares of its common
stock. At December 31, 1993, ICN's percentage ownership of SPI would have
decreased from 39% to 35% if these options were exercised.
At December 31, 1993, ICN owned 7,853,454 shares of SPI common stock which
had an aggregate value of approximately $113,875,000, based upon the quoted
market price per share of SPI common stock at that date. This amount, however,
is not necessarily indicative of the realizable value in the open market.
3. VIRATEK, INC.
Viratek's primary purpose is to conduct research and development on
compounds derived from nucleic acids and to develop new biomedical and
diagnostic products.
During 1991, 1992 and 1993, ICN sold 200,000, 348,000 and 272,500 shares of
Viratek common stock for an aggregate sales price of $2,790,000, $5,243,000 and
$3,325,000, respectively, resulting in a gain of
F-44
<PAGE> 158
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
$2,558,000, $4,792,000 and $2,647,000, respectively. These sales, in addition to
shares issued in connection with the exercise of employee stock options and the
shares issued in the offering discussed below, have reduced ICN's ownership from
83% at January 1, 1991, to 63% at December 31, 1993.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of approximately $8,897,000. Each unit
consists of one share of common stock and one warrant to purchase one unit of
common stock at $10.075. On March 19, 1993, the underwriters exercised their
option to purchase the overallotment (206,250 units) in connection with the
public offering for net proceeds of $1,368,000. The warrants became separately
transferable on July 29, 1993 and were exercisable until August 30, 1993 and
redeemable by the Company on August 31, 1993 at $.05 per warrant if not
previously exercised. A total of 1,366,642 warrants were exercised resulting in
net proceeds to the Company of $13,472,000.
Goodwill related to publicly traded subsidiaries at December 31, 1993
includes $6,677,000, net of amortization, related to purchases of Viratek common
stock.
Viratek has granted options for the purchase of 877,222 shares of its
common stock. At December 31, 1993, ICN's percentage ownership of Viratek would
have decreased from 63% to 60% if these options were exercised. In December
1993, Viratek declared a stock distribution of 5%.
4. ICN BIOMEDICALS, INC.
Biomedicals manufactures and distributes research chemical products, cell
biology products, chromatography materials, immunology instrumentation,
environmental technology products, precision liquid delivery instrumentation and
immunodiagnostic reagents and instrumentation in the United States, Canada,
Mexico, South America, Eastern and Western Europe, Australia and Japan.
Biomedicals also purchases research chemicals from other manufacturers, in bulk,
for repackaging and distributes biomedical instrumentation manufactured by
others.
During the second quarter of 1993, Biomedicals' Italian operation
negotiated settlements with certain of its suppliers and banks resulting in an
extraordinary income of $627,000 or $.03 per share.
On December 31, 1992, Biomedicals exchanged, in a non-cash transaction,
$11,250,000 of debt owed to ICN in exchange for 3,214,286 shares of Biomedicals'
common stock issued to ICN at a price of $3.50 per share which represented the
closing market price of the stock at that date.
On December 31, 1992, Biomedicals transferred $5,747,000 of debt owed to a
major supplier to ICN. ICN became primarily liable for the debt and Biomedicals
became guarantor.
On April 1, 1992, Biomedicals transferred, in a non-cash transaction,
$13,072,000 of debt with First City Bank of Texas -- Houston N.A., to ICN.
Biomedicals, in exchange, issued 2,412,449 shares of Biomedicals' common stock
at a price of $5.42 per share which represented the closing market price of the
stock at that date less a discount of 15%.
On March 31, 1992, Biomedicals transferred, in a non-cash transaction,
$2,711,000 of debt owed to Skopbank of Finland to ICN. Biomedicals, in exchange,
issued 500,334 shares of Biomedicals' common stock at a price of $5.42 per share
which represented the closing market price of Biomedicals' stock on that date
less a discount of 15%. ICN became primarily liable for the debt and Biomedicals
became guarantor.
On March 31, 1992 Biomedicals exchanged, in a non-cash transaction,
$4,837,000 of debt owed to ICN for 892,703 shares of Biomedicals' common stock
issued to ICN at a price of $5.42 per share which represented the closing market
price of the stock at that date less a discount of 15%.
F-45
<PAGE> 159
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
On December 31, 1991, Biomedicals issued, in a non-cash transaction,
3,363,298 shares of Biomedicals' common stock to ICN at a price of $6.25 which
represented the fair market value of Biomedicals' stock at that date in exchange
for debt owed ICN in the amount of $18,167,523.
On March 1, 1991, Biomedicals, pursuant to a fairness opinion, exchanged,
in a non-cash transaction, $3,833,000 of advances due to ICN into 538,000 shares
of Biomedicals' common stock, issued at a price of $7.125 which represented the
fair market value of Biomedicals' stock at that date less a discount of 22%.
On August 30, 1993, Biomedicals issued 300,000 shares of a new series "A"
of its non-convertible, non-voting, preferred stock valued pursuant to a
fairness opinion, at $30,000,000 to the Company. In exchange, the Company
delivered 4,983,606 shares of Biomedicals' common stock that ICN owned and
exchanged intercompany debt owed to ICN by Biomedicals in the amount of
$11,000,000.
In addition, on August 30, 1993, Biomedicals issued 390,000 shares of a new
series "B" of its non-convertible, non-voting, preferred stock valued pursuant
to a fairness opinion, at $32,000,000 to the Company. In exchange, ICN delivered
to Biomedicals 8,384,843, shares of Biomedicals' common stock that ICN owned.
As a result of this exchange, Biomedicals had 9,033,623 common shares
issued and outstanding.
Subject to declaration by Biomedicals' Board of Directors, the new series
"A" preferred stock pays an annual dividend of $8, noncumulative, payable
quarterly and the new series "B" preferred stock pays an annual dividend of $10,
noncumulative, payable quarterly. Both series "A" and "B" preferred stock become
cumulative in respect to dividends upon certain events deemed to be a change in
control, as defined by the certificates of designation. The series "B" preferred
dividends are subject to the prior rights of the holders of the series "A"
preferred stock and any other preferred stock ranking prior to the series "B"
preferred.
The series "A" preferred stock is senior in ranking to the series "B"
preferred stock and the series "B" preferred stock is senior to Biomedicals'
common stock as to voluntary or involuntary liquidation, dissolution or winding
up of the affairs of Biomedicals, after payment or provision for payment of the
debts and other liabilities of Biomedicals. The holders of the series "A"
preferred shares are entitled to receive an amount in cash or in property,
including securities of another corporation, equal to $100 per share in
involuntary liquidation or $106 per share in voluntary liquidation prior to
August 31, 1994 and declining ratably per year to $100 per share after 1998,
plus dividends, in the event dividends have become cumulative. the holders of
the series "B" preferred shares are entitled to receive an amount in cash or in
property, including securities of another corporation equal to $100 per share in
voluntary or involuntary liquidation, plus dividends, in the event dividends
have become cumulative.
The series "A" and "B" preferred shares are redeemable, for cash or
property, including securities of another corporation, in whole or in part, at
the option of Biomedicals only, subject to approval by a vote of a majority of
the independent directors of Biomedicals. The series "A" preferred shares are
redeemable at $106 per share prior to August 31, 1994 and declining ratably per
year to $100 in 1998, plus dividends, in the event dividends have become
cumulative. The series "B" shares are redeemable at $100 per share, plus
dividends, in the event dividends have become cumulative.
No dividends were declared on the series "A" or series "B" preferred stock
during 1993.
Goodwill related to publicly traded subsidiaries at December 31, 1993
includes $3,975,000, net of amortization, related to purchases of Biomedicals'
stock.
Biomedicals has granted options for the purchase of 2,419,830 shares of its
common stock. At December 31, 1992, ICN's percentage ownership of Biomedicals
would have decreased from 69% to 44%
F-46
<PAGE> 160
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
assuming exercise of all options and exchange of all the Bio Capital Holding
Exchangeable Certificates (see Note 7).
5. RELATED PARTY TRANSACTIONS
General
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with SPI. Certain officers of
ICN occupy similar positions with SPI, Biomedicals and Viratek. ICN, SPI,
Biomedicals and Viratek (collectively, the "Affiliated Corporations") have
engaged in, and will continue to engage in, certain transactions with each
other.
An Oversight Committee of the Boards of Directors of the Affiliated
Corporations reviews transactions between or among the Affiliated Corporations
to determine whether a conflict of interest exists among the Affiliated
Corporations with respect to a particular transaction and the manner in which
such conflict can be resolved. The Oversight Committee has advisory authority
only and makes recommendations to the Boards of Directors of each of the
Affiliated Corporations. The Oversight Committee consists of one non-management
director of each Affiliated Corporation and a non-voting chairman. The
significant related party transactions have been reviewed and recommended for
approval by the Oversight Committee, and approved by the respective Boards of
Directors.
Royalty agreements
Effective December 1, 1990, SPI and Viratek entered into a new royalty
agreement. Under this agreement, SPI continued to act as Viratek's exclusive
distributor of ribavirin and pays Viratek a royalty of 20% on sales worldwide
for a term of 10 years with an option by either party to extend it for an
additional 10 years. Royalties to Viratek under this agreement for 1991, 1992
and 1993 were $4,263,000, $5,448,000 and $5,903,000, respectively. Included in
royalties for 1991, 1992 and 1993 are royalties earned on foreign sales by SPI
totalling $1,189,000, $1,472,000 and $2,107,000, respectively.
During 1991, SPI purchased $235,000 of ribavirin from Viratek and also
transferred $2,943,000 of Virazole(R) from Viratek at its cost.
Under an agreement between ICN and the employer of a director of Viratek,
SPI is required to pay a 2% royalty to the employer on all sales of Virazole(R)
in aerosolized form. Such royalties for 1991, 1992 and 1993 were $313,000,
$430,000, and $422,000, respectively.
In July 1988, SPI began marketing products under license from ICN for the
treatment of myasthenia gravis, a disease characterized by muscle weakness and
atrophy. ICN charged SPI royalties at 9% of net sales. Effective September 1,
1990, SPI prepaid royalties to ICN in the amount of $9,590,000. There are no
future royalties due to ICN for these products.
Beginning December 1986, SPI began selling Brown Pharmaceuticals, Inc.
products under license from ICN. ICN charges SPI royalties at 8 1/2% of net
sales. During 1991, 1992 and 1993 SPI paid ICN $93,000, $65,000 and $218,000,
respectively, in royalties under this arrangement.
Cost allocations
The Affiliated Corporations occupy ICN's facility in Costa Mesa,
California. In each of 1991, 1992 and 1993, ICN charged facility costs of
$30,000, $310,000 and $279,000 to SPI, Biomedicals and Viratek, respectively.
The costs of common services such as maintenance, purchasing and personnel are
paid by SPI and allocated to ICN, Biomedicals and Viratek based on services
utilized. The total of such costs were
F-47
<PAGE> 161
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
$2,617,000 in 1991, $2,556,000 in 1992 and $2,584,000 in 1993 of which
$1,568,000, $1,679,000 and $1,733,000 were allocated to the Affiliated
Corporations, respectively. Effective January 1, 1993, ICN reimburses
Biomedicals for those allocations which are in excess of the amounts determined
by Biomedicals' management using competitive data, as reviewed and recommended
by the Oversight Committee, that would have been incurred by the Company if it
operated in a facility suited solely to its requirements. During 1993, such
reimbursements totalled $772,000.
During 1991, Viratek began renting certain office equipment to ICN for use
at the Costa Mesa facility. Rent is being charged at the rate of $20,000 per
month through 1993, renewable annually. During 1991, 1992 and 1993 Viratek
charged ICN $120,000, $240,000 and $240,000, respectively.
It is management's belief that the methods used and amounts allocated for
facility costs and common services are reasonable based upon the usage by the
respective companies.
Investment policy
ICN and its affiliates have a policy covering intercompany advances and
interest rates, and the types of investments (marketable equity securities,
high-yield bonds, etc.) to be made by ICN and its affiliates. As a result of
this policy, excess cash is transferred to ICN. The affiliates are credited with
interest income based on prime (6% at December 31, 1993) less 1/2% and are
charged interest at the prime rate plus 1/2% on the amounts invested or
advanced.
SPI had outstanding borrowings from ICN in the amount of $30,433,000 and
$18,313,000 as of December 31, 1992 and 1993. During 1991, 1992 and 1993, ICN
charged (credited) SPI interest of ($2,486,000), $1,195,000 and $800,000,
respectively. During 1992 and 1993, SPI reclassified its Biomedicals
intercompany receivable of $3,631,000 and $2,333,000 and its Viratek
intercompany payable of $6,332,000 and $5,228,000, respectively, to SPI's ICN
intercompany account resulting in a net increase in SPI's liability to ICN of
$2,701,000 and $2,895,000, respectively.
During 1992 and 1993, Viratek reclassified $536,000 and $272,000 of
intercompany payables to Biomedicals to ICN and reclassified $6,332,000 and
$5,228,000 of intercompany receivables from SPI to ICN, which resulted in a
receivable of $9,325,000 and $15,528,000 due from ICN at December 31, 1992 and
1993, respectively. Viratek earned interest income of $271,000, $239,000 and
$714,000 from ICN on the average balance outstanding during 1991, 1992 and 1993.
During the year ended December 31, 1992 and 1993, Biomedicals reclassified
its SPI intercompany payable of $3,631,000 and $2,333,000, and its Viratek
intercompany receivables of $536,000 and $272,000 to ICN, resulting in
intercompany payables of $8,414,000 and $5,932,000 to ICN as of December 31,
1992 and 1993, respectively. ICN charged (credited) ($218,000), $314,000 and
$420,000 to Biomedicals for interest on the average balance outstanding during
1991, 1992 and 1993, respectively.
Other
Certain outside directors have provided legal and other consultation
services to ICN, which amounted to $58,000, $811,000 and $148,000 during 1991,
1992 and 1993, respectively.
During first quarter 1993, Biomedicals transferred its Dublin, Virginia,
facility to ICN in exchange for a reduction in the intercompany amounts due to
ICN of $586,000 representing the net book value at the date of the transfer.
Effective January 1, 1992, Viratek and Biomedicals entered into an
agreement whereby Biomedicals agreed to transfer rights, title and interest in
certain of its research and development assets to Viratek.
F-48
<PAGE> 162
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Biomedicals shall retain a right of first refusal to the marketing and
distribution rights for any product developed from the transferred assets and
pay a royalty to Viratek. Future royalties will be recognized as income when
earned. During 1992 and 1993 there have been no sales of product subject to this
royalty.
In 1991 SPI's 75%-owned subsidiary, Galenika, purchased equipment from
Viratek at its net book amount of $333,000.
In 1991, SPI's Mexican subsidiary purchased inventory from Biomedicals for
approximately $500,000, which was returned for credit in 1992.
During 1991, ICN transferred to SPI an idle manufacturing facility in
Brooksville, Mississippi at its net book amount of $3,114,000.
Since SPI assumed production and sales of Virazole, effective March 1,
1991, Viratek transferred to SPI all inventory at its net book amount of
$2,943,000.
During 1991, Biomedicals charged $250,000 to SPI representing costs
expended by Biomedicals for a product development program launched for SPI which
SPI determined not to pursue.
Effective May 1, 1991, Viratek and ICN transferred the rights to four
compounds, in various stages of development, to SPI for $1,350,000 and $250,000,
respectively, plus a royalty of 6.8% of future sales representing a non-cash
transaction. These amounts have been credited to additional capital. Future
royalties will be recognized as income when earned. During 1992 and 1993, there
have been no sales of product subject to this royalty. Viratek has reclassified
the intercompany receivable from SPI to a receivable due from ICN in the amount
of $1,350,000.
See Note 4 "ICN Biomedicals, Inc." concerning Biomedicals' preferred stock
transaction.
See Note 9 "Commitments and Contingencies -- Other" concerning transactions
with management.
6. ACQUISITIONS
Effective May 1, 1991, SPI formed a new joint company with Galenika
Pharmaceuticals headquartered in Belgrade, Yugoslavia. The joint company,
Galenika, is 75%-owned by SPI and 25%-owned by Galenika Holding ("Galenika
Holding"). Galenika, the leading pharmaceutical company in Yugoslavia, produces,
markets and distributes over 450 pharmaceutical, veterinary, dental and other
products in Yugoslavia, Eastern Europe and Russia.
In connection with the agreement, the Company contributed assets totaling
$58,301,000, consisting of $14,453,000 cash, an obligation to pay $13,550,000
and 1,200,000 unregistered shares of common stock of SPI issued to the employees
("owners" in Socialist Yugoslavia) of Galenika Holding with a fair value of
$9,000,000. On December 31, 1991, the Company, on behalf of SPI, contributed
1,468,000 shares of common stock of SPI to Galenika with a cost basis of
$11,555,000, the minority interest share of the excess of the fair value of the
common stock of the Company contributed by ICN and ICN's cost basis or
$6,743,000, and acquisition costs of $3,000,000. Under the terms of the Galenika
agreement, SPI had an obligation to contribute, in part, $50,000,000 in cash and
1,200,000 shares of SPI stock or $12,000,000 in cash. However, the agreement was
subsequently changed in December 1991 whereby the Company, on behalf of SPI,
contributed shares of SPI stock in lieu of the $40,000,000 (after a cash payment
of $10,000,000) and SPI issued 1,200,000 shares of SPI stock in lieu of cash to
comply with the original intent of the parties.
The Galenika transaction has been accounted for by the purchase method of
accounting, and accordingly, SPI's investment has been allocated, based on SPI's
ownership percentage, to the assets acquired and the liabilities assumed based
on the estimated fair values at the effective date of formation, May 1, 1991.
F-49
<PAGE> 163
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Assuming that the acquisition of Galenika occurred at January 1, 1991, the
Company's 1991 pro forma revenues for the full year ended December 31, 1991,
would have been $548,467,000 with net income of $19,825,000. The pro forma
information presented does not purport to be indicative of the results that
would have been obtained if the operations were combined during the year
presented and is not intended to be a projection of future results or trends.
7. DEBT
Long-term debt and obligations under capital leases consist of the
following:
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
ICN:
12 7/8% Sinking Fund Debentures due July 15,
1998.......................................... $ 70,697,000 $ 70,697,000
6% Dutch Guilder Subordinated Convertible
Bonds due 1990-1994........................ 13,086,000 6,143,000
Swiss Franc Subordinated Bonds due 1988-2001
with effective interest rate of 7.4%....... 17,214,000 15,559,000
12 1/2% Senior Subordinated Debentures due
1999....................................... 17,353,000 17,798,000
6 3/4% Subordinated Convertible Bonds due
2001....................................... 8,273,000 449,000
3 1/4% Subordinated Double Convertible Bonds
due 1997................................... 5,290,000 5,236,000
Zero Coupon ECU Subordinated Bonds due
1987-1996 with effective interest rate of
8.9%....................................... 4,745,000 3,408,000
Mortgages payable, with variable interest
rates from 9 1/2% to 11 1/2% and due
December 1990-2003......................... 13,839,000 13,353,000
Other long-term debt with variable interest
rates...................................... 8,241,000 6,551,000
------------ ------------
Total ICN.................................. 158,738,000 139,194,000
------------ ------------
Subsidiaries of ICN:
Zero Coupon Guaranteed Bonds with an effective
interest rate of 13.5%, maturing in 2002...... 9,112,000 8,441,000
Other long-term debt............................ 4,660,000 3,505,000
------------ ------------
Total subsidiaries of ICN.................. 13,772,000 11,946,000
------------ ------------
Total long-term debt and obligations under
capital leases................................ 172,510,000 151,140,000
Less: Current maturities........................ (12,499,000) (12,093,000)
------------ ------------
Total...................................... $160,011,000 $139,047,000
============ ============
</TABLE>
Other long-term debt includes notes payable, mortgages, margin borrowings
and the present value of capital lease obligations due in various installments
through 2002.
On March 25, 1987, the Company completed an underwritten public offering in
Switzerland of SFr. 60,000,000 principal amount (approximately $38,961,000) of
3 1/4% Subordinated Double Convertible Bonds due 1997 "Double Convertible
Bonds". These bonds are convertible at the option of the holder into one of the
following: (1) entirely into 1,500,000 shares of Common Stock of ICN at a
conversion price of $26.14 per share (at a fixed exchange rate of SFr. 1.53 per
$1.00); or (2) entirely into 15,000 shares of Common Stock of Ciba-Geigy Ltd. at
a conversion price of SFr. 4,000 per share; or (3) a combination of 750,000
shares of Common Stock of ICN and 7,500 shares of Common Stock of Ciba-Geigy
Ltd. at conversion prices of $26.14 and SFr. 4,000 per share, respectively,
subject to adjustment for dilutive issues. In connection with this
F-50
<PAGE> 164
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
offering, the Company placed in escrow 15,000 shares of CibaGeigy Ltd. common
stock, of which 1,928 shares remain at December 31, 1993 which are reflected in
the Consolidated Balance Sheet as investment in other equity securities.
Conversions during 1991 and 1992 were not material and there were no conversions
during 1993. Fair value of these bonds was approximately $6,021,000 at December
31, 1993.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN
and Biomedicals, completed a public offering in Switzerland of Swiss Francs
(SFr.) 70,000,000 principal amount of 5 1/2% Swiss Franc Exchangeable
Certificates ("Old Certificates"). At the option of the certificate holder, the
Old Certificates are exchangeable into shares of Biomedicals common stock. Net
proceeds were used by Bio Capital to purchase SFr. 70,000,000 face amount of
zero coupon Swiss Franc Debt Notes due 2002 of the Kingdom of Denmark (the
"Danish Bonds") for SFr. 33,772,000 and 15 series of zero coupon Swiss Franc
Guaranteed Bonds of the Company (the "Zero Coupon Guaranteed Bonds") for SFr.
32,440,000, which are guaranteed by ICN. Each series of the Zero Coupon
Guaranteed Bonds are in an aggregate principal amount of SFr. 3,850,000 maturing
in February of each year through 2002. ICN and Biomedicals have no obligation
with respect to the payment of the principal amount of the Old Certificates
since they will be paid upon maturity by the Danish bonds.
During 1990, Biomedicals offered to exchange, to all certificate holders,
the Old Certificates for newly issued certificates ("New Certificates"), the
terms of which remain the same except that 334 shares per SFr. 5,000 principal
certificate can be exchanged at $10.02 using a fixed exchange rate of SFr. 1.49
to U.S. $1.00. Substantially all of the outstanding Old Certificates were
exchanged for New Certificates (together referred to as "Certificates"). This
exchange was accounted for as an extinguishment of debt and the effect on net
income was not material.
During 1992, Biomedicals repurchased SFr. 5,640,000 of Bio Capital
Certificates, representing long-term debt of $1,859,000. During 1991, SFr.
1,245,000 ($918,000) principal amount of Certificates were exchanged into 83,166
shares of Biomedicals' common stock. No repurchases were made in 1993.
As of December 31, 1993, the consolidated financial statements include
outstanding debt of SFr. 12,534,000 ($8,441,000) which represents the present
value of the Company's obligation to pay the Zero Coupon Guaranteed Bonds. When
Certificates are exchanged into common stock, Biomedicals' obligation to pay the
Zero Coupon Guaranteed Bonds is reduced and the Danish Bonds are released by Bio
Capital to Biomedicals, both on a pro rata basis. As of December 31, 1993, SFr.
39,615,000 ($26,677,000) principal of Certificates were outstanding which, if
exchanged for common stock, would result in the issuance of 2,608,241 shares of
Biomedicals' common stock, a reduction of long-term debt of SFr. 11,330,000
($7,630,000), a reduction of SFr. 1,204,000 ($811,000) of current maturities of
long-term debt, and an increase in marketable securities of SFr. 20,204,000
($13,605,000) from the release of Bio Capital of the Danish Bonds to
Biomedicals. Fair value of these bonds was approximately $7,850,000 at December
31, 1993.
In October 1986, the Company completed an underwritten public offering of
$75,000,000 principal amount of 6 3/4% Subordinated Convertible Bonds Due 2001
(the "6 3/4% Bonds") convertible into 3,626,692 shares of ICN Common Stock at a
conversion price of $20.68 per share, subject to adjustment for dilutive issues.
During 1993, $7,824,000 principal amount of the bonds were redeemed at the
bondholder's option. Fair value of these bonds was approximately $442,000 at
December 31, 1993.
In October 1986, Pharma Capital Holdings ("Pharma Capital"), a trust
established by the Company, completed an underwritten public offering in Europe
of ECU 40,000,000 principal amount of 7 1/4% Exchangeable Certificates Due 1996
(the "Pharma Certificates") of which ECU 16,195,000 remain outstanding at
December 31, 1993. The Pharma Certificates are exchangeable into 1,936,000
shares of Common Stock of ICN at an initial exchange price of $21.1364 per
share, at a fixed exchange rate of ECU
F-51
<PAGE> 165
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
.9775 per $1.00. The net proceeds of approximately ECU 19,400,000 were used by
Pharma Capital to purchase nine series of Zero Coupon ECU Subordinated Bonds of
ICN (consisting of one series, payable in two installments, the first on May 30,
1987 in the amount of ECU 1,756,111 and the second on May 30, 1988 in the amount
of ECU 2,900,000, and eight series each in the aggregate principal amount of ECU
2,900,000 maturing on May 30 in each of the years 1989 to 1996) (the "ICN-ECU
Bonds") and ECU 40,000,000 aggregate principal amount of ECU 200,000,000 Zero
Coupon Guaranteed Bonds Due May 30, 1996, Series 119, of The Mortgage Bank and
Financial Agency of the Kingdom of Denmark (unconditionally guaranteed by the
Kingdom of Denmark). The Company has no obligation with respect to the payment
of the face amount of the Pharma Certificates since these are to be paid upon
maturity by the Kingdom of Denmark Zero Coupon Guaranteed Bonds (except for
payment of certain additional amounts in the event of the imposition of U.S.
withholding taxes on either the Pharma Certificates or ICN-ECU Bonds and funds
required for redemption of the Pharma Certificates in the event the Company
exercises its optional right to redeem). Fair value of these bonds was
approximately $3,204,000 at December 31, 1993.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust established by
the Company, completed an underwritten public offering in Switzerland of Swiss
Francs 100,000,000 principal amount of 5 5/8% Swiss Franc Exchangeable
Certificates (the "Xr Certificates") of which SFr 66,510,000 remain outstanding
at December 31, 1993. The Xr Certificates are exchangeable through 2001 for
1,250,000 shares of Common Stock of ICN and 860,000 shares of Common Stock of
SPI owned by ICN at initial exchange prices of $24.10 and $35.02 per share,
respectively, at a fixed exchange rate of SFr. 1.66 per $1.00. The net proceeds
of the offering were used by Xr Capital to purchase from the Company 14 series
of Swiss Franc Subordinated Bonds due 1988-2001 (the "ICN-Swiss Franc Xr Bonds")
for approximately $27,944,000 and SFr. 45,700,000 principal amount of cumulative
coupon 5.4 percent Italian Electrical Agency Bonds due 2001 for approximately
$27,202,000. The Company has no obligation with respect to the payment of the
face amount of the Xr Certificates since these are to be paid upon maturity by
the Italian Bonds (except for payment of certain additional amounts in the event
of the imposition of U.S. withholding taxes on either the Xr Certificates or
ICN-Swiss Franc XR Bonds and funds required for redemption of the Xr
Certificates in the event the Company exercises its optional right to redeem).
Fair value of these bonds was approximately $14,314,000 at December 31, 1993.
In September 1986, the Company completed an underwritten public offering in
the Netherlands of Dutch Guilders 75,000,000 principal amount (approximately
$32,751,000 at date of issuance) of 6% Subordinated Convertible Bonds due
1990-1994 (the "Dutch Guilder Bonds"). These bonds are convertible into
1,259,657 shares of ICN Common Stock at a conversion price of $26 per share at a
fixed exchange rate of Dfl. 2.29 per $1.00, subject to adjustment for dilutive
issues. Fair value of these bonds was approximately $6,032,000 at December 31,
1993.
The Company has the optional right to redeem the 6 3/4% Bonds, ICN-ECU
Bonds, ICN-Swiss Franc Xr Bonds, Bio Certificates, Double Convertible Bonds, and
the Dutch Guilder Bonds in the event that the market price of ICN Common Stock
meets certain conditions.
In July 1986, the Company sold $115,000,000 principal amount of 12 7/8%
Sinking Fund Debentures (the "12 7/8% Debentures"), due July 15, 1998, in an
underwritten public offering. The 12 7/8% Debentures are redeemable, in whole or
in part, at the option of the Company, at any time on or after July 15, 1991, at
specified redemption prices, plus accrued interest. Mandatory annual sinking
fund payments, commencing on July 15, 1994, are calculated to retire 80% of the
issue prior to maturity. The indenture imposes limitations on, among other
things, (i) the issuance or assumption by the Company or its subsidiaries of
additional debt which is senior to the 12 7/8% Debentures, (ii) dividends and
distributions on, or repurchases and redemptions
F-52
<PAGE> 166
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
of, Common Stock of the Company and (iii) the Company becoming an investment
company. The fair value of these debentures was approximately $72,641,000 at
December 31, 1993.
In May 1984, the Company completed a public offering of $30,000,000 of
12 1/2 percent Senior Subordinated Debentures (the "12 1/2% Debentures") due
1999. The 12 1/2% Debentures provide for annual sinking fund payments of
$3,215,000 commencing May 15, 1992. The 12 1/2% Debentures are redeemable at any
time after May 15, 1989 at the Company's option and are subordinated to all
senior indebtedness. The net proceeds from the 12 1/2% Debentures were
$21,390,000. The original issue discount and costs associated with the offering
are being amortized over the life of the 12 1/2% Debentures. This results in an
effective interest rate to the Company (exclusive of sinking fund requirements)
of 16.75%. The indenture agreement for the 12 1/2% Debentures is less
restrictive than the indenture relating to the 12 7/8% Debentures. The fair
value of these debentures was approximately $18,619,000 at December 31, 1993.
Annual aggregate maturities of long-term debt, including obligations under
capitalized leases subsequent to December 31, 1993 are as follows:
<TABLE>
<S> <C>
1994................................................... $ 12,093,000
1995................................................... 11,027,000
1996................................................... 36,427,000
1997................................................... 36,109,000
1998................................................... 30,733,000
Thereafter............................................. 24,751,000
------------
Total........................................ $151,140,000
============
</TABLE>
At December 31, 1992 and 1993, the Company had $16,584,000 and $7,600,000,
respectively, of margin borrowings and notes payable. At December 31, 1993,
1,107,898 and 402,000 shares of ICN-owned shares of SPI and Viratek,
respectively, collateralized these borrowings. The Company may use as collateral
or sell additional shares of its common stock or common stock of its
subsidiaries or equity investment in order to meet its short term cash
requirements or other corporate goals.
The fair value of the Company's debt is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying amount of all
short-term and variable interest rate borrowings approximates fair value.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The new
statement supersedes the Company's previous policy of accounting for income
taxes under Statement of Financial Accounting Standards No. 96 "Accounting for
Income Taxes" (SFAS 96). Both statements require the use of the liability method
of accounting for income taxes, but the recognition of deferred tax assets was
limited under SFAS 96. Under SFAS 109, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. The change in the method of
accounting for income taxes from SFAS 96 to SFAS 109 resulted in no cumulative
effect adjustment.
F-53
<PAGE> 167
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Income (loss) before provision for income taxes, minority interests and
extraordinary income for 1991, 1992 and 1993, consists of the following:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Domestic......................... $(19,342,000) $(51,269,000) $(10,964,000)
Foreign.......................... 50,806,000 10,992,000 (1,930,000)
------------ ------------ ------------
$ 31,464,000 $(40,277,000) $(12,894,000)
============ ============ ============
</TABLE>
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................ $ 3,452,000 $ 5,928,000 $ (162,000)
State.......................... 360,000 212,000 --
Foreign........................ 3,072,000 1,801,000 (312,000)
----------- ----------- -----------
$ 6,884,000 $ 7,941,000 $ (474,000)
----------- ----------- -----------
Deferred:
Federal........................ 103,000 841,000 --
State.......................... (39,000) -- --
Foreign........................ (374,000) 1,185,000 --
(310,000) 2,026,000 --
----------- ----------- -----------
$ 6,574,000 $ 9,967,000 $ (474,000)
=========== =========== ===========
</TABLE>
Of the 1992 current federal tax provision of $5,928,000, $956,000 relates
to the tax benefit from the exercise of stock options. Such amount was credited
to additional capital.
The primary components of temporary differences which give rise to the
Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1993 1993
----------- ------------
<S> <C> <C>
Deferred tax assets:
Inventory and other reserves...................... $ 6,386 $ 5,378
Amortization differences.......................... 1,986 246
Compensation not currently deductible............. 1,029 873
Unrealized losses................................. 2,151 2,214
Other deferred items.............................. 1,750 1,750
Domestic NOL...................................... 40,012 50,983
Foreign NOL....................................... 12,635 13,311
Valuation reserve................................. (63,985) (72,733)
-------- --------
Total deferred tax asset....................... 1,964 2,022
-------- --------
Deferred tax liabilities:
Depreciation (tax over book)...................... (1,964) (2,022)
-------- --------
Total deferred tax liability................... (1,964) (2,022)
-------- --------
Net deferred tax liability..................... $ 0 $ 0
======== ========
</TABLE>
F-54
<PAGE> 168
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
A reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
--- --- ---
<S> <C> <C> <C>
Statutory rate....................................... 34% (34)% (35)%
Operating losses -- no tax benefit realized.......... 25 15 30
Write-off and amortization of goodwill............... 10 47 5
Provision to return adjustment....................... -- -- (1)
Reduction in foreign tax liabilities................. -- -- (2)
Utilization of domestic NOL.......................... (28) (2) --
Utilization of foreign NOL........................... (2) (3) --
Foreign source income taxed at different effective
rates, net......................................... (45) 12 --
Transactions involving subsidiaries stock............ 23 (12) --
Alternative minimum tax.............................. 1 1 --
Other, net........................................... 4 1 (1)
--- --- ---
22% 25% (4)%
=== === ===
</TABLE>
The Company files its Federal income tax return on a stand-alone basis. In
years prior to 1993, tax sharing agreements allocated taxes for periods when a
subsidiary was included in the Company's consolidated tax return. The following
table indicates inclusion of subsidiaries in the Company's consolidated tax
return.
<TABLE>
<CAPTION>
1991 1992
-------------- --------------
<S> <C> <C>
SPI........................................ Until 8-13-91 --
Biomedicals................................ -- --
Viratek.................................... Entire year Until 2-1-92
</TABLE>
The Company conducts business in a number of different tax jurisdictions.
Accordingly, losses sustained in one jurisdiction generally cannot be applied to
reduce taxable income in another jurisdiction. The income of certain foreign
subsidiaries is not subject to U.S. income taxes, except when such income is
paid to the U.S. parent company or one of its domestic subsidiaries. No U.S.
taxes have been provided on the Company's foreign subsidiaries since management
intends to reinvest those amounts in foreign operations. Included in
consolidated retained earnings (deficit) at December 31, 1993 is approximately
$1,820,000 of accumulated earnings of foreign operations that would be subject
to U.S. income taxes if and when repatriated.
The Company has domestic net operating loss carryforwards ("NOL") of
approximately $190,000,000 (of which $17,800,000 will be credited to additional
capital when utilized) at December 31, 1993, expiring at various dates from 1994
through the year 2008.
Included in the $190,000,000 NOL is approximately $47,500,000 of NOL
attributable to Viratek. Of the $47,500,000 NOL attributable to Viratek,
$10,900,000 will be credited to capital when utilized. Viratek's NOL can only be
utilized by the Company to offset Viratek taxable income generated on a separate
company basis.
Also included in the $190,000,000 NOL is approximately $39,000,000 of
domestic NOL and $38,000,000 of foreign NOL attributable to Biomedicals of which
$458,000 will be credited to additional capital when utilized. Biomedicals'
NOL's are restricted to utilization by that company. In connection with the
acquisition of Flow, Biomedicals acquired Flow's domestic net operating loss
carryforwards of $9,771,000. Biomedicals has agreed to pay Flow the first
$500,000 of any benefits realized. In the event this amount is not realized by
November 1994, it will become due and payable to Flow including interest at 10%.
Tax benefits realized in excess of $500,000 will be shared equally with Flow.
F-55
<PAGE> 169
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Company is currently under examination by the U.S. Internal Revenue
Service ("IRS") for the tax years ended November 30, 1988 and 1989. While the
proposed adjustments, if upheld, would not result in a significant additional
tax liability, they would result in significant reductions in the NOL
carryforwards available to the Company in the future.
9. COMMITMENTS AND CONTINGENCIES
Operating and capital leases
At December 31, 1993, the Company and its consolidated subsidiaries were
committed under noncancellable operating and capital leases for minimum
aggregate lease payments as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ---------
<S> <C> <C>
1994................................................ $ 849,000 $ 155,000
1995................................................ 799,000 88,000
1996................................................ 625,000 88,000
1997................................................ 507,000 89,000
1998................................................ 534,000 --
Thereafter.......................................... 4,782,000 --
---------- ---------
$8,096,000 420,000
----------
Less amounts representing interest.................. (62,000)
---------
Present value of net minimum lease payments......... 358,000
Less current maturities............................. (129,000)
---------
$ 229,000
=========
</TABLE>
Rental expense on operating leases was $2,107,000 (including SPI) in 1991,
$2,934,000 (including SPI) in 1992 and $870,000 in 1993.
Post approval studies
By letter dated December 31, 1985, the FDA advised Viratek that the FDA had
approved Viratek's NDA for the hospital use of aerosolized ribavirin for the
treatment of RSV in infants. As a condition of the approval, Viratek agreed to
conduct certain additional studies. The future costs of such studies are not
expected to be significant.
Litigation
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York entitled
In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (VLB); In re
ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)). The plaintiffs
represent alleged classes of persons who purchased ICN, Viratek or SPI common
stock during the period January 7, 1986 to and including April 15, 1987. In
their memorandum of law, dated February 4, 1994, the ICN Defendants argue that
class certification may only be granted for purchasers of ICN common stock for
the period August 12, 1986 through February 20, 1987 and for purchasers of
Viratek common stock for the period December 9, 1986 through February 20, 1987.
The ICN Defendants assert that no class should be certified for purchasers of
the common stock of SPI for any period. The plaintiffs allege that during such
period the defendants made, or aided and abetted other defendants in making,
misrepresentations of material fact and omitted to state material facts
concerning the business, financial condition and future prospects of ICN,
Viratek and SPI in certain public announcements, Paine Webber, Inc. research
reports and filings with
F-56
<PAGE> 170
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
the Commission. The alleged misstatements and omissions primarily concern
developments regarding Virazole(R), including the efficacy and safety of the
drug and the market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Exchange Act of
1934 and Rule 10b-5 promulgated thereunder and constitute common law fraud and
misrepresentation. The plaintiffs seek an unspecified amount of monetary
damages, together with interest thereon, and their costs and expenses incurred
in the action, including reasonable attorneys' and experts' fees. The ICN
defendants moved to dismiss the consolidated complaint in March 1988, for
failure to state a claim upon which relief may be granted and for failure to
plead the allegations of fraud and misrepresentation with sufficient
particularity. On September 18, 1992, the Court denied the ICN defendants'
motion to dismiss and for summary judgment. The ICN defendants filed their
answer on February 17, 1993. On October 20, 1993, plaintiffs informed the Court
that they had reached an agreement to settle with codefendant Paine Webber, Inc.
and that they would submit a proposed settlement stipulation to the Court.
Expert discovery, which commenced in September 1993, is expected to conclude by
the end of April 1994. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN Defendants' damages experts find to be inappropriate
under the circumstances, has testified that, assuming that classes were
certified for purchasers of ICN, Viratek and SPI common stock for the entire
class periods alleged by plaintiffs, January 7, 1986 through April 15, 1987, and
further assuming that all of the plaintiffs' allegations were proven, potential
damages against ICN, Viratek and SPI would, in the aggregate, amount to
$315,000,000. The ICN Defendants' four damages experts have testified that
damages are zero. Management believes, having extensively reviewed the issues in
the above referenced matters, that there are strong defenses and that the
Company intends to defend the litigation vigorously. While the ultimate outcome
of these lawsuits cannot be predicted with certainty, and an unfavorable outcome
could have an adverse effect on the Company, at this time management does not
expect that these matters will have a material adverse effect on the financial
position, result of operations or liquidity of the Company. The attorney's fees
and other costs of the litigation are allocated equally between ICN and Viratek.
In August 1992, an action was filed in United States District Court for the
Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc. (Case
No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product liability,
negligence and strict liability in tort, allege that birth defects in an infant
were caused by the mother's exposure to ribavirin during pregnancy. The
plaintiff's counsel has agreed to place the case on the courts "suspense
calendar" pending completion of ICN's investigation of the underlying facts.
Based on such investigation, the case was dismissed with prejudice pursuant to
stipulation by the parties in December 1993. Pursuant to a license agreement,
SPI has indemnified Viratek and ICN for lawsuits involving the use of
Virazole(R).
On September 27, 1993, ICN and Biomedicals filed a complaint in the
California State Superior Court for Orange County, California, against GRC
International Inc., alleging fraud, negligent misrepresentation in the sale of
securities in California and violations of state and federal securities laws.
The precise amount of damages is unknown at this time. The lawsuit arises out of
the acquisition of all of the issued and outstanding shares of Flow
Laboratories, Inc. ("Flow") and Flow Laboratories B.V. by Biomedicals in
November 1989 from GRC International Inc., (formerly known as Flow General
Inc.). Defendant GRC's motion to compel arbitration was granted as to the
Biomedicals claims. The action is stayed until April 7, 1994, as to ICN's causes
of action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan") in
the United States District Court for the Southern District of New York. The
complaint alleges, inter alia, that Khan violated numerous provisions of the
securities laws and breached his fiduciary duty to ICN and Viratek by attempting
to effectuate a change in control of ICN while acting as an agent and fiduciary
of ICN and Viratek. As relief, ICN and Viratek, among other things, sought an
injunction enjoining Khan from effectuating a change in
F-57
<PAGE> 171
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
control of ICN and compensatory and punitive damages in the amount of
$25,000,000. Khan filed a counterclaim on April 12, 1993, naming the then ICN
directors and ICN, as a nominal defendant sued only in a derivative capacity.
The counterclaim contains causes of action for slander, interference with
economic relations, and a shareholders' derivative action for breach of
fiduciary duties. Khan seeks compensatory damages for interest in an unspecified
amount, and exemplary damages of $29,000,000. On December 22, 1993, Khan filed a
notice of appeal from a prior injunction granted by the court, to the Court of
Appeals for the Second Circuit. On March 13, 1994, that appeal was dismissed on
the grounds that Khan had defaulted for failure to comply with the Court's
scheduling order. Management believes that Khan's counterclaim is without merit
and the Company intends to vigorously defend this matter.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the opinion
of management, these various other pending lawsuits will not have a material
adverse effect on the consolidated financial position or operations of the
Company.
Purchase Commitment
Biomedicals has a purchase commitment with a major supplier for which the
remaining purchase of inventory under agreement which will be due June 1994 in
the amount of approximately $1,727,000 (Finnish Markka 10,000,000).
Biomedicals is also a guarantor on a note payable to the same supplier for
which ICN is primarily liable. On June 30, 1993, ICN filed a claim in
arbitration alleging breach of agreement entered into with such supplier and
withheld final payment due on that date of approximately $1,295,000 (Finnish
Markka 7,500,000). In addition, ICN is seeking declaration and award that
Biomedicals is not obligated to honor the aforementioned purchase commitment or
installments on the note. Arbitration is set for October 4, 1994.
Acquisition Commitments
Under the terms of the Flow purchase agreement, Biomedicals issued 100,000
shares of common stock to the seller, which shares have a guaranteed value of
$20 per share on November 8, 1994. If the fair value, as defined, of
Biomedicals' common stock is less than $20 per share on that date, Biomedicals
must pay the difference in cash. Biomedicals may redeem such shares for the $20
guaranteed value prior to November 8, 1994. At December 31, 1993, Biomedicals
would have paid $1,575,000 to honor the guarantee.
Product Liability Insurance
During 1985, after reviewing costs, availability and related factors,
management decided not to continue to maintain product liability insurance.
While to date no material adverse claim for personal injury resulting from
allegedly defective products, including ribavirin, has been successfully
maintained against the Company, a substantial claim, if successful, could have a
material adverse effect on the Company.
Other
Milan Panic, the Company's Chairman of the Board, President and Chief
Executive Officer, is employed under a contract expiring November 30, 1994 that
provides for, among other things, certain retirement benefits. 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 currently estimated to be in excess of $520,000 per year. 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.
F-58
<PAGE> 172
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Board of Directors of the Company adopted Employment Agreements during
1993 which contain "change in control" benefits for six key senior executive
officers of the Company and its subsidiaries. Upon a "change in control" of the
Company or the respective subsidiary as defined in the Contract, the employee
shall receive severance benefits equal to three times salary and other benefits.
The executives include Mr. Jerney, Mr. Giordani, Mr. MacDonald and Mr. Watt,
officers of the Company, Mr. Phillips and Mr. Sholl, officers of SPI.
On April 1, 1992, the Board of Directors of the Company voted to grant to
Mr. Panic, a bonus of 200,000 shares of the common stock of SPI in consideration
of his extraordinary efforts in negotiating and closing the Galenika
transaction, which was paid in 1992.
In July 1992, Milan Panic, Chairman of the Board, President and Chief
Executive Officer of the Company, with the approval of the Company's Board of
Directors, became Prime Minister of Yugoslavia and was granted a paid leave of
absence from all duties to the Company while retaining his title as Chairman of
the Board. Mr. Panic and the Company entered into a Leave of Absence and
Reemployment Agreement which contained mutual obligations, requiring, among
other things, that the Company reemploy Mr. Panic and that Mr. Panic return to
his previous positions with the Company. Mr. Panic was succeeded as Prime
Minister on March 4, 1993, and pursuant to the Leave of Absence and Reemployment
Agreement, returned to his duties at the Company. In addition to the salaries of
Mr. Panic and certain Company employees assisting him during his leave of
absence, the Company has incurred certain other expenses of which the net amount
outstanding totalled $103,000 at December 31, 1992 in connection with Mr.
Panic's transition to and return from his leave of absence. Mr. Panic reimbursed
the Company for expenses paid by the Company in 1992, subject to a review by an
independent outside party and the Audit Committee of the Board. Amounts incurred
by the Company during the first quarter of 1993 for approximately $362,000
remain unpaid at December 31, 1993. In addition, Mr. Panic reimbursed certain
withholding taxes due as of December 31, 1992, previously advanced by the
Company, in connection with the exercise of stock options, in the amount of
$1,351,000. Mr. Panic paid these amounts, during 1993, in the form of cash in
the amount of $678,000 and common stock of Viratek, Inc. in the amount of
$776,000 valued at fair market value.
Benefit plans
The Company adopted a 401(k) plan in 1988 that provides all U.S. employees
with the opportunity to defer a portion of their compensation for payout at a
subsequent date. The Company makes a contribution equal to one half of the
employee's contribution up to a maximum of approximately $4,000 per year. The
employer and employee contributions are given to a trustee on a monthly basis
and invested by the trustee in fixed or variable interest-bearing investments or
a common stock fund. The Company has made such matching contributions for 1991,
1992 and 1993 of $398,000, $397,000 and $447,000, respectively.
Biomedical's United Kingdom subsidiary has a defined benefit retirement
plan which covers all eligible U.K. employees. The plan is actuarily reviewed
approximately every three years. Annual contributions are based on total
pensionable salaries. It is estimated that the plan's assets exceeded the
actuarial computed value of vested benefits as of December 31, 1992 and 1993.
The total expense under this plan for 1991, 1992 and 1993 was approximately
$440,000, $32,000, and $248,000, respectively.
The Company also has deferred compensation agreements with certain officers
and certain key employees, with benefits commencing at death or retirement. As
of December 31, 1993, the present value of the deferred compensation benefits to
be paid has been accrued in the amount of $2,481,000. Interest at 11.75% as of
December 31, 1993, accrues until all payments are made. No new contributions are
being made, however, interest continues to accrue on the present value of the
benefits expected to be paid. The expense for 1991, 1992 and 1993 was $453,000,
$309,000 and $217,000, respectively.
F-59
<PAGE> 173
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
10. COMMON STOCK
Under the Company's 1981 Employee Stock Option Plan, 700,000 shares of
common stock have been reserved for granting to key employees, officers and
directors of the Company. The exercise price of these options may not be less
than the fair market value of the stock at date of grant and may not have a term
exceeding ten years. At December 31, 1993, options under the 1981 Employee
Incentive Stock Option Plan for 35,878 shares were outstanding and exercisable
(at prices ranging from $3.00 to $9.25). The number of shares exercised were:
1991 -- 5,000; 1992 -- 2,250; 1993 -- 30,256, at average prices of $6.375, $3.00
and $4.655, respectively.
At December 31, 1993, options under the 1981 non-qualified stock option
agreements with key employees and officers of the Company for 215,863 shares
were outstanding (at prices ranging from $3.00 to $5.75) with 126,863 shares
exercisable. The number of shares exercised were: 1991 -- 348,007; 1992 --
181,855; 1993 -- 153,808, at average prices of $3.00, $3.55 and $4.736,
respectively.
During 1992, the stockholders of the Company approved the 1992
Non-Qualified Stock Option Plan ("1992 Option Plan") and the 1992 Employee
Incentive Stock Option Plan ("1992 Incentive Plan"), reserving 500,000 shares
per plan of the Company's common stock for issuance to employees and directors
of the Company. The Company has granted options for shares of its common stock
under both plans. Options under both plans are exercisable over a period to be
determined by the Compensation Committee, which shall not exceed ten years from
the date of grant and will expire at the end of the option period. At December
31, 1993, under the 1992 Option Plan, options of 85,000 were outstanding (at
prices ranging from $6.375 to $22.875), 11,000 shares were exercisable and none
have been exercised. At December 31, 1993, under the 1992 Incentive Plan,
options of 255,000 were outstanding (at prices ranging from $6.375 to $9.50),
26,250 shares were exercisable and none have been exercised.
In addition, the Company entered into non-qualified stock option agreements
with Mr. Panic pursuant to which he could purchase 932,000 shares of common
stock of the Company at $3.00 per share of which 832,000 shares were exercised
in 1993. There were no shares exercised in 1992 and 100,000 shares were
exercised in 1991. As of December 31, 1993, no shares were outstanding.
During 1992 and 1993, the Company sold, under various agreements, 4,198,000
and 3,000,000 shares of its common stock to a foreign bank for $30,608,000 and
$21,861,000, respectively, which is net of transaction fees and commissions.
11. DETAIL OF CERTAIN ACCOUNTS
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Inventories, net:
Raw materials and supplies.................... $ 3,898,000 $ 3,422,000
Work-in-process............................... 2,439,000 610,000
Finished goods................................ 22,692,000 23,048,000
------------ ------------
$ 29,029,000 $ 27,080,000
Allowance for inventory obsolescence.......... (15,530,000) (11,479,000)
------------ ------------
$ 13,499,000 $ 15,601,000
============ ============
</TABLE>
F-60
<PAGE> 174
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Property, plant and equipment, net:
Land.......................................... $ 11,852,000 $ 13,697,000
Buildings..................................... 16,223,000 18,096,000
Machinery and equipment....................... 21,214,000 21,919,000
Furniture and fixtures........................ 3,972,000 3,464,000
Leasehold improvements........................ 2,440,000 2,709,000
Construction in progress...................... 78,000 78,000
------------ ------------
55,779,000 59,963,000
Accumulated depreciation...................... (21,666,000) (23,720,000)
------------ ------------
$ 34,113,000 $ 36,243,000
============ ============
Other assets and deferred charges:
Deferred loan costs........................... $ 6,021,000 $ 4,546,000
Patents, trademarks and clinical trials,
net of amortization........................ 3,178,000 2,102,000
Other......................................... 408,000 946,000
------------ ------------
$ 9,607,000 $ 7,594,000
============ ============
Accrued liabilities:
Payroll and related items..................... $ 1,939,000 $ 2,305,000
Accrued interest.............................. 7,129,000 6,909,000
Lease vacancy costs........................... -- 1,200,000
Income taxes payable.......................... 333,000 1,227,000
Professional services......................... 8,583,000 4,027,000
Outside sales commissions..................... 831,000 478,000
Deferred income............................... 2,294,000 2,397,000
Severance, restructuring and other liabilities
related to acquisitions.................... 4,509,000 478,000
Other......................................... 6,898,000 2,376,000
------------ ------------
$ 32,516,000 $ 21,397,000
============ ============
Other liabilities and deferred income taxes:
Deferred compensation plan.................... $ 1,919,000 $ 2,191,000
Deferred income -- Hoffmann................... 4,147,000 3,791,000
Deferred income taxes......................... 528,000 109,000
Other......................................... 2,754,000 923,000
------------ ------------
$ 9,348,000 $ 7,014,000
============ ============
</TABLE>
Prepaid expenses and other current assets include assets held for sale of
$10,225,000 at December 31, 1992 and $1,218,000 at December 31, 1993, which are
recorded at the lower of cost or net realizable value. During the fourth quarter
of 1993, Biomedicals moved its Italian operation from Cassina de Pecchi, Italy,
a leased facility, back to Opera, an owned facility. Therefore, the Opera
facility was reclassified from assets held for disposition to Property, Plant
and Equipment.
F-61
<PAGE> 175
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Other (income) expense, net:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Realized (gains) losses from sale of
marketable securities, net........ $ 354,000 $ (228,000) $ (139,000)
Amortization of goodwill............ 3,944,000 4,216,000 2,102,000
Litigation settlements.............. 7,143,000 1,247,000 --
Write-down of assets and
intangibles....................... -- 2,000,000 --
Write-off prepaid royalties......... 1,503,000 -- --
Write-downs and other costs for
domestic nutrition group.......... 10,878,000 -- --
Facility relocation expense in
Spain............................. 2,198,000 -- --
Gain on lease termination........... -- -- (938,000)
Favorable settlement of a foreign
non-income tax dispute and accrued
liability......................... -- -- (1,680,000)
License fees........................ -- 2,187,000 --
Lease vacancy costs................. -- -- 1,436,000
Other, net.......................... 3,459,000 5,765,000 298,000
----------- ----------- -----------
$29,479,000 $15,187,000 $ 1,079,000
=========== =========== ===========
</TABLE>
12. BUSINESS SEGMENTS AND GEOGRAPHICAL DATA
The Company operates in two industry segments: pharmaceuticals (the
"Pharmaceuticals group") and biomedicals (the "Biomedicals group"). The
Pharmaceuticals group is composed of SPI (accounted for as an unconsolidated
equity investee effective December 31, 1992), which produces and markets
pharmaceutical products in the United States, Mexico, Canada and Europe; and
Viratek, which conducts the Company's research and development efforts on
compounds derived from nucleic acids. The Biomedicals group is composed of
Biomedicals, which markets research chemical and cell biology products and
related services, biomedical instrumentation and immunodiagnostic reagents and
instrumentation.
F-62
<PAGE> 176
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Information regarding the Company's business segments and geographic data
for the years ended 1991, 1992 and 1993 is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:(1)
Pharmaceuticals group............................ $364,358,000 $476,118,000 $ 3,480,000
Biomedicals group................................ 96,007,000 75,648,000 59,076,000
------------ ------------ ------------
Net sales........................................ $460,365,000 $551,766,000 $ 62,556,000
============ ============ ============
Income (loss) before interest, provision for income
taxes, minority interest and extraordinary
income:
Pharmaceuticals group(5)......................... $ 60,269,000 $ 55,610,000 $ 8,591,000
Biomedicals group................................ (6,471,000) (97,234,000) 2,847,000
------------ ------------ ------------
53,798,000 (41,624,000) 11,438,000
Corporate(2)..................................... 11,985,000 26,909,000 (5,370,000)
------------ ------------ ------------
Income (loss) before interest, provision for income
taxes, minority interest and extraordinary
income........................................... 65,783,000 (14,715,000) 6,068,000
Net interest expense............................... 34,321,000 25,562,000 18,962,000
------------ ------------ ------------
Income (loss) before provision for income taxes,
minority interest and extraordinary income....... $ 31,462,000 $(40,277,000) $(12,894,000)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES
-------------------------------------- --------------------------------------
1991 1992 1993 1991 1992 1993
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pharmaceuticals group... $ 9,536,000 $ 9,390,000 $1,770,000 $19,051,000 $11,610,000 $ 207,000
Biomedicals group....... 6,095,000 6,174,000 3,607,000 1,978,000 911,000 2,235,000
Corporate............... 535,000 2,046,000 1,985,000 17,000 33,000 106,000
----------- ----------- ---------- ----------- ----------- ----------
$16,166,000 $17,610,000 $7,362,000 $21,046,000 $12,554,000 $2,548,000
=========== =========== ========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
----------------------------------------------
1991 1992(4) 1993
------------ ------------ ------------
<S> <C> <C> <C>
Pharmaceuticals group.............................. $367,561,000 $111,768,000 $116,406,000
Biomedicals group.................................. 170,540,000 67,548,000 55,806,000
Corporate(3)....................................... 36,985,000 44,252,000 35,644,000
------------ ------------ ------------
$575,086,000 $223,568,000 $207,856,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INTEREST, PROVISION
FOR
TAXES AND MINORITY INTEREST, AND
NET SALES(1) EXTRAORDINARY INCOME
----------------------------------------- ----------------------------------------
1991 1992 1993 1991 1992 1993
------------ ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $ 95,917,000 $ 92,769,000 $39,696,000 $(7,540,000) $(54,864,000) $13,022,000
Western Europe..... 74,225,000 62,311,000 16,311,000 830,000 (29,315,000) (2,465,000)
Yugoslavia......... 224,782,000 325,903,000 -- 57,190,000 37,692,000 --
Latin America...... 41,691,000 48,654,000 -- 1,249,000 3,772,000 --
Canada............. 18,148,000 16,779,000 2,381,000 1,813,000 1,234,000 157,000
Asia/Pacific....... 5,602,000 5,350,000 4,168,000 256,000 (143,000) 724,000
------------ ------------ ----------- ----------- ------------ -----------
$460,365,000 $551,766,000 $62,556,000 53,798,000 (41,624,000) 11,438,000
============ ============ =========== ----------- ------------ -----------
Corporate(2)....... 11,985,000 26,909,000 (5,370,000)
----------- ------------ -----------
$65,783,000 $(14,715,000) $ 6,068,000
=========== ============ ===========
</TABLE>
F-63
<PAGE> 177
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
-----------------------------
1991 1992(4) 1993
------------ ------------ ------------
<S> <C> <C> <C>
United States...................................... $169,747,000 $147,930,000 $152,301,000
Western Europe..................................... 115,329,000 29,298,000 17,928,000
Yugoslavia......................................... 218,284,000 -- --
Latin America...................................... 22,961,000 -- --
Canada............................................. 9,704,000 521,000 561,000
Asia/Pacific....................................... 2,076,000 1,567,000 1,422,000
------------ ------------ ------------
538,101,000 179,316,000 172,212,000
Corporate(3)....................................... 36,985,000 44,252,000 35,644,000
------------ ------------ ------------
$575,086,000 $223,568,000 $207,856,000
============ ============ ============
</TABLE>
- ---------------
(1) Sales between industry segments and geographic areas are not material.
(2) Corporate and other includes corporate general and administrative expenses,
net interest expense, other non-operating income and expense, and unrealized
gains and losses.
(3) Corporate assets exclude intercompany receivables, loans, advances and
investments.
(4) Excludes the amounts of SPI Pharmaceuticals, Inc. which was deconsolidated
at December 31, 1992, but includes ICN's investment in SPI in the
"Pharmaceuticals Group" and in the "United States".
(5) Included in Income (loss) before provision for taxes and minority interest
and extraordinary income for the United States and Pharmaceuticals group for
1993 is $11,646,000 representing the equity in earnings of SPI.
The following table sets forth the amount of net sales, income before
provision for income taxes and minority interest and identifiable assets of SPI
by geographical areas for 1993 (in thousands):
<TABLE>
<CAPTION>
1993
----------------
INCOME (LOSS)
BEFORE INTEREST,
PROVISION FOR
INCOME TAXES
AND MINORITY IDENTIFIABLE
SALES INTEREST ASSETS
-------- ---------------- -------------
<S> <C> <C> <C>
United States............................. $ 62,008 $25,756 $ 38,764
Yugoslavia................................ 239,832 11,828 180,055
Mexico.................................... 57,782 7,371 33,874
Western Europe............................ 30,601 4,079 33,284
Canada.................................... 13,734 851 6,155
Corporate................................. -- (7,101) 9,885
-------- ------- --------
Income before interest, provision for
income tax and minority interest........ -- 42,784 --
Net interest expense...................... -- 15,717 --
-------
Income before provision for income taxes
and minority interest................... -- $27,067 --
=======
Total........................... $403,957 $302,017
======== ========
</TABLE>
During the year ended December 31, 1993, approximately 68% of Galenika's
sales were to the Federal Republic of Yugoslavia or government sponsored
entities. At December 31, 1993, there were no significant receivables from the
Yugoslavian government, however future sales of Galenika could be dependent on
the
F-64
<PAGE> 178
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
ability of the Yugoslavian government to generate cash to purchase
pharmaceuticals and the continuation of its current policy to buy products from
Galenika. No other customer accounts for more than 10% of SPI's net sales.
Export sales shipped from the United States for 1991, 1992 and 1993 were
$8,034,000 (including SPI), $8,857,000 (including SPI) and $3,892,000,
respectively.
13. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Supplemental information
The following table sets forth the amounts of interest and income taxes
paid for the years ended 1991, 1992 and 1993.
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest paid....................... $30,057,000 $26,545,000 $17,918,000
=========== =========== ===========
Income taxes paid................... $ 2,793,000 $ 2,435,000 $ 488,000
=========== =========== ===========
</TABLE>
On August 30, 1993, Biomedicals issued 300,000 and 390,000 shares of
preferred stock series "A" and "B", respectively, to ICN. In exchange, ICN
retired $11,000,000 of debt owed to ICN by Biomedicals and exchanged 13,368,449
shares of Biomedicals' common stock that ICN owned. See Note 4 "ICN Biomedicals,
Inc." concerning Biomedicals' preferred stock transaction.
During 1991, SPI acquired Galenika as follows:
Estimated fair value of net assets acquired:
<TABLE>
<S> <C>
Assets................................................ $ 162,581,000
Liabilities and minority interest..................... (104,280,000)
-------------
58,301,000
Less consideration given:
SPI Stock contributed by ICN........................ 11,555,000
Obligation to Galenika.............................. 13,550,000
Fees and expenses................................... 3,000,000
Issuance of SPI common stock to employees........... 9,000,000
Other consideration................................. 6,743,000
-------------
Net cash paid to Galenika........................ $ 14,453,000
=============
</TABLE>
14. RESTRUCTURING COSTS AND SPECIAL CHARGES
In November 1989, Biomedicals acquired for $37,700,000 all of the issued
and outstanding common shares of Flow Laboratories, Inc. and Flow Laboratories
B.V. from GRC International, Inc. (formerly Flow General Inc.). These companies
together with their respective subsidiaries ("Flow"), constitutes the Biomedical
division of Flow General. The excess of the total purchase price (including
acquisition costs) over the fair value of net assets acquired was $35,245,000,
which was allocated to the excess of costs over net assets of purchased
subsidiaries and was being amortized over 40 years. Flow was a manufacturer and
distributor of several thousand biochemical products worldwide. At the time of
the acquisition, Biomedicals had concluded that Flow was a significant
complement to the company, since Flow had a major presence in the European
markets, which Biomedicals lacked at the time. Therefore, more than products,
Biomedicals acquired an international distribution network. Since 1990,
Biomedicals utilized this distribution network to introduce
F-65
<PAGE> 179
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
ICN products. At the same time, it decided to phase out or to eliminate Flow low
margin products, certain other product lines which did not fit Biomedicals'
long-term strategies and to close down inefficient operations.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused on the European
operations as Biomedicals had only a limited presence in Europe prior to the
Flow acquisition. Accordingly, Biomedicals used the expected future operating
income of the European operations in evaluating the recoverability of the Flow
goodwill. During 1991, Biomedicals initiated a restructuring program designed to
reduce costs, and improve operating efficiencies. The program included, among
other items, the consolidation, relocation and closure of certain manufacturing
and distribution facilities within the U.S. and Europe, which were acquired in
the Flow acquisition. Those measures, including a fifteen percent reduction in
the work force, were largely enacted during 1991 and continued in 1992. Costs
incurred relating to this restructuring plan during 1991 were $6,087,000.
During the fourth quarter of 1992, as a result of a continued decline in
sales and other factors, Biomedicals reassessed their business plan and
prospects for 1993 and beyond which included, among other things, the decision
to sell the last remaining major European manufacturing facility and to
restructure the previously acquired distribution network and European operations
in line with the revised sales estimates. Consequently, based upon the
continuing decline in European revenue and profitability relating to Flow, Flow
facility closures and an ineffective distribution network, management concluded
that there was no current or expected future benefit associated from the Flow
acquisition. Accordingly, Biomedicals wrote off goodwill and other intangibles,
primarily from the Flow acquisition of $37,714,000.
The relocation of various U.S. and European operations was re-evaluated. It
was determined that many of the operations did not support the costs of
maintaining separate facilities. Therefore, estimated costs associated with
lease termination, employee termination, facility shut-down (of facilities held
for disposition) were expensed primarily in the fourth quarter of 1992, and
amounted to $4,858,000.
During the fourth quarter of 1992, Biomedicals reassessed the valuation of
inventory, given the decline in sales and lack of effective integration of
Biomedicals' and Flow's product lines. Accordingly, Biomedicals recorded a
provision for abnormal write-downs of inventory to estimated realizable value of
$9,924,000 and discontinued products of $3,377,000.
In addition, during the fourth quarter of 1992, Biomedicals determined that
the unamortized costs of the catalog marketing program would not be recovered
within a reasonable period, therefore, costs totaling $6,659,000 were written
off. In the future, specifically focused customer or "product line" catalogs
will be used for customer product lines and a more focused general catalog for
others.
F-66
<PAGE> 180
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Restructuring and special charges of $6,087,000 and $63,032,000 are shown
as a separate item in the Consolidated Statement of Operations and include the
following for the years 1991 and 1992, no similar charges were incurred during
1993:
<TABLE>
<CAPTION>
1991 1992
---------- -----------
<S> <C> <C>
Goodwill and other intangibles..................... $ -- $37,714,000
Catalog............................................ -- 6,659,000
Inventory allowances............................... -- 9,924,000
Discontinued products.............................. 1,550,000 3,377,000
Employee termination costs......................... 1,866,000 1,961,000
Lease termination costs............................ 737,000 1,434,000
Facility relocation costs.......................... 724,000 357,000
Reduction to net realizable value of vacant
facilities held for disposition.................. 800,000 1,106,000
Miscellaneous restructuring costs.................. 410,000 500,000
---------- -----------
Total......................................... $6,087,000 $63,032,000
========== ===========
</TABLE>
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of cash deposits
and trade receivables. The Company places its cash deposits with respected
financial institutions and limits the amount of credit exposure to any one
financial institution. Biomedicals has $7,013,000 and $3,506,000 of trade
receivables in Italy at December 31, 1992 and 1993, respectively. The ability to
collect these receivables is influenced by the general economic conditions in
that country.
16. LEASE VACANCY COSTS
During 1993, Biomedicals vacated its High Wycombe facility in England and
moved to a facility more suitable to Biomedicals' operating needs in Thame,
England. Biomedicals pursued various subleasing agreements for which none were
consummated as of December 31, 1993. Consequently, Biomedicals accrued
approximately $1,200,000 which represents management's best estimate of the net
present value of future leasing costs to be incurred for High Wycombe. During
1993, Biomedicals expensed an additional $236,000 of leasing costs related to
this facility.
17. EQUITY INVESTMENT
Effective December 31, 1992, the Company's ownership percentage of SPI fell
below 50%, resulting in the deconsolidation of SPI in the Company's consolidated
financial statements as of December 31, 1992. The investment is currently
accounted for using the equity method of accounting. During 1993, ICN received
F-67
<PAGE> 181
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
$2,159,000 in dividends from SPI. The condensed results of operations for the
year ended December 31, 1993 and the condensed financial position of SPI as of
December 31, 1992 and 1993 are summarized below.
<TABLE>
<CAPTION>
SPI FINANCIAL
POSITION
AS OF DECEMBER 31,
1992 AND 1993
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets......................................... $235,963 $208,762
Non-current assets..................................... 97,255 93,255
Current liabilities.................................... 115,021 81,503
Non-current liabilities................................ 41,530 23,206
Minority interest...................................... 41,240 41,429
Stockholders' equity................................... 135,427 155,879
</TABLE>
<TABLE>
<CAPTION>
SPI RESULTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1993
-------------------------
1993
-------------------------
(IN THOUSANDS)
<S> <C>
Net sales....................................... $ 403,957
Gross profit.................................... 192,034
Net income...................................... 21,510
</TABLE>
On October 21, 1992, SPI announced that it had concluded an agreement with
the Leningrad Industrial Chemical and Pharmaceutical Association to form a
pharmaceutical joint venture in Russia, ICN Oktyabr, in which SPI will have a
75% interest. The new joint venture was registered with the Russian Federation
on March 9, 1993. The joint venture represents a new business, and not the
acquisition of the existing business or assets of Oktyabr. Business operations
of the joint venture will commence on the completion of a business plan.
Oktyabr, which recently privatized, will contribute output from its current
production facilities until construction of a new facility is completed. SPI
will contribute management expertise, technology, equipment, intellectual
property, training and technical assistance to the new joint venture. Because of
the transition of the Russian economy into a free market oriented economy, SPI
plans for a gradual phase-in of the joint venture in 1994 and 1995. During this
phase-in period, the joint venture will develop training and marketing
strategies and begin constructing a new manufacturing facility in 1995 that is
scheduled to be fully operational in 1996. Because of this phase-in period, SPI
does not expect any current material effects on it operating results, as well
as, its capital resources and liquidity.
In addition to the joint venture, on March 24, 1994, SPI entered into an
Agreement with the City of St. Petersburg to acquire 15% of the outstanding
shares of its joint venture partner, Oktyabr, in exchange for approximately
30,000 shares of SPI's common stock. As part of this Agreement, SPI may qualify
to receive newly issued shares of Oktyabr pursuant to Russian privatization
regulations that will raise its total investment in Oktyabr to 43%. The issuance
of these additional shares is subject to approval and completion of an
"investment plan." The completion of the investment plan will not require any
additional financial resources of SPI. SPI has also extended an offer to the
employees of Oktyabr to exchange their Oktyabr shares for SPI shares. The
Oktyabr employees currently own approximately 33% of the outstanding shares,
however, the number of employees that will exchange their shares is uncertain.
In the event that SPI qualifies under the investment plan to raise its
investment to 43%, it is possible that a sufficient number of employees might
exchange their Oktyabr shares for SPI shares so that total SPI investment in
Oktyabr would exceed 50%. If this event occurs, SPI would be required to
consolidate the financial results of Oktyabr into the financial statements of
SPI.
F-68
<PAGE> 182
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The condensed financial position of Galenika, a consolidated 75% owned
Yugoslavian subsidiary of SPI, as of December 31, 1992 and 1993, and the
condensed statements of income before provision for income taxes and minority
interest for the years ended December 31, 1992 and 1993 are presented below.
GALENIKA FINANCIAL POSITION
AS OF DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Current assets......................................... $190,874 $157,291
Non-current assets..................................... 39,202 38,264
Current liabilities.................................... 41,258 18,400
Non-current liabilities................................ 53,034 40,802
Stockholders' equity................................... 135,784 136,353
</TABLE>
GALENIKA CONDENSED RESULTS OF OPERATIONS BEFORE
PROVISION FOR INCOME TAXES
FOR THE YEAR ENDED DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Net sales.............................................. $325,903 $239,832
Gross profit........................................... 173,985 83,643
Income before provision for income taxes............... 38,518 310
</TABLE>
Sanctions:
A substantial majority of Galenika's business is conducted in the Federal
Republic of Yugoslavia (Serbia and Montenegro). On May 30, 1992, the UNSC
adopted a resolution that imposed economic sanctions on the Federal Republic of
Yugoslavia and on April 17, 1993, the UNSC adopted a resolution that imposed
additional economic sanctions on the Federal Republic of Yugoslavia. On April
26, 1993, the United States issued an executive order that implemented the
additional sanctions pursuant to the United Nations resolution. The new
sanctions continue to specifically exempt certain medical supplies for
humanitarian purposes, a portion of which are distributed by Galenika.
Galenika continues to apply for, and has received, licenses under the new
sanctions. The renewed efforts to enforce sanctions will create additional
administrative burdens that will slow the shipments of licensed raw materials to
Yugoslavia. Shipments of imported raw materials declined in 1993 to 38% of prior
year levels. Additionally, the new sanctions have contributed to an overall
deteriorating business environment in which Galenika must operate.
The new sanctions provide for the freezing of bank accounts of Yugoslavian
commercial and industrial entities. The implementation of new sanctions may
create a restriction on Galenika's cash holdings that are maintained in a bank
outside of Yugoslavia. Management believes, however, that these funds will be
available for drawdowns on lines of credit for shipments specifically licensed
under the new and prior sanctions. As a result of continuing political and
economic instability within Yugoslavia, including the long-term impact of the
sanctions, wage and price controls and devaluations, there may be further limits
on the availability of hard and local currency and consequently, an adverse
impact on the future operating results of SPI.
F-69
<PAGE> 183
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
At December 31, 1992, Galenika had cash and cash equivalents of $44,700,000
of which $15,200,000 was restricted as to use, invested with a financial
institution outside of Yugoslavia. These funds have been used for letters of
guarantee on Galenika's raw material purchases and to collateralize the payment
of dividends. During the first quarter 1993, $731,000 was withdrawn under the
letters of guarantee. Before the implementation of additional sanctions in April
1993, approximately $9,885,000 was withdrawn under the letters of guarantee. In
October 1993, Galenika acquired marketable securities with these funds in order
to maximize their interest earned. The marketable securities are maintained at
the same financial institution. As of December 31, 1993, at this institution,
Galenika had $834,000 of hard currency and $32,587,000 of marketable securities
which are used to collateralize a $10,000,000 note payable.
In order to conserve operating cash, the wages of all Galenika employees
were reduced to Yugoslavian minimum wage levels beginning in the fourth quarter
1993. To help alleviate the burden of sanctions and wage reductions, SPI intends
to expend funds for humanitarian aid in the form of food assistance for Galenika
employees. This aid will be subject to approval and licensing required by UNSC
sanctions. In the first quarter 1994, SPI obtained licenses for approximately
$280,000 of aid. The expenditure of future aid will be dependent on the
conditions in Yugoslavia and will be subject to obtaining approval and licenses
under UNSC sanctions.
Hyperinflation and Price Controls:
Under existing Yugoslavian price controls imposed in July 1992, Galenika
can no longer continue the unrestricted practice of increasing selling prices in
anticipation of inflation. Rather, price increases must be approved by the
government prior to implementation. The imposition of price controls along with
the effect of sanctions and recurring currency devaluations resulted in reduced
sales levels in the last half of 1992 and for 1993. This trend of reduced sales
levels is expected to continue as long as sanctions are in place. As a result of
decreased sales levels, management expects that profit margins will decrease and
overall operating expenses as a percentage of sales will increase.
As a result of the hyperinflation in Yugoslavia, the Yugoslavian government
devalued the dinar on several occasions during 1993 and, on October 1, 1993,
changed the denomination of the currency. The effect of the devaluations,
adjusted for the change in currency denomination, was to increase the exchange
rate from less than one dinar per $1 U.S. at the beginning of 1993 to over one
trillion dinars per $1 U.S. at the end of 1993. In anticipation of devaluations
in 1993, SPI implemented a plan described below, to minimize its monetary
exposure. As a result of the devaluations and subsequent exchange losses from
obtaining hard currencies, Galenika experienced translation losses of $173,000.
While SPI cannot predict with any certainty the actual remeasurement and
exchange gains or losses that may occur in 1994, such amounts may be
substantial. Annual inflation is very high with some estimates of over 1 billion
percent. Future devaluations are likely in the near term. At December 31, 1993,
Galenika's net monetary liability exposure was $2,093,000. As a result of the
non-tradability of the dinar, SPI is unable to effectively hedge against the
loss from devaluation.
SPI is taking action to generate the dinar cash needed to acquire hard
currency to reduce its monetary exposure. Galenika has access to short-term
borrowings at interest rates below the level of inflation. Galenika plans to
maximize its borrowings under these arrangements and use the proceeds to acquire
hard currency for the purchase of inventory. This strategy will provide hard
currency, accelerate the purchase of inventory to minimize the effects of
inflation, and reduce future transaction losses. This strategy will also
increase Galenika's monetary liabilities, and lower its risk of loss from
devaluations. This strategy, however, has resulted in increased interest expense
in 1993 and will result in high levels of interest expense in 1994.
In conjunction with a currency devaluation on July 23, 1993, the
Yugoslavian government announced that businesses in Yugoslavia can no longer buy
and sell hard currency in privately negotiated transactions. All
F-70
<PAGE> 184
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
purchases of hard currency must be made through the National Bank of Yugoslavia
based on government approved allocations. This action could possibly limit the
availability of hard currency in the future for Galenika. However, if the
government is successful in controlling access to hard currency, SPI's
operations in Yugoslavia may benefit through increased allocations of hard
currency. Due to the strategic nature of pharmaceutical drugs in Yugoslavia,
Galenika has, in the past, received relatively favorable allocations of hard
currency from the government. For the year ended December 31, 1993, Galenika
received $12,744,000 in currency allocations.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavian government guarantees the conversion of dinars to Deutsche
marks and is able to do so by exercising restraint in the amount of dinars that
it prints. Since the inception of this program the exchange rate of dinars to
Deutsche marks has remained stable. The impact of this change on the future
operations of Galenika is uncertain.
As required by Generally Accepted Accounting Principles ("GAAP"), SPI
translates Galenika financial results at the dividend payment rate established
by the National Bank of Yugoslavia. To the extent that changes in this rate lag
behind the level of inflation, sales and expenses will, at times, tend to be
inflated. Future sales and expenses can substantial increase if the timing of
future devaluations falls significantly behind the level of inflation. While the
impact of sanctions, price controls, and devaluations on the future sales and
net income cannot be determined with certainty, they may, under the present
political and economic environment, result in an adverse impact in the future.
At December 31, 1993, Galenika has U.S. $33,421,000 invested with a
financial institution outside of Yugoslavia. These funds came from the initial
cash investment made by SPI of $14,453,000 and from the sale of SPI's stock
transferred to Galenika by ICN, also in conjunction with the acquisition. Under
the terms of the acquisition agreement, these funds were originally intended to
finance business expansion. However, in light of the current economic conditions
in Yugoslavia, these funds are used for letters of guarantee on Galenika's raw
material purchases and to collateralize the payment of dividends. These funds
are encumbered by a letter of guarantee for raw material purchases, of which
$5,200,000 was outstanding at December 31, 1992 and no amount was outstanding at
December 31, 1993, and as collateral for $10,000,000 of loans included in Notes
Payable bearing interest at 4.5%, that were issued to pay the 1992 dividend of
the same amount. Other uses of these funds in the future, such as capital
investment, additional letters of guarantee, or future dividends are subject to
review and licensing under the UNSC sanctions. At December 31, 1992, these funds
are included in cash with $15,200,000 reflected as restricted cash. At December
31, 1993, these funds have been invested in bonds and are recorded as marketable
securities which were used to collateralize a $10,000,000 notes payable.
As noted above, Galenika paid a $10,000,000 dividend in 1992 of which SPI
received 75% or $7,500,000. Yugoslavian law allows free distribution of earnings
whether to domestic (Yugoslavian) or international investors. Galenika is
allowed to pay dividends out of earnings calculated under Yugoslavian Accounting
Practices ("YAP"), not earnings calculated under GAAP. As a result of the
current level of inflation, the accumulated YAP earnings of ICN Galenika are
insignificant when stated in dollars. Future dividends from Galenika will depend
heavily on future earnings. Under GAAP, Galenika had accumulated earnings, which
are not available for distributions, of approximately $61,787,000 at December
31, 1993. However, additional repatriation of cash could be declared from
contributed capital as provided for in the original purchase agreement. In 1992,
SPI made the decision to no longer repatriate the earnings of Galenika and
instead will use these earnings for local operations and reduction of debt.
The current political and economic conditions in Yugoslavia could continue
to deteriorate to the point that SPI's investment in Galenika would be
threatened. Worsening political and economic conditions could
F-71
<PAGE> 185
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
also result in a situation where SPI may be unable to exercise control over
Galenika's operations or be unable to receive dividends from Galenika. Under
these conditions, SPI would no longer be able to continue to consolidate the
financial information of Galenika. In this situation, SPI would be required to
deconsolidate Galenika and account for its investment using the cost method of
accounting and the investment in Galenika would be carried at the lower of cost
or realizable value.
F-72
<PAGE> 186
REVIEW REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
ICN Pharmaceuticals, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of
ICN Pharmaceuticals, Inc. and subsidiaries (the Company) as of June 30, 1994,
and the related consolidated condensed statements of operations for the three
and six month periods ended June 30, 1994 and 1993, and the consolidated
condensed statements of cash flows for the six-month periods then ended. These
consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated condensed financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (included in this Registration Statement, as
listed in the accompanying index on page F-1); and in our report dated March 31,
1994, which included an emphasis of a matter paragraph relating to certain
transactions between the Company and its majority owned subsidiaries as more
fully described in the notes to the consolidated financial statements, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the consolidated balance sheet as of
December 31, 1993, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND LLP
Los Angeles, California
August 4, 1994
F-73
<PAGE> 187
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND JUNE 30, 1994
(000'S OMITTED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1994
1993 UNAUDITED
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 14,652 $ 13,264
Restricted cash.................................................... 1,518 1,262
Certificates of deposit............................................ 8,000 --
Receivables, net................................................... 12,122 14,134
Receivables from SPI............................................... 18,313 5,225
Inventories, net................................................... 15,601 15,473
Prepaid expenses and other current assets.......................... 4,479 3,846
-------- --------
Total current assets....................................... 74,685 53,204
Property, plant and equipment, net, at cost.......................... 36,243 36,439
Investment in SPI.................................................... 71,671 75,407
Other assets and deferred charges, net............................... 12,025 11,140
Goodwill related to purchased businesses, net........................ 2,580 2,404
Goodwill related to publicly traded subsidiaries, net................ 10,652 10,046
-------- --------
$207,856 $188,640
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable...................................................... $ 4,226 $ 3,456
Current maturities of long-term debt............................... 12,093 17,942
Accounts payable................................................... 7,342 5,770
Accrued liabilities................................................ 21,397 17,910
-------- --------
Total current liabilities.................................. 45,058 45,078
Long-term debt, less current maturities:
Convertible into ICN Common Stock.................................. 22,023 20,238
Publicly-traded debentures and other debt.......................... 117,024 111,762
Other liabilities and deferred income taxes.......................... 7,014 6,867
Minority interests................................................... 12,717 12,720
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $1.00 par value; 100,000,000 shares authorized;
20,519,431 and 20,529,181 shares issued and outstanding at
December 31, 1993 and June 30, 1994, respectively............... 20,519 20,529
Additional capital................................................. 180,897 180,911
Accumulated deficit................................................ (193,711) (205,088)
Foreign currency translation adjustments........................... (3,685) (4,377)
-------- --------
Total stockholders' equity (deficit)....................... 4,020 (8,025)
-------- --------
$207,856 $188,640
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-74
<PAGE> 188
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1993 1994 1993 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $15,723 $15,641 $ 32,355 $ 32,843
Cost of sales................................... 6,957 6,660 14,333 13,500
------- ------- -------- --------
Gross profit.................................... 8,766 8,981 18,022 19,343
Selling, general and administrative expenses.... 9,554 10,297 18,202 20,554
Research and development costs.................. 1,459 2,166 2,495 3,930
Interest expense, net........................... 4,421 4,365 9,418 8,734
Foreign Currency translation and exchange
(gains) losses................................ (1,138) 1,486 (1,774) 3,380
Equity in earnings of SPI....................... (1,010) (2,278) (4,193) (6,683)
Gain on sales of subsidiaries common stock owned
by ICN........................................ -- -- (3,732) --
Other (income) expense, net..................... (1,137) 395 (321) 1,010
------- ------- -------- --------
Loss before income taxes, minority interests
and extraordinary income................... (3,383) (7,450) (2,073) (11,582)
Income taxes.................................... 127 6 162 (32)
Minority interests.............................. 83 (624) 295 (173)
------- ------- -------- --------
Net loss before extraordinary income.......... (3,593) (6,832) (2,530) (11,377)
Extraordinary income............................ 627 -- 627 --
------- ------- -------- --------
Net loss................................... $(2,966) $(6,832) $ (1,903) $(11,377)
======= ======= ======== ========
Per share information:
Loss before extraordinary income........... $ (.18) $ (.33) $ (.13) $ (.55)
Extraordinary income....................... .03 -- .03 --
------- ------- -------- --------
Net loss per share......................... $ (.15) $ (.33) $ (.10) $ (.55)
======= ======= ======== ========
Shares used in per share computation....... 20,416 20,529 19,135 20,526
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-75
<PAGE> 189
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1993 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (1,903) $(11,377)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 3,539 3,457
Equity earnings of SPI............................................ (4,193) (6,683)
Gain on sales of ICN owned subsidiaries Common Stock.............. (3,732) --
Gain on settlements of leasing contracts.......................... (938) --
Foreign currency translation and exchange losses (gains).......... (1,774) 3,380
Minority interests................................................ 295 (173)
Extraordinary income.............................................. (627) --
Other, net........................................................ (283) (129)
Change in assets and liabilities.................................. (5,424) (8,492)
-------- --------
Net cash used in operating activities........................... (15,040) (20,017)
-------- --------
Cash flows from investing activities:
Capital expenditures................................................. (792) (1,190)
Proceeds from sales of assets held for disposal...................... 4,534 --
Sales of marketable securities....................................... 139 203
Payment received from SPI............................................ 2,900 16,419
Maturity of certificate of deposit................................... -- 8,000
Sales of ICN owned subsidiaries common stock......................... 11,726 --
-------- --------
Net cash provided by investing activities....................... 18,507 23,432
-------- --------
Cash flows from financing activities:
Proceeds from issuance of stock...................................... 24,642 24
Payment of debt, net................................................. (14,696) (4,965)
Proceeds from issuance of common stock by subsidiaries............... 10,570 --
Decrease in restricted cash.......................................... -- 256
Dividend paid by subsidiaries........................................ (117) (118)
-------- --------
Net cash provided by (used in) financing activities............. 20,399 (4,803)
-------- --------
Net increase (decrease) in cash and cash equivalents................... 23,866 (1,388)
Cash and cash equivalents at beginning of period....................... 2,595 14,652
-------- --------
Cash and cash equivalents at end of period............................. $ 26,461 $ 13,264
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-76
<PAGE> 190
ICN PHARMACEUTICALS, INC.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The results of operations presented
herein are not necessarily indicative of the results to be expected for a full
year. Although the Company believes that all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are adequate to make the
information presented not misleading, these consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in this Prospectus for the year ended
December 31, 1993.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1994
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated condensed financial statements, as of June
30, 1994, include the accounts of ICN Pharmaceuticals, Inc. ("ICN" or the
"Company"), its 69 percent owned subsidiary, ICN Biomedicals,Inc.
("Biomedicals") and its 63 percent owned subsidiary, Viratek, Inc. ("Viratek").
ICN currently owns 38 percent of SPI Pharmaceuticals, Inc. ("SPI"), and accounts
for the investment using the equity method of accounting. Under such method, the
Company's share of net income (or losses) is included as a separate item in the
consolidated condensed statement of operations. All significant intercompany
account balances and transactions have been eliminated.
Per share information
For the three and six months ended June 30, 1993 and 1994, per share
information is based on the weighted average number of common shares
outstanding.
ICN's share of the income of Biomedicals has been reduced to give effect to
the dilution in ownership which would result upon the exercise of dilutive
options and warrants outstanding to purchase Biomedicals common shares.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
period presentation.
2. RELATED PARTY TRANSACTIONS
Royalty agreements
During the three and six months ended June 30, 1994, SPI sold $3,790,000
and $17,850,000 of ribavirin resulting in royalties to Viratek of $758,000 and
$3,570,000, respectively. For the same periods in 1993, SPI sold $2,700,000 and
$9,920,000 of ribavirin resulting in royalties to Viratek of $540,000 and
$1,984,000, respectively. These royalties are based on a license agreement
whereby 20% of the sales of ribavirin by SPI are payable to Viratek. Included in
royalties for the three and six months ended June 30, 1994 are royalties earned
on foreign sales by SPI totaling $499,000 and $1,110,000, respectively. For the
same periods in 1993, royalties earned on foreign sales by SPI were $449,000 and
$1,122,000, respectively.
F-77
<PAGE> 191
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Cost allocations
ICN, SPI, Viratek and Biomedicals occupy ICN's facility in Costa Mesa,
California. During the three and six months ended June 30, 1994, ICN charged
facility costs of $70,000 and $140,000 to SPI, $60,000 and $120,000 to Viratek,
and $78,000 and $155,000 to Biomedicals, respectively. For the same periods in
1993, ICN charged facility costs of $70,000 and $140,000 to SPI, $8,000 and
$15,000 to Viratek, and $78,000 and $155,000 to Biomedicals, respectively.
The costs of common services such as maintenance, purchasing and personnel
are incurred by SPI and allocated to ICN, Viratek and Biomedicals based on
various formulas. During the three and six months ended June 30, 1994 the total
of such costs were $643,000 and $1,377,000 of which $460,000 and $955,000 were
allocated to ICN, Viratek and Biomedicals, respectively. For the same periods in
1993, the total of such costs were $594,000 and $1,299,000 of which $386,000 and
$832,000 were allocated to ICN, Viratek, and Biomedicals, respectively.
3. OTHER ASSETS AND DEFERRED CHARGES, NET
At June 30, 1994, "Other assets and deferred charges, net" includes
$4,110,000 of deferred loan costs related to successfully completed financings
and $1,911,000 of patents, trademarks and clinical trials, net of amortization.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of June 30, 1994, "Prepaid expenses and other current assets" includes
$1,218,000 of assets held for disposition which are recorded at the lower of
cost or net realizable value.
5. INVENTORIES, NET
Inventories, net consist of the following components (000's omitted):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ --------
<S> <C> <C>
Raw materials and supplies............................ $ 3,422 $ 3,461
Work-in-progress...................................... 610 488
Finished goods, net................................... 11,569 11,777
-------- --------
$ 15,601 $ 15,726
======== ========
</TABLE>
6. SUPPLEMENTAL CASH FLOWS DISCLOSURES
The following table sets forth the amount of cash paid for interest and
income taxes (000's omitted):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1993 1994
------ ------
<S> <C> <C>
Interest................................................... $9,737 $8,797
Income taxes............................................... $ 316 $ 329
</TABLE>
F-78
<PAGE> 192
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
7. OTHER EXPENSE, NET
The following table summarizes other (income) expense, net (000's
omitted):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1993 1994 1993 1994
------- ----- ------- ------
<S> <C> <C> <C> <C>
Realized (gains) losses on marketable securities...... $ -- $ -- $ (139) $ 24
Amortization of goodwill.............................. 509 518 1,024 1,037
Gain on lease terminations............................ (938) -- (938) --
Reversal of legal settlement accrual.................. (1,000) -- (1,000) --
Other, net............................................ 292 (123) 732 (51)
------- ----- ------- ------
Other (income) expense, net......................... $(1,137) $ 395 $ (321) $1,010
======= ===== ======= ======
</TABLE>
8. SALES OF SUBSIDIARIES COMMON STOCK OWNED BY ICN
For the six months ended June 30, 1993, ICN sold 918,200 shares of SPI
Common Stock for $11,726,000 in cash, net of commission expenses. The company
did not sell subsidiaries common stock owned by ICN during 1994.
9. COMMITMENTS AND CONTINGENCIES
Class Actions -- In Re Viratek, In Re Paine Webber. The Company is a
defendant in certain consolidated class actions pending in the United States
District Court for the Southern District of New York entitled In re Paine Webber
Securities Litigation (Case No. 86 Civ. 6776 (VLB); In re ICN/Viratek Securities
Litigation (Case No. 87 Civ. 4296 (VLB)). In the Third Amended Consolidated
Class Action Complaint plaintiffs allege that the ICN Defendants made, or aided
and abetted Paine Webber in making, misrepresentations of material fact and
omitted to state material facts concerning the business, financial condition and
future prospects of ICN, Viratek and SPI in certain public announcements, Paine
Webber, Inc. research reports and filings with the Commission. The alleged
misstatements and omissions primarily concern developments regarding Virazole(R)
including the efficacy and safety of the drug and the market for the drug. The
plaintiffs allege that such misrepresentations and omissions violate Section
10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and
constitute common law fraud and misrepresentation. The ICN Defendants filed
their Answer, containing affirmative defenses, on February 15, 1993. Plaintiffs
seek the certification of classes of persons who purchased ICN, Viratek, or SPI
common stock during the period January 7, 1986 through April 15, 1987. In their
memorandum of law, dated February 4, 1994, the ICN Defendants argue that class
certification may only be granted for purchasers of ICN common stock for the
period August 12, 1986 through February 20, 1987 and for purchasers of Viratek
common stock for the period December 9, 1986 through February 20, 1987. The ICN
Defendants assert that no class should be certified for purchasers of the common
stock of SPI for any period. Oral argument on plaintiffs' motion for class
certification was held on June 2, 1994. To date, no decision has been rendered.
On October 20, 1993, plaintiffs informed the Court that they had reached an
agreement to settle with co-defendant Paine Webber. On May 6, 1994 plaintiffs
submitted their Stipulation of Settlement to the Court. The Court hearing on the
Stipulation of Settlement was held on July 27, 1994. The Court approved the
proposed settlement (in the amount of $6.5 million) and requested additional
information in connection with plaintiffs' counsel's application for attorney
fees and costs. Fact discovery is complete and expert discovery is virtually
complete. Plaintiff's damages expert, utilizing assumptions and methodologies
that the ICN Defendants' damages experts find to be inappropriate under the
circumstances, has testified that assuming that classes were certified for
purchasers of
F-79
<PAGE> 193
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
ICN, Viratek, and SPI common stock for the entire class periods alleged by
plaintiffs, January 7, 1986 through April 15, 1987 and further assuming that all
of the plaintiffs' allegations were proven, potential damages against ICN,
Viratek, and SPI would, in the aggregate, amount to $315,000,000. The ICN
Defendants' four damages experts have testified that damages are zero. On May 4,
1994, plaintiffs' counsel agreed to stipulate to the dismissal of the aiding and
abetting claim asserted against the ICN Defendants and a formal stipulation will
be submitted to the Court in the near future. Management believes that, having
extensively reviewed the issues in the above referenced matters, there are
strong defenses and the Company intends to defend the litigation vigorously.
While the ultimate outcome of these lawsuits cannot be predicted with certainty,
and an unfavorable outcome could have an adverse effect on the Company, at this
time management does not expect that these matters will have a material adverse
effect on the financial position, result of operations or liquidity of the
Company. The attorney's fees and other costs of the litigation are allocated
equally between ICN and Viratek.
Rafi M. Khan v. ICN Pharmaceuticals, Inc. On April 5, 1993, ICN and Viratek
filed suit against Rafi Khan ("Khan") in the United States District Court for
the Southern District of New York. The complaint alleges, inter alia, that Khan
violated numerous provisions of the securities laws and breached his fiduciary
duty to ICN and Viratek by attempting to effectuate a change in control of ICN
while acting as an agent and fiduciary of ICN and Viratek. As relief, ICN and
Viratek, among other things, sought an injunction enjoining Khan from
effectuating a change in control of ICN and compensatory and punitive damages in
the amount of $25,000,000. Khan filed a counterclaim on April 12, 1993, naming
the then ICN directors and ICN, as a nominal defendant sued only in a derivative
capacity. The counterclaim contains causes of action for slander, interference
with economic relations, and a shareholders' derivative action for breach of
fiduciary duties. Khan seeks compensatory damages for interest in an unspecified
amount, and exemplary damages of $29,000,000. On December 22, 1993, Khan filed a
notice of appeal from a prior injunction granted by the court, to the Court of
Appeals for the Second Circuit. On March 13, 1994, that appeal was dismissed on
the grounds that Khan had defaulted for failure to comply with the Court's
scheduling order. The Company has been advised by Mr. Khan that he intends to
represent himself pro se in this matter. With the consent of the parties, the
Court ordered all discovery stayed until September 6, 1994. Management believes
that Khan's counterclaim is without merit and the Company intends to vigorously
defend these counterclaims.
10. EQUITY INVESTMENT
The following tables set forth the condensed financial position of SPI as
of December 31, 1993 and June 30, 1994 and the condensed results of its
operations for the quarters ended June 30, 1993 and 1994.
SPI FINANCIAL POSITION
(IN 000'S)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ --------
<S> <C> <C>
Current assets....................................... $208,762 $178,865
Non-current assets................................... 93,255 126,266
Current liabilities.................................. 81,503 74,714
Non-current liabilities.............................. 23,206 23,155
Minority interest.................................... 41,429 41,862
Stockholders' equity................................. 155,879 165,400
</TABLE>
F-80
<PAGE> 194
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
SPI RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1994
(IN 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1993 1994 1993 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales......................................... $66,422 $78,927 $186,058 $151,094
Gross profit...................................... 31,159 33,759 90,105 73,311
Net income........................................ 1,091 5,245 6,827 13,609
Equity in earnings of SPI......................... $ 1,010 $ 1,993 $ 4,193 $ 6,398
</TABLE>
The condensed results of operations of ICN Galenika, a consolidated 75%
owned Yugoslavian subsidiary of SPI, for the three and six months ended June 30,
1993 and 1994 are presented below (000's omitted):
ICN GALENIKA
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1993 1994 1993 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales............................................. $28,656 $37,671 $108,964 $ 63,826
Gross profit...................................... 7,237 7,222 41,170 14,360
Net income (loss)................................. $(2,788) $ 777 $ (467) $ 1,298
</TABLE>
ICN Galenika operates in a highly inflationary economy and uses the dollar
as the functional currency rather than the Yugoslavian dinar. At December 31,
1993, the rate used to remeasure ICN Galenika's results was over one trillion
dinars per $1 U.S. On January 1, 1994, the Yugoslavian government changed the
denomination of its currency by dropping nine zeros. The effect of this
redenomination on the Yugoslavian dinar resulted in an exchange rate of 1,053
dinars to $1 U.S. Subsequent to the redenomination and prior to the enactment of
the stabilization program described below, the dinar had devalued to 12,563,000
dinars per $1 U.S.
On January 24, 1994, the Yugoslavian government enacted a "Stabilization
Program" designed to strengthen its currency. Under this program the official
exchange rate of the dinar is fixed at a ratio of one dinar to one Deutsche
mark. The Yugoslavia government guarantees the conversion of dinars to Deutsche
marks by exercising restraint in the amount of dinars that it prints, thereby
restricting cash in circulation to correspond to hard currency reserves in
Yugoslavia. Since the inception of this program the exchange rate of dinars to
Deutsche marks has remained stable. The trading of dinars at other than official
rates has been virtually eliminated and inflation and interest rates have
declined from over 1 billion percent a year to a current rate of approximately
14% since January 24, 1994, based on information currently available to the
Company. The Company believes that the period of time that the stabilization
program has been operating successfully is significant given that past attempts
at monetary control by the Yugoslavian government have generally been temporary.
In the near term, the positive effects of the stabilization program could
reverse and a return to prior levels of hyperinflation could occur. The success
of this stabilization program is dependent upon improvement in the Yugoslavian
economy, which is in part dependent upon the lifting of United Nations
sanctions.
F-81
<PAGE> 195
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
SPI has recently entered into an agreement with the City of St. Petersburg
to acquire 15% of the outstanding shares of SPI's recently privatized joint
venture partner, Oktyabr, for approximately $600,000. Under the terms of the
agreement, SPI has the option to pay for the shares by using privatization
vouchers or cash. As a result of this investment, and as part of the
privatization of Oktyabr, SPI submitted an "investment plan" which, if approved,
will allow SPI to purchase additional outstanding shares of Oktyabr. These
shares along with the shares purchased from the City of St. Petersburg would
increase SPI's ownership to 43%. The "investment plan" does not contemplate any
significant additional cash investment by SPI but gives effect to SPI's past
assistance provided to Oktyabr. SPI has also recently completed a transaction
whereby SPI purchased 26% of the outstanding shares from the employees of
Oktyabr in exchange for rights to acquire SPI common stock. Should SPI complete
the transaction to acquire 43% of the outstanding shares of Oktyabr together
with the 26% acquired from the employees, SPI would own 61% of the outstanding
shares of Oktyabr, in which case SPI may be required to consolidate the
financial statements of Oktyabr with those of SPI.
11. SUBSEQUENT EVENTS
On August 1, 1994, the Company and its three affiliated corporations (SPI
Pharmaceuticals, Inc., Viratek, Inc. and ICN Biomedicals, Inc.) entered into a
merger agreement to combine the four companies into a newly formed corporation
(which will be renamed ICN Pharmaceuticals, Inc.) or in the case of Biomedicals,
into a wholly-owned subsidiary of New ICN (the "Merger"). Under the terms of the
merger agreement, all outstanding shares of common stock of the four companies
(other than shares held by ICN) will be exchanged for shares of common stock of
the new company pursuant to the following exchange ratios: ICN: 1 to .512; SPI:
1 to 1; Viratek: 1 to .499; and Biomedicals: 1 to .197. The proposed Merger is
subject to various conditions, including approval by the stockholders of each of
the four companies, issuance of $150 million of convertible debentures to
refinance a substantial portion of the long-term indebtedness of the four
companies (a waivable condition), appropriate regulatory approvals and certain
other conditions. Assuming these conditions are satisfied, the transaction is
expected to close during the fall of 1994.
Three lawsuits have been filed by stockholders of SPI and, in one of these
lawsuits, Viratek, with respect to the Merger in the Court of Chancery of the
State of Delaware against ICN, SPI, Viratek (with respect to one of such
lawsuits) and certain directors and officers of ICN, SPI and/or Viratek
(including Milan Panic). The lawsuits, entitled Helmut Kling v. Milan Panic, et
al., Jallath v. Milan Panic, et al., and Amy Hoffman v. Milan Panic, et al.
purport to be class actions on behalf of all persons who hold shares of SPI
Common Stock and, in one lawsuit, Viratek Common Stock. These suits allege that
the consideration to be provided to the public stockholders of SPI and Viratek
(with respect to one of such lawsuits) in the Merger is unfair and inadequate,
and that the defendants have breached their fiduciary duties in approving the
proposed Merger and otherwise. The Company believes that these suits are without
merit.
F-82
<PAGE> 196
REPORT OF INDEPENDENT AUDITORS
To Viratek, Inc.:
We have audited the accompanying balance sheets of Viratek, Inc. (a
Delaware corporation) as of December 31, 1993 and 1992, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The Company has had certain transactions with its parent and affiliated
companies as more fully described in Notes 1 and 3 to the financial statements.
Whether the terms of these transactions would have been the same had they been
between wholly unrelated parties cannot be determined.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Viratek, Inc. as of December
31, 1993 and 1992, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND
Los Angeles, California
March 4, 1994
F-83
<PAGE> 197
VIRATEK, INC.
BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
ASSETS
<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 5,000 $ 9,698,000
Certificates of deposit......................................... -- 8,000,000
Receivables from affiliate...................................... 9,325,000 --
Prepaid expenses and other current assets....................... 65,000 20,000
----------- -----------
Total current assets......................................... 9,395,000 17,718,000
Receivables from affiliate........................................ -- 15,503,000
Property, plant and equipment, net................................ 118,000 204,000
Patents, clinical trials and trademarks, net...................... 2,127,000 1,823,000
----------- -----------
$11,640,000 $35,248,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 23,000 $ 405,000
Accrued liabilities............................................. 544,000 508,000
----------- -----------
Total current liabilities.................................... 567,000 913,000
----------- -----------
Deferred compensation............................................. 270,000 260,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.10 par value; 1,000,000 shares authorized;
none outstanding............................................. -- --
Common stock: $.10 par value; 30,000,000 shares authorized;
14,145,870 shares outstanding at December 31, 1992 and
18,113,149 shares outstanding at December 31, 1993........... 1,415,000 1,811,000
Additional capital.............................................. 41,789,000 73,465,000
Accumulated deficit............................................. (32,401,000) (41,201,000)
----------- -----------
Total stockholders' equity................................... 10,803,000 34,075,000
----------- -----------
$11,640,000 $35,248,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 198
VIRATEK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Royalties from SPI (an affiliate).................... $4,263,000 $5,448,000 $5,903,000
Net sales to SPI..................................... 235,000 -- --
---------- ---------- ----------
Total revenues.................................... 4,498,000 5,448,000 5,903,000
Costs and expenses:
Cost of sales........................................ 235,000 -- --
General and administrative expense................... 455,000 1,026,000 2,226,000
Research and development costs....................... -- 2,299,000 5,193,000
Interest income, net................................. (239,000) (210,000) (873,000)
Depreciation and amortization........................ 515,000 738,000 425,000
Other income, net.................................... (52,000) (285,000) (232,000)
---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes............................................. 3,584,000 1,880,000 (836,000)
Provision (benefit) for income taxes................... (3,000) 63,000 (14,000)
---------- ---------- ----------
Net income (loss).................................... $3,587,000 $1,817,000 $ (822,000)
========== ========== ==========
Per share information:
Net income (loss).................................... $ .24 $ .12 $ (.05)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 199
VIRATEK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at November 30,
1990.................. 13,946,002 $1,394,000 $40,010,000 $(37,970,000) $ 3,434,000
December 1990 net
income................ -- -- -- 165,000 165,000
Proceeds from exercise
of stock options...... 157,022 16,000 319,000 -- 335,000
Transfer of intangible
assets................ -- -- 1,350,000 -- 1,350,000
Net income.............. -- -- -- 3,587,000 3,587,000
--------- --------- ---------- ----------- -----------
Balance at December 31,
1991.................. 14,103,024 1,410,000 41,679,000 (34,218,000) 8,871,000
Proceeds from exercise
of stock options...... 42,846 5,000 110,000 -- 115,000
Net income.............. -- -- -- 1,817,000 1,817,000
--------- --------- ---------- ----------- -----------
Balance at December 31,
1992.................. 14,145,870 1,415,000 41,789,000 (32,401,000) 10,803,000
Stock offering and
warrants exercised.... 2,947,892 294,000 23,443,000 -- 23,737,000
Proceeds from exercise
of stock options...... 156,856 16,000 341,000 -- 357,000
Effect of stock
distribution issued in
January 1994.......... 862,531 86,000 7,892,000 (7,978,000) --
Net loss................ -- -- -- (822,000) (822,000)
--------- --------- ---------- ----------- ----------
Balance at December 31,
1993.................. 18,113,149 $1,811,000 $73,465,000 $(41,201,000) $34,075,000
========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE> 200
VIRATEK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net income (loss).................................. $ 3,587,000 $ 1,817,000 $ (822,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization................... 515,000 738,000 425,000
Deferred taxes.................................. (3,000) 8,000 --
Other non cash items............................ (6,000) -- --
Change in assets and liabilities:
Other receivables............................... 6,000 -- --
Inventories..................................... 174,000 -- --
Prepaid expenses and other current assets....... (2,000) (48,000) 45,000
Accounts payable................................ (560,000) (5,000) 382,000
Accrued liabilities............................. (351,000) 367,000 (36,000)
Deferred compensation........................... 56,000 (9,000) (10,000)
Intercompany receivables........................ (4,727,000) (3,562,000) (6,432,000)
----------- ----------- ----------
Net cash used in operating activities........... (1,311,000) (694,000) (6,448,000)
----------- ----------- ----------
Cash flows provided by (used in) investing
activities:
Disposals (additions) of property, plant and
equipment....................................... 7,000 -- (207,000)
Purchase of certificates of deposit................ -- -- (8,000,000)
----------- ----------- ----------
Net cash provided by (used in) investing
activities...................................... 7,000 -- (8,207,000)
----------- ----------- ----------
Cash flows provided by financing activities:
Proceeds from ICN advances......................... 1,006,000 580,000 254,000
Net proceeds from stock offering and warrants...... -- -- 23,737,000
Proceeds from stock options........................ 335,000 115,000 357,000
----------- ----------- ----------
Net cash provided by financing activities.......... 1,341,000 695,000 24,348,000
----------- ----------- ----------
Net increase in cash and cash equivalents............ 37,000 1,000 9,693,000
Cash and cash equivalents at beginning of year....... (33,000) 4,000 5,000
----------- ----------- ----------
Cash and cash equivalents at end of year............. $ 4,000 $ 5,000 $9,698,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 201
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., SPI PHARMACEUTICALS, INC. AND
ICN BIOMEDICALS, INC.
Viratek, Inc. was incorporated on August 1, 1980 as a wholly-owned
subsidiary of ICN Pharmaceuticals, Inc. ("ICN") and at December 31, 1993 is
63%-owned by ICN. At December 31, 1993, SPI Pharmaceuticals, Inc. ("SPI") is
39%-owned by ICN and ICN Biomedicals, Inc. ("Biomedicals") is 69%-owned by ICN.
The Company was organized primarily to develop compounds derived from or related
to the components of nucleic acids which are to be used in the treatment of
viral diseases.
Viratek operates in one business segment and geographic region whose
revenues are dependent upon sales of ribavirin by SPI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior year items have reclassified to conform with the current year
presentation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts of these assets approximates fair value due to
the short-term maturity of these instruments.
Property, Plant and Equipment
The Company uses the straight-line method for depreciating property, plant
and equipment over their estimated useful lives. Machinery and equipment are
depreciated over 10 years and furniture and fixtures over 5-10 years.
Repairs and maintenance which are not considered betterments and do not
extend the useful life of the property are charged to expense as incurred. Upon
sale or retirement, the costs and related accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
recorded in income.
Patents, Clinical Trials and Trademarks
The Company expenses research and development costs as incurred. Costs
associated with clinical trials conducted prior to FDA approval are expensed as
research and development, unless approval is considered routine and is expected
to occur in a short period of time.
At December 31, 1992 and 1993, costs associated with previous clinical
trials of RSV and post approval follow-up studies of RSV have been capitalized.
Patents, clinical trials and trademarks are amortized over their estimated
useful lives of 17 years which, based upon a reevaluation beginning in 1991,
have a remaining useful life at December 31, 1993 of 6 years.
Income Taxes
In January 1993, the Company adopted SFAS 109, Accounting for Income Taxes.
SFAS 109 requires an asset and liability approach be used in 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.
F-88
<PAGE> 202
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Earnings per share
Per share information is based on the weighted average number of common
shares outstanding and dilutive common share equivalents. Common equivalent
shares represent shares issuable for outstanding options, on the assumption that
the proceeds would be used to repurchase shares in the open market. In December
1993, the Company declared a fourth quarter 1993 stock distribution of 5%. All
share and per share amounts used in computing earnings per share have been
restated to reflect this stock distribution. The number of shares used in the
per share computation was 15,102,000 in 1991, 15,249,000 in 1992, and 16,937,000
in 1993.
3. RELATED PARTY TRANSACTIONS
General
ICN controls Biomedicals and Viratek through stock ownership, voting
control and board representation and is affiliated with SPI. Certain officers of
ICN occupy similar positions with SPI, Biomedicals and Viratek. ICN, SPI,
Biomedicals and Viratek (collectively, the "Affiliated Corporations") have
engaged in, and will continue to engage in, certain transactions with each
other.
An Oversight Committee and the Boards of Directors of the Affiliated
Corporations reviews transactions between or among the Affiliated Corporations
to determine whether a conflict of interest exists with respect to a particular
transaction and the manner in which such conflict can be resolved. The Oversight
Committee has advisory authority only and makes recommendations to the Board of
Directors of each of the Affiliated Corporations. The Oversight Committee
consists of one non-management director of each Affiliated Corporation and a
non-voting chairman. The significant related party transactions have been
reviewed and recommended for approval by the Oversight Committee, and approved
by the respective Boards of Directors.
Ribavirin agreements
Effective December 1, 1990, SPI and Viratek entered into a royalty
agreement. Under this agreement, SPI acts as Viratek's exclusive distributor of
ribavirin, and pays Viratek a royalty of 20% on sales worldwide for a term of 10
years with an option by either party to extend it for an additional 10 years.
Royalties under this agreement with SPI were $4,263,000, $5,448,000, and
$5,903,000 for 1991, 1992 and 1993, respectively. Included in royalties for
1991, 1992 and 1993 are royalties earned on foreign sales by SPI totalling
$1,189,000, $1,472,000 and $2,107,000, respectively.
During 1991, SPI purchased $235,000 of ribavirin from the Company.
Cost allocations
The Affiliated Corporations occupy ICN's facility in Costa Mesa,
California. During 1991, 1992 and 1993, ICN charged facility costs of $30,000
per year to the Company. The facility cost is determined using a formula based
upon the proportionate usage of the facilities by the Affiliated Corporations.
The costs of common services such as maintenance, purchasing and personnel are
incurred by SPI and allocated to the Affiliated Corporations based on the
services utilized. These common service costs were $2,617,000, $2,556,000, and
$2,584,000 for 1991, 1992 and 1993, respectively, of which SPI allocated
$30,000, $26,000 and $47,000 to the Company, respectively. It is management's
belief that the methods used and amounts allocated for facility costs and common
services are reasonable based upon the usage by the Company.
During 1991, the Company began renting certain office equipment to ICN for
use at the Costa Mesa Facility. Rent is being charged at $20,000 per month
through 1993, renewable annually.
F-89
<PAGE> 203
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Investment policy and intercompany transactions
ICN and the Company have adopted a policy covering intercompany advances
and interest rates and the types of investments (marketable equity securities,
high-yield bonds, etc.) to be made by ICN and its subsidiaries whereby excess
cash held by ICN's subsidiaries is transferred to ICN and cash advances are made
to ICN's subsidiaries to fund short-term cash requirements. ICN charges or
credits interest expense or income based on the amount invested, current
interest rates and the cost of capital.
During 1991, advances from ICN totalled $1,006,000. During the year,
Viratek reclassified $5,515,000 of intercompany receivables from SPI to ICN,
which resulted in a receivable of $3,767,000 due from ICN at December 31, 1991.
Interest is credited on outstanding balances at prime (6.5% at December 31,
1991) plus 1/2%. Viratek earned interest income of $271,000 from ICN on the
average balance outstanding during 1991. In addition, Viratek had a receivable
from SPI of $2,576,000 at December 31, 1991, upon which interest was not earned.
During 1992, Viratek reclassified $536,000 of intercompany payables to
Biomedicals to ICN and reclassified $6,332,000 of intercompany receivable from
SPI to ICN, which resulted in a receivable of $9,325,000 due from ICN at
December 31, 1992. Interest is credited on outstanding ICN balances at prime (6%
at December 31, 1992) plus 1/2%. Viratek earned interest income of $239,000
from ICN on the average balance outstanding during 1992.
During 1993, Viratek reclassified $272,000 of intercompany payables to
Biomedicals to ICN and reclassified $5,228,000 of intercompany receivable from
SPI to ICN, which resulted in a receivable of $15,528,000 due from ICN at
December 31, 1993. Interest is credited on outstanding ICN balances at prime (6%
at December 31, 1993) plus 1/2%. Viratek earned interest income of $714,000
from ICN on the average balance outstanding during 1993.
Other
Effective January 1, 1992, Viratek and Biomedicals entered into an
agreement whereby Biomedicals agreed to transfer rights, title and interest in
certain of its research and development assets to Viratek. Biomedicals shall
retain a right of first refusal to the marketing and distribution rights for any
product developed from the transferred assets and pay a royalty to the Company.
Accordingly, Viratek incurred $514,000 and $793,000 of expenses relating to
biomedical research and development for the years ended December 31, 1992 and
1993.
Effective March 1, 1991, Viratek transferred all inventory, consisting of
ribavirin in bulk, work-in-process and finish goods form, to SPI at its recorded
book value of $2,943,000. Viratek no longer supplies ribavirin to SPI. Viratek
then reclassified the intercompany receivable from SPI to a receivable due from
ICN in the amount of $2,943,000.
Effective May 1, 1991, Viratek transferred the rights to three compounds,
in various stages of development, to SPI for $1,350,000 plus a royalty of 6.8%
of future sales. The amount has been credited to additional capital. Future
royalties will be recognized as income when earned. However, during 1993, 1992
and 1991, there have been no sales of product subject to the 6.8% royalty. The
Company reclassified the intercompany receivable from SPI to a receivable due
from ICN in the amount of $1,350,000.
During 1991, the Company transferred equipment to ICN Galenika, a 75% owned
subsidiary of SPI, at its net book value of $333,000.
F-90
<PAGE> 204
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Following is a summary of transactions, as described above, between the
Company and ICN and its subsidiaries for each of the three years ended December
31, 1991, 1992 and 1993:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Transactions:
Royalties from SPI............................. $4,263,000 $5,448,000 $5,903,000
Sales of ribavirin to SPI...................... 235,000 -- --
Facility costs charged by ICN.................. (30,000) (30,000) (30,000)
Allocation of common services from SPI......... (30,000) (26,000) (47,000)
Interest charged to (by) ICN, net.............. (271,000) 239,000 714,000
Equipment rents charged to ICN................. 120,000 240,000 240,000
Transfer of inventory to SPI................... 2,943,000 -- --
Transfer of compounds to SPI................... 1,350,000 -- --
Transfer of equipment to SPI................... 333,000 -- --
</TABLE>
In addition to the above transactions, the Affiliated Corporations paid
certain of the Company's liabilities in lieu of making cash payments to the
Company, totalling $1,791,000 and $602,000, for the year ended December 31, 1992
and 1993.
4. COMMON STOCK
On April 22, 1992, the stockholders of the Company approved the 1992
Non-Qualified Stock Option Plan ("1992 Option Plan") and the 1992 Employee
Incentive Stock Option Plan ("1992 Incentive Plan"), reserving 525,000 shares
per plan of the Company's Common Stock for issuance to employees and directors
of the Company and its affiliates (including ICN). In addition, the Company had
reserved and issued 1,292,000 shares of the Company's common stock under the
1980 Employee Stock Option Plan ("1980 Option Plan").
The Company has granted options for shares of its common stock under the
Company's 1992 Option Plan and 1980 Option Plan. Options under the 1992 Option
Plan are exercisable over a period to be determined by the Compensation
Committee, which shall not exceed ten years from the date of grant and will
expire at the end of the option period. Options under the 1980 Option Plan are
exercisable during a four year period beginning one year after the date of grant
and expire five years after the date of grant. At December 31, 1993, options of
141,750 and 31,314 were outstanding (with exercise prices ranging from $2.024 to
$13.214) of which 5,250 and 20,816 shares were exercisable under the 1992 Option
Plan and the 1980 Option Plan, respectively. During 1993, 22,483 shares were
exercised under the 1980 Option Plan at an average price of $3.03 and no shares
were exercised under the 1992 Option Plan.
As of December 31, 1993, 425,250 options were outstanding at prices ranging
from $7.619 to $21.190 and none were exercisable under the 1992 Incentive Plan.
During fiscal 1981, 1984 and 1986, the Board of Directors of the Company
reserved for its President and certain directors non-qualified stock options to
purchase 735,000 shares of common stock at a price of $2.024 per share. At
December 31, 1993 options to purchase 278,908 shares were outstanding and
exercisable. Options to purchase 420,000 shares were outstanding and exercisable
during 1992 and 1991. 134,373 shares were exercised during 1993 and no options
were exercised during 1992 and 1991.
In February 1993, Viratek successfully completed an offering in which it
sold 1,375,000 units for net proceeds of $8,897,000. Each unit consisted of one
share of common stock and one warrant to purchase one unit of common stock at
$10.075. On March 19, 1993, the underwriters exercised their option to purchase
the
F-91
<PAGE> 205
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
overallotment (206,250 units) in connection with the public offering for net
proceeds of $1,368,000. The warrants became separately transferable on July 29,
1993 and were exercisable until August 30, 1993 and redeemable by the Company on
August 31, 1993 at $.05 per warrant if not previously exercised. A total of
1,366,642 warrants were exercised resulting in net proceeds to the Company of
$13,472,000.
In December 1993, the Company declared a fourth quarter 1993 stock
distribution of 5%. Accordingly, all numbers of common shares, except shares
authorized, stock option data and per share data have been restated to reflect
the distribution. Fractional shares resulting from the distribution were settled
in cash.
5. INCOME TAXES
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 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. The adoption of
SFAS 109 did not result in a cumulative effect adjustment.
The Company's income tax benefit for 1993 of $14,000 is primarily
attributable to the difference between the 1992 provision for income taxes
accrued in the financial statements and the liability as finally determined upon
the filing of the Company's 1992 tax return. The Company's 1992 tax provision of
$63,000 was based primarily on the Company's estimated alternative minimum tax
liability.
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
<TABLE>
<CAPTION>
1991 1992 1993
--- --- ---
<S> <C> <C> <C>
Statutory rate................................................... 34% 34% (34)%
NOL utilization/limitation....................................... (34) (34) 34
Alternative minimum tax.......................................... -- 2 --
Other............................................................ -- 1 --
Provision to return adjustment................................... (2)
--- --- ---
0 3 (2)
=== === ===
</TABLE>
The Company files its federal tax return on a stand-alone basis. Prior to
January 1992, the Company filed a consolidated tax return with ICN and was
subject to a tax sharing agreement. In accordance with the terms of the tax
sharing agreement, the Company was required to pay ICN for federal taxes
otherwise payable on a stand-alone basis. The federal tax sharing agreement and
consolidated federal filing terminated in January 1992 when ICN's ownership of
the Company dropped below 80 percent.
The Company has net operating loss carryforwards of $47,500,000 which
expire in varying amounts from 1995 through 2005. The NOL carryforwards include
$10,900,000 of stock option deductions. For financial statement purposes, the
tax benefit from the utilization of stock option deductions are credit to
paid-in-capital. The Company has research and development tax credit carryovers
of $800,000 which expire in varying amounts from 1996 to 2002.
The Company's net operating loss carryforward differs from the Company's
accumulated deficit primarily due to the portion of the NOL carryforward
attributable to stock option deductions.
The primary component which gives rise to the Company's net deferred tax
position is the tax benefit associated with the Company's NOL carryforward
position. At December 31, 1993, and January 1, 1993, the future tax benefit
associated with the Company's NOL carryforward was approximately $12,800,000 and
F-92
<PAGE> 206
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
$12,100,000, respectively. A full valuation reserve has been established against
this deferred tax asset in accordance with SFAS 109.
6. RSV CLINICAL TRIALS
As of December 31, 1993, the Company had net amounts capitalized of
$1,823,000, related to patents, trademarks and outside studies requested by the
FDA to obtain and maintain approval for the use of ribavirin in treating RSV. As
of December 31, 1993, accumulated amortization applicable to all patents,
clinical trials and trademarks costs was $2,270,000.
7. COMMITMENTS AND CONTINGENCIES
Post approval studies
By letter dated December 31, 1985, the FDA advised the Company that the FDA
had approved the Company's NDA for the hospital use of aerosolized ribavirin for
the treatment of RSV in infants. As a condition of the approval, the Company
agreed to conduct certain additional studies. The future costs of such studies
are not expected to be significant.
Deferred compensation
During fiscal 1985, the Company adopted deferred compensation agreements
with its officers and certain key employees, with benefits commencing at death
or retirement. As of December 31, 1993, the present value of the deferred
compensation benefits to be paid to a former officer of the Company, has been
accrued in the amount of $269,000. Payments are made monthly over a 15 year
period with interest at a rate of 12.4%. The interest expense for the year ended
December 31, 1993, was $38,000. The Deferred Compensation Plan was terminated in
May 1990 and no other amounts are due thereunder.
Litigation
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York entitled
In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (VLB); In re
ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)). The plaintiffs
represent alleged classes of persons who purchased ICN, Viratek or SPI common
stock during the period January 7, 1986 to and including April 15, 1987. In
their memorandum of law, dated February 4, 1994, the ICN Defendants argue that
class certification may only be granted for purchasers of ICN common stock for
the period August 12, 1986 through February 20, 1987 and for purchasers of
Viratek common stock for the period December 9, 1986 through February 20, 1987.
The ICN Defendants assert that no class should be certified for purchasers of
the common stock of SPI for any period. The plaintiffs allege that during such
period the defendants made, or aided and abetted other defendants in making,
misrepresentations of material fact and omitted to state material facts
concerning the business, financial condition and future prospects of ICN,
Viratek and SPI in certain public announcements, Paine Webber, Inc. research
reports and filings with the Commission. The alleged misstatements and omissions
primarily concern developments regarding Virazole(R), including the efficacy and
safety of the drug and the market for the drug. The plaintiffs allege that such
misrepresentations and omissions violate Section 10(b) of the Exchange Act of
1934 and Rule 10b-5 promulgated thereunder and constitute common law fraud and
misrepresentation. The plaintiffs seek an unspecified amount of monetary
damages, together with interest thereon, and their costs and expenses incurred
in the action, including reasonable attorneys' and experts' fees. The ICN
defendants moved to dismiss the consolidated complaint in March 1988, for
failure to state a claim upon which relief may be granted and for failure to
plead the allegations of fraud and misrepresentation with sufficient
particularity. On
F-93
<PAGE> 207
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
September 18, 1992, the Court denied the ICN defendants' motion to dismiss and
for summary judgment. The ICN defendants filed their answer on February 17,
1993. On October 20, 1993, plaintiffs informed the Court that they had reached
an agreement to settle with co-defendant Paine Webber, Inc. and that they would
submit a proposed settlement stipulation to the Court. Expert discovery, which
commenced in September 1993, is expected to conclude by the end of April 1994.
Plaintiffs' damages expert, utilizing assumptions and methodologies that the ICN
Defendants' damages experts find to be inappropriate under the circumstances,
has testified that, assuming that classes were certified for purchasers of ICN,
Viratek and SPI common stock for the entire class periods alleged by plaintiffs,
January 7, 1986 through April 15, 1987, and further assuming that all of the
plaintiffs' allegations were proven, potential damages against ICN, Viratek and
SPI would, in the aggregate, amount to $315,000,000. The ICN Defendants' four
damages' experts have testified that damages are zero. Management believes that,
having extensively reviewed the issues in the above referenced matters, there
are strong defenses and that the Company intends to defend the litigation
vigorously. While the ultimate outcome of these lawsuits cannot be predicted
with certainty, and an unfavorable outcome could have an adverse effect on the
Company, at this time management does not expect that these matters will have a
material adverse effect on the financial position, result of operations or
liquidity of the Company. The attorney's fees and other costs of the litigation
are allocated equally between ICN and Viratek.
In August 1992, an action was filed in United States District Court for the
Southern District of New York, entitled Rossi v. ICN Pharmaceuticals, Inc. (Case
No. 92 Cir. 4819 (CL6)). The plaintiffs, citing theories of product liability,
negligence and strict liability in tort, allege that birth defects in an infant
were caused by the mother's exposure to ribavirin during pregnancy. The
plaintiff's counsel agreed to place the case on the courts "suspense calendar"
pending completion of ICN's investigation of the underlying facts. Based on such
investigations, this case was dismissed without prejudice pursuant to
stipulation by the parties in December 1993. Per the License Agreement, SPI
indemnified Viratek and ICN for lawsuits involving the use of Virazole(R).
The Company, from time to time, is a party to a number of other pending or
threatened lawsuits arising out of, or incident to, its ordinary course of
business. In the opinion of management, neither the lawsuits discussed above nor
various other pending lawsuits will have a material adverse effect on the
consolidated financial position or operations of the Company.
Product Liability Insurance
During 1985, after reviewing costs, availability and related factors,
management decided not to continue to maintain product liability insurance.
While to date no material adverse claim for personal injury resulting from
allegedly defective products, including ribavirin, has been successfully
maintained against the Company, a substantial claim, if successful, could have a
material adverse effect on the Company.
8. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company made cash payments for interest of $0, $29,000 and $38,000
during 1991, 1992, and 1993, respectively. Income taxes paid during 1993, net of
refunds, were $17,000. No income taxes were paid during 1991 and 1992.
In December 1993, the Company declared a 5% common stock distribution
amounting to 862,531 shares of common stock for $7,978,000.
In 1991, Viratek transferred all inventory, three compounds and certain
equipment, to SPI and its subsidiaries in the amount of $4,626,000.
F-94
<PAGE> 208
VIRATEK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
9. DETAIL OF CERTAIN ACCOUNTS
<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
Property, plant and equipment, net:
Machinery and equipment........................... $1,263,000 $1,424,000
Autos and trucks.................................. 59,000 84,000
Furniture and fixtures............................ 33,000 54,000
---------- ----------
1,355,000 1,562,000
---------- ----------
Less: Accumulated depreciation...................... 1,237,000 1,358,000
---------- ----------
$ 118,000 $ 204,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
1992 1993
---------- ----------
<S> <C> <C>
Accrued liabilities:
Professional Fees................................. $ 231,000 $ 291,000
Accrued communications expenses................... 197,000 88,000
Other............................................. 116,000 129,000
---------- ----------
$ 544,000 $ 508,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
1991 1992 1993
--------- ---------- ----------
<S> <C> <C> <C>
Other (income) expense, net:
Contribution to the UC San Diego..... $ 325,000 $ -- $ --
Equipment rental income.............. (120,000) (240,000) (240,000)
Legal expense reversal............... (200,000) -- --
Other................................ (57,000) (45,000) 8,000
--------- ---------- ----------
$ (52,000) $ (285,000) $ (232,000)
========= ========= =========
</TABLE>
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for each of the quarters
ended March 31, June 30, September 30 and December 31 for the years ended
December 31, 1992 and 1993.
<TABLE>
<CAPTION>
1992 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues...................... $ 1,993,000 $ 265,000 $ 1,948,000 $1,242,000
Research and development
expenses and other, net..... 605,000 113,000 1,269,000 1,644,000
Net income (loss)............. 1,388,000 152,000 679,000 (402,000)
Net income (loss) per
share(1).................... $ .09 $ .01 $ .04 $ (.03)
</TABLE>
<TABLE>
<CAPTION>
1993 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues...................... $ 1,444,000 $ 540,000 $ 2,048,000 $1,871,000
Research and development
expenses and other, net..... 1,157,000 1,649,000 1,799,000 2,119,000
Net income (loss)............. 287,000 (1,109,000) 249,000 (249,000)
Net income (loss) per
share(1).................... $ .02 $ (.07) $ .01 $ (.01)
</TABLE>
- ---------------
(1) Net income (loss) per share has been restated to reflect a fourth quarter
1993 stock distribution of 5%.
F-95
<PAGE> 209
(This page intentionally left blank)
F-96
<PAGE> 210
VIRATEK, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND JUNE 30, 1994
(000'S OMITTED)
A S S E T S
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1994
1993 UNAUDITED
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 9,698 $ 11,564
Certificates of deposit........................................ 8,000 --
Prepaid expenses and other current assets...................... 20 26
-------- --------
Total current assets................................... 17,718 11,590
Receivables from affiliates, net................................. 15,503 19,911
Property, plant and equipment, net............................... 204 993
Patents, clinical trials and trademarks, net..................... 1,823 1,671
-------- --------
TOTAL ASSETS........................................... $ 35,248 $ 34,165
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 405 $ 168
Accrued liabilities............................................ 508 1,007
-------- --------
Total current liabilities.............................. 913 1,175
Deferred compensation............................................ 260 255
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 30,000,000 shares authorized;
18,113,149 shares outstanding as of December 31, 1993 and
June 30, 1994............................................... 1,811 1,811
Additional capital............................................. 73,465 73,456
Accumulated deficit............................................ (41,201) (42,532)
-------- --------
Total stockholders' equity............................. 34,075 32,735
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 35,248 $ 34,165
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 211
VIRATEK, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1993 1994 1993 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Royalties from SPI.............................. $ 540 $ 758 $ 1,984 $ 3,570
Costs and expenses:
General and administrative expenses............. 449 792 781 1,753
Research and development........................ 1,359 2,079 2,298 3,717
Depreciation and amortization................... 109 137 212 252
Interest income, net............................ (210) (453) (373) (826)
Other income, net............................... (58) -- (112) --
------- ------- ------- -------
Loss before income tax expense.................. (1,109) (1,797) (822) (1,326)
Income tax expense.............................. -- 5 -- 5
------- ------- ------- -------
Net loss........................................ $(1,109) $(1,802) $ (822) $(1,331)
======= ======= ======= =======
Per share information:
Net loss........................................ $ (.07) $ (.10) $ (.05) $ (.07)
======= ======= ======= =======
Shares used in per share computation.............. 16,655 18,113 16,228 18,113
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE> 212
VIRATEK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1993 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $ (822) $(1,331)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 212 252
Change in asset and liabilities:
Increase in receivables from affiliates, net...................... (2,227) (4,408)
Decrease in prepaid expenses and other current assets............. 54 (6)
Increase (decrease) in accounts payable and accrued liabilities... (177) 262
Deferred compensation............................................. (5) (5)
------- -------
Net cash used in operating activities............................... (2,965) (5,236)
------- -------
Cash flows from investing activities:
Capital expenditures................................................... (138) (889)
Maturity of certificate of deposit..................................... -- 8,000
------- -------
Net cash used in investing activities............................... (138) 7,111
------- -------
Cash flows from financing activities:
Proceeds from ICN advances............................................. 254 --
Redemption of warrants................................................. -- (9)
Proceeds from stock options............................................ 297 --
Net proceeds from stock offering....................................... 10,269 --
------- -------
Net cash provided by (used in) financing activities................. 10,820 (9)
------- -------
Net increase in cash..................................................... 7,717 1,866
Cash and cash equivalents at beginning of period......................... 5 9,698
------- -------
Cash and cash equivalents at end of period............................... $ 7,722 $11,564
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE> 213
VIRATEK, INC.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The results of operations for the periods presented
herein are not necessarily indicative of the results to be expected for a full
year. Although the Company believes that all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are adequate to make the
information presented not misleading, these condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in this Prospectus for the year ended December 31, 1993.
F-100
<PAGE> 214
VIRATEK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1994
(UNAUDITED)
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., SPI PHARMACEUTICALS, INC.
AND ICN BIOMEDICALS, INC. --
Viratek, Inc. ("Viratek" or the "Company") was incorporated on August 1,
1980, as a wholly-owned subsidiary of ICN Pharmaceuticals, Inc. ("ICN"). As of
June 30, 1994, Viratek was 63 percent owned by ICN. SPI Pharmaceuticals, Inc.
("SPI") was 38 percent owned by ICN and ICN Biomedicals, Inc. ("Biomedicals")
was 69 percent owned by ICN.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Per share information
For the three and six months ended June 30, 1993 and 1994 per share
information is based on the weighted average number of common shares
outstanding. In December 1993, the Company declared a fourth quarter 1993 stock
distribution of 5%. All relevant share and per share amounts used in computing
earnings per share have been restated to reflect this stock distribution.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. RELATED PARTY TRANSACTIONS --
Royalty agreements
During the three and six months ended June 30, 1993, SPI sold $2,700,000
and $9,920,000 of ribavirin resulting in royalties to Viratek of $540,000 and
$1,984,000, respectively. For the same periods in 1994, SPI sold $3,790,000 and
$17,850,000 of ribavirin resulting in royalties to Viratek of $758,000 and
$3,570,000, respectively. These royalties are based on a license agreement
whereby 20% of the sales of ribavirin by SPI are payable to Viratek. Included in
royalties for the three and six months ended June 30, 1993, are royalties earned
on foreign sales by SPI totaling $449,000 and $1,122,000, respectively. For the
same periods in 1994, royalties earned on foreign sales by SPI were $499,000 and
$1,110,000, respectively.
Cost Allocation
ICN, SPI, Viratek and Biomedicals occupy ICN's facility in Costa Mesa,
California. During the three and six months ended June 30, 1993 ICN charged
facility costs of $8,000 and $15,000, respectively, to the Company. For the same
periods in 1994, ICN charged facility costs of $60,000 and $120,000,
respectively. The costs of common services such as maintenance, purchasing and
personnel are incurred by SPI and allocated to ICN, Viratek and Biomedicals
based on the services utilized. The common services costs for the three and six
months ended June 30, 1993 were $10,000 and $23,000, respectively. For the same
periods in 1994, these common services costs were $156,000 and $199,000,
respectively.
Debt and equity transactions
At June 30, 1994, Viratek had $19,911,000 of receivables due from ICN.
During the three and six months ended June 30, 1993, Viratek charged $171,000
and $318,000 respectively, to ICN for interest on the average balances owed to
Viratek. For the same periods in 1994, Viratek charged $345,000 and $616,000,
respectively, to ICN for interest on the average balances owed to Viratek.
F-101
<PAGE> 215
VIRATEK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
Charges for the usage of equipment
For the three and six months ended June 30, 1993 Viratek charged $60,000
and $120,000 to ICN for the usage of equipment owned by Viratek. None were
incurred in 1994.
4. CLINICAL TRIALS --
As of June 30, 1994, the Company had net amounts capitalized of $1,498,000
related to outside studies requested by the FDA in order to obtain approval of
the use of ribavirin in treating RSV. These costs are being amortized on a
straight-line basis over their useful lives.
5. COMMON STOCK --
In December 1993, the Company declared a fourth quarter 1993 stock
distribution of 5%. Accordingly, all numbers of common shares, except shares
authorized, stock option data and per share data have been restated to reflect
the distribution. Fractional shares resulting from the distribution were settled
in cash.
6. SUPPLEMENTAL CASH FLOW DISCLOSURES --
The following table sets forth the amount of cash paid for interest and
income taxes.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1993 1994
------- -------
<S> <C> <C>
Interest................................................. $16,000 $18,000
Income taxes............................................. 50,000 13,000
</TABLE>
7. COMMITMENTS AND CONTINGENCIES --
The Company is a defendant in certain consolidated class actions pending in
the United States District Court for the Southern District of New York entitled
In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (VLB); In re
ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (VLB)). In the Third
Amended Consolidated Class Action Complaint plaintiffs allege that the ICN
Defendants made, or aided and abetted Paine Webber in making, misrepresentations
of material fact and omitted to state material facts concerning the business,
financial condition and future prospects of ICN, Viratek and SPI in certain
public announcements, Paine Webber, Inc. research reports and filings with the
Commission. The alleged misstatements and omissions primarily concern
developments regarding Virazole(R) including the efficacy, safety, and market
for the drug. The plaintiffs allege that such misrepresentations and omissions
violate Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and constitute common law fraud and misrepresentation. The ICN
Defendants filed their Answer, containing affirmative defenses, on February 15,
1993. Plaintiffs seek the certification of classes of persons who purchased ICN,
Viratek, or SPI common stock during the period January 7, 1986 through April 15,
1987. In their memorandum of law, dated February 4, 1994, the ICN Defendants
argue that class certification may only be granted for purchasers of ICN common
stock for the period August 12, 1986 through February 20, 1987 and for
purchasers of Viratek common stock for the period December 9, 1986 through
February 20, 1987. The ICN Defendants assert that no class should be certified
for purchasers of the common stock of SPI for any period. Oral argument on
plaintiffs' motion for class certification was held on June 2, 1994. To date, no
decision has been rendered.
F-102
<PAGE> 216
VIRATEK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
On October 20, 1993, plaintiffs informed the Court that they had reached an
agreement to settle with co-defendant Paine Webber. On May 6, 1994 plaintiffs
submitted their Stipulation of Settlement to the Court. The hearing on the
Stipulation of Settlement was held on July 27, 1994. The Court approved the
proposed settlement (in the amount of $6.5 million) and requested additional
information in connection with Plaintiffs' counsel's application for attorney
fees and costs. Fact discovery is complete and expert discovery is virtually
complete. Plaintiffs' damages expert, utilizing assumptions and methodologies
that the ICN Defendants' damages experts find to be inappropriate under the
circumstances, has testified that assuming that classes were certified for
purchasers of ICN, Viratek, and SPI common stock for the entire class periods
alleged by plaintiffs, January 7, 1986 through April 15, 1987, and further
assuming that all of the plaintiffs' allegations were proven, potential damages
against ICN, Viratek, and SPI would, in the aggregate, amount to $315,000,000.
The ICN Defendants' four damages' experts have testified that damages are zero.
On May 4, 1994, plaintiffs' counsel agreed to stipulate to the dismissal of the
aiding and abetting claim asserted against the ICN Defendants and a formal
stipulation will be submitted to the Court in the near future. Management
believes that, having extensively reviewed the issues in the above referenced
matters, there are strong defenses and the Company intends to defend the
litigation vigorously. While the ultimate outcome of these lawsuits cannot be
predicted with certainty, and an unfavorable outcome could have an adverse
effect on the Company, at this time management does not expect that these
matters will have a material adverse effect on the financial position, result of
operations or liquidity of the Company. The attorney's fees and other costs of
the litigation are allocated equally between ICN and Viratek.
Rafi M. Khan v. ICN Pharmaceuticals, Inc. On April 5, 1993, ICN and Viratek
filed suit against Rafi Khan ("Khan") in the United States District Court for
the Southern District of New York. The complaint alleges, inter alia, that Khan
violated numerous provisions of the securities laws and breached his fiduciary
duty to ICN and Viratek by attempting to effectuate a change in control of ICN
while acting as an agent and fiduciary of ICN and Viratek. As relief, ICN and
Viratek, among other things, sought an injunction enjoining Khan from
effectuating a change in control of ICN and compensatory and punitive damages in
the amount of $25,000,000. Khan filed a counterclaim on April 12, 1993, naming
the then ICN directors and ICN, as a nominal defendant sued only in a derivative
capacity. The counterclaim contains causes of action for slander, interference
with economic relations, and a shareholders' derivative action for breach of
fiduciary duties. Khan seeks compensatory damages for interest in an unspecified
amount, and exemplary damages of $29,000,000. On December 22, 1993, Khan filed a
notice of appeal from a prior injunction granted by the court, to the Court of
Appeals for the Second Circuit. On March 13, 1994, that appeal was dismissed on
the grounds that Khan had defaulted for failure to comply with the Court's
scheduling order. The Company has been advised by Mr. Khan that he intends to
represent himself pro se in this matter. With the consent of the parties, the
Court ordered all discovery stayed until September 6, 1994. Management believes
that Khan's counterclaim is without merit and the Company intends to vigorously
defend these counterclaims.
8. SUBSEQUENT EVENTS --
On August 1, 1994, the Company and its three affiliated corporations (ICN
Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., Viratek, Inc. and ICN
Biomedicals, Inc.) entered into a merger agreement to combine the four companies
into a newly formed corporation (which will be renamed ICN Pharmaceuticals,
Inc.) or in the case of Biomedicals, into a wholly-owned subsidiary of New ICN
(the "Merger"). Under the terms of the merger agreement, all outstanding shares
of common stock of the four companies (other than shares held by ICN) will be
exchanged for shares of common stock of the new Company pursuant to the
following exchange ratios: ICN: 1 to .512, SPI: 1 to 1; Viratek: 1 to .499; and
Biomedicals: 1 to .197. The proposed Merger is subject to various conditions,
including approval by the stockholders of each of the four companies, issuance
of
F-103
<PAGE> 217
VIRATEK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1994
(UNAUDITED)
$150 million of convertible debentures to refinance a substantial portion of the
long-term indebtedness of the four companies (a waivable condition), appropriate
regulatory approvals and certain other conditions. Assuming these conditions are
satisfied, the transaction is expected to close during the fall of 1994.
Three lawsuits have been filed by stockholders of SPI and, in one of these
lawsuits, Viratek, with respect to the Merger in the Court of Chancery of the
State of Delaware against ICN, SPI, Viratek (with respect to one of such
lawsuits) and certain directors and officers of ICN, SPI and/or Viratek
(including Milan Panic). The lawsuits, entitled Helmut Kling v. Milan Panic, et
al., Jallath v. Milan Panic, et al., and Amy Hoffman v. Milan Panic, et al.
purport to be class actions on behalf of all persons who hold shares of SPI
Common Stock and, in one lawsuit, Viratek Common Stock. These suits allege that
the consideration to be provided to the public stockbrokers of SPI and Viratek
(with respect to one of such lawsuits) in the Merger is unfair and inadequate,
and that the defendants have breached their fiduciary duties in approving the
proposed Merger and otherwise. The Company believes that these suits are without
merit.
F-104
<PAGE> 218
REPORT OF INDEPENDENT AUDITORS
To ICN Biomedicals, Inc.:
We have audited the accompanying consolidated balance sheets of ICN
Biomedicals, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company has had certain transactions with its parent and affiliated
companies as more fully described in Notes 3, 4, 6, 7 and 11 to the consolidated
financial statements. Whether the terms of these transactions would have been
the same had they been between wholly unrelated parties cannot be determined.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ICN Biomedicals, Inc. and subsidiaries as of December 31, 1993 and 1992 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND
Los Angeles, California
March 30, 1994
F-105
<PAGE> 219
ICN BIOMEDICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Current assets:
Cash and equivalents................................................... $ 2,204 $ 509
Restricted cash........................................................ -- 256
Receivables, net....................................................... 16,270 11,574
Inventories, net....................................................... 13,499 15,601
Prepaid expenses and other current assets.............................. 3,587 3,241
Assets held for disposition............................................ 8,959 --
-------- --------
Total current assets......................................... 44,519 31,181
Property, plant and equipment, net..................................... 13,155 15,728
Other assets and deferred charges, net................................. 2,735 2,342
Excess of cost over net assets of purchased subsidiaries, net.......... 2,933 2,580
-------- --------
$ 63,342 $ 51,831
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................... $ 4,223 $ 1,926
Current maturities of long-term debt and capital lease obligations..... 2,064 1,379
Accounts payable....................................................... 12,808 6,404
Accrued liabilities.................................................... 16,748 10,716
-------- --------
Total current liabilities.................................... 35,843 20,425
Long-term debt and capital lease obligations, less current
maturities........................................................... 11,709 10,567
Deferred income taxes and other liabilities............................ 3,560 2,266
Payable to ICN......................................................... 8,414 5,932
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; Series A,
300,000 shares ($30,000,000 involuntary liquidation preference)...... -- 3
Series B, 390,000 shares ($39,000,000 involuntary liquidation
preference).......................................................... -- 4
Common stock, $.01 par value: 30,000,000 shares authorized; 22,397,272
and 9,033,623 shares issued and outstanding at December 31, 1992 and
1993, respectively................................................... 224 90
Additional capital: Preferred.......................................... -- 61,928
Additional capital: Common............................................. 93,934 43,072
Deficit................................................................ (89,014) (89,540)
Foreign currency translation adjustments............................... (1,328) (2,916)
-------- --------
Total stockholders' equity................................... 3,816 12,641
-------- --------
$ 63,342 $ 51,831
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-106
<PAGE> 220
ICN BIOMEDICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................ $ 96,507 $ 75,648 $ 59,076
Cost of sales............................................ 51,917 44,851 27,631
-------- -------- --------
Gross profit............................................. 44,590 30,797 31,445
Selling, general and administrative expenses............. 39,922 43,509 28,455
Research and development costs........................... 1,687 583 378
Amortization of goodwill and other intangibles........... 1,829 1,486 502
Interest income (including $218 from ICN in 1991)........ (512) (212) (6)
Interest expense (including $314 and $420 to ICN in 1992
and 1993, respectively)................................ 7,585 4,779 2,256
Lease vacancy costs...................................... -- -- 1,436
Restructuring costs and special charges.................. 6,087 63,032 --
Other (income) expense, net.............................. 1,268 4,731 (2,399)
-------- -------- --------
Income (loss) before provision (benefit) for income taxes
and extraordinary income............................... (13,276) (87,111) 823
Provision (benefit) for income taxes..................... (384) 309 (312)
-------- -------- --------
Income (loss) before extraordinary income................ (12,892) (87,420) 1,135
Extraordinary income..................................... -- -- 627
-------- -------- --------
Net income (loss)........................................ $(12,892) $(87,420) $ 1,762
======== ======== ========
Per share information:
Net income (loss) before extraordinary income............ $ (1.09) $ (4.80) $ .07
Extraordinary income..................................... -- -- .03
-------- -------- --------
Net income (loss)........................................ $ (1.09) $ (4.80) $ .10
======== ======== ========
Dividends per common share............................... $ .15 $ .17 $ .17
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-107
<PAGE> 221
ICN BIOMEDICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES "A" AND "B" COMMON STOCK ADDITIONAL
---------------------- ----------------------- CAPITAL
NUMBER OF NUMBER OF PREFERRED AND
SHARES AMOUNT SHARES AMOUNT COMMON
--------- ------ ----------- ------ -------------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1990.............................. -- $ -- 11,249,913 $ 113 $ 38,882
December 1990 net loss.................................... -- -- -- -- --
Dividends declared ($.15 per share)....................... -- -- -- -- --
Translation adjustments................................... -- -- -- -- --
Exercise of stock options................................. -- -- 89,083 1 343
Conversion of debt into common stock...................... -- -- 3,984,464 39 25,816
Net loss.................................................. -- -- -- -- --
------- ----- ----------- ----- --------
Balance at December 31, 1991.............................. -- -- 15,323,460 153 65,041
Dividends declared ($.17 per share)....................... -- -- -- -- --
Translation adjustments................................... -- -- -- -- --
Exercise of stock options................................. -- -- 54,040 1 245
Conversion of debt into common stock...................... -- -- 7,019,772 70 28,648
Net loss.................................................. -- -- -- -- --
------- ----- ----------- ----- --------
Balance of December 31, 1992.............................. -- -- 22,397,272 224 93,934
Dividends declared ($.17 per share)....................... -- -- -- -- --
Translation adjustments................................... -- -- -- -- --
Exercise of stock options................................. -- -- 4,800 -- 4
Conversion of common stock and debt into Preferred stock
series "A" and "B"...................................... 690,000 7 (13,368,449) (134) 11,062
Net income................................................ -- -- -- -- --
------- ----- ----------- ----- --------
Balance at December 31, 1993.............................. 690,000 $ 7 9,033,623 $ 90 $105,000
======= ===== =========== ===== ========
<CAPTION>
RECEIVABLE
FOREIGN FROM
RETAINED CURRENCY PARENT FOR
EARNINGS TRANSLATION ISSUANCE OF
(DEFICIT) ADJUSTMENTS STOCK TOTAL
--------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Balance at November 30, 1990.............................. $ 18,507 $ 3,298 $ -- $60,800
December 1990 net loss.................................... (1,508) -- -- (1,508)
Dividends declared ($.15 per share)....................... (1,738) -- -- (1,738)
Translation adjustments................................... -- (1,145) -- (1,145)
Exercise of stock options................................. -- -- -- 344
Conversion of debt into common stock...................... -- -- (2,853) 23,002
Net loss.................................................. (12,892) -- -- (12,892)
-------- -------- -------- -------
Balance at December 31, 1991.............................. 2,369 2,153 (2,853) 66,863
Dividends declared ($.17 per share)....................... (3,963) -- -- (3,963)
Translation adjustments................................... -- (3,481) -- (3,481)
Exercise of stock options................................. -- -- -- 246
Conversion of debt into common stock...................... -- -- 2,853 31,571
Net loss.................................................. (87,420) -- -- (87,420)
-------- -------- -------- -------
Balance of December 31, 1992.............................. (89,014) (1,328) -- 3,816
Dividends declared ($.17 per share)....................... (2,288) -- -- (2,288)
Translation adjustments................................... -- (1,588) -- (1,588)
Exercise of stock options................................. -- -- -- 4
Conversion of common stock and debt into Preferred stock
series "A" and "B"...................................... -- -- -- 10,935
Net income................................................ 1,762 -- -- 1,762
-------- -------- -------- -------
Balance at December 31, 1993.............................. $(89,540) $ (2,916) $ -- $12,641
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-108
<PAGE> 222
ICN BIOMEDICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) before extraordinary income.......... $(12,892) $(87,420) $ 1,762
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Lease vacancy costs................................. -- -- 1,200
Gain on settlements of certain lease contracts...... -- -- (938)
Gain on settlement of foreign non-income tax related
dispute........................................... -- -- (430)
Gain on settlement of certain liabilities for less
than original estimate............................ -- -- (1,250)
Extraordinary income................................ -- -- (627)
Depreciation and amortization....................... 6,045 6,076 3,381
Allowance for losses on receivables................. 20 2,251 168
Loss (gain) on disposition of assets................ 931 1,184 (271)
Foreign exchange gains, net......................... (744) (730) (178)
Restructuring costs and special charges............. 6,087 63,032 --
Other non-cash gains................................ (98) (125) (147)
Change in assets and liabilities, net:
Decrease in receivables................................ 12,141 5,540 4,528
Decrease (increase) in inventories, net................ 8,569 10,881 (2,102)
Decrease (increase) in prepaid expenses and other...... (2,032) (3,615) 726
Decrease in accounts payable and accrued liabilities... (9,670) (3,281) (12,498)
-------- -------- --------
Net cash (used in) provided by operating
activities........................................ 8,357 (6,207) (6,676)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................................... (1,978) (911) (2,235)
Proceeds from the sale of asset held for disposition... -- -- 4,543
Other, net............................................. 3,253 90 --
-------- -------- --------
Net cash (used in) provided by investing
activities........................................ 1,275 (821) 2,308
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and notes
payable............................................. $ 17,952 $ 2,733 $ 661
Principal payments on long-term debt and notes
payable............................................. (38,765) (11,736) (4,214)
Proceeds from exercise of stock options................ 344 246 4
Increase in restricted cash............................ -- -- (256)
Cash dividends paid.................................... (411) (537) (351)
Cash received from ICN, net............................ 13,444 16,739 6,783
Other, net............................................. (568) -- --
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ (8,004) 7,445 2,627
-------- -------- --------
Effect of exchange rate changes on cash.................. 481 (218) 46
-------- -------- --------
Net increase (decrease) in cash and equivalents.......... 2,109 199 (1,695)
Cash and equivalents at beginning of year................ (104) 2,005 2,204
-------- -------- --------
Cash and equivalents at end of year...................... $ 2,005 $ 2,204 $ 509
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-109
<PAGE> 223
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. FORMATION AND HISTORY
ICN Biomedicals, Inc. (the "Company") was incorporated in September 1983 as
a Delaware corporation by ICN Pharmaceuticals, Inc. ("ICN") and operated as a
wholly-owned subsidiary of ICN until the Company completed its initial public
offering during 1986. The Company is a 69%-owned subsidiary of ICN at December
31, 1993. The Company conducts its business in research chemical products,
diagnostics products, biomedical instrumentation, and radiation monitoring
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior year items have been reclassified to conform with the current
year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
account balances and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a
maturity of less than three months to be cash equivalents.
Excess of Cost Over Net Assets of Purchased Subsidiaries
The difference between the purchase price and the fair value of net assets
at the date of acquisition is included in the consolidated balance sheets as
"Excess of cost over net assets of purchased subsidiaries, net" ("Goodwill").
Goodwill has been amortized primarily over forty years through 1992. The Company
evaluates the carrying value of goodwill including the amortization periods on a
quarterly basis to determine whether events and circumstances warrant revised
estimates of useful lives. The recoverability of goodwill is assessed based on
the expected undiscounted future operating income of the acquired entity. During
the fourth quarter of 1992, the Company wrote-off a substantial portion of its
goodwill, primarily related to its Flow acquisition, as more fully described in
Note 12. Additionally, of the remaining goodwill, the Company revised the
remaining amortization period to primarily five years, which reflects the
estimated recovery period of the remaining goodwill. Accumulated amortization
totaled $2,548,000 and $2,901,000 at December 31, 1992 and 1993, respectively.
Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are
translated at the end of period exchange rates. Revenues and expenses are
translated at the average exchange rates prevailing during the period. The
effects of unrealized exchange rate fluctuations on translating foreign currency
assets and liabilities into U.S. dollars are accumulated in stockholders'
equity. The Company has included in operating income all foreign exchange gains
and losses arising from foreign currency transactions. Gains included in other
expenses, net from foreign exchange transactions for 1991, 1992 and 1993 were
$744,000, $730,000 and $178,000, respectively.
F-110
<PAGE> 224
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Inventories
Inventories, which include material, direct labor and overhead, are stated
at the lower of cost or market. Cost is determined on a first-in, first-out
(FIFO) basis.
Catalog Costs
The initial costs of design, production and distribution of the Company's
product catalog are deferred and amortized over its estimated service life,
approximately one year. However, for the year ended December 31, 1992, due to
lower than expected sales results, the Company wrote-off these costs in the
fourth quarter of 1992 (See Note 12).
Property, Plant and Equipment
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 over 20-40 years, machinery and equipment
over 2-10 years, furniture and fixtures over 3-10 years, and leasehold
improvements are amortized over their useful lives, limited to the life of the
lease.
The Company follows the policy of capitalizing expenditures that materially
extend the life or increase the value of the related assets. Repair and
maintenance costs are charged 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.
Patents and Other Intangible Assets
The costs of patents, license rights and other intangible assets acquired
primarily through acquisitions are included in other assets and deferred
charges, net and are being amortized over approximately 5 to 10 years. Such
costs totaled $1,024,000 and $871,000, net of accumulated amortization of
$654,000 and $803,000 as of December 31, 1992 and 1993, respectively. In
addition, certain patents and intangible assets which were acquired in
connection with the Flow and other acquisitions were re-evaluated during the
fourth quarter 1992. The Company wrote-off a portion of its patents and
intangible assets, as more fully described in Note 12. Additionally, of the
remaining patents and other intangible assets, the Company revised the remaining
amortization period to primarily five years which reflects the estimated
recovery period of the remaining patents and other intangible assets.
Income Taxes
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, (SFAS 109) "Accounting for Income Taxes". SFAS 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. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. The adoption of SFAS 109 did not
result in a cumulative effect adjustment in the statement of operations.
F-111
<PAGE> 225
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Notes Payable
The Company classifies bank borrowings with initial terms of one year or
less as Notes Payable. These notes, originating in the Italian subsidiary, bear
interest at average rates of 16%. The carrying amount of Notes Payable
approximates fair value due to the short-term maturity of these instruments.
Per Share Information
Per share information is based on the weighted average number of shares
outstanding and dilutive common share equivalents. Common share equivalents
represent shares issuable for outstanding options and warrants on the assumption
that the proceeds would be used to repurchase shares on the open market. The
Swiss Franc Exchangeable Certificates debt issue (see Note 6) is not a common
share equivalent. Fully dilutive earnings per share is not shown because the
computation was antidilutive or the difference from primary earnings per share
was not material. The number of shares used in the per share computation was
11,790,000, 18,224,000 and 17,964,000 in 1991, 1992 and 1993, respectively.
Concentrations of Credit Risk
The Company has approximately $3,506,000 of accounts receivables related to
its Italian subsidiary for which a significant portion of the balance relates to
local government entities. The ability and timing to collect these receivables
is influenced by the general economics in that country.
3. ASSETS HELD FOR DISPOSITION
During January 1993, the Company transferred its Dublin, Virginia, facility
to ICN in exchange for a reduction in the intercompany amounts due ICN of
$586,000 representing the net book value at the date of transfer.
During April 1993, the Company sold certain assets of its manufacturing
business, producing liquid and powder media, located in Irvine, Scotland. The
resulting gain of approximately $278,000 is included in other (income) expense,
net. Additionally, the Company has deferred approximately $256,000 of the sales
proceeds for certain environmental contingencies related to the Irvine, Scotland
property. This obligation is funded and included in restricted cash and held in
an escrow trust account. In the event such contingencies do not utilize the
escrow balance, remaining funds, if any, will be remitted to the Company.
During the fourth quarter of 1993, the Company moved its Italian operation
from Cassina de Pecchi, a leased facility, back to Opera, an owned facility. The
Opera facility was transferred from assets held for disposition to property,
plant and equipment during December 1993.
4. RELATED PARTY TRANSACTIONS
General
As of December 31, 1993, ICN owned 69% of the outstanding common stock of
the Company. ICN controls the Company through stock ownership, voting control
and board representation. The Company, ICN, SPI Pharmaceuticals, Inc. (a
39%-owned equity investment of ICN at December 31, 1993 -- "SPI") and Viratek,
Inc. (a 69%-owned subsidiary of ICN at December 31, 1993 -- "Viratek") have
engaged in, and will continue to engage in, certain transactions with each
other.
The Company has obtained a written agreement from ICN that ICN is prepared,
if needed, to provide financial support to the Company in order to meet its
financial obligations through April 15, 1995.
F-112
<PAGE> 226
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
An Oversight Committee of the Boards of Directors of ICN, SPI, Viratek and
the Company reviews transactions between or among the Company, ICN, SPI and
Viratek (collectively, the "Affiliated Corporations") to determine whether a
conflict of interest exists with respect to a particular transaction and the
manner in which such conflict can be resolved. The Oversight Committee has
advisory authority only and makes recommendations to the Board of Directors of
each of the Affiliated Corporations. The Oversight Committee consists of one
non-management director of each Affiliated Corporation and a non-voting
chairman. The significant related party transactions have been reviewed and
recommended for approval by the Oversight Committee, and approved by the
respective Boards of Directors.
Cost Allocations
The Company subleases space on a year-to-year basis in Costa Mesa,
California from ICN. The costs of common services used by the Company, SPI,
Viratek and ICN are allocated by SPI based upon various formulas. Effective
January 1, 1993, ICN reimburses the Company for those allocations which are in
excess of the amounts determined by management using competitive data, as
reviewed and recommended by the Oversight Committee, that would have been
incurred by the Company if it operated in a facility suited solely to its
requirements. It is management's belief that the methods used and amounts
allocated for facility costs and common services are reasonable based upon the
usage by the respective Companies.
Rent and common services charged to the Company were as follows:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- --------
<S> <C> <C> <C>
Rent............................................ $ 310,000 $ 310,000 $310,000
Common services................................. 1,475,000 1,497,000 528,000
---------- ---------- --------
$1,785,000 $1,807,000 $838,000
========== ========== ========
</TABLE>
Investment Policy
Effective December 1, 1986, ICN and its affiliates have adopted an
investment policy covering intercompany advances and interest rates, and the
types of investment acquisitions (marketable equity securities, high-yield
bonds, etc.) to be made by ICN and its affiliates. As a result of this policy,
excess cash held by the Company is transferred to ICN and in turn, invested by
ICN and cash advances have been made by ICN to the Company to fund acquisitions
and certain other transactions. ICN charges interest at the prime rate plus
1/2% and credits interest at the prime rate less 1/2% on the amounts invested
or advanced. Interest (income) expense, related to this balance was ($218,000),
$314,000, and $420,000 for 1991, 1992 and 1993, respectively, at average
interest rates of approximately 7.9%, 6.75%, and 6.5%, respectively.
During the year ended December 31, 1992 and 1993, the Company reclassified
its SPI intercompany payable of $3,631,000 and $2,333,000, and its Viratek
intercompany receivable of $536,000 and $272,000 to the Company's ICN
intercompany account resulting in a net increase in the Company's liability to
ICN of $3,095,000 and $2,061,000, respectively. Total loans and advances from
ICN were $8,414,000 and $5,932,000 as of December 31, 1992 and 1993,
respectively. Such advances have been classified as a long-term payable.
In accordance with this investment policy, the Company advanced the net
proceeds of the Company's Bio Capital Holding Swiss Franc public offering,
completed in February 1987, to ICN. These advances were payable to the Company
by ICN in Swiss Francs. At March 1, 1991 the Company converted an advance due
from ICN of SFr. 14,386,000 into $10,849,000. As a result of this change, the
Company removed the hedge from its Swiss franc liability and recorded exchange
gains of $170,000, $758,000 and $159,000 in 1991, 1992 and 1993, respectively.
F-113
<PAGE> 227
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Debt and Equity Transactions
On August 30, 1993, the Company issued 300,000 shares of a new series "A"
of the Company's non-convertible, non-voting, preferred stock valued pursuant to
a fairness opinion, at $30,000,000 to ICN. In exchange, ICN delivered 4,983,606
shares of the Company's common stock that ICN owned and exchanged intercompany
debt owed to ICN by the Company in the amount of $11,000,000.
In addition, on August 30, 1993, the Company issued 390,000 shares of a new
series "B" of the Company's non-convertible, non-voting, preferred stock valued
pursuant to a fairness opinion, at $32,000,000 to ICN. In exchange, ICN
delivered to the Company 8,384,843 shares of the Company's common stock that ICN
owned.
As a result of the exchange, the Company had 9,033,623 common shares issued
and outstanding.
Subject to declaration by the Company's Board of Directors, the new series
"A" preferred stock pays an annual dividend of $8, noncumulative, payable
quarterly and the new series "B" preferred stock pays an annual dividend of $10,
noncumulative, payable quarterly. Both series "A" and "B" preferred stock become
cumulative in respect to dividends upon certain events deemed to be a change in
control, as defined by the certificates of designation. The series "B" preferred
dividends are subject to the prior rights of the holders of the series "A"
preferred stock and any other preferred stock ranking prior to the series "B"
preferred.
The series "A" preferred stock is senior in ranking to the series "B"
preferred stock and the series "B" preferred stock is senior to the Company's
common stock as to voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company, after payment or provision for payment of the
debts and other liabilities of the Company. The holders of the series "A"
preferred shares are entitled to receive an amount in cash or in property,
including securities of another corporation, equal to $100 per share in
involuntary liquidation or $106 per share in voluntary liquidation prior to
August 31, 1994 and declining ratably per year to $100 per share after 1998,
plus dividends, in the event dividends have become cumulative. The holders of
the series "B" preferred shares are entitled to receive an amount in cash or in
property, including securities of another corporation equal to $100 per share in
voluntary or involuntary liquidation, plus dividends, in the event dividends
have become cumulative.
The series "A" and "B" preferred shares are redeemable, for cash or
property, including securities of another corporation, in whole or in part, at
the option of the Company only, subject to approval by a vote of a majority of
the independent directors of the Company. The series "A" preferred shares are
redeemable at $106 per share prior to August 31, 1994 and declining ratably per
year to $100 in 1998, plus dividends, in the event dividends have become
cumulative. The series "B" shares are redeemable at $100 per share, plus
dividends, in the event dividends have become cumulative.
No dividends were declared on the Series "A" or Series "B" preferred stock
during 1993.
On December 31, 1992, the Company exchanged $11,250,000 of debt owed to ICN
for 3,214,286 shares of the Company's common stock issued to ICN at a price of
$3.50 per share which represents the closing market price of the stock on that
date.
On April 1, 1992, the Company transferred $13,072,000 of debt with First
City Bank of Texas-Houston N.A., to ICN. The Company, in exchange, issued
2,412,449 shares of the Company's common stock at a price of $5.42 per share
which represents the closing market price of the stock at that date less a
discount of 15%. ICN became primarily liable for the debt. The Company's
domestic inventories and receivables remained as collateral. The outstanding
debt was repaid in full by ICN on December 3, 1992 and all pledges were
extinguished.
F-114
<PAGE> 228
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
On March 31, 1992, the Company transferred $2,711,000 of debt owed to
Skopbank of Finland to ICN. The Company, in exchange, issued 500,334 shares of
the Company's common stock at a price of $5.42 per share which represents the
closing market price of the Company's stock on that date less a discount of 15%.
ICN became primarily liable for the debt and the Company became guarantor.
On March 31, 1992, the Company exchanged $4,837,000 of debt owed to ICN for
892,703 shares of the Company's common stock issued to ICN at a price of $5.42
per share which represents the closing market price of the stock on that date
less a discount of 15%.
On December 31, 1991, the Company issued 3,363,298 shares of the Company's
common stock to ICN at a price of $6.25 which represents the fair market value
of the Company's stock on that date in exchange for debt owed ICN in the amount
of $18,167,523.
On March 1, 1991, the Company exchanged $3,833,000 of advances due to ICN
into 538,000 shares of the Company's common stock, issued at a price of $7.125
which represented the fair market value of the Company's stock on that date less
a discount of 22%.
In March 1987 and October 1988, the Company purchased ICN 12 7/8%
debentures due 1998 and ICN 12 1/2% debentures due 1999 on the open market. The
debentures had a book value of $3,567,250. On December 30, 1991 the Company sold
all the debentures to ICN for a loss of $64,250.
Research and Development
Effective January 1, 1992, the Company entered into an agreement with
Viratek, whereby the Company transferred right, title, and interest in certain
of its research and development projects to Viratek. The Company retains a right
of first refusal to the marketing and distribution rights for any products
developed. Viratek conducts biomedical research related to the development of
non-isotopic diagnostic test kits and associated hardware. The Company continues
to perform research and development in reagents and instrumentation.
Other
During January 1993, the Company transferred its Dublin, Virginia, facility
to ICN in exchange for a reduction in the intercompany amounts due ICN of
$586,000 representing the net book value at the date of the transfer.
On December 31, 1992, the Company transferred $5,747,000 of debt owed to a
major supplier, to ICN. ICN became primarily liable for the debt and the Company
became guarantor. On June 30, 1993, ICN filed a claim in arbitration alleging
breach of agreement entered with such supplier and withheld final payment due on
that date of approximately, $1,295,000 (Finnish Markka 7,500,000). Arbitration
is set for October 11, 1994.
5. INCOME TAXES
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, (SFAS 109) "Accounting for Income Taxes". SFAS 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. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. The
F-115
<PAGE> 229
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
adoption of SFAS 109 did not result in a cumulative effect adjustment in the
statement of operations. Prior years' amounts are presented as previously
reported.
Income (loss) before provision for income taxes and extraordinary income
(1993) for the years ended December 31 consists of the following:
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ -----------
<S> <C> <C> <C>
Domestic.................................. $ (9,993,000) $(51,267,000) $ 2,753,000
Foreign................................... (3,283,000) (35,844,000) (1,930,000)
------------ ------------ -----------
$(13,276,000) $(87,111,000) $ 823,000
============ ============ ===========
</TABLE>
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1991 1992 1993
-------------------- ------------------- --------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal.................... $ -- $ 139,000 $ -- $ -- $ -- $ --
State...................... 60,000 -- -- -- -- --
Foreign.................... 263,000 (846,000) 309,000 -- (312,000) --
-------- --------- -------- -------- --------- --------
$323,000 $(707,000) $309,000 $ -- $(312,000) $ --
======== ========= ======== ======== ========= ========
</TABLE>
The components of the deferred income tax provision relate primarily to the
net tax effects of the differences arising as the result of utilizing different
depreciation and amortization methods for income tax purposes than for financial
reporting purposes and establishing inventory allowances for financial reporting
purposes which are not currently deductible for income tax purposes.
A reconciliation of the Federal statutory income tax rates to the effective
income tax rates is as follows:
<TABLE>
<CAPTION>
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate.......................................... (34)% (34)% 35 %
Goodwill amortization................................... 2 15 15
Operating loss -- no tax benefit........................ 36 20 --
Net operating loss -- tax benefit....................... -- -- (50)
Reduction -- foreign income tax liabilities............. (7) -- (38)
--- --- ---
Effective rate.......................................... (3)% 1 % (38)%
=== === ===
</TABLE>
The Company conducts business in a number of different tax jurisdictions.
Accordingly, losses sustained in one jurisdiction generally cannot be applied to
reduce taxable income in another jurisdiction. The income of certain foreign
subsidiaries is not subject to U.S. income taxes, except when such income is
paid to the U.S. parent company or one of its domestic subsidiaries. No U.S.
taxes have been provided on the Company's foreign subsidiaries since management
intends to reinvest those amounts in foreign operations. Included in
consolidated retained earnings (deficit) at December 31, 1993 is approximately
$1,820,000 of accumulated earnings of foreign operations that would be subject
to U.S. income taxes if and when repatriated.
The Company has domestic and foreign operating loss carryforwards (NOL) of
approximately $39,000,000 and $38,000,000, respectively, at December 31, 1993.
Such NOLs expire in varying amounts from 1994 until 2008. Of the $77,000,000
NOL, $458,000 will be credited to additional paid in capital when utilized. In
connection with the acquisition of Flow, the Company acquired Flow's net
operating loss carryforwards of $9,771,000. The Company has agreed to pay Flow
the first $500,000 of any benefits realized. In the event this amount is not
realized by November 1994, it will become due and payable to Flow including
F-116
<PAGE> 230
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
interest at 10%. Tax benefits related to the NOL existing at the date of
acquisition realized in excess of $500,000 will be shared equally with Flow.
The primary temporary differences which give rise to the Company's net
deferred tax liability, at January 1, 1993 and December 31, 1993, are as
follows: (in thousands)
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1993 1993
---------- ------------
<S> <C> <C>
Deferred tax assets:
Inventory and other allowances.................. $ 4,789 $ 3,734
Amortization differences........................ 2,157 417
Compensation not currently deductible........... 533 363
Other........................................... 1,750 1,750
Domestic NOL.................................... 10,024 11,958
Foreign NOL..................................... 12,635 13,311
Valuation reserve............................... (29,924) (29,511)
--------- ---------
Total deferred tax asset..................... 1,964 2,022
--------- ---------
Deferred tax liabilities:
Depreciation.................................... (1,964) (2,022)
--------- ---------
Total deferred tax liability................. (1,964) (2,022)
--------- ---------
Net deferred tax liability................... $ -- $ --
========= =========
</TABLE>
6. DEBT
Long-term debt and obligations under capital leases due non-affiliates
consists of the following:
<TABLE>
<CAPTION>
1992 1993
----------- -----------
<S> <C> <C>
Zero Coupon Guaranteed Bonds with an effective
interest rate of 13.5%, maturing in 2002.......... $ 9,112,000 $ 8,441,000
Notes payable to banks, collateralized by land and
buildings, due in various installments through the
year 2000 with interest at 5.75% to 10%........... 3,093,000 2,712,000
Bank loans from Italian Government agency with
interest rate of 2% maturing in 2002.............. 504,000 435,000
Loans from the Scottish Development Agency,
collateralized by real property, at an average
interest rate of 11.9% (paid upon sale of
underlying real property in 1993)................. 382,000 --
Obligations under capital leases.................... 682,000 358,000
----------- -----------
Total long-term debt and capital leases............. 13,773,000 11,946,000
Less -- current maturities.......................... 2,064,000 1,379,000
----------- -----------
Total.......................................... $11,709,000 $10,567,000
=========== ===========
</TABLE>
All of the long-term debt noted above (other than $1,670,000 and $1,555,000
of notes payable to banks, collateralized by land and buildings in 1992 and
1993, respectively), is denominated in currencies other than the U.S. Dollar.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN
and the Company, completed a public offering in Switzerland of Swiss Francs
(SFr.) 70,000,000 principal amount of 5 1/2% Swiss Franc Exchangeable
Certificates ("Old Certificates"). At the option of the certificate holders, the
Old Certificates
F-117
<PAGE> 231
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
are exchangeable into shares of common stock of the Company. Net proceeds were
used by Bio Capital to purchase SFr. 70,000,000 face amount of zero coupon Swiss
Franc Debt Notes due 2002 of the Kingdom of Denmark (the "Danish Bonds") for
SFr. 33,772,000 and 15 series of zero coupon Swiss Franc Guaranteed Bonds of the
Company (the "Zero Coupon Guaranteed Bonds") for SFr. 32,440,000, which are
guaranteed by ICN. Each series of the Zero Coupon Guaranteed Bonds are in an
aggregate principal amount of SFr. 3,850,000 maturing in 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, the Company offered, to all certificate holders, to exchange
the Old Certificates for newly issued certificates ("New Certificates"), the
terms of which remain the same except that 334 shares per SFr. 5,000 principal
certificate can be exchanged at $10.02 using a fixed exchange rate of SFr. 1.49
to U.S. $1.00. Substantially all of the outstanding Old Certificates were
exchanged for New Certificates (together referred to as "Certificates"). The
deferred loan costs associated with the exchange are included in other assets
and deferred charges, net in the accompanying consolidated balance sheets. This
exchange was accounted for as an extinguishment of debt and the effect on net
income was not material.
During 1992, the Company repurchased SFr. 5,640,000 of Certificates,
representing long-term debt of $1,859,000.
During 1991, SFr. 1,245,000 ($918,000) principal amount of New Certificates
were exchanged into 83,166 shares of common stock. These transactions resulted
in a reduction of debt of SFr. 434,000 ($312,000) during 1991. There were no
Certificates exchanged during 1992 or 1993.
As of December 31, 1993, the accompanying consolidated financial statements
include total outstanding debt of SFr. 12,534,000 ($8,441,000) which represents
the present value of the Company's obligation to pay the Zero Coupon Guaranteed
Bonds. When Certificates are exchanged into common stock, the Company's
obligation to pay the Zero Coupon Guaranteed Bonds is reduced and the Danish
Bonds are released by Bio Capital to the Company, both on a pro rata basis. As
of December 31, 1993, SFr. 39,615,000 ($26,677,000) principal of Certificates
were outstanding which, if exchanged for common stock, would result in the
issuance of 2,608,241 shares of common stock, a reduction of long-term debt of
SFr. 11,330,000 ($7,630,000), a reduction of SFr. 1,204,000 ($811,000) of
current maturities of long-term debt, and an increase in marketable securities
of SFr. 20,204,000 ($13,605,000) from the release by Bio Capital of the Danish
Bonds to the Company.
Annual aggregate maturities of long-term debt including obligations under
capital leases are as follows:
<TABLE>
<S> <C>
1994............................................ $ 1,379,000
1995............................................ 1,344,000
1996............................................ 1,419,000
1997............................................ 1,510,000
1998............................................ 1,513,000
Thereafter...................................... 4,781,000
-----------
Total................................. $11,946,000
===========
</TABLE>
The average month-end balances of aggregate short-term borrowings due to
non-affiliates were $6,059,000, and $2,933,000, at weighted average interest
rates of 20.9% and 16.2%, for 1992 and 1993, respectively. Maximum total
month-end borrowings during 1992 and 1993 were $7,712,000, and $4,204,000,
respectively. The weighted average interest rates of total short-term debt due
to non-affiliates at the end of 1992 and 1993, approximated the weighted average
rate on average month-end balances.
F-118
<PAGE> 232
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
7. COMMITMENTS AND CONTINGENCIES
Commitments
At December 31, 1993, the Company was committed under noncancellable leases
with non-affiliates for minimum aggregate lease payments as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
1994............................................... $ 849,000 $155,000
1995............................................... 799,000 88,000
1996............................................... 625,000 88,000
1997............................................... 507,000 89,000
1998............................................... 534,000 --
Thereafter......................................... 4,782,000 --
---------- --------
$8,096,000 420,000
==========
Less -- amount representing interest............... 62,000
--------
Present value of net minimum lease payments........ 358,000
Less -- current maturities......................... 129,000
--------
$229,000
========
</TABLE>
Rental expense on operating leases was $1,426,000, $1,066,000 and $870,000
in 1991, 1992 and 1993, respectively.
Purchase Commitment
The Company has a purchase commitment with a major supplier for which the
remaining purchase of inventory under agreement will be due June 1994 in the
amount of approximately $1,727,000 (Finnish Markka 10,000,000).
The Company is also a guarantor on a note payable to the same supplier for
which ICN is primarily liable. On June 30, 1993, ICN filed a claim in
arbitration alleging breach of agreement entered with such supplier and withheld
final payment due on that date of approximately $1,295,000 (Finnish Markka
7,500,000). In addition, ICN is seeking declaration and award that the Company
is not obligated to honor the aforementioned purchase commitment or installments
on the note. Arbitration is set for October 4, 1994.
Acquisition Commitments
Under the terms of the Flow purchase agreement, the Company issued 100,000
shares of common stock to the seller, which shares have a guaranteed value of
$20 per share on November 8, 1994. If the fair value, as defined, of the
Company's common stock is less than $20 per share on that date, the Company must
pay the difference in cash. The Company may redeem such shares for the $20
guaranteed value prior to November 8, 1994. At December 31, 1993, the Company
would have paid $1,575,000 to honor the guarantee.
Litigation
The Company is party to a number of pending or threatened lawsuits arising
out of, or incidental to, its ordinary course of business. In the opinion of
management, the resolution of these matters will not have a material adverse
effect upon the consolidated financial position of the Company.
F-119
<PAGE> 233
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Product Liability Insurance
The Company is self-insured for potential product liability with respect to
currently marketed products. 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 upon the consolidated
financial position of the Company.
Benefit Plans
The Company has several benefit plans covering substantially all of their
employees.
All eligible U.S. employees may elect to participate in an ICN sponsored
401(k) plan. The Company partially matches employee contributions.
The Company's United Kingdom subsidiary has a defined benefit retirement
plan which covers all eligible U.K. employees. The plan is actuarially reviewed
approximately every three years. Annual contributions are based on total
pensionable salaries. It is estimated that the plan's assets exceeded the
actuarial computed value of vested benefits as of December 31, 1992 and 1993,
respectively.
The total expense under the U.S. and U.K. plans was approximately $440,000
in 1991, $260,000 in 1992, and $452,000 in 1993.
The Company also had deferred compensation agreements for certain of its
officers and certain key employees, with benefits commencing at death or
retirement. The present value of the benefits expected to be paid was accrued
from 1985 through 1989 at which time the agreements were terminated. Interest
continues to accrue on the amounts due until all payments are made.
8. COMMON STOCK
The Company has reserved a total of 2,140,000 shares for issuance under its
1983 Employee Incentive Stock Option Plan and its 1983 Non-Qualified Stock
Option Plan and 1,000,000 shares for issuance under its 1992 Employee Incentive
Stock Option Plan and 1992 Non-Qualified Stock Option Plan (the "Plans"). Under
the terms of the plans, participants may receive options to purchase common
stock in such amounts as may be established by the Compensation Committee of the
Board of Directors. Options are granted at a price not less than 100 percent of
the fair market value on the date of grant and may be granted for a term of up
to ten years. Options have been granted at prices ranging from $.83 to $10.50
per share. Options for 1,137,258, 1,192,130 and 1,819,830 shares were
outstanding at December 31, 1991, 1992 and 1993, respectively. Shares available
for grant under the Plans were 343,860, 789,120 and 169,750 at December 31,
1991, 1992 and 1993, respectively. Shares remaining under grant were 1,192,130
and 1,819,830 at December 31, 1992 and 1993, respectively. Shares of 592,310 and
843,135, were exercisable as of December 31, 1992 and 1993, respectively.
Options totaling 89,083, 54,040, and 4,800 shares were exercised during 1991,
1992 and 1993, at average prices of $3.86, $4.55 and $.83, respectively. The
Company's 1983 Plans expired on September 1, 1993 and the Company's 1992 Plans
expire in 2002.
At December 31, 1993, options for 600,000 shares at prices ranging from
$6.125 to $7.00 per share of the Company's common stock were outstanding, which
had been granted during 1988 and 1992 to Milan Panic, Chairman of the Board of
Directors and Chief Executive Officer of the Company.
The Company issued 83,166 shares of common stock upon the exchange of
Certificates in 1991. There were no certificates exchanged during 1992 or
1993.
F-120
<PAGE> 234
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
9. DETAIL OF CERTAIN ACCOUNTS
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Receivables:
Trade......................................... $ 19,181,000 $ 13,527,000
Other......................................... 442,000 447,000
------------ ------------
19,623,000 13,974,000
Allowance for doubtful accounts............ (3,353,000) (2,400,000)
------------ ------------
$ 16,270,000 $ 11,574,000
============ ============
Inventories:
Raw materials and supplies.................... $ 3,898,000 $ 3,422,000
Work-in-process............................... 2,439,000 610,000
Finished goods................................ 22,692,000 23,048,000
------------ ------------
29,029,000 27,080,000
Allowance for slow moving and obsolete
inventory................................ (15,530,000) (11,479,000)
------------ ------------
$ 13,499,000 $ 15,601,000
============ ============
Prepaid expenses and other current assets:
Prepaid inventory............................. $ 2,874,000 $ --
Catalog costs................................. -- 2,295,000
Other......................................... 713,000 946,000
------------ ------------
$ 3,587,000 $ 3,241,000
============ ============
Property, plant and equipment, at cost:
Land.......................................... $ 995,000 $ 2,839,000
Buildings..................................... 4,782,000 6,655,000
Machinery and equipment....................... 19,149,000 19,612,000
Furniture and fixtures........................ 2,704,000 2,163,000
Leasehold improvements........................ 1,390,000 1,659,000
------------ ------------
29,020,000 32,928,000
Accumulated depreciation...................... (15,865,000) (17,200,000)
------------ ------------
$ 13,155,000 $ 15,728,000
============ ============
Other assets and deferred charges, net:
Deferred loan costs........................... $ 1,304,000 $ 1,118,000
Patents, trademarks and other intangibles..... 1,024,000 871,000
Other......................................... 407,000 353,000
------------ ------------
$ 2,735,000 $ 2,342,000
============ ============
</TABLE>
F-121
<PAGE> 235
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
1992 1993
------------ ------------
<S> <C> <C>
Accrued liabilities:
Payroll and related items..................... $ 1,717,000 $ 1,027,000
Deferred income............................... 2,294,000 2,397,000
Restructuring accruals........................ 4,509,000 478,000
Lease vacancy accrual......................... -- 1,200,000
Professional services......................... 1,620,000 1,133,000
Taxes other than income taxes................. 1,304,000 557,000
Interest...................................... 1,004,000 1,147,000
Commissions................................... 831,000 477,000
Other......................................... 3,469,000 2,300,000
----------- -----------
$16,748,000 $10,716,000
=========== ===========
</TABLE>
10. GEOGRAPHICAL DATA
The following tables set forth the amounts of net sales, income (loss)
before provision for income taxes and extraordinary income and identifiable
assets by geographical area for 1991, 1992 and 1993.
<TABLE>
<CAPTION>
1991 1992 1993
------------ ------------ -----------
<S> <C> <C> <C>
Net sales:
United States........................... $ 44,874,000 $ 39,668,000 $36,216,000
Canada.................................. 3,159,000 2,610,000 2,381,000
Europe.................................. 42,872,000 28,020,000 16,311,000
Asia/Pacific............................ 5,602,000 5,350,000 4,168,000
------------ ------------ -----------
Total................................ $ 96,507,000 $ 75,648,000 $59,076,000
============ ============ ===========
Income (loss) before provision for income
taxes and extraordinary income:
United States(1)(2)..................... $ (9,993,000) $(51,267,000) $ 2,753,000
Canada.................................. 386,000 (99,000) 157,000
Europe(2)............................... (3,859,000) (35,582,000) (2,831,000)
Asia/Pacific(2)......................... 190,000 (163,000) 744,000
------------ ------------ -----------
Total................................ $(13,276,000) $(87,111,000) $ 823,000
============ ============ ===========
Identifiable assets:
United States........................... $ 80,875,000 $ 31,957,000 $31,920,000
Canada.................................. 850,000 520,000 561,000
Europe.................................. 68,857,000 29,298,000 17,928,000
Asia/Pacific............................ 2,076,000 1,567,000 1,422,000
------------ ------------ -----------
Total................................ $152,658,000 $ 63,342,000 $51,831,000
============ ============ ===========
</TABLE>
- ---------------
(1) Includes net interest (income) expense related to the Company's consolidated
operations of $7,073,000, $4,567,000 and $2,250,000 for 1991, 1992 and 1993,
respectively.
(2) Amounts include restructuring charges of $6,087,000 and $63,032,000 for 1991
and 1992, respectively. These amounts consist of $2,296,000 and $38,064,000
for the U.S. for 1991 and 1992, respectively, and $3,791,000 and $24,608,000
for Europe for 1991 and 1992, respectively and $360,000 for Asia/Pacific for
1992.
F-122
<PAGE> 236
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Export sales made by United States operations amounted to $4,458,000,
$4,033,000 and $3,893,000 for 1991, 1992 and 1993, respectively. These sales
were made primarily to Europe and Asia/Pacific.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest charges of $5,483,000, $3,168,000 and $1,478,000
in 1991, 1992 and 1993, respectively. The Company also paid income taxes of
$469,000, $706,000 and $164,000 in 1991, 1992 and 1993, respectively.
On August 30, 1993, the Company issued 300,000 and 390,000 shares of
preferred stock series "A" and "B", respectively, to ICN. In exchange, ICN
retired $11,000,000 of debt owed to ICN by the Company and delivered 13,368,449
shares of the Company's common stock that ICN owned (see Note 3 -- "Preferred
Stock").
During January 1993, the Company transferred its Dublin, Virginia, facility
to ICN in exchange for a reduction in the intercompany amounts due ICN of
$586,000 representing the net book value at the date of transfer.
See Note 4 regarding debt converted into the Company's common stock during
1992 and 1991.
12. RESTRUCTURING COSTS AND SPECIAL CHARGES
The following is a summary regarding the Company's 1991 and 1992
Restructuring Costs and Special Charges.
In November 1989, the Company acquired for $37,700,000 all of the issued
and outstanding common shares of Flow Laboratories, Inc. and Flow Laboratories
B.V. from GRC International, Inc. (formerly Flow General Inc.). These companies
together with their respective subsidiaries ("Flow"), constituted the Biomedical
division of Flow General. The excess of the total purchase price (including
acquisition costs) over the fair value of net assets acquired was $35,245,000,
which was allocated to the excess of cost over net assets of purchased
subsidiaries and was being amortized over 40 years. Flow was a manufacturer and
distributor of several thousand biochemical products worldwide. At the time of
the acquisition, the Company had concluded that Flow was a significant
complement to the Company, since Flow had a major presence in the European
markets, which the Company lacked at the time. Therefore, more than products,
the Company acquired an international distribution network. Since 1990, the
Company utilized this distribution network to introduce ICN products. At the
same time, it decided to phase out or to eliminate Flow low margin products,
certain other product lines which did not fit the Company's long-term strategies
and to close down inefficient operations.
In prior years and the first three quarters of 1992, recoverability of
goodwill associated with the Flow acquisition was focused on the European
operations as Biomedicals had only a limited presence in Europe prior to the
Flow acquisition. Accordingly, Biomedicals used the expected future operating
income of the European operations in evaluating the recoverability of the Flow
goodwill.
During 1991, the Company initiated a restructuring program designed to
reduce costs, and improve operating efficiencies. The program included, among
other items, the consolidation, relocation and closure of certain manufacturing
and distribution facilities within the U.S. and Europe, which were acquired in
the Flow acquisition. Those measures, including a 15% reduction in the work
force, were largely enacted during 1991 and continued in 1992. Costs incurred
relating to this restructuring plan during 1991 were $6,087,000.
During the fourth quarter 1992, as a result of a continued decline in sales
and other factors, the Company reassessed their business plan and prospects for
1993 and beyond which included, among other things, the
F-123
<PAGE> 237
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
decision to sell the last remaining major European manufacturing facility and to
restructure the previously acquired distribution network and European operations
in line with the revised sales estimates. Consequently, based upon the
continuing decline in European revenue and profitability relating to Flow, Flow
facility closures and an ineffective distribution network, management concluded
that there was no current or expected future benefit associated from the Flow
acquisition. Accordingly, the Company wrote off goodwill and other intangibles,
primarily from the Flow acquisition of $37,714,000.
The relocation of various U.S. and European operations was also
re-evaluated. It was determined that many of the operations did not support the
costs of maintaining separate facilities. Therefore, estimated costs associated
with lease termination, employee termination, facility shut-down (of facilities
held for disposition) were expensed primarily in the fourth quarter of 1992 and
amounted to $4,858,000.
During the fourth quarter of 1992, the Company reassessed the valuation of
inventory, given the decline in sales and lack of effective integration of the
Company's and Flow's product lines. Accordingly, the Company recorded a
provision for abnormal writedowns of inventory to estimated realizable value of
$9,924,000 and discontinued products of $3,377,000.
In addition, during the fourth quarter of 1992, the Company determined that
the unamortized costs of the catalog marketing program would not be recovered
within a reasonable period; therefore, costs totaling $6,659,000 were written
off. In the future, specifically focused customer or "product line" catalogs
will be used for customer product lines and a more focused general catalog for
others.
Restructuring costs and special charges of $6,087,000 and $63,032,000 for
the years ended December 31, 1991 and 1992, respectively, are shown as a
separate item in the Consolidated Statements of Operations and include the
following:
<TABLE>
<CAPTION>
1991 1992
---------- -----------
<S> <C> <C>
Goodwill and other intangibles..................... $ -- $37,714,000
Catalog............................................ -- 6,659,000
Inventory allowances............................... -- 9,924,000
Discontinued products.............................. 1,550,000 3,377,000
Employee termination costs......................... 1,866,000 1,961,000
Lease termination costs............................ 737,000 1,434,000
Facility relocation costs.......................... 724,000 357,000
Reduction to net realizable value of vacant
facilities held for disposition.................. 800,000 1,106,000
Miscellaneous restructuring cost................... 410,000 500,000
---------- -----------
Total......................................... $6,087,000 $63,032,000
========== ===========
</TABLE>
13. LEASE VACANCY COSTS
During 1993, the Company vacated its High Wycombe facility in England and
moved to a facility more suitable to the Company's operating needs in Thames
England. The Company pursued various subleasing agreements for which none were
consummated as of December 31, 1993. Consequently, the Company accrued
approximately $1,200,000 which represents management's best estimate of the net
present value of future leasing costs to be incurred for High Wycombe. During
1993, the Company expensed an additional $236,000 of leasing costs related to
High Wycombe.
F-124
<PAGE> 238
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
14. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $1,268,000, $4,731,000 and $(2,399,000) in
1991, 1992 and 1993, respectively. In 1993, Other (income) expense, net,
includes a gain of $430,000 representing a favorable settlement of a foreign
non-income related tax dispute, a gain of $278,000 on the sale of the Company's
Irvine, Scotland facility, a gain of $938,000 realized by the Company's Italian
operation on the favorable termination of certain leasing contracts, and a gain
of $1,250,000 relating to certain liabilities accrued during 1992 which were
settled for less than the original estimates. In 1992, the Company expensed
$2,187,000 for a non-exclusive license fee for the purpose of marketing certain
laboratory equipment in the U.S., Canada and South America. Other charges in
1992 include certain non-income related taxes and an equity investment write-off
totaling $2,202,000. Other (income) expense, net in 1991 included $1,286,000 of
one-time costs relating to the introduction of the Company's catalog.
15. EXTRAORDINARY INCOME
During the second quarter of 1993, the Company's Italian operation
negotiated settlements with certain of its suppliers and banks resulting in an
extraordinary income of $627,000 or $.03 per share.
F-125
<PAGE> 239
(This page intentionally left blank)
F-126
<PAGE> 240
ICN BIOMEDICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND JUNE 30, 1994
(000'S OMITTED EXCEPT FOR PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30
DECEMBER 31 1994
1993 UNAUDITED
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 509 $ 850
Restricted cash.................................................... 256 --
Receivables, net................................................... 11,574 13,173
Inventories, net................................................... 15,601 15,473
Prepaid expenses and other current assets.......................... 3,241 2,602
-------- --------
Total current assets....................................... 31,181 32,098
Property, plant and equipment, net................................... 15,728 15,388
Other assets and deferred charges.................................... 2,342 2,305
Excess of cost over net assets of purchased businesses, net.......... 2,580 2,404
-------- --------
Total assets............................................... $ 51,831 $ 52,195
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ 1,926 $ 1,845
Current maturities of capital lease obligations and long-term
debt............................................................ 1,379 1,254
Accounts payable and accrued liabilities........................... 17,120 15,340
-------- --------
Total current liabilities.................................. 20,425 18,439
Long-term debt and capital lease obligations......................... 10,567 10,768
Deferred income taxes and other liabilities.......................... 2,266 2,339
Payable to ICN....................................................... 5,932 7,738
Stockholders' equity:
Preferred stock, $.01 par value:
1,000,000 shares authorized; issued:
Series A, 300,000 shares ($30,000,000 involuntary liquidation
preference).................................................... 3 3
Series B, 390,000 shares ($39,000,000 involuntary liquidation
preference).................................................... 4 4
Common Stock, $.01 par value:
30,000,000 shares authorized; 9,033,623 and 9,033,873 shares issued
and outstanding at December 31, 1993 and June 30, 1994,
respectively.................................................... 90 90
Additional capital: Preferred........................................ 61,928 61,928
Additional capital: Common........................................... 43,072 43,072
Deficit.............................................................. (89,540) (88,875)
Foreign currency translation adjustments............................. (2,916) (3,311)
-------- --------
Total stockholders' equity................................. 12,641 12,911
-------- --------
$ 51,831 $ 52,195
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-127
<PAGE> 241
ICN BIOMEDICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1993 1994 1993 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales........................................... $15,415 $15,171 $31,224 $30,658
Cost of sales....................................... 6,957 6,660 14,333 13,500
------- ------- ------- -------
Gross profit................................... 8,458 8,511 16,891 17,158
Selling, general and administrative expenses........ 6,745 6,848 13,277 13,750
Interest expense, net............................... 532 580 1,266 1,066
Foreign currency transaction losses (gains)......... (106) 389 (328) 802
Other (income) expense, net......................... (1,597) 247 (1,259) 592
------- ------- ------- -------
Income before provision for income taxes and
extraordinary income......................... 2,884 447 3,935 948
Provision (benefit) for income taxes................ 127 (89) 162 (102)
------- ------- ------- -------
Income before extraordinary income............. 2,757 536 3,773 1,050
Extraordinary income................................ 627 -- 627 --
------- ------- ------- -------
Net income..................................... 3,384 $ 536 4,400 1,050
======= ======= ======= =======
Per share information:
Income before extraordinary income................ $ .12 $ .06 $ .17 $ .12
Extraordinary income.............................. .03 -- .03 --
------- ------- ------- -------
Net income........................................ $ .15 $ .06 $ .20 $ .12
======= ======= ======= =======
Shares used in computing per share information...... 22,461 9,061 22,440 9,128
======= ======= ======= =======
Dividends per common share.......................... $ .0425 $ -- $ .085 $ --
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-128
<PAGE> 242
ICN BIOMEDICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1993 AND 1994
(UNAUDITED -- 000'S OMITTED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1993 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 4,400 $ 1,050
Adjustments to net income:
Depreciation and amortization.......................................... 1,518 1,629
Foreign currency transaction losses (gains)............................ (328) 802
Gain on sale of assets held for disposition............................ (278) --
Gain on settlement of certain leasing contracts........................ (938) --
Extraordinary income................................................... (627) --
Change in assets and liabilities, net.................................. (9,249) (4,059)
------- -------
Net cash used in operations......................................... (5,502) (578)
------- -------
Cash flows from investing activities:
Capital expenditures................................................... (610) (300)
Proceeds from sale of asset held for disposition....................... 4,543 --
Other, net............................................................. 65 --
------- -------
Net cash (used in) provided by investing activities................. 3,998 (300)
------- -------
Cash flows from financing activities:
Repayments of long-term debt, net...................................... (785) (726)
Repayments of short-term debt, net..................................... (1,260) (81)
Decrease in restricted cash............................................ -- 256
Cash dividends paid.................................................... (117) (118)
Cash received from ICN, net............................................ 3,600 1,806
------- -------
Net cash provided by financing activities........................... 1,438 1,137
------- -------
Effect of exchange rate changes on cash.................................. (87) 82
------- -------
Increase (decrease) in cash and equivalents.............................. (153) 341
Cash and equivalents at beginning of period.............................. 2,204 509
------- -------
Cash and equivalents at end of period.................................... $ 2,051 $ 850
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-129
<PAGE> 243
ICN BIOMEDICALS, INC.
MANAGEMENT'S STATEMENT REGARDING
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The results of operations presented herein are not
necessarily indicative of the results to be expected for a full year. Although
the Company believes that all adjustments necessary (consisting only of normal
recurring adjustments) for a fair presentation of the interim periods presented
are included and that the disclosures are adequate to make the information
presented not misleading, it is suggested that these consolidated condensed
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in this Prospectus for the year ended
December 31, 1993.
F-130
<PAGE> 244
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. RELATIONSHIP WITH ICN PHARMACEUTICALS, INC., SPI PHARMACEUTICALS, INC. AND
VIRATEK, INC.
ICN Biomedicals, Inc. (the "Company") was incorporated in September, 1983
as a wholly-owned subsidiary of ICN Pharmaceuticals, Inc. ("ICN"). As of June
30, 1994, the Company was a 69%-owned subsidiary of ICN. SPI Pharmaceuticals,
Inc. ("SPI") and Viratek, Inc. ("Viratek") were 38% and 63%-owned by ICN,
respectively.
2. INVENTORIES
Inventories are carried at the lower of cost or market using the first-in
first-out (FIFO) method and are comprised of the following: (000's omitted)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1993 1994
------------ --------
<S> <C> <C>
Raw materials and supplies......................... $ 3,422 $ 3,461
Work-in-process.................................... 610 488
Finished goods, net................................ 11,569 11,524
------- -------
Inventories, net................................... $15,601 $15,473
======= =======
</TABLE>
3. RELATED PARTY TRANSACTIONS
General
The Company has obtained a written agreement from ICN that ICN is prepared,
if needed, to provide financial support to the Company in order to meet its
financial obligations through April 15, 1995.
Cost Allocations
The Company subleases space on a year-to-year basis in Costa Mesa,
California, from ICN. The cost of common services used by the Company, SPI,
Viratek and ICN are allocated by SPI based upon various formulas. Effective
January 1, 1993, ICN reimburses the Company for those allocations which are in
excess of the amounts determined by management using competitive data, as
approved by the Oversight Committee, that would have been incurred by the
Company if it operated in a facility suited solely to its requirements. Rent and
common services charges for the three and six months ended June 30, 1993 and
1994 were $213,000 and $426,000, and $213,000 and $425,000, respectively.
4. LONG-TERM DEBT
As of June 30, 1994, the accompanying consolidated condensed financial
statements include total outstanding Swiss Franc convertible debt of SFr.
11,488,000, ($8,615,000) which represents the present value of the Company's
obligation to pay the Zero Coupon Guaranteed Bonds. As of June 30, 1994, SFr.
39,615,000 principal of the Company's 5 1/2% Exchangeable Certificates were
outstanding which, if exchanged for common stock, would result in the issuance
of 2,608,241 shares of common stock, a reduction of long-term debt of SFr.
10,201,000 ($7,650,000) a reduction of SFR 1,286,000 ($965,000) of current
maturities of long-term debt, and an increase in marketable securities of SFr.
20,204,000 ($15,150,000) from the release by Bio Capital of the Danish Bonds to
the Company. The Company does not hedge the exchange risk associated to the
Swiss Franc convertible debt. Consequently, the Company incurred approximately
$136,000 and $334,000 of exchange losses related to the Swiss Franc convertible
debt during the three and six months periods ended June 30, 1993, respectively,
as compared to gains of $451,000 and $844,000 for the same periods in 1994.
F-131
<PAGE> 245
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMON STOCK
As of June 30, 1994, there were 2,608,241 shares of common stock issuable
upon conversion of the Company's 5 1/2% Exchangeable Certificates, and 1,961,485
shares of common stock issuable upon the exercise of stock options, of which
1,102,025 options are exercisable at June 30, 1994 at prices ranging from $.83
to $10.50 per share.
6. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosures required by Statement of Financial Accounting
Standards No. 95, "Statement of Cash Flows" are as follows: (000's omitted)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE JUNE
30, 30,
1993 1994
------ ------
<S> <C> <C>
Interest paid............................................ $1,121 $1,043
Taxes paid............................................... $ 177 $ 194
</TABLE>
7. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $(1,597,000) and $(1,259,000) for the three
and six months ended June 30, 1993, respectively, compared to $247,000 and
$592,000 for the same periods in 1994.
Other (income) expense for the three months ended June 30, 1994 includes a
$(210,000) gain on settlement of an escrow account related to the sale of the
Company's Irvine, Scotland facility in 1993, offset by costs incurred in
connection with the closure of a foreign facility of $204,000. Other (income)
expense for the three months ended June 30, 1994, also includes $125,000 of
amortization of goodwill and other intangibles.
For the six months ended June 30, 1994, other (income) expense includes the
aforementioned gain on settlement of an escrow account of $(210,000), foreign
facility closure costs of $204,000 and amortization of goodwill of $251,000.
Additionally, other (income) expense for the six months ended June 30, 1994
includes severance and termination costs of $250,000, offset by a reevaluation
of certain foreign allowances, primarily related to accounts receivable of
$(300,000).
Other (income) expense for the three and six months ended June 30, 1993,
includes a gain of $(938,000) realized by the Company's Italian operation on the
favorable termination of certain leasing contracts, a gain of $(1,000,000)
representing certain liabilities accrued during 1992 which were settled for less
than the original estimate and a gain of $(278,000) on the sale of the Company's
Irvine, Scotland facility.
Amortization of goodwill and other intangibles was $129,000 and $251,000
for the three and six months ended June 30, 1993, respectively.
8. SUBSEQUENT EVENT
On August 1, 1994, the Company and its three affiliated corporations (ICN,
SPI and Viratek, entered into a merger agreement to combine the four companies
into a newly formed corporation (which will be renamed ICN Pharmaceuticals,
Inc.) or in the case of Biomedicals, into a wholly-owned subsidiary of New ICN
(the "Merger"). Under the terms of the merger agreement, all outstanding shares
of common stock of the four companies (other than shares held by ICN) will be
exchanged for shares of common stock of the new company pursuant to the
following exchange ratios: ICN: 1 to .512; SPI: 1 to 1; Viratek: 1 to .499; and
Biomedicals: 1 to .197. The proposed merger is subject to various conditions,
including approval by the stockholders of each of the four companies, issuance
of $150 million of convertible debenture to refinance a
F-132
<PAGE> 246
ICN BIOMEDICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
substantial portion of the long-term indebtedness of the four companies (a
waivable condition), appropriate regulatory approvals and certain other
conditions. Assuming these conditions are satisfied, the transaction is expected
to close during the fall of 1994.
Three lawsuits have been filed by stockholders of SPI and, in one of these
lawsuits, Viratek, with respect to the Merger in the Court of Chancery of the
State of Delaware against ICN, SPI, Viratek (with respect to one of such
lawsuits) and certain directors and officers of ICN, SPI and/or Viratek
(including Milan Panic). The lawsuits, entitled HELMUT KLING v. MILAN PANIC, ET
AL., JALLATH v. MILAN PANIC, ET AL., and AMY HOFFMAN v. MILAN PANIC, ET AL.,
purport to be class actions on behalf of all persons who hold shares of SPI
Common Stock and, in one lawsuit, Viratek Common Stock. These suits allege that
the consideration to be provided to the public stockholders of SPI and Viratek
(with respect to one of such lawsuits) in the Merger is unfair and inadequate,
and that the defendants have breached their fiduciary duties in approving the
proposed merger and otherwise.
F-133
