- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11397
ICN PHARMACEUTICALS, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
- - ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
--------------------------------------
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
--------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of outstanding shares of the registrant's Common Stock, $.01
par value, as of November 12, 1998 was 76,514,277.
- - --------------------------------------------------------------------------------
<PAGE>
2
ICN PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
<S> <C>
Consolidated Condensed Balance Sheets - September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income - Three months and nine months
ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and nine months ended September 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, 1998
and 1997 6
Management's Statement Regarding Unaudited Financial Statements 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 29
</TABLE>
<PAGE>
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 255,439 $ 209,896
Receivables, net 212,968 260,495
Notes receivable, net 25,000 145,431
Inventories, net 171,171 146,988
Prepaid expenses and other current assets 42,563 23,941
-------------- --------------
Total current assets 707,141 786,751
Property, plant and equipment, net 415,469 360,713
Deferred income taxes, net 70,907 69,710
Other assets 80,093 47,978
Goodwill and intangibles, net 286,808 226,593
-------------- --------------
$ 1,560,418 $ 1,491,745
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 92,358 $ 96,437
Accrued liabilities 78,878 67,883
Notes payable 20,225 13,759
Current portion of long-term debt 12,380 19,359
Income taxes payable 2,605 3,707
-------------- --------------
Total current liabilities 206,446 201,145
Long-term debt, less current portion 522,294 315,088
Deferred license and royalty income 9,789 12,449
Other liabilities 23,737 24,658
Minority interest 83,094 142,077
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized; -0- and
2 shares Series B and 1 and -0- shares Series D issued and outstanding
at September 30, 1998 and December 31, 1997, respectively ($22,988
liquidation preference at September 30, 1998) 1 1
Common stock, $.01 par value; 200,000 shares authorized;
73,624 and 71,432 shares outstanding at September 30, 1998
and December 31, 1997, respectively 735 714
Additional capital 838,388 766,868
Retained earnings (deficit) (71,840) 70,129
Accumulated other comprehensive income (52,226) (41,384)
-------------- --------------
Total stockholders' equity 715,058 796,328
-------------- --------------
$ 1,560,418 $ 1,491,745
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months and nine months
ended September 30, 1998 and 1997
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
Product sales $ 156,360 $ 177,397 $ 610,047 $ 496,594
Royalties 6,631 -- 26,683 --
------------ ------------ ------------ -------------
Total revenues 162,991 177,397 636,730 496,594
Costs and expenses:
Cost of product sales 70,972 77,309 278,585 228,070
Selling, general and administrative expenses 81,373 54,187 228,999 165,369
Research and development costs 5,139 4,290 16,640 13,210
Provision for losses related to Eastern Europe (Note 2) 39,884 -- 205,530 --
------------ ------------ ------------ -------------
Total expenses 197,368 135,786 729,754 406,649
------------ ------------ ------------ -------------
Income (loss) from operations (34,377) 41,611 (93,024) 89,945
Translation and exchange losses, net 35,259 1,494 59,983 7,204
Interest income (2,353) (6,392) (9,576) (9,855)
Interest expense 12,890 5,950 24,698 13,332
------------ ------------ ------------ -------------
Income (loss) before income
taxes and minority interest (80,173) 40,559 (168,129) 79,264
Provision (benefit) for income taxes (4,840) (521) 5,147 (12,311)
Minority interest (10,110) 6,523 (44,503) 13,438
------------ ------------ ------------ -------------
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
============ ============ ============ =============
Basic earnings (loss) per common share $ (0.89) $ 0.61 $ (1.77) $ 1.38
============ ============ ============ =============
Shares used in per share computation 73,478 55,460 72,680 52,488
============ ============ ============ =============
Diluted earnings (loss) per common share $ (0.89) $ 0.50 $ (1.77) $ 1.17
============ ============ ============ =============
Shares used in per share computation 73,478 72,450 72,680 66,434
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
For the three months and
nine months ended September 30, 1998 and 1997
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
Other comprehensive income:
Foreign currency translation adjustments (4,213) (2,890) (10,842) (11,947)
Unrealized gains on marketable securities:
Unrealized holding gains arising during period -- -- 1,993 --
Reclassification adjustment for gains
included in net income -- -- (1,993) --
------------ ------------ ------------ -------------
Net unrealized gains -- -- -- --
------------ ------------ ------------ -------------
Other comprehensive income (4,213) (2,890) (10,842) (11,947)
------------ ------------ ------------ -------------
Comprehensive income (loss) $ (69,436) $ 31,667 $ (139,615) $ 66,190
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
6
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1998 1997
---------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (128,773) $ 78,137
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 36,080 18,370
Provision for losses related to Eastern Europe (Note 2) 215,729 --
Provision for losses on accounts receivable 6,105 2,235
Provision for inventory obsolescence 2,831 1,224
Translation and exchange losses, net 59,983 7,204
Other noncash items (249) --
Deferred income (5,778) 2,684
Loss (gain) on sale of fixed assets 270 (483)
Deferred income taxes (1,197) (25,854)
Minority interest (44,503) 13,438
Change in assets and liabilities, net of effects of acquired companies:
Accounts and notes receivable (111,265) (74,327)
Inventories (29,817) (3,447)
Prepaid expenses and other assets (35,219) 419
Trade payables and accrued liabilities 20,791 (9,374)
Income taxes payable (578) 2,185
Other liabilities 1,764 2,963
---------------- --------------
Net cash provided by (used in) operating activities (13,826) 15,374
---------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 22,958 --
Proceeds from sale of fixed assets 938 1,527
Capital expenditures (84,908) (27,634)
Acquisition of product rights and businesses (69,411) (24,137)
---------------- --------------
Net cash used in investing activities (130,423) (50,244)
---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 215,573 267,000
Proceeds from exercise of stock options 6,707 16,534
Proceeds from issuance of stock 4,299 --
Net increase (decrease) in notes payable 1,188 (8,958)
Payments on long-term debt (22,192) (256)
Dividends paid (12,629) (8,414)
---------------- --------------
Net cash provided by financing activities 192,946 265,906
---------------- --------------
Effect of exchange rate changes on cash and cash equivalents (3,154) (541)
---------------- --------------
Net increase in cash and cash equivalents 45,543 230,495
Cash and cash equivalents at beginning of period 209,896 39,366
---------------- --------------
Cash and cash equivalents at end of period $ 255,439 $ 269,861
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
7
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The results of operations
presented herein are not necessarily indicative of the results to be expected
for a full year. Although the Company believes that all adjustments (consisting
only of normal, recurring adjustments and a provision for losses related to
Eastern Europe) necessary for a fair presentation of the interim periods
presented are included and that the disclosures are adequate to make the
information presented not misleading, these consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
<PAGE>
8
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated condensed financial
statements include the accounts of ICN Pharmaceuticals, Inc. and Subsidiaries
(the "Company") and all of its majority-owned subsidiaries. Investments in 20%
through 50% owned affiliated companies, where the Company exercises significant
influence over operating and financial affairs, are included under the equity
method. Investments in less than 20% owned companies are recorded at cost. All
significant intercompany account balances and transactions have been eliminated.
Per Share Information: Earnings per share have been restated to reflect the
fourth quarter 1997 adoption of Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. Common share and per common share amounts
for all periods presented have also been restated to reflect a three-for-two
stock split (in the form of a dividend), which became effective March 16, 1998.
During 1998, the Company's Board of Directors declared a quarterly cash dividend
of $0.06 per share for each of its first, second and third fiscal quarters. The
third quarter dividend is payable on October 28, 1998 to stockholders of record
as of October 14, 1998.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current period presentation, with no effect on previously reported net
income or stockholders' equity.
2. PROVISION FOR LOSSES RELATED TO EASTERN EUROPE
The Company's operations in Eastern Europe have been adversely affected by
recent economic and political developments in the region, including the
increasingly volatile Russian economic situation. During the quarter ended
September 30, 1998, the Russian ruble declined from a rate of approximately 6.1
rubles to $1 to approximately 16.1 rubles to $1. As a result of the exchange
rate change, the Company recorded a foreign currency translation loss of
$31,708,000 related to its Russian operations in the quarter ended September 30,
1998.
The economic crisis in Russia has adversely affected the pharmaceutical industry
in the region. Many Russian companies, including many of the Company's
customers, continue to experience severe liquidity shortages as rubles are in
short supply, and as Russian companies' hard-currency assets remain frozen in
Russian banks. This liquidity crisis has diminished many Russian companies'
ability to pay their debts, and is likely to lead to a number of business
failures in the region.
At ICN Yugoslavia, the Company's operations continue to be affected by the April
1998 devaluation of the dinar, and by the Company's previously-announced
suspension of sales to the Yugoslavian government. In addition, ICN Yugoslavia's
export sales for the quarter ended September 30, 1998 have been and will
continue to be affected by the economic crisis in Russia. In the second and
third quarters of 1998, the Yugoslavian government defaulted on its obligations
to the Company of $176,204,000 of accounts and notes receivable--see Note 11.
As a result of these factors, the Company has recorded provisions for losses
related to Eastern Europe totaling $42,289,000 and $215,729,000 in the three
months and nine months ended September 30, 1998. The third quarter charge
consists of reserves for accounts receivable of $37,873,000, the write-off of
certain investments of $2,011,000, and a reduction in the value of certain
inventories of $2,405,000. The provision for losses related to Eastern Europe
for the nine months ended September 30, 1998 also includes a provision of
$173,440,000 in Yugoslavia, offset by minority interest of $43,360,000,
representing a reserve for notes and accounts receivable due from the
Yugoslavian government and government-sponsored entities of $165,646,000,
charges to cost of sales of $3,667,000 and a charge against interest of
$4,127,000.
<PAGE>
9
3. ACQUISITIONS
Acquired Product Rights - In February 1998, the Company acquired from SmithKline
Beecham plc ("SKB") the Asian, Australian and African rights to 39 prescription
and over-the-counter pharmaceutical products, including Actal, Breacol,
Coracten, Eskornade, Fefol, Gyno-Pevaryl, Maxolan, Nyal, Pevaryl, Ulcerin and
Vylcim. The Company received the product rights in exchange for $45,500,000
payable in a combination of $22,500,000 in cash and 821 shares of the Company's
Series D Convertible Preferred Stock. Each share of the Series D Convertible
Preferred Stock is initially convertible into 750 shares of the Company's common
stock (together, the "SKB Shares"), subject to certain antidilution adjustments.
Except under certain circumstances, SKB has agreed not to sell the SKB Shares
until November 4, 1999. The Company has agreed to pay SKB an additional amount
in cash (or, under certain circumstances, in shares of common stock) to the
extent proceeds received by SKB from the sale of the SKB Shares during a
specified period ending in December 1999 and the then market value of the unsold
SKB Shares do not provide SKB with an average value of $46.00 per common share
(including any dividend paid on the SKB Shares). Alternatively, SKB is required
to pay the Company an amount, in cash or shares of the Company's common stock,
to the extent that such proceeds and market value provide SKB with an average
per share value in excess of $46.00 per common share (including any dividend
paid on the SKB Shares). The Company has also granted SKB certain registration
rights covering the common shares issuable upon conversion of the Series D
Preferred Stock. Based upon the September 30, 1998 market price of the Company's
common stock of $17.50, the aggregate guaranteed value of the SKB Shares exceeds
their market value by approximately $17,549,000, and the Company may be required
to issue approximately 1,003,000 additional common shares in satisfaction of
this agreement.
In March 1998, the Company acquired the rights to a portfolio of 32 dermatology
products from Laboratorio Pablo Cassara ("Cassara") for $22,450,000 in cash. The
Company will market the products through its subsidiary, ICN Argentina.
Vyzkumny Ustav Antibiotic a Biotransformacii - In July 1998, the Company
acquired Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a pharmaceutical
manufacturing and research facility located in a suburb of Prague in the Czech
Republic, for approximately $17,600,000 in cash. VUAB produces and sells
pharmaceutical products in finished forms, principally injectable antibiotics
and infusion solutions, and pharmaceutical raw materials. The acquisition was
accounted for as a purchase and is not material to the financial position or
results of operations of the Company.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, Reporting Comprehensive Income, which established standards for the
reporting and display of comprehensive income. The Company has adopted SFAS No.
130 effective January 1, 1998. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized holding gains and losses
on available-for-sale securities that are currently being presented by the
Company as a component of stockholders' equity. SFAS No. 130 does not affect
current principles of measurement of revenues and expenses and accordingly the
adoption of SFAS No. 130 had no effect on the Company's results of operations or
financial position.
The balance of accumulated other comprehensive income at September 30, 1998 and
December 31, 1997 consists of accumulated foreign currency translation
adjustments. Such amounts are not recorded net of any tax provision or benefit
as the Company does not expect to realize any significant tax benefit or expense
from these items.
<PAGE>
10
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
Income:
<S> <C> <C> <C> <C>
Net income (loss) $ (65,223) $ 34,557 $ (128,773) $ 78,137
Dividends and accretion on preferred stock -- (659) (34) (5,618)
------------- -------------- ------------- -------------
Numerator for basic earnings per share--
income available to common stockholders (65,223) 33,898 (128,807) 72,519
Effect of dilutive securities:
Convertible debt -- 2,022 -- 5,505
------------- ------------- ------------- -------------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ (65,223) $ 35,920 $ (128,807) $ 78,024
============= ============= ============= =============
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 73,478 55,460 72,680 52,488
Effect of dilutive securities:
Employee stock options -- 3,323 -- 2,267
Convertible debt -- 10,667 -- 10,668
Other dilutive securities -- 3,000 -- 1,011
------------- ------------- ------------- -------------
Dilutive potential common shares -- 16,990 -- 13,946
------------- ------------- ------------- -------------
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 73,478 72,450 72,680 66,434
============= ============= ============= =============
Basic earnings (loss) per common share $ (0.89) $ 0.61 $ (1.77) $ 1.38
============= ============= ============= =============
Diluted earnings (loss) per common share $ (0.89) $ 0.50 $ (1.77) $ 1.17
============= ============= ============= =============
</TABLE>
Income available to common stockholders, for purposes of computing basic
earnings per common share, includes adjustments for preferred dividends and, in
1997, an embedded dividend arising from the discounted conversion terms of the
Series B Convertible Preferred Stock. For the three months and nine months ended
September 30, 1998, the Company's stock options, preferred stock, and
convertible debt are not included in the computation of diluted earnings per
share as such securities are antidilutive. For all periods presented, the
Company's Series B Convertible Preferred Stock is not reflected in the
computation of diluted earnings per common share as such securities are
antidilutive. In April 1998, all of the remaining outstanding shares of the
Company's Series B Preferred Stock were converted into approximately 57,000
shares of the Company's common stock.
<PAGE>
11
6. DETAIL OF CERTAIN ACCOUNTS
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1998 1997
--------------- ---------------
Receivables, net:
<S> <C> <C>
Trade accounts receivable $ 263,106 $ 254,376
Other receivables 17,185 18,118
--------------- ---------------
280,291 272,494
Allowance for doubtful accounts (67,323) (11,999)
--------------- ---------------
$ 212,968 $ 260,495
=============== ===============
Inventories, net:
Raw materials and supplies $ 59,415 $ 65,937
Work-in-process 21,413 16,745
Finished goods 109,588 75,782
--------------- ---------------
190,416 158,464
Allowance for inventory obsolescence ( 19,245) (11,476)
--------------- ---------------
$ 171,171 $ 146,988
=============== ===============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 482,818 $ 413,825
Accumulated depreciation and amortization (67,349) (53,112)
--------------- ---------------
$ 415,469 $ 360,713
=============== ===============
</TABLE>
7. LONG-TERM DEBT
In August 1998, the Company completed a private placement of $200,000,000 of its
8-3/4% Senior Notes due 2008 (the "8-3/4% Senior Notes"). The 8-3/4% Senior
Notes are unsecured senior obligations of the Company which rank pari passu with
other senior indebtedness of the Company, including its 9-1/4% Senior Notes due
2005. The 8-3/4% Senior Notes mature on November 15, 2008. Interest is payable
semiannually on May 15 and November 15 of each year, commencing in November
1998. The 8-3/4% Senior Notes are subject in limited circumstances to optional
redemption (at the Company's option) at any time prior to November 15, 2001, at
108.75% of their principal amount, plus accrued and unpaid interest. Upon a
change in control (as defined in the related indenture) the Company may be
required to repurchase the 8-3/4% Senior Notes from the holders at 101% of their
principal amount, plus accrued and unpaid interest. The indenture governing the
8-3/4% Senior Notes contains certain covenants which may restrict, among other
things, the incurrence of additional indebtedness, the payment of dividends or
other restricted payments, the creation of certain liens, the sale of assets, or
the Company's ability to consolidate or merge, subject to certain qualifications
and exceptions. The Company also gave the purchasers of the 8-3/4% Senior Notes
certain registration rights.
8. STOCK REPURCHASE PROGRAM
In September and October 1998, the Company's Board of Directors authorized two
stock repurchase programs. The first repurchase program authorizes the Company
to repurchase up to $10,000,000 of its outstanding common stock. The second
authorized the Company to initiate a long-term repurchase program that allows
the Company to repurchase up to 3,000,000 shares of its common stock. In
executing the repurchase programs, the Company is limited by certain covenants
contained in the indentures relating to the Company's 9-1/4% Senior Notes due
2005 and its 8-3/4% Senior Notes. In the indentures, the Company is permitted to
<PAGE>
12
repurchase up to $10,000,000 of its common stock under the first program;
however, repurchases under the second program will only be permitted as the
Company generates cumulative net income as provided for in the indentures. As of
September 30, 1998, no shares had been repurchased under this program.
9. COMMITMENTS AND CONTINGENCIES
Pursuant to an Order Directing Private Investigation and Designating Officers to
Take Testimony, entitled In the Matter of ICN Pharmaceuticals, Inc., (P-177)
(the "Order"), a private investigation is being conducted by the United States
Securities and Exchange Commission (the "Commission") with respect to certain
matters pertaining to the status and disposition of the 1994 Hepatitis C NDA. As
set forth in the Order, the investigation concerns whether, during the period
from June 1994 through February 1995, the Company, persons or entities
associated with it and others, in the offer and sale or in connection with the
purchase and sale of ICN securities, engaged in possible violations of Section
17(a) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of
the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
thereunder, by having possibly: (i) made false or misleading statements or
omitted material facts with respect to the status and disposition of the 1994
Hepatitis C NDA; (ii) purchased or sold Common Stock while in possession of
material, non-public information concerning the status and disposition of the
1994 Hepatitis C NDA; or (iii) conveyed material, non-public information
concerning the status and disposition of the 1994 Hepatitis C NDA, to other
persons who may have purchased or sold Common Stock. The Company has cooperated
and continues to cooperate with the Commission in its investigation. On January
13, 1998, ICN received a letter from the Commission's Philadelphia District
Office (the "District Office") stating the District Office's intention to
recommend to the Commission that it authorize the institution of a civil action
against the Company, Milan Panic, Chairman and Chief Executive Officer of the
Company, and a former senior executive of the Company. As set forth in the
letter, the District Office seeks the authority to commence a civil action to
enjoin the Company from future violations of Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder and to impose a civil penalty of up to $500,000 on
ICN. In regard to Mr. Panic, the District Office seeks the authority to commence
a civil action: (i) to enjoin Mr. Panic from future violations of Section 17(a)
of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5
thereunder; (ii) for disgorgement of approximately $390,000; (iii) for
prejudgment interest; (iv) for a civil penalty pursuant to Section 21A of the
Exchange Act that cannot exceed three times any amount disgorged; and (v) for an
order barring Mr. Panic from serving as an officer or director of a public
company pursuant to Section 21 of the Exchange Act. On January 30, 1998, the
Company filed submissions with the Commission urging that it reject the District
Office's request. On August 27, 1998, the Company's counsel was informed by the
District Office that (i) the District Office had withdrawn its request for
authorization to commence an enforcement action against Mr. Panic with respect
to allegations of illegal insider trading and the remedies of disgorgement,
interest, and monetary penalties attendant thereto; and (ii) the Commission had
granted the District Office's request for authorization to commence an
enforcement action against the Company and Mr. Panic alleging false or
misleading statements or omissions with respect to the status and disposition of
the 1994 Hepatitis C NDA, including the remedies of injunctive relief and a
civil penalty not to exceed $500,000 against the Company, and injunctive relief
and a director and officer bar against Mr. Panic.
The Company has received subpoenas from a Grand Jury in the United States
District Court, Central District of California requesting the production of
documents covering a broad range of matters over various time periods. The
Company understands that the Company, Mr. Panic, a current senior executive
officer, a former senior officer, and a current employee of the Company are
targets of the investigation. The Company also understands that a senior
executive officer, a former officer, a current employee, and a former employee
are subjects of the investigation. The United States Attorney's office has
<PAGE>
13
advised counsel for the Company that the areas of its investigation include
disclosures made and not made concerning the 1994 Hepatitis C NDA to the public
and other third parties; stock sales for the benefit of Mr. Panic following
receipt on November 28, 1994 of a letter from the FDA informing the Company that
the 1994 Hepatitis C NDA had been found not approvable; possible violations of
the economic embargo imposed by the United States upon the Federal Republic of
Yugoslavia, based upon alleged sales by the Company and Mr. Panic of stock
belonging to ICN employees; and, with respect to Mr. Panic, personal disposition
of assets of entities associated with Yugoslavia, including possible
misstatements and/or omissions in federal tax filings. The Company has and
continues to cooperate in the Grand Jury investigation. A number of current and
former employees of the Company have been interviewed by the government in
connection with the investigation. The United States Attorney's office has
issued subpoenas requiring various current and former officers and employees of
the Company to testify before the Grand Jury. Certain current and former
employees testified before the Grand Jury beginning in July 1998.
The ultimate outcome of the Commission and Grand Jury investigations cannot be
predicted and any unfavorable outcome could have a material adverse effect on
the Company.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. In the opinion of management, the ultimate resolution will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity. However, there can be no assurance that any
unfavorable outcome of any such matter would not have a material adverse effect
on the Company.
10. GEOGRAPHIC DATA
The following tables set forth the amount of revenues and operating income
(loss) of the Company by geographic area for the three and nine months ended
September 30, 1998 and 1997 and the identifiable assets of the Company by
geographic area as of September 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues:
<S> <C> <C> <C> <C>
United States $ 39,653 $ 29,089 $ 139,814 $ 88,328
Canada 4,907 4,840 14,377 14,970
-------------- -------------- -------------- --------------
North America 44,560 33,929 154,191 103,298
Latin America (principally Mexico) 19,799 17,057 60,880 44,898
Western Europe 18,413 18,229 56,029 47,039
Yugoslavia 11,133 58,660 125,860 156,768
Russia 34,329 28,806 131,282 83,014
Hungary 6,345 11,498 34,493 41,147
Poland 7,548 -- 25,079 --
Czech Republic 5,541 -- 5,541 --
-------------- -------------- -------------- --------------
Eastern Europe 64,896 98,964 322,255 280,929
Asia, Africa, and Australia 15,323 9,218 43,375 20,430
-------------- -------------- -------------- --------------
Total $ 162,991 $ 177,397 $ 636,730 $ 496,594
============== ============== ============== ==============
</TABLE>
<PAGE>
14
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Operating income (loss):
<S> <C> <C> <C> <C>
United States $ 13,959 $ 8,897 $ 64,881 $ 29,489
Canada 2,030 1,740 5,161 5,153
-------------- -------------- -------------- --------------
North America 15,989 10,637 70,042 34,642
Latin America (principally Mexico) 6,505 5,233 19,012 11,322
Western Europe 4,420 3,968 12,666 6,163
Yugoslavia (7,647) 21,273 (143,520) 53,855
Russia (17,533) 5,097 (4,998) 15,789
Hungary (12,376) 1,485 (6,142) 6,271
Poland (115) -- 4,094 --
Czech Republic (121) -- (121) --
--------------- -------------- -------------- --------------
Eastern Europe (37,792) 27,855 (150,687) 75,915
Asia, Africa, and Australia 2,404 2,054 8,520 2,169
Corporate (25,903) (8,136) (52,577) (40,266)
-------------- -------------- -------------- --------------
Total $ (34,377) $ 41,611 $ (93,024) $ 89,945
============== ============== ============== ==============
</TABLE>
September 30, December 31,
1998 1997
---------------- --------------
Identifiable assets:
United States $ 359,193 $ 377,315
Canada 8,848 11,282
---------------- --------------
North America 368,041 388,597
Latin America (principally Mexico) 56,067 30,191
Western Europe 59,322 48,086
Yugoslavia 290,811 421,731
Russia 160,973 145,162
Hungary 75,548 79,632
Poland 86,568 68,066
Czech Republic 27,708 --
---------------- --------------
Eastern Europe 641,608 714,591
Asia, Africa, and Australia 81,612 26,812
Corporate 353,768 283,468
---------------- --------------
Total $ 1,560,418 $ 1,491,745
================ ==============
<PAGE>
15
11. ICN YUGOSLAVIA
Business Environment: ICN Yugoslavia, a 75% owned subsidiary, operates in a
business environment that is subject to significant economic volatility and
political instability. The economic conditions in Yugoslavia include continuing
liquidity problems, inflationary pressures, recent and potential future currency
devaluations, unemployment, price controls, government spending limitations, a
weakened banking system, a high trade deficit, and international economic
sanctions. The future of the economic and political environment of Yugoslavia is
uncertain and could deteriorate further, resulting in a material adverse impact
on the Company's financial position and results of operations.
Devaluation: On April 1, 1998, the Yugoslavian government devalued the dinar
from a rate of 6.0 dinars per U.S. $1 to 10.92 dinars per U.S. $1. At the time
of the devaluation the Company's net monetary asset position in Yugoslavia was
approximately $38,000,000, resulting in a foreign translation loss of
approximately $17,000,000 which was recognized in the second quarter of 1998. In
addition to the foreign translation loss, the devaluation has and will continue
to adversely affect sales and gross profit margins at ICN Yugoslavia. Subsequent
to the devaluation, sales are lower due to higher exchange rates and a lack of
immediate price increases. Gross profit margins are further affected as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. Margins are expected to improve after a
devaluation if price increases are obtained and, to some extent, when older,
higher-priced inventory is replaced with inventory manufactured after the
devaluation.
Recovery from the effects of the devaluation will depend on the approval of new
price increases by the Yugoslavian government. Subsequent to the devaluation,
the Company, along with others in the Yugoslavian pharmaceutical industry,
applied to the government for price increases in an amount believed to be
adequate to make possible a recovery from the effects of the devaluation.
However, the Yugoslavian government did not approve any significant price
increases and the Company, along with many of its competitors, suspended all
direct sales to the Yugoslavian government in an effort to encourage the
Yugoslavian government to approve price increases. The suspension of sales to
the Yugoslavian government continued through the third quarter of 1998. The
Company is unable to predict the amount and timing of future price increases
that may be allowed by the Yugoslavian government, if any, and the resultant
impact on future earnings.
Credit Risk: Through the first quarter of 1998, the majority of ICN Yugoslavia's
domestic sales were made to the Yugoslavian government or government-funded
entities. During early 1997, the Company established credit terms with the
Yugoslavian government under which future receivables were interest-bearing with
one year terms and payable in dinars, but fixed in dollar amounts. At December
31, 1997, the Company had approximately $145,431,000 of notes receivable from
the Yugoslavian government under such terms. During the first quarter of 1998,
the Company continued to make sales to the Yugoslavian government and
government-sponsored entities under similar terms in order to reduce the
Company's exposure to losses resulting from exchange rate fluctuations, but
sales were suspended in April 1998, following the devaluation. As of September
30, 1998, the Yugoslavian government had defaulted on the outstanding balance of
the notes receivable of approximately $176,204,000. In negotiations with the
Company subsequent to the default, the Yugoslavian government is seeking
concessions from the Company, including the forgiveness of a substantial portion
of the amounts owed, and has ceased making all of the payments required under
the original credit agreements. The Company is currently working to renegotiate
the credit terms.
As a result of the government's default and the suspension of sales to the
government, the Company recorded a $173,440,000 charge against earnings at ICN
Yugoslavia in the second quarter of 1998; a portion of this charge is included
in cost of sales ($3,667,000) and interest income ($4,127,000) in the
accompanying condensed consolidated statements of income. The charge consists of
a $151,204,000 reserve for estimated losses on notes receivable (including
accrued interest), a $7,757,000 reserve for accounts receivable from
government-sponsored entities, and a $14,479,000 write-down of the value of
certain related investments and assets. Pending resolution of the negotiations
and the approval of price increases, ICN Yugoslavia has suspended all direct
credit sales to the Yugoslavian government and/or government-sponsored entities.
<PAGE>
16
12. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and during
the nine months ended September 30, 1998 SFr 37,670,000 principal amount of the
New Certificates was exchanged for an aggregate of approximately 802,000 shares
of the Company's common stock and the remainder of the New Certificates were
redeemed for cash. Upon the exchange and redemption of the New Certificates,
marketable securities held in trust for the payment of the New Certificates,
having a market value of approximately $22,958,000, became available to the
Company. The exchange increased stockholders' equity by $25,399,000 and reduced
long-term debt and accrued interest by $4,680,000.
In March 1998, ICN Yugoslavia acquired a 33.7% interest in a healthcare center
in the Republic of Montenegro, from the Yugoslavian government in exchange for
147,000,000 dinars ($24,400,000) of accounts receivable and approximately
$1,200,000 in cash. The Company has guaranteed the collection of the accounts
receivable given as consideration for the health institute. As of September 30,
1998, the Company remains obligated for up to 52,300,000 dinars under this
guarantee. ICN Yugoslavia also acquired a 15% interest in the financial
institution Komercijalna Banka A.D. from the Yugoslavian government in exchange
for 28,600,000 dinars ($4,700,000) of accounts receivable.
In January 1997, the Company issued approximately 811,000 shares of common stock
as payment of its $10,000,000 obligation under the 1987 class action settlement.
Also during the nine months ended September 30, 1997, the Company accrued a
third quarter common stock dividend of $3,085,000. The Company also issued
approximately 131,000 shares of common stock as payment of preferred stock
dividends of $1,875,000.
Cash paid for income taxes for the nine months ended September 30, 1998 and 1997
was $8,286,000 and $2,629,000, respectively. Cash paid for interest, net of
amounts capitalized, for the nine months ended September 30, 1998 and 1997 was
$27,448,000 and $3,888,000, respectively.
13. SUBSEQUENT EVENTS
In November, 1998 the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product; Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. Under the
terms of the Company's agreement with Roche, the Company has guaranteed to Roche
a per share price initially at $31.00, increasing at a rate of 6% per annum
through December 31, 2000. Should Roche sell any of the shares prior to December
31, 2000, the Company is entitled to one-half of any proceeds realized by Roche
in excess of the guaranteed price. Should the market price of the Company's
common stock be below the guaranteed price at the end of the guarantee period,
the Company will be required to satisfy the aggregate guarantee amount by
payment to Roche in cash or, in certain circumstances, in additional shares of
the Company's common stock.
Also effective October 1, the Company acquired from SKB the rights within Latin
America to three ethical pharmaceutical products, including Breacol, Cynoplus
and Cytomel for $2,800,000.
<PAGE>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company's operations in Eastern Europe have been adversely affected by
recent economic and political developments in the region, including the
increasingly volatile Russian economic situation. In response to worsening
liquidity and declining currency reserves, the Russian government has continued
to seek international financial assistance. The Russian Central Bank has used
recent financial assistance from the International Monetary Fund, along with its
existing monetary reserves, in an effort to support the value of the ruble.
However, in August 1998, the Central Bank announced that it was no longer able
to support the ruble at its then-current exchange rate of approximately 6.3
rubles to $1, and that it would allow the ruble to fall as far as 9.5 rubles to
$1. Subsequently, the ruble fell sharply and the Russian Central Bank was unable
to support the ruble, even at the previously-announced level. In September 1998,
there have been large fluctuations in exchange rates for the ruble and the value
of the ruble has continued to decline in relation to the dollar, at times
exceeding 20 rubles to $1, a decline of more than 68% from the ruble's
mid-August 1998 level. As of September 30, 1998, the exchange rate was
approximately 16.1 rubles to $1. As a result of the decline in the ruble
exchange rate, the Company recorded a foreign currency translation loss of
$31,708,000 related to its Russian operations in the quarter ended September 30,
1998.
The Company believes the economic crisis in Russia has adversely affected the
pharmaceutical industry in the region. Many Russian companies, including many of
the Company's customers, continue to experience severe liquidity shortages as
rubles are in short supply, and as Russian companies' hard-currency assets
remain frozen in Russian banks. This liquidity crisis has diminished many
Russian companies' ability to pay their debts, and is likely to lead to a number
of business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, increasing pressure on the
Company and other producers to limit price increases (in hard currency terms).
These factors have and may continue to adversely affect sales and gross margins
in the Company's Russian operations.
At ICN Yugoslavia, the Company's operations continue to be affected by the April
1998 devaluation of the dinar, and by the Company's previously-announced
suspension of sales to the Yugoslavian government. In addition, ICN Yugoslavia's
export sales for the quarter ended September 30, 1998 have been and will
continue to be affected by the economic crisis in Russia. In the second and
third quarters of 1998, the Yugoslavia government defaulted on its obligations
to the Company under $176,204,000 of accounts and notes receivable--see "ICN
Yugoslavia".
As a result of these factors, the Company has recorded provisions for losses
related to Eastern Europe totaling $42,289,000 and $215,729,000 in the three
months and nine months ended September 30, 1998. The third quarter charge
consists of reserves for accounts receivable of $37,873,000, the write-off of
certain investments of $2,011,000, and a reduction in the value of certain
inventories of $2,405,000. The provision for losses related to Eastern Europe
for the nine months ended September 30, 1998 also includes a provision of
$173,440,000 in Yugoslavia, offset by minority interest of $43,360,000,
representing a reserve for notes and accounts receivable due from the
Yugoslavian government and government-sponsored entities of $165,646,000,
charges to cost of sales of $3,667,000 and a charge against interest of
$4,127,000.
The Company continues to pursue strategic acquisitions that balance its Eastern
European operations with an enhanced Western presence. In November 1998, the
Company completed the acquisition of the worldwide rights (except India) to four
products from Roche for $178,800,000 in cash and common stock. The products
include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology product;
Librax, a treatment for gastrointestinal disorders; and Mogadon, a sleep
disorder drug also used to treat epilepsy. In addition, the Company recently
entered into agreements with Senetek plc under which it obtained the worldwide
marketing rights to AdrenaJect(R), a device which automatically delivers
epinephrine to treat anaphylactic shock, and the United States marketing rights
to Kinetin(R), a skin cream to inhibit signs of aging. The Company will market
these products primarily through its existing North American and Western Europe
operations. In Latin America, the Company has recently acquired the rights to
market three products from SKB, and has acquired a pharmaceutical distributor in
Brazil. The Company believes these acquisitions complement its existing product
lines and increase its Latin America market presence.
<PAGE>
18
RESULTS OF OPERATIONS
Certain financial information for the Company is set forth below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Pharmaceutical
<S> <C> <C> <C> <C>
North America $ 32,250 $ 22,663 $ 105,435 $ 70,750
Latin America 19,380 16,443 59,882 42,898
Western Europe 12,535 13,547 37,969 31,352
Eastern Europe 64,896 98,964 322,255 280,929
Asia, Africa, Australia 12,445 7,301 37,255 15,133
--------------- --------------- --------------- ---------------
Total Pharmaceutical 141,506 158,918 562,796 441,062
Biomedical 14,854 18,479 47,251 55,532
--------------- --------------- --------------- ---------------
Product sales 156,360 177,397 610,047 496,594
Royalties 6,631 -- 26,683 --
--------------- --------------- --------------- ---------------
Total revenues $ 162,991 $ 177,397 $ 636,730 $ 496,594
=============== =============== =============== ===============
Cost of product sales $ 70,972 $ 77,309 $ 278,585 $ 228,070
Gross profit margin 55% 56% 54% 54%
</TABLE>
Product sales: The decline in pharmaceutical net sales of $17,412,000 (11%) for
the three months ended September 30, 1998 primarily reflects the continued
suspension of sales to the Yugoslavian government and the impact of the Russian
economic crisis on our Eastern European business. Pharmaceutical sales in North
America increased $9,587,000 or 42% due primarily to the acquisition of products
from Roche.
The increase in pharmaceutical net sales of $121,734,000 (28%) for the nine
months ended September 30, 1998 reflects double-digit growth in each of the
Company's operating regions. Sales in Eastern Europe increased $41,326,000 (15%)
due to additional sales from acquisitions in Russia, Poland and the Czech
Republic, which offset a $30,908,000 decline in sales in Yugoslavia. The
acquisition of products from Roche contributed to sales increases in North
America and Western Europe. In Latin America, sales reflect continued growth in
the Company's base business and sales of the products acquired from Cassara. The
acquisition of products from SKB contributed to the sales increase in the Asia,
Africa, and Australia region.
Pharmaceutical net sales in Eastern Europe were $64,896,000 and $322,255,000 for
the three and nine months ended September 30, 1998, compared to $98,964,000 and
$280,929,000 for the same periods in 1997. For the quarter, sales at ICN
Yugoslavia decreased $47,527,000 due primarily to lower domestic sales resulting
from the effects of the April 1998 devaluation of the dinar and the continued
suspension of sales to the Yugoslavian government, and decreased export sales,
principally to customers in Russia (see "ICN Yugoslavia"). The sales decrease in
Yugoslavia was partially offset by $26,678,000 additional sales from the
Company's acquisitions of Polfa Rzeszow, S.A. in Poland, VUAB in the Czech
Republic, and Marbiopharm and AO Tomsk Chemical Pharmaceutical Plant in Russia,
each subsequent to the quarter ended September 30, 1997. Excluding the sales
contribution of acquisitions, the Company experienced an overall sales decline
of approximately 28% in its Russian base business.
Sales in Eastern Europe for the nine months ended September 30, 1998 increased
$41,326,000, reflecting increased sales from the aforementioned acquisitions of
$75,424,000, which were partially offset by a net $30,908,000 decrease in sales
at ICN Yugoslavia and a $6,654,000 decrease in sales at ICN Hungary. In Russia,
sales increased by $3,464,000 (4%), excluding growth from the 1997 acquisitions,
due to increased volume and price increases in the first and second quarters of
1998.
<PAGE>
19
Pharmaceutical net sales in North America were $32,250,000 and $105,435,000 for
the three and nine months ended September 30, 1998, compared to $22,663,000 and
$70,750,000 for the same periods in 1997. The $9,587,000 (42%) increase in net
sales for the quarter is primarily the result of the Company's acquisition of
the rights to certain products from Roche in the third and fourth quarters of
1997, which generated additional sales of $11,837,000 in the third quarter of
1998. This was partially offset by lower sales of certain dermatological and
hormone replacement products. For the nine months ended September 30, 1998, the
$34,685,000 (49%) increase in net sales is primarily the result of the
acquisition of the rights to the Roche products, which generated additional
sales of $47,028,000. Increased sales of the acquired products were partially
offset by lower sales of certain dermatological products.
Pharmaceutical net sales in Latin America were $19,380,000 and $59,882,000 for
the three and nine months ended September 30, 1998, compared to $16,443,000 and
$42,898,000 for the same periods in 1997. For the quarter and nine months ended
September 30, 1998, the increase in net sales of $2,937,000 (18%) and
$16,984,000 (40%), respectively, is primarily due to price increases and higher
unit volume, partially offset by unfavorable currency exchange fluctuations. The
increase also reflects third quarter 1998 sales of $1,362,000 and nine month
sales of $7,237,000 generated by the products which the Company acquired from
Cassara and Roche subsequent to September 30, 1997. Excluding the effect of the
acquired products, product sales for Latin America for the nine months ended
September 30, 1998 increased 23% over the same period of 1997.
Pharmaceutical net sales in Western Europe were $12,535,000 and $37,969,000 for
the three and nine months ended September 30, 1998, compared to $13,547,000 and
$31,352,000 for the same periods in 1997. The increase in net sales for the nine
months ended September 30, 1998 of $6,617,000 (21%) is primarily due to the
Company's acquisition of the rights to certain products from Roche in the third
and fourth quarters of 1997, which generated additional sales of $11,101,000.
Pharmaceutical net sales in Asia, Africa and Australia were $12,445,000 and
$37,255,000 for the three and nine months ended September 30, 1998, compared to
$7,301,000 and $15,133,000 for the same periods in 1997. The increase for the
three and nine months ended September 30, 1998 of $5,144,000 (70%) and
$22,122,000 (146%) is primarily due to the 1998 acquisition of the rights to 39
prescription and over-the-counter pharmaceutical products from SKB, which
generated sales of $7,876,000 and $18,394,000 for the three and nine months
ended September 30, 1998, respectively.
Biomedical segment net sales for the three and nine months ended September 30,
1998 were $14,854,000 and $47,251,000 compared to $18,479,000 and $55,532,000
for the same periods of 1997. The decrease for the three months and nine months
ended September 30, 1998 of $3,625,000 (20%) and $8,281,000 (15%) is primarily
due to lower unit sales volume in certain diagnostics product lines. The
decrease for the nine month period is also affected by the 1997 net sales
amounts including dosimetry product shipments made to fulfill higher than normal
order backlog which existed at the beginning of the 1997 first quarter.
Royalties: Royalties represent amounts earned under the Company's Exclusive
License and Supply Agreement (the "License Agreement") with Schering-Plough
Corporation ("Schering-Plough"). Under the License Agreement, Schering-Plough
licensed all oral forms of ribavirin for the treatment of chronic hepatitis C
(HCV) in combination with Schering-Plough's alpha interferon. Schering-Plough
has received approval from the United States Food and Drug Administration
("FDA") to market Rebetron(TM) Combination Therapy, containing Rebetol(TM)
(ribavirin) Capsules and Intron(R)A (interferon alfa-2b, recombinant) Injection
(the "Combination Therapy"), for the treatment of HCV in patients with
compensated liver disease who have relapsed following alpha interferon therapy
and in June 1998 Schering-Plough began selling the Combination Therapy in the
United States. Also in June 1998, Schering-Plough submitted a Marketing
Authorization Application for the Combination Therapy to the European Medicines
Evaluation Agency for the treatment of relapsed HCV patients. Schering-Plough
has also filed a supplemental New Drug Application with the FDA for the
Combination Therapy for the treatment of HCV in patients with compensated liver
disease previously untreated with alpha interferon therapy.
Royalty revenues for the three and nine months ended September 30, 1998 include
amounts earned from United States commercial sales made by Schering-Plough
subsequent to receipt of FDA approval, as well as royalties on compassionate use
sales outside the United States, primarily in Western Europe. Royalty revenues
for the nine months ended September 30, 1998 also include a one-time payment of
$16,500,000 which the Company received from Schering-Plough in consideration for
the sale to Schering-Plough of additional marketing rights in the European
<PAGE>
20
Union, in settlement of past royalties, and as reimbursement for expenses
incurred by the Company in preparation for the launch of ribavirin capsules in
the European Union.
Gross Profit: Gross profit as a percentage of product sales decreased to 55% for
the three months ended September 30, 1998, compared to 56% for the same period
in 1997. The decrease for the third quarter is primarily attributable to gross
margin declines in Yugoslavia and Russia. Subsequent to the April 1998
devaluation of the Yugoslavian dinar, gross profit margins at ICN Yugoslavia
suffered as sales are translated at higher exchange rates, while no significant
price increases were received. Gross profit margins at ICN Yugoslavia were
further impacted as inventories manufactured prior to the devaluation are
charged to cost of sales at the higher historical exchange rate. Gross profit
margins for ICN Yugoslavia are likely to continue to be adversely affected by,
among other factors, the lack of price increases--see "ICN Yugoslavia." The
margins in Russia were adversely impacted by the weakening of the ruble. While
the Company is generally able to set its prices for Russian markets without
government approval, the severe liquidity crisis in Russia and the reduced
purchasing power of Russian consumers after the devaluation of the ruble
restricted price increases to a level which does not fully offset the impact of
the devaluation. Gross profit margins at ICN Russia were further impacted as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. The overall gross margins for Eastern
Europe were 38% for the third quarter of 1998, compared to 46% for the same
period in 1997. The effects of recent events in Eastern Europe were partially
offset by improved margins in North America, Western Europe and Latin America
resulting from the sales of the products acquired from Roche and Cassara, which
generally yield relatively high gross profit margins.
For the nine months ended September 30, 1998, gross profit as a percentage of
product sales was 54% compared to 54% for the same period in 1997. The gross
margins in Eastern Europe for the nine months ended September 30, 1998 were 43%
compared to 44% for the same period in 1997. This decrease resulted from the
impact of devaluations and economic problems in Yugoslavia and Russia.
Offsetting the declines in Eastern Europe are improved margins in most of the
Company's operating regions primarily due to product acquisitions.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $81,373,000 (50% of revenues) and $228,999,000 (36%
of revenues) for the three and nine months ended September 30, 1998, compared to
$54,187,000 (31% of revenues) and $165,369,000 (33% of revenues) for the same
periods in 1997. The Company's acquisition of four pharmaceutical companies in
Eastern Europe and the acquisition of product rights from Roche and SKB (all
subsequent to September 30, 1997) generated additional expenses of $22,867,000
and $48,680,000 for the three months and nine months ended September 30, 1998,
of which approximately $2,995,000 and $9,112,000 represents increased
amortization of goodwill and purchased intangibles. In addition, the ongoing
development of the sales, marketing, and administrative functions at the
Company's Eastern European headquarters in Moscow, Russia resulted in additional
expenses of $7,509,000 and $15,106,000 for the three months and nine months
ended September 30, 1998. The 1997 periods also include a $12,000,000 charge
related to the settlement of litigation. Other increases in selling, general and
administrative costs reflect increased expenditures, primarily in the Company's
Eastern European operations and at its United States corporate offices, to
support the Company's recent acquisitions and increased sales volume in the base
business.
Research and Development: Research and development expenditures were $5,139,000
and $16,640,000 for the three and nine months ended September 30, 1998, compared
to $4,290,000 and $13,210,000 for the same periods in 1997. The increase
reflects the Company's continued investment in the development of products,
primarily at its facilities in the United States and Eastern Europe.
Translation and Exchange Gains and Losses, Net: Foreign exchange losses, net,
were $35,259,000 for the three months ended September 30, 1998, compared to
$1,494,000 for the same period in 1997. In the third quarter of 1998, the
Company's Russian operations recorded a translation loss of $31,708,000
representing the effect of the approximately 65% devaluation of the ruble during
the quarter. Additionally, the Company's operations in Poland and Hungary
recorded transaction losses of $1,554,000 and $2,240,000 during the quarter,
principally related to foreign-denominated debt. In the third quarter of 1997
the Company recorded net foreign exchange losses of $1,494,000, consisting of
$2,849,000 of translation losses, primarily related to ICN Yugoslavia's net
monetary asset position, partially offset by $1,363,000 of translation gains
related to the Company's foreign-denominated debt.
<PAGE>
21
Foreign exchange losses, net, were $59,983,000 for the nine months ended
September 30, 1998, compared to $7,204,000 for the same period in 1997. The
foreign exchange losses for the nine months ended September 30, 1998 include
losses of $34,955,000 at the Company's Russian operations, principally due to
the third quarter devaluation of the ruble. ICN Yugoslavia recorded losses of
$20,993,000 in 1998, including the effect of the April 1998 devaluation of the
dinar. Additionally, the Company recorded foreign currency transaction losses of
$3,122,000 in Hungary and $1,523,000 in Poland. For the nine months ended
September 30, 1997, net translation losses include $10,403,000 of translation
losses, primarily related to ICN Yugoslavia's net monetary asset position,
partially offset by $3,095,000 of translation gains related to the Company's
foreign-denominated debt.
Interest Income and Expense: Interest expense during the three months ended
September 30, 1998 increased $6,940,000 compared to the same period in 1997,
primarily due to interest expense on the Company's $275,000,000 9-1/4% Senior
Notes due 2005, issued in August 1997 and interest on the Company's $200,000,000
8-3/4% Series B Senior Notes due 2008, issued in August 1998 (collectively
referred to as "Senior Notes"). Interest on the Senior Notes was partially
offset by interest savings resulting from the conversion of certain long-term
debt to common stock. Interest income decreased to $2,353,000 in 1998 from
$6,392,000 in 1997 as the Company has ceased recognizing interest income on its
notes receivable from the Yugoslavian government, partially offset by increased
earnings from the investment of a significant portion of the proceeds of the
Senior Notes.
For the nine months ended September 30, 1998, interest expense increased
$11,366,000 compared to the same period in 1997, primarily due to interest
expense on the Company's Senior Notes. Interest on the Senior Notes was
partially offset by interest savings resulting from the conversion of certain
long-term debt to common stock and capitalization of interest costs related to
plant construction at ICN Yugoslavia. Interest income for the nine months ended
September 30, 1998 decreased to $9,576,000 in 1998 from $9,855,000 in the
comparable 1997 period due to not recognizing income on notes receivable from
the Yugoslavian government, partially offset by increased earnings on the
investment of a significant portion of the proceeds of the Senior Notes
Income Taxes: The Company's benefit for income taxes for the three months ended
September 30, 1998 was $4,840,000 compared to $521,000 the same period of 1997.
The benefit recorded in 1998 primarily represents the tax benefits resulting
from United States-based pretax losses.
For the nine months ended September 30, 1998, the Company recorded a provision
for taxes of $5,147,000 compared to a tax benefit of $12,311,000 for the same
period in 1997. In 1998, the Company recorded tax provisions in North America of
$2,929,000 and Latin America of $4,238,000, partially offset by a tax benefit
recorded in Eastern Europe. Income taxes for the 1997 period include a deferred
tax benefit of $25,854,000 resulting from the Company's recognition of a
deferred tax asset for net operating losses and tax benefits expected to be
realized in the future.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, cash used in operating
activities totaled $13,826,000. Operating cash flows reflected the Company's net
loss of $128,773,000 and working capital increases (after the effect of business
acquisitions and currency translation adjustments) totaling approximately
$154,324,000, offset by net noncash charges (including the $215,729,000 of
provisions for losses related to Eastern Europe, along with depreciation,
minority interest, and foreign exchange gains and losses) of $269,271,000. The
working capital increases are principally related to increases in accounts and
notes receivable, especially at ICN Yugoslavia and at the Company's Russian
operations. In the third quarter, the collection period of receivables from the
Company's Russian customers has been adversely affected by the current Russian
economic crisis, which has dramatically reduced the availability of cash among
Russian companies. The collection period of receivables at ICN Yugoslavia
continues to be affected by the lack of availability of dinars in
Yugoslavia--see "ICN Yugoslavia". The Company's inventories increased by
approximately $29,817,000, primarily to support increased sales volume in the
Company's Eastern European operations and a build-up of inventories of
recently-acquired products. Prepaid expenses and other assets increased
approximately $35,219,000, primarily due to vendor prepayments made in
Yugoslavia and Russia to reduce the Company's exposure to exchange rate
<PAGE>
22
fluctuations. These amounts were partially offset by an increase in trade
payables and accrued liabilities of $20,791,000 and other working capital
changes.
Cash used in investing activities of $130,423,000 for the nine months ended
September 1998 includes $69,411,000 paid for the acquisition of the rights to
certain products from SKB and Cassara. The Company also purchased VUAB, and
acquired a portion of the minority interests in five of its subsidiaries. In
addition, the Company made capital expenditures of $84,908,000, principally
representing the continuation of its plant expansion efforts. These amounts were
partially offset by proceeds from the sale of marketable securities of
$22,958,000 and proceeds from the sale of fixed assets of $938,000.
Cash provided by financing activities totaled $192,946,000 during the nine
months ended September 30, 1998, including proceeds of long-term borrowings
totaling $215,573,000. In August 1998, the Company completed a private placement
of $200,000,000 of its 8-3/4% Senior Notes due 2008 for net proceeds of
approximately $190,821,000. Other sources of cash from financing activities
included proceeds of $6,707,000 from the exercise of employee stock options and
a net increase in short-term borrowings of $1,188,000. The Company also received
proceeds of $4,299,000 related to shares of its common stock issued in the
Company's acquisition of certain product rights from Roche in 1997; under the
purchase agreement, the Company was entitled to a portion of the proceeds
realized by Roche from the sale of the shares in excess of a specified price.
These amounts were partially offset by principal payments on long-term debt of
$22,192,000, and cash dividends paid on common stock of $12,629,000. The
dividend payments reflect higher levels of shares outstanding and a 12.5%
increase in the per share dividend from the same period in 1997.
In March 1998, the Company announced the redemption of its Bio Capital Holdings
5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and SFr
37,670,000 principal amount of the New Certificates was exchanged for an
aggregate of approximately 802,000 shares of the Company's common stock. The
remaining SFr 200,000 principal amount of the New Certificates was redeemed for
cash. Upon the exchange of the New Certificates, marketable securities held in
trust for the payment of the New Certificates, having a market value of
approximately $22,958,000, became available to the Company.
In September 1998, the Company's Board of Directors declared a third quarter
cash dividend of $.06 per share payable on October 28, 1998 to shareholders of
record on October 14, 1998.
Demands on Liquidity: The Company's principal sources of liquidity are its
existing cash and cash equivalents and cash provided by operations. Cash and
cash equivalents at September 30, 1998 totaled $255,439,000, compared to
$209,896,000 at December 31, 1997. Working capital at September 30, 1998 was
$500,695,000 compared to $585,606,000 at December 31, 1997. The decrease in
working capital is primarily due to the provisions for losses related to Eastern
Europe (principally on accounts and notes receivable) of $215,729,000 and cash
payments of approximately $69,411,000 for the acquisition of product rights and
businesses, partially offset by the proceeds of the Company's recently-completed
offering of its 8-3/4% Senior Notes due 2008. Certain of the Company's lines of
credit and long term borrowings include covenants restricting the payment of
dividends, the issuance of new indebtedness, and the repurchase of the Company's
common stock and requiring the maintenance of certain financial ratios.
Management believes that funds generated from operations, along with its
existing cash reserves, will be sufficient to meet its normal operating
requirements.
In November 1998, the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product; Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. The
Company also has several preliminary acquisition prospects that may require
significant funds in 1998.
The August 1998 devaluation of the Russian ruble decreased the Company's working
capital by approximately $32,000,000. In addition, the current economic crisis
in Russia continues to adversely affect the Company's operating cash flows in
that region, as its Russian customers continue to experience severe liquidity
shortages. The Company may need to invest additional working capital in Eastern
Europe to sustain its operations, to provide increasing levels of working
<PAGE>
23
capital necessary to support renewed growth, and to fund the purchase or
upgrading of facilities. In connection with a recent acquisition, the Company
has guaranteed the collection of certain accounts receivable and could
potentially be required to pay up to 52,300,000 dinars in the event that any
such accounts are ultimately uncollectible.
Management believes that the Company's existing cash and cash equivalents and
funds generated from operations will be sufficient to meet its liquidity
requirements and to fund anticipated acquisitions and capital expenditures. The
Company may also seek additional debt financing or issue additional equity
securities to finance future acquisitions.
The Company and certain subsidiaries do not maintain product liability
insurance. While the Company 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 Company'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 restrictive
governmental actions. Changes in the relative values of currencies which occur
from time to time have, and may in the future, materially affect the Company's
results of operations. The effect of these risks remains difficult to predict.
As of September 30, 1998, the Company had a net monetary asset position in
Russia of approximately $20,340,000 which is subject to loss in the event of
further decline in the value of the ruble. Due to the extremely large
fluctuation in the ruble exchange rate, the ultimate amount of any future
foreign exchange loss the Company may incur cannot presently be determined and
such loss may have a material adverse effect on the Company's financial position
and results of operations. The Company's management continues to work to reduce
its net monetary exposure, including the tightening of credit policies and
increased accounts receivable collection efforts including, in some cases,
discounts for early payment from customers. However, there can be no assurance
that such efforts will be successful.
The Company and its subsidiaries are also subject to foreign currency risk on
its foreign-denominated debt of approximately $38,722,000 at September 30, 1998,
which is primarily denominated in Swiss francs and German marks and, at
Alkaloida and Polfa Rzeszow, in U.S. dollars.
The effects of inflation are experienced by the Company through increases in the
costs of labor, services and raw materials. The Company is subject to price
control restrictions on its pharmaceutical products in the majority of countries
in which it operates. While the Company attempts to raise selling prices in
anticipation of inflation, the Company has been affected by the lag in allowed
price increases in Yugoslavia and Mexico, which has created lower sales in U.S.
dollars and reductions in gross profit. Future sales and gross profit could be
materially affected if the Company is unable to obtain price increases
commensurate with the levels of inflation. Pharmaceutical prices in the United
States and the Russian pharmaceutical markets are not heavily regulated by the
government. However, the recent economic crisis in Russia has limited the
Company's ability to increase prices in the Russian market.
ICN YUGOSLAVIA
ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that
is subject to significant economic volatility and political instability. The
economic conditions in Yugoslavia include continuing liquidity problems,
inflationary pressures, unemployment, a weakened banking system and a high trade
deficit. Between May 1992 and December 1995, ICN Yugoslavia operated under
United Nations' sanctions that severely limited its ability to import raw
materials and prohibited all exports. While most of these sanctions were
subsequently suspended, in June 1998, the European Union and the United States
imposed additional economic sanctions on Yugoslavia in response to the continued
violence by government forces against the Albanian population in Kosovo. On June
<PAGE>
24
8, 1998, the United States announced a ban on new American investments in
Yugoslavia and a freeze on the assets of that country in the United States. The
future of the economic and political environment of Yugoslavia is uncertain and
could deteriorate further, resulting in a material adverse impact on the
Company's financial position and results of operations.
On April 1, 1998, the Yugoslavian government devalued the dinar from a rate of
6.0 dinars per U.S. $1 to 10.92 dinars per U.S. $1. At the time of the
devaluation the Company's net monetary asset position in Yugoslavia was
approximately $38,000,000, resulting in a foreign translation loss of
approximately $17,000,000 which was recognized in the second quarter of 1998. In
addition to the foreign translation loss, the devaluation has and will continue
to adversely affect sales and gross profit margins at ICN Yugoslavia. Subsequent
to the devaluation, sales are lower due to higher exchange rates and a lack of
immediate price increases. Gross profit margins are further affected as
inventories manufactured prior to the devaluation are charged to cost of sales
at the higher historical exchange rate. Margins are expected to improve after a
devaluation if price increases are obtained and, to some extent, when older,
higher-priced inventory is replaced with inventory manufactured after the
devaluation.
Recovery from the effects of the devaluation will depend on the approval of new
price increases by the Yugoslavian government. Subsequent to the devaluation,
the Company, along with others in the Yugoslavian pharmaceutical industry,
applied to the government for price increases in an amount believed to be
adequate to make possible a recovery from the effects of the devaluation.
However, the Yugoslavian government has not approved any significant price
increases and in April 1998 the Company, along with many of its competitors,
suspended all direct sales to the Yugoslavian government in an effort to
encourage the Yugoslavian government to approve price increases. The suspension
of sales continued through the third quarter of 1998. The Company is unable to
predict the amount and timing of future price increases that may be allowed by
the Yugoslavian government, if any, and the resultant impact on future earnings.
As of June 30, 1998 the Company had notes receivable, including accrued
interest, of approximately $176,204,000 due from the Yugoslavian government and
as of September 30 1998, the Yugoslavian government had defaulted on its
obligations under the notes. In negotiations with the Company subsequent to the
default, the Yugoslavian government is seeking concessions from the Company,
including the forgiveness of a substantial portion of the amounts owed, and has
ceased making all payments required under the original credit agreements.
As a result of the government's default and the suspension of sales to the
government, the Company recorded a $173,440,000 charge against earnings
($130,080,000 after minority interests) at ICN Yugoslavia in the second quarter
of 1998. The charge consists of a $151,204,000 reserve for estimated losses on
notes receivable, a $7,757,000 reserve for accounts receivable from
government-sponsored entities, and a $14,479,000 write-down of the value of
certain related investments and assets.
The Company continues to work to renegotiate the credit terms and is hopeful
that an agreement will be reached on the amounts due the Company and future
sales to the government. If an agreement is reached on future sales, it is
likely that the level of these sales will be substantially lower than the level
of sales prior to the default. The Company intends to expand ICN Yugoslavia's
selling efforts toward the private sector and export customers. However, the
outcome of these efforts is uncertain and there can be no assurance that the
Company will be able to generate new business to replace the government sales,
or that revenues from such new business will be adequate to sustain operations
at ICN Yugoslavia. The Company has taken actions to reduce operating costs at
ICN Yugoslavia by placing approximately 1,000 employees on paid leave, which
allows the Company to pay 60% of an employee's salary rather than a full salary.
Yugoslavian law requires the payment of a two-year severance benefit to
terminated employees. The Company may consider employee terminations in the
future to reduce its operating costs. Should the Company be unable to reach an
agreement providing for the resumption of sales to the Yugoslavian government or
to generate adequate non-government sales, there may be a further material
adverse impact on the Company's financial position and results of operations.
Yugoslavia is also subject to political instability. The elections that took
place in 1997 have not resulted in a change of political leadership that would
provide a foundation for significant economic reforms. The Federal Republic of
Yugoslavia is comprised of two states, Serbia and the much smaller state of
Montenegro. Within Yugoslavia there exist political dissension and unrest. The
<PAGE>
25
state of Montenegro has been active in seeking greater autonomy from Serbia.
Additionally, in Kosovo, ethnic Albanians are also seeking independence from
Serbia. Recent armed conflicts in Kosovo between ethnic Albanians and Serbian
forces continue to escalate and have contributed to increased instability in the
Balkans.
In June 1998, in response to continued violence by Yugoslavian government forces
against the ethnic Albanian population in Kosovo, the United States government
along with countries of the European Union imposed a ban on new American
investments in Yugoslavia and a freeze on that country's assets in the United
States. These sanctions are likely to worsen economic conditions in Yugoslavia
and may result in further adverse impact on the Company's financial position and
results of operations.
THE YEAR 2000 ISSUE
The Company is pursuing an action plan to be Year 2000 compliant in all
locations by the third quarter of 1999. The Company does not have heavy reliance
on custom, internally generated software; the Company principally uses third
party software that is, in most cases, already Year 2000 compliant. The Company
has completed an assessment of its worldwide computer systems and has determined
that it will be required to perform some modification or replacement of software
so that all systems will properly utilize dates beyond December 31, 1999. As of
September 30, 1998, the Company has spent approximately $3,800,000 to upgrade
its systems to be Year 2000 compliant, and considers its information systems to
be 85% Year 2000 compliant. The Company recently converted its Russian
operations to Year 2000 compliant software.
The remaining projects that must be completed for full Year 2000 compliance are
software upgrades at the Company's plants in Hungary and Puerto Rico. The
purchase of replacement software is necessary to maintain the existing "Good
Manufacturing Practices" status of these plants. The company has identified
appropriate replacement software for these facilities and prepared
implementation plans. Installation is expected to begin early in 1999. The
estimated cost to complete the conversion to full Year 2000 compliance is
estimated to be approximately $4,500,000 which will be spent primarily in 1999
and funded with cash from operations. The Company does not consider itself
particularly vulnerable to third parties' failure to remediate those third
parties' own Year 2000 issues, and continues to monitor the issue.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. The new standard becomes effective for the
Company for the year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company does not expect this pronouncement to materially
change the Company's current reporting and disclosures.
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for the year ended December 31,
1998, and the adoption of this standard is not expected to have a material
effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. This statement is effective for the Company's financial
statements for all fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). The Company has not yet determined the impact, if any, that
the adoption of SFAS 133 will have on its results of operations or financial
position.
<PAGE>
26
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Form 10-Q contains statements that constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Form 10-Q and include
statements regarding, among other matters, the factors affecting the Company's
financial condition or results of operations, liquidity in Yugoslavia,
management of monetary exposure, economic conditions in Yugoslavia, credit
policies in Yugoslavia, and trends in financial results. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements expressed or implied in such forward
looking statements. Such factors are discussed in this Form 10-Q and also
include, without limitation, the Company's dependence on foreign operations
(which are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and exchange control,
limitations on foreign participation in local enterprises, health-care
regulations and other restrictive governmental conditions); the risk of
operations in Yugoslavia, Eastern Europe, Russia and China in light of the
unstable economies, political and regulatory conditions in such regions; the
Company's ability to successfully develop and commercialize future products; the
limited protection afforded by the patents relating to Virazole(R), and possibly
on future drugs, techniques, processes or products the Company may develop or
acquire; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; the results of lawsuits pending against the
Company; the Company's dependence on its management, including Milan Panic, its
Chairman and Chief Executive Officer; the Company's potential product liability
exposure and lack of any insurance coverage thereof; government regulation of
the pharmaceutical industry (including review and approval for new
pharmaceutical products by the FDA in the United States and comparable agencies
in other countries), and competition.
<PAGE>
27
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 9 of Notes to Consolidated Condensed Financial Statements
Item 5. OTHER INFORMATION
ACQUISITION OR DISPOSITION OF ASSETS
In November, 1998 the Company completed the acquisition of the worldwide rights
(except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). The
products include Dalmadorm, a sleep disorder drug; Fluor-Uracil, an oncology
product: Librax, a treatment for gastrointestinal disorders; and Mogadon, a
sleep disorder drug also used to treat epilepsy. Aggregate consideration for the
products was $178,800,000, paid in a combination of $89,400,000 cash and
2,883,871 shares of the Company's common stock, valued at $89,400,000. Under the
terms of the Company's agreement with Roche, the Company has guaranteed to Roche
a per share price initially at $31.00, increasing at a rate of 6% per annum
through December 31, 2000. Should Roche sell any of the shares prior to December
31, 2000, the Company is entitled to one-half of any proceeds realized by Roche
in excess of the guaranteed price. Should the market price of the Company's
common stock be below the guaranteed price at the end of the guarantee period,
the Company will be required to satisfy the aggregate guarantee amount by
payment to Roche in cash or, in certain circumstances, in additional shares of
the Company's common stock. The cash portion of the purchase price was paid
using the Company's existing cash, including a portion of the proceeds of the
August 1998 private placement of $200,000,000 of its 8-3/4% Senior Notes due
2008.
Roche marketed the pharmaceutical products internationally. The Company intends
to use the acquired assets for the same purposes.
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The Company intends to file the required financial statements within 60 days of
the date that this report is required to be filed.
PRO FORMA FINANCIAL INFORMATION
The Company intends to file the required pro forma financial information within
60 days of the date that this report is required to be filed.
EXHIBITS
The Asset Purchase Agreement dated October 2, 1998 by and between F. Hoffmann -
LaRoche Ltd. and ICN Puerto Rico, Inc. is filed as an exhibit to this Form 10-Q
Quarterly Report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Asset Purchase Agreement dated October 2, 1998 by and
between F. Hoffmann - LaRoche Ltd. and ICN Puerto Rico,
Inc.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27 Financial Data Schedule
<PAGE>
28
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
September 30, 1998:
Form 8-K dated July 19, 1998, reporting the Company's intent to provide
a reserve for notes receivable from the Yugoslavian government, and
reporting the sale to Schering-Plough Corporation of the rights to
co-market oral ribavirin for the treatment of hepatitis C in the
European Union.
Form 8-K dated July 24, 1998, reporting the Company's intent to issue
$200,000,000 of Senior Notes in a private placement transaction.
Form 8-K dated September 16, 1998 reporting recent developments
relating to the United States Securities and Exchange Commission's
Order Directing Private Investigation and Designating Officers to Take
Testimony, entitled In the Matter of ICN Pharmaceuticals, Inc. (P-177).
<PAGE>
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: November 13, 1998 /s/ MILAN PANIC
----------------------------------------------
Milan Panic
Chairman of the Board and Chief
Executive Officer
Date: November 13, 1998 /s/ JOHN E. GIORDANI
----------------------------------------------
John E. Giordani
Executive Vice President, Chief
Financial Officer and Corporate Controller
<PAGE>
30
EXHIBIT INDEX
Exhibit
10.1 Asset Purchase Agreement dated October 2, 1998 by and between
F. Hoffmann - LaRoche Ltd. and ICN Puerto Rico, Inc.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27 Financial Data Schedule
Exhibit 10.1
1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of
2 October 1998 by and between F.Hoffmann-La Roche Ltd, Grenzacherstrasse 124,
CH-4070 Basel, Switzerland ("Seller") on the one hand and ICN Puerto Rico, Inc.
with registered offices at Bo. Mariana Road 909 KM 1.1 Humacao, Puerto Rico
00791-9731 ("Buyer"), a wholly-owned subsidiary of ICN Pharmaceuticals, Inc.,
ICN Plaza, 3300 Hyland Avenue, Costa Mesa, CA 92626 ("ICN") and ICN acting
either as a direct party to this Agreement with respect to certain matters or as
a guarantor of performance by Buyer hereunder on the other hand.
WHEREAS Seller and Buyer are both engaged in the pharmaceutical business;
WHEREAS Seller wishes to sell and Buyer wishes to buy the Assets (as hereinafter
defined) related to certain pharmaceutical products of Seller;
WHEREAS in connection with the contemplated purchase of the Assets Seller and
ICN wish for ICN to engage also as a party to this Agreement with regard to
specific matters and to guarantee due performance by Buyer under this Agreement;
NOW THEREFORE, in consideration of the representations, warranties, covenants
and agreements set forth herein, the parties hereto agree as follows:
1. DEFINITIONS
1.1 "Active Ingredients" mean the pharmaceutical compounds known by the
chemical names set forth in Schedule 1.1 hereto.
1.2 "Affiliate" of a party means any corporation or other business entity
controlled by, controlling or under common control with, such party.
For this purpose "control" shall mean direct or indirect beneficial
ownership of more than fifty percent (50%) of the voting or income
interest in such corporation or other business entity; provided,
however, Genentech, Inc., with offices located at 460 Point San Bruno
Boulevard, South San Francisco, California, 94080, shall not be
considered an Affiliate of Seller.
1.3 "Assets" has the meaning ascribed to such term in Article 2.
1.4 "Business" means the business as currently conducted by Seller and its
Affiliates with respect to manufacture and sale of the Products in the
Territory.
1.5 "cGMP's" shall mean the then-current Good Manufacturing Practices
applicable to the manufacture of pharmaceutical products for human use
in the Territory in accordance with regulations of the competent
authority in the Territory.
1.6 "Closing" has the meaning ascribed to such term in Article 10.1.
<PAGE>
2
1.7 "Closing Date" has the meaning ascribed to such term in Article 10.1.
1.8 "Damages" has the meaning ascribed to such term in Article 12.2.1.
1.9 "Disclosure Schedule" means the disclosure schedule delivered prior to
the Effective Date to Buyer by Seller in connection with this
Agreement. The sections of the Disclosure Schedule correspond to the
sections of this Agreement, but information disclosed in any section
of the Disclosure Schedule shall be deemed to be disclosed as to all
relevant sections thereof, except as otherwise specifically provided
herein.
1.10 "Distribution Agreements" means the agreements referred to in Article
8.10.
1.11 "DOJ" means the United States Department of Justice.
1.12 "Effective Date" means 1 October 1998.
1.13 "FDA" means the United States Food and Drug Administration.
1.14 "FTC" means the United States Federal Trade Commission.
1.15 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
1.16 "Indemnifiable Claims" has the meaning ascribed to such term in
Article 12.2.1 and 12.3.
1.17 "Indemnified Party" has the meaning ascribed to such term in Article
12.4.
1.18 "Indemnifying Party" has the meaning ascribed to such term in Article
12.4.
1.19 "Inventory" has the meaning ascribed to such term in Article 2.6.
1.20 "Know-How" has the meaning ascribed to such term in Article 2.3.
1.21 "Litigation" has the meaning as ascribed to such term in Art. 4.13.
1.22 "Marketing and Promotional Documents" has the meaning ascribed to such
term in Article 2.5.
1.23 "Material Adverse Effect" means an event that has a material adverse
effect on the Assets, taken as a whole.
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3
1.24 "Patents" means any patent or patent application and any and all
divisions, continuations, continuations-in-part, re-examinations,
reissues, extensions, pending or granted supplementary protection
certificates, substitutions, confirmations, registrations,
revalidations, revisions, additions and the like, of or to said patent
and patent application.
1.25 "Products" means each packaging size of each finished pharmaceutical
dosage form identified by the Trademarks as defined in Art. 2.1 below
and marketed or formerly marketed by Seller or its Affiliates or third
party distributors of Seller or Seller's Affiliates in the Territory
as defined in Art. 1.33 hereinbelow.
1.26 "Purchase Price" means such term as used in Article 3.
1.27 "Registrations" has the meaning ascribed to such term in Article 2.2.
1.28 "Roche Labeling" means the printed labels, labeling and packaging
materials, including printed carton, container label and package
inserts, as currently used by Seller and its Affiliates for each
Product.
1.29 "Roche Net Sales" means gross sales after deduction of returns,
distributor discounts, sales rebates (price reduction) and volume
(quantity) discount as well as sales taxes (e.g. value added taxes)
and other taxes directly linked to the sales (e.g. excise taxes).
1.30 "Roche Process" means, for each Product, the manufacturing process
approved in the Registrations for each such Product.
1.31 "Roche Sales Statements" means the monthly Roche Net Sales by Product
in the Territory for the twelve month period ended 31 July 1998,
attached as Schedule 1.31.
1.32 "Toll Manufacturing Agreements" means the agreement referred to in
Article 8.9.
1.33 "Territory" means worldwide except India. Buyer acknowledges that
Assets may not exist and Products may not be marketed in all countries
of the Territory.
1.34 "Trademarks" has the meaning ascribed to such term in Article 2.1.
1.35 "World-wide Safety Reports" has the meaning ascribed to such term in
Article 2.4.
2 ASSETS BEING SOLD
Subject to the terms and conditions of this Agreement, at Closing,
Seller shall sell, transfer, assign, convey and deliver or cause an
Affiliate of Seller to sell, transfer, assign, convey and deliver to
Buyer, forever, all of the rights, title, and interest of Seller or
Seller's Affiliates in the assets solely and exclusively used
for/dedicated to the Products in the Territory as listed below
(collectively, the "Assets") and Buyer shall assume all rights, title,
and interest of Seller in the Assets and all obligations and
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4
responsibilities associated therewith; provided that Buyer shall not
assume any liabilities relating to the Assets or the Business arising
prior to Closing or from events preceding Closing.
2.1 Trademarks: Trademarks mean the trademarks, service marks,
registrations and applications for the Territory and all goodwill
related thereto, which are set forth on Schedule 2.1 including for
each Trademark the registration or application number, owner,
registration and expiration dates, marks and class. The trademark
files contain, to the extent available, the pertaining documents, such
as the usual consent letters, coexistence and prior right agreements
which are not included in Schedule 2.1 or Schedule 2.1 (a). Schedule
2.1 may contain trademark registrations and applications which may not
be supported by use and therefore may unavoidably expire due to
non-use. Trademarks also includes any copyrights and any unregistered
trade dress that are owned by Seller which are associated solely with
the Products and (only as to trade dress) currently used on or in
association with such Products in the Territory. "Trademarks" shall
not include copyrights and trade dress associated with the divisions,
companies or corporate entities of Seller, its Affiliates or
distributors. "Trademarks" also does not include copyrights and trade
dress associated with the Products and also associated with products
not being transferred by Seller. Trademarks does not include the word
"Roche", the Roche logo, the housemark Roche or the hexagon used by
Roche. Trademarks does also not include the trademarks associated with
the hexagon or with trademarks used by Seller or its Affiliates for
other products which are not subject matter of this Agreement. Buyer
is aware that Trademarks does additionally not include the following
trademarks: (a) trademarks which are subject matter of agreements with
third parties which are listed in Schedule 2.1(a); (b) trademarks
combined with "Roche" which are listed in Schedule 2.1(b); and (c) the
associated trademarks which are listed in Schedule 2.1(c). Details and
consequences of the trademarks listed in Schedule 2.1(a), 2.1(b) and
2.1(c) are regulated in Art. 4.16 and 8.3 below.
2.2 Registrations: All marketing approvals, registrations, regulatory
files and approvals, governmental authorizations, licenses and
permits, and applications therefor, required for the marketing and
sale of the Products in the Territory that are owned by Seller or its
Affiliates (the "Registrations"), as well as the pertaining
registration dossiers. The Registrations include, without limitation,
registrations covering all sales reflected in the Roche Sales
Statements set forth in Schedule 1.31, as well as the registrations
listed in Schedule 2.2, for which there are no current sales.
2.3 Manufacturing Technology and Know-How: The ownership and/or beneficial
interest of Seller in the Roche manufacturing technology and know-how
that is solely and exclusively used in the pharmaceutical
manufacturing of any Product for the Territory, including but not
limited to specifications and test methods (Products, raw material,
packaging, stability and other applicable specifications),
pharmaceutical manufacturing and packaging instructions, master
formula, validation reports (process, analytical methods and cleaning)
to the extent available, stability data, analytical methods, records
of complaints, annual product reviews to the extent available, and
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5
other master documents necessary to manufacture, control, and release
of the Products by Seller (the "Know-How") including all documents
associated therewith; and a non-exclusive, perpetual, paid-up,
irrevocable, royalty-free license, with right to sub-license, to use
any manufacturing technology and know-how that are necessary or used
in pharmaceutical manufacturing of any Product (but not exclusively
used thereto) with such license or sub-license being restricted to use
for the Products in the Territory and Seller retains the right to use
or to license such manufacturing technology and know-how for use with
any products in the Territory except for Competing Products as defined
in Art. 6.5. Seller shall, to the extent available, provide a list of
all suppliers of components and raw materials, and copies of GMP audit
reports of all suppliers, whether third parties or Affiliates.
2.4 World-wide Safety Reports: A copy of the world-wide safety reports
with respect to the Products (the "World-wide Safety Reports"). Seller
shall make available to Buyer for transfer a print-out and an
electronic copy of the World-wide Safety Reports with respect to the
Products but Buyer shall have all responsibility and shall pay all
costs associated with converting such electronic copy of the
World-wide Safety Reports into the format from which Buyer can access
that information.
2.5 Marketing and Promotional Documents: The marketing and promotional
documents, such as clients lists, promotional plans and items,
promotional materials and training manuals, that are solely and
exclusively used with the Products, to the extent available in the
Territory (the "Marketing and Promotional Documents"). All such
documents shall be shipped Ex Works (Incoterms 1990) Seller's
location.
2.6 Inventory: Buyer shall in addition, pursuant to the Supply Agreement
attached as Schedule 2.6, purchase Seller's and its Affiliates'
Inventory of all finished Products (including samples), that are owned
by Seller or an Affiliate of Seller and that have been approved by
Seller as meeting specifications and otherwise saleable in the
ordinary and normal course of business as of the Effective Date (the
"Inventory").; the quantity which shall be set forth in a document
delivered by Seller at Closing, and based on a physical inventory to
be taken on 30 September 1998. The Inventory shall be shipped EX WORKS
(Incoterms 1990) Seller's location at dates mutually agreed upon by
Seller and Buyer consistent with the transfer of the marketing
responsibilities from either party to the other.
2.7 Assumed Agreements: Subject to Art. 6.2 and 7.1 Seller agrees or shall
cause an Affiliate to agree that the agreements with unaffiliated
third parties relating to the Products listed in Schedule 2.7 (the
"Assumed Agreements") shall be assigned to Buyer and Buyer shall
assume the Assumed Agreements on the same terms now existing,
provided, however, that if such Assumed Agreements cover also other
products than the Products, they shall only be assigned and assumed to
the extent they relate to the Products. Some of the Assumed Agreements
are licence manufacturing agreements under which the third party
formulates the Products ex active substances delivered by the Seller
or its Affiliates and distributes them locally for its own account.
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6
3 PURCHASE PRICE
3.1 Purchase Price: The purchase price for the sale, conveyance,
assignment, transfer and delivery of the Assets (except the Inventory)
provided for in Article 2 hereof shall be US$ 178,800,000.-- (US
Dollars one hundred seventy eight million eight hundred-thousand (the
"Purchase Price").
The Purchase Price shall be allocated among the Affiliates/countries
in accordance with Schedule 3.1.
3.2 Payment of Purchase Price
3.2.1 Note. At the Closing, Buyer shall deliver the Purchase Price to Seller
in the form of (a) a cash payment in the principal amount of US$
89,400,000.-- and (b) a promissory note from Buyer, as maker, to
Seller, as payee, in the principal amount of US$ 89,400,000.-- in a
form a set forth under Schedule 3.2.1(the "Note"). Concurrently with
the delivery of the Note, Seller shall assign the Note to ICN in
exchange for 2,883,871 shares of the common stock, $.01 par value
("Common Stock") of ICN. For purposes hereof, the term "Original
Common Stock" shall mean such 2,883,871 shares of Common Stock
received hereunder. The shares of Original Common Stock shall be
registered in the name of Seller (or an Affiliate of Seller, as
designated by Seller). In the event such shares are held by an
Affiliate of Seller, such Affiliate shall be deemed "Seller" for
purposes of this Section 3.2 and Seller hereby guaranties all
obligations of such Affiliate under this Section 3.2.
3.2.2 Price Guaranty. ICN guarantees that Seller will get the full Purchase
Price by December 31, 2000, or earlier if there is a change of control
over ICN, and hence, since part of the Purchase Price is paid by
shares of ICN which, at the time of signature are traded approximately
at 50% of the Guaranteed Price (as defined hereinafter) which trade
price may or may not move up to the Guaranteed Price until December
31. 2000 (or the date of a change of control), the parties agree on
the following price guaranty wording:
On December 31, 1999, on December 31, 2000 and on a Restriction
Termination Date (as defined under section 3.2.4 below and occurring
before December 31, 2000) (each a "Guaranty Date"), ICN guaranties to
Seller that the then current market price per share of ICN's Common
Stock, based on the average closing sale price on the New York Stock
Exchange for the 10 trading days prior to each such Guaranty Dates
(plus dividends paid to Seller since the Closing on such shares) (the
"Current Market Price") shall equal or exceed the applicable
Guaranteed Price (as defined below) for such Guaranty Date.
For purposes hereof, "Guaranteed Price" shall be US$ 31 (thirty one US
Dollars) plus 6% p.a. from Effective Date).
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7
In the event that the Current Market Price is less than the Guaranteed
Price on a Guaranty Date, ICN shall pay to Seller not later than 30
days following such Guaranty Date ((i)on December 31, 2000 and on a
Restriction Termination Date (at a Restriction Termination Date only
at the option of Seller upon Seller's request which shall be made
within 10 business days upon written information by ICN to Seller that
a Restriction Termination Date has occurred) in cash of US Dollars and
(ii) on December 31, 1999 in the form of additional shares of Common
Stock or of non-voting preferred shares (if Seller's holding in Common
Stock would increase over five percent) at the option of Seller,
valued at the then Current Market Price as of the date of payment,
which additional shares of Common Stock shall be referred to as the
"Additional Shares", or in cash as the parties shall agree; however,
in the event that ICN until and including December 31, 1999 shall have
disposed (or committed to dispose) of a material portion of its assets
the payment shall be in cash) the amount by which (A) the product (the
"Guaranteed Value") of the Guaranteed Price for such Guaranty Date
times the number of shares of Original Common Stock, owned on such
date by Seller ("Seller's Common Stock") exceed (B) the sum (the
"Actual Value") of (i) the product of the then Current Market Price
times the aggregate of the number of shares of Seller's Common Stock
and number of Additional Shares, if any, and (ii) the amount of any
dividends paid to Seller since the Closing on any Additional Shares
theretofore received by Seller (whether or not such Additional Shares
are then owned by Seller) (the "Dividend Payment") and (iii) any cash
payment made on December 31, 1999, plus interest of 6 % p.a. on such
cash payment.
In the event that, on December 31, 2000, the Actual Value exceeds the
Guaranteed Value, Seller shall, within 30 days after such date, return
to ICN (i) that amount of cash received on December 31, 1999, (only),
plus interest of 6 % p.a. on such cash payment, or (ii) that number of
Additional Shares (only) received hereunder , and valued as of the
date of such return, in the same manner as stated above, in either
case equal to the amount by which the Actual Value exceeds the
Guaranteed Value.
3.2.3 Capital Gains. In the event that Seller shall, at any time prior to
December 31, 2000, sell to any third party, excluding any Affiliate of
Seller, ICN or any Affiliate of ICN, any shares of Original Common
Stock received hereunder for a net sale price per share in excess of
the Guaranteed Price, fifty percent of such excess shall be paid to
ICN] in the form of the return of shares of Original Common Stock
received hereunder, valued, based on the Current Market Price, as of
the date of payment or in cash at Seller's option 10 days after the
month in which the sale occurred. The remaining fifty percent of such
excess shall be kept by Seller as participation in such capital gain.
On December 31, 2000, any Original Common Stock received hereunder
which remains unsold shall be deemed sold at the Current Market Price
on that date and the capital gain, if any, divided according to the
formula above. After December 31, 2000, Seller is entitled to all
additional capital gains.
3.2.4 Restrictions on Transfer. Except as provided for in this Section
3.2.4, prior to December 31, 2000, Seller shall not, without ICN's
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8
prior written consent, sell any of the shares of Common Stock received
hereunder unless the net price to be received by Seller would exceed
the Guaranteed Price. Seller undertakes that such a sale will be made
in a way which does not hurt the market;. Any shares of Common Stock
may be sold by Seller to an Affiliate of Seller, at any time without
restriction, provided that such Affiliate shall agree to be bound by
the terms of this Agreement relating to any such shares purchased by
it.
The foregoing restrictions shall terminate in the event (the day of
any such event, the "Restriction Termination Date") that (i) ICN shall
enter into an agreement (x) to merge or consolidate with or into any
other corporation or entity or other person (whether or not ICN is the
surviving corporation), or (y) to transfer all or a substantial part
of ICN's assets to any other unaffiliated corporation or other entity
or person, or (ii) there occurs any other corporate reorganization or
transaction or series of related transactions, following which the
present shareholders of ICN would be expected to own less in the
aggregate than 50 % of the voting power or equity of the ultimate
parent corporation or other entity surviving or resulting from such
merger, consolidation, reorganization or other transaction, or (iii)
any person shall have commenced a tender or exchange offer for any
shares of ICN Common Stock.
3.2.5 Voting Rights. Seller shall take such action as may be required so
that all shares of Common Stock received hereunder and owned by Seller
are voted in accordance with the recommendations of ICN's Board of
Directors.
3.2.6 Anti-Dilution Adjustments to Guaranteed Price. In the event that ICN
issues additional shares of Common Stock pursuant to a stock dividend,
stock distribution or subdivision, the then applicable Guaranteed
Price shall, concurrently with the effectiveness of such stock
dividend, stock distribution or subdivision, be proportionately
reduced, and in the event the outstanding shares of Common Stock of
ICN shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the
Guaranteed Price shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
3.2.7 Investment Representations of Seller. The Seller represents and
warrants to ICN as follows:
(a) Experience. It is knowledgeable, sophisticated and
experienced in making investments, and is qualified to make
decisions with respect to investment in the Common Stock.
(b) Investment. It is acquiring the Common Stock for investment
for its own account and not with a view to, or for resale in
connection with, any distribution thereof. It understands
that the shares of Common Stock (the "Shares") have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act") by reason of a specified exemption from
the registration provisions of the Securities Act which
<PAGE>
9
depends upon, among other things, the bona fide nature of
its investment intent as expressed herein.
(c) Rule 144. It acknowledges that the Shares must be held
indefinitely unless they are subsequently registered under
the Securities Act or an exemption from such registration is
available. It has been advised or is aware of the provisions
of Rule 144 promulgated under the Securities Act.
(d) Access to Data. It has had an opportunity to discuss
business, management and financial affairs with its
management and has had the opportunity to view ICN's
facilities.
(e) Financial Condition. Its financial condition is such that it
is able to bear all risks of holding the Shares for an
indefinite period of time.
(f) Authorization. It is duly authorized to enter into this
Agreement and to consummate the transactions contemplated
hereby.
3.2.8 Registration Rights Agreement. ICN shall agree to register the Shares
under the Securities Act pursuant to a Registration Rights Agreement
in the form attached hereto as Schedule 3.2.9, which Agreement shall
be executed and delivered at the Closing.
3.3 Termination of Certain Provisions. Notwithstanding any provision of
this Agreement to the contrary, the rights and obligations of Seller
and ICN with respect to shares of Common Stock received hereunder (and
any shares issued in dividends or distributions thereon) and set forth
in Section 3.2.4 and 3.2.5. shall terminate, with respect to any such
shares of Common Stock, upon the sale of such shares by Seller to a
third party.
3.4 Payment for Inventory: In addition to the Purchase Price according to
Article 3.1 above, Buyer shall pay to Seller or an Affiliate of Seller
in US Dollars, where this is the national currency, or in Swiss
Francs, in all other countries, for the Inventory, based on the
quantity document delivered by Seller at Closing, price per unit as
set forth in Schedule 2.6. Buyer shall effect such payment so that
Seller shall receive it on its designated bank account within 90
(ninety) days from the Effective Date (but in no event prior to
Closing) subject to confirmation that inventories (other than those
for the Products Dalmane/Dalmadorm and Librax for the U.S.-market)
will not exceed 120 days supply in average
3.5 Purchase Price Adjustment: In the event a regulatory authority finally
refuses, through no fault of Buyer, to assign a Registration (i.e. a
Registration needed by Buyer to sell the Products in the market as
currently done by Seller and its Affiliates; not a registration of a
change of manufacturer, process, analysis, specification or
manufacturing site etc.) to Buyer within 2 (two) years from the
Closing Date, the Purchase Price shall be adjusted downward by an
amount based on the sales associated with such non-assigned
Registration as reflected in the Roche Sales Statements. Such purchase
price adjustment shall be paid by Seller to Buyer by returning an
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10
appropriate amount of shares of Original Common Stock, valued at the
Guaranteed Price as of the Guaranty Date next preceding such
adjustment plus pro rata 6% p.a or in cash at the option of Seller.
4 REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 Organization: Seller is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of
organization, with full corporate power and authority to consummate
the transactions contemplated hereby.
4.2 Authority; The execution and delivery of this Agreement by Seller and
the consummation and performance of the transactions contemplated
hereby, have been duly and validly authorized by all necessary
corporate and other proceedings, and this Agreement has been duly
authorized, executed, and delivered by Seller and, assuming the
enforceability against Buyer, constitutes the legal, valid and binding
obligation of Seller, enforceable in accordance with its terms.
4.3 Title to Assets; Except as set forth in Schedule 4.3 Seller or an
Affiliate of Seller has good and marketable title to all the Assets
and will convey good and marketable title at Closing, free and clear
of any and all liens, encumbrances, charges, claims, restrictions,
pledges, security interests, or impositions of any kind (including
those of secured parties). None of the Assets is leased, rented,
licensed, or otherwise not owned by Seller or an Affiliate.
4.4 No Violation or Conflict: The execution and delivery of this Agreement
by Seller and the performance of this Agreement (and the transactions
contemplated herein) by Seller (a) do not and will not conflict with,
violate or constitute or result in a default under any law, judgment,
order, decree, the articles of incorporation or bylaws of Seller or
any contract or agreement to which Seller is a party or by which
Seller is bound or (b) will not result in the creation or imposition
of any lien, charge, mortgage, claim, pledge, security interest,
restriction or encumbrance of any kind on, or liability with respect
to, the Assets except as otherwise provided herein or otherwise
disclosed on the Disclosure Schedule.
4.5 Patents: Seller does not own any Patents with respect to the Active
Ingredients or the Products or the manufacturing of Active Ingredients
or the Products in the Territory.
4.6 Registrations: As per Seller's central registration data bank, the
registrations covering the sales reflected in the Roche Sales
Statements, together with the registrations listed on Schedule 2.2,
constitute all Registrations held by Seller or its Affiliates in the
Territory. In the event additional registrations are discovered at any
time, they will be transferred forthwith to Buyer at Seller's expense.
Except as set forth on Schedule 4.6 of the DISCLOSURE SCHEDULE, the
Registrations (a) are in the name of Seller or an Affiliate of Seller,
(b) constitute all licenses, permits, approvals, qualifications, and
governmental specifications, authorizations or requirements which
Seller or its Affiliates have in connection with the marketing and
sale of the Products in the Territory, and (c) to the best knowledge
of Seller after due inquiry made, constitute all such licenses,
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11
permits, approvals, qualifications, and governmental specifications,
authorizations, and requirements necessary for the marketing and sale
of the Products in the Territory as currently conducted by Seller and
its Affiliates. All Registrations are in full force and effect. Seller
has complied with all its obligations under these Registrations and
all applicable laws and regulations. To Seller's knowledge, no
Registration is likely to be suspended, cancelled or revoked or is
likely not to qualify for assignment to Buyer provided Buyer makes
best efforts to obtain the authorities' consent to such an assignment.
It is, however, understood that Seller does not warrant the
possibility of continuation of any Registration in the name of Buyer
in the event Buyer decides to have Products manufactured by an entity
other than the company which is actually manufacturing that Product as
of the Closing Date, and, finally, Seller does not warrant any
continuation of price reimbursement for the Products by social
security institutions following the transfer of the Registrations to
Buyer. Roche shall bear 50 % of a total amount of up to USD one
million of registration fees due by Buyer for the assignment and
re-registration of the Registrations, any exceeding fees being borne
entirely by Buyer.
4.7 Inventory: As of the Effective Date, each Product in the Inventory
shall meet the specifications therefor as set forth in the
manufacturing documentation and Registrations for such Product with
the competent authority in the country concerned of the Territory. The
Inventory will be in good condition, properly stored and in compliance
with applicable laws, usable and saleable in the ordinary course of
business. The Inventory shall in each case be sufficient to maintain a
running business for 90 days. Seller represents and warrants that
since January 1, 1998 it has not made or instituted any unusual or
novel method of sale in the conduct of the Business inconsistent with
past practices.
4.8 Taxes: As of the date hereof, there are no liens for taxes upon the
Assets except for liens for current taxes not yet due and payable.
4.9 Absence of Certain Changes: As of the date hereof and as of the
Closing Date and except as otherwise disclosed on the Disclosure
Schedule, there has not been any material adverse change in the Assets
and Seller is not aware of any facts, circumstances, or proposed or
contemplated events that would have a Material Adverse Effect after
Closing.
4.10 Violations of Law: Except as set forth in Schedule 4.10, to the best
of Seller's knowledge after due inquiry made, the operation of the
Assets by Seller (i) does not violate or conflict with any law,
governmental specification, authorization, or requirement, or any
decree, judgment, order, or similar restriction in any material
respect, or (ii) has not been the subjectof an investigation or
inquiry by any governmental agency or authority regarding violations
or alleged violations, or found by any such agency or authority to be
in violation, of any law, other than investigations, inquiries or
findings that have not had, or are reasonably likely not to have, a
Material Adverse Effect.
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12
4.11 Financial Information:
4.11.1 Roche Sales Statements. The Roche Sales Statements are accurate and
complete in all material respects, reflect only actual bona fide
transactions, are consistent with the accounting records of the Roche
legal entities, and were prepared in accordance with International
Accounting Standards ("IAS") consistently applied.
4.11.2 Liabilities. Seller and its Affiliates have no liabilities,
contingent, absolute, accrued or otherwise, relating to the Assets.
4.12 No Government Restrictions: The Seller believes that no consent,
approval, order or authorization of, or registration, declaration or
filing with, any governmental agency is required to be obtained or
made by or with respect to Seller in connection with the execution and
delivery of this Agreement by Seller or the consummation by it of the
transactions contemplated hereby to be consummated by it except with
respect to the filing of a pre-merger notification report under the
HSR Act.
4.13 Litigation: Except as set forth on Schedule 4.13 of the Disclosure
Schedule or for adverse drug reports annexed to Schedule 4.13, the
Assets are not the subject of (i) any outstanding judgment, order,
writ, injunction or decree of any arbitrator or administrative or
governmental authority or agency, limiting, restricting or affecting
the Assets in a way that would have a Material Adverse Effect, (ii)
any pending or, to the best of Seller's knowledge, after due inquiry
made, threatened claim, suit, proceeding, charge, inquiry,
investigation or action of any kind, and (iii) any court suits filed
with respect to the Assets since 1 January 1990. To the best knowledge
of Seller, there are no claims, actions, suits, proceedings or
investigations pending or threatened by or against Seller with respect
to the transactions contemplated hereby, at law or in equity or before
or by any supranational, federal, state, municipal or other
governmental department, commission, board, agency, instrumentality or
authority.
4.14 Agreements; Required Consents for Assignment or Termination: To the
best of Seller's knowledge, Schedule 2.7 sets forth all of the Assumed
Agreements. Seller and its Affiliates and, to the best knowledge of
Seller, each other party to each Assumed Agreement has performed in
all material respects each term, covenant and condition of each
Assumed Agreement which is to be performed by them at or before the
date hereof. Each of the Assumed Agreements is in full force and
effect and constitutes the legal and binding obligation of Seller or
its Affiliate and, to the best knowledge of Seller, the other parties
thereto. Subject to Art. 6.2 and 7.1 (consent of counterparties) the
Assumed Agreements, to the extent related to the Products, are
assignable to and assumable by Buyer.
4.15 Manufacturing Technology and Know-How: The Manufacturing Technology
and Know-How will be sufficient to enable Buyer to manufacture the
Products to the same standard as Seller currently enjoys. The Product
formulations fully conform with the pertaining Registrations approved
by the competent government authorities in the Territory.
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13
4.16 Trademarks Seller or an Affiliate of Seller owns the Trademarks set
forth in Schedule 2.1 which are formally registered or applied. All
Trademark registrations set forth in Schedule 2.1 have been duly
issued and have not been cancelled, abandoned or otherwise terminated
to the best knowledge of Seller. All Trademark applications set forth
in Schedule 2.1 have been duly filed and maintained to the best
knowledge of Seller. Seller shall not be obliged to maintain any
Trademark after the Closing.
Seller will pay any fees for such renewals of any of the Trademarks as
were initiated by it prior to the Closing. All other renewal and
maintenance fees as well as the costs and expenses of defending the
Trademarks against infringements by third parties occurring after the
Closing Date shall be paid by Buyer.
Seller will arrange for the files relating to the Trademarks to be
handed over to Buyer without delay after the Closing.
Until 31 December 1998 Seller will promptly notify Buyer of any
infringement or threatened infringement of any of the Trademarks
coming to its attention and will, if the registration of the
Trademarks is still in its name, at the expense of Buyer take such
action against the infringer as Buyer may reasonably request to
restrain such infringement, or alternatively authorize Buyer or its
nominee to take such action in its own name. In the latter event,
Seller or its Affiliate will at Buyer's expense provide reasonable
assistance to Buyer.
With respect to the trademarks listed in Schedule 2.1(a) Buyer is
aware that such a trademark cannot be assigned to Buyer unless the
third party gives its consent to the assignment as may be required by
the third party or unless it is clarified that Buyer is entitled to
enter in the agreement with the third party or unless the agreement
with the third party is terminated. After Closing Seller and Buyer
will enter into negotiation with the third parties in good faith.
With respect to the trademarks listed in Schedule 2.1(b) Buyer is
aware that such a trademark cannot be assigned to Buyer as long as the
third party is entitled to insist on the use of the trademark in
combination with the trademark ROCHE. After Closing Seller and Buyer
will enter into negotiations with the third parties in good faith to
obtain their permission to the use of the trademark without the
trademark ROCHE or to obtain their permission to use trademark in
combination with a trademark owned by Buyer.
With respect to the trademarks listed in Schedule 2.1(c) Buyer is
aware that such an associated trademark can only be assigned under the
conditions that the trademark is not associated with the hexagon or
with a trademark used by Roche for other products which are not
subject matter of this Agreement and the association can be dissolved.
After Closing Seller will use all reasonable effort to obtain the
consent of the competent Trademark Authorities that the according
trademark can be assigned separately to Buyer.
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14
Seller grants to Buyer the non-exclusive right, subject to the Assumed
Agreements according to Art. 2.7 and 6.2 hereof, to use the Trademarks
listed in Schedule 2.1(a) and 2.1(c) until the aforesaid obstacles
have been removed. Seller will not grant to any further third party
the right to use the trademarks listed in Schedule 2.1(a), 2.1(b) and
2.1(c).
When the aforesaid obstacles have been removed Seller is obliged to
assign the according Trademark listed in Schedule 2.1(a), 2.1(b) and
2.1(c) to Buyer without any culpable delay according to Art. 8.3.
4.17 No Infringement of Third Party Rights: Except as set forth herein or
in the Disclosure Schedule, the use of the Assets by Seller in the
Territory does not infringe any third party rights.
5 REPRESENTATIONS AND WARRANTIES OF BUYER AND ICN
5.1 Organization: Buyer and ICN each is a corporation duly organized,
validly existing and in good standing under the laws of its
jurisdiction of organization, with full corporate power and authority
to consummate the transactions contemplated hereby.
5.2 Authority: The execution and delivery of this Agreement and all other
Agreements to be executed in connection with this Agreement by Buyer
and ICN, and the consummation and performance of the transactions
contemplated hereby and thereby, have been duly and validly authorized
by all necessary corporate and other proceedings, and this Agreement
and all other Agreements to be executed in connection with this
Agreement has been duly authorized, executed, and delivered by Buyer
and ICN and, assuming the enforceability against Seller, constitutes
the legal, valid and binding obligation of Buyer and ICN respectively,
enforceable in accordance with its terms.
5.3 No Violation or Conflict:. The execution and delivery of this
Agreement and all other Agreements to be executed in connection with
this Agreement by Buyer and ICN and the performance of this Agreement
and all other Agreements to be executed in connection with this
Agreement (and the transactions contemplated herein and thereby) by
Buyer and ICN do not and will not conflict with, violate or constitute
or result in a default under any law, judgment, order, decree, the
articles of incorporation or bylaws of Buyer or ICN, or any contract
or agreement to which Buyer or ICN is a party or by which Buyer or ICN
is bound.
5.4 No Government Restrictions: Except as set forth on Schedule 5.4 and
for consents the failure of which to obtain would not have a material
adverse effect no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental agency is
required to be obtained or made by or with respect to Buyer or ICN in
connection with the execution and delivery of this Agreement and all
other Agreements to be executed in connection with this Agreement by
Buyer or ICN or the consummation by either Buyer or ICN of th
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15
transactions contemplated hereby to be consummated by either Buyer or
ICN except with respect to the filing of a pre-merger notification
report under the HSR Act.
5.5 Litigation: There are no claims, actions, suits, proceedings or
investigations pending or, to the best of Buyer's or ICN's knowledge,
threatened by or against Buyer or ICN with respect to the transactions
contemplated hereby, at law or in equity or before or by any
supranational, federal, state, municipal or other governmental
department, commission, board, agency, instrumentality or authority.
5.6 Capitalization. The authorized capital stock of ICN consists of
200,000,000 authorized shares of Common Stock, $ .01 par value, and
10,000,000 authorized shares of Preferred Stock, $ .01 par value. As
of May 11, 1998 there were outstanding 72,863,133shares of Common
Stock, as of July 1, 1998, 821 shares of Series D Convertible
Preferred Stock, and as of December 31, 1997 employee stock options to
purchase an aggregate of 8,920,000 shares of ICN Common Stock (of
which options to purchase an aggregate of 5,643,000 shares of ICN
Common Stock were exercisable). As of June 23, 1998 a total of 615,750
shares of Common Stock were issuable upon conversion of ICN's Series D
Convertible Preferred Stock, and a total of 20,917 shares of Common
Stock were issuable upon the conversion of certain other convertible
debt securities of ICN. All outstanding shares of capital stock of ICN
have been duly authorized and validly issued and are fully paid and
non-assessable. Except as set forth in this Section and this
Agreement, that certain Agreement for the Sale and Purchase of a
Portfolio of Pharmaceutical, OTC and Consumer Healthcare Products by
and between Smith Kline Beecham P.L.C. and ICN Pharmaceuticals, Inc.
and that certain Stock Purchase Agreement by and between ICN
Pharmaceuticals, Inc. and Schering-Plough Corporation dated July 28,
1995, and except for changes since December 31, 1997 resulting from
the exercise of employee stock options outstanding on such date, there
are outstanding (a) no shares of capital stock or other voting
securities of ICN, (b) no securities of ICN convertible into or
exchangeable for shares of capital stock or voting securities of ICN,
and no options or other rights to acquire from ICN, and (c) no
obligation of ICN to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or
voting securities of ICN (the items in clauses (a), (b) and (c) being
referred to collectively as "Company Securities"). There are no
outstanding obligations of ICN or any of its subsidiaries to
repurchase, redeem or otherwise acquire any Company Securities.
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16
5.7 Shares to be Issued to Seller. Upon the consummation of the
transactions contemplated hereby, all shares of Common Stock of ICN to
be issued to Seller will have been validly issued, fully paid and
non-assessable and will be free and clear of any lien, charge or other
encumbrance or claim and the issuance thereof will not be subject to
any preemptive or similar rights.
5.8 SEC Filings.
(a) ICN has made available to Seller the annual reports on Form
10-K for its fiscal years ended December 31, 1996 and 1997,
its quarterly reports on Form 10-Q for its fiscal quarters
ended March 31 and June 30, 1998 its proxy or information
statements relating to meetings of, or actions taken without
a meeting by, the stockholders of ICN held since December
31,1995, and all of its other reports, statements, schedules
and registration statements filed with the Securities and
Exchange Commission (the "SEC") since December 31, 1996.
(b) As of its filing date, each such report or statement filed
pursuant to the Securities Exchange Act of 1934, as amended,
did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make
the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(c) Each such registration statement, as amended or
supplemented, if applicable, filed pursuant to the
Securities Act of 1933, as amended, as of the date such
statement or amendment became effective did not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading.
5.9. Financial Statements. The audited consolidated financial statements
and unaudited consolidated interim financial statements of ICN
included in its annual reports on Form 10-K and the quarterly report
on Form 10-Q referred to in Section 5.8 fairly present, in conformity
with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto), the
consolidated financial position of ICN and its consolidated
subsidiaries as of the dates thereof and their consolidated results of
operations and changes in financial position for the periods then
ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements). For purposes of this
Agreement, "Balance Sheet" means the consolidated balance sheet of ICN
as of December 31, 1997 set forth in ICN 10-K and "Balance-Sheet Date"
means December 31, 1997.
5.10. Absence of Certain Changes. Since the Balance Sheet Date, ICN and its
subsidiaries have conducted their business in the ordinary course
consistent with past practice and, except as described in ICN's
subsequent SEC-filings, there has not been any event, occurrence or
development of a state of circumstances or facts which has had or
reasonably could be expected to have a material adverse effect on ICN.
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17
5.11 No Undisclosed Material Liabilities. There are no liabilities of ICN
or any of its subsidiaries of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there
is no existing condition, situation or set of circumstances which
could reasonably be expected to result in such a liability, other
than: (i) liabilities disclosed or provided for in the Balance Sheet;
(ii) liabilities incurred in the ordinary course of business
consistent with past practice since the Balance Sheet Date, which in
the aggregate are not material to ICN and its subsidiaries, taken as a
whole; and (iii) liabilities under this Agreement.
6 SELLER'S COVENANTS
6.1 Maintenance of Assets: Seller agrees that from the date hereof until
the Closing Date that, except as specifically disclosed in Schedule
6.1 or unless otherwise consented to by Buyer in writing, Seller shall
6.1.1 except as disclosed on the DISCLOSURE SCHEDULE maintain the Assets in
good status and condition and not sell or dispose of any of the Assets
except in the ordinary course of business;
6.1.2 continue the Business in the ordinary course of business and not make
or institute any unusual or novel methods of purchase, sale,
management, operation, or other business practice in the conduct of
the Business inconsistent with past practices;
6.1.3 not enter into any material contract or commitment, engage in any
transaction, extend credit or incur any obligation with respect to the
Assets/Business, in each case not in the usual and ordinary course of
business and consistent with normal business practices;
6.1.4 use best efforts to maintain Roche Net Sales of the Products in the
Territory until Closing. it being understood that Seller is not liable
for the effects of exchange rate fluctuations and the effects of
currency translations; and
6.1.5 promptly inform Buyer of any change in the Assets that could have a
Material Adverse Effect.
6.2 Consents: Seller shall use all reasonable best efforts to cooperate
with Buyer in obtaining the consents of the third parties to the
assignment to Buyer of the Assumed Agreements, to the extent they
relate to the Products, at the same terms as currently contained in
the Assumed Agreements; provided, however, Seller shall not be
required to make any payment of any kind whatsoever to Buyer or any
third party, or waive any rights or assume any obligations other than
those obligations set forth in the Assumed Agreements, in connection
with obtaining any such required consents.
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18
6.3 Disclosure Supplements: From time to time prior to the Closing Date,
Seller will promptly inform Buyer, in writing, with respect to any
matter that may arise hereafter and that, if existing or occurring
prior to the Closing Date, would have been required to be set forth or
described herein or in the Disclosure Schedule.
6.4 Access: From and after the date hereof and up to Closing (except as
otherwise provided herein), Buyer and its authorized agents, officers,
and representatives shall have access to the Assets during normal
business hours upon reasonable prior notice and at a time and manner
mutually agreed upon between Buyer and Seller in order to conduct such
examination and investigation of the Assets as is reasonably
necessary, provided that such examinations shall not unreasonably
interfere with Seller's operations and activities.
6.5 Non-Compete: Seller covenants and agrees that for a period of five
years following the Closing Date, neither Seller nor any of its
Affiliates will directly or indirectly engage in the Territory in the
manufacture, marketing and distribution of products having both the
same chemical substance and being promoted for the same indication as
the Products (hereinafter "Competing Products"). Should, during the
aforesaid five year period, either Seller or an Affiliate of Seller
as a consequence of an acquisition of a company or a business acquire
any Competing Products, Buyer shall have the right of first refusal to
acquire such Competing Products from Seller or its Affiliate at
conditions to be negotiated in good faith. Should Buyer not exercise
its right of first refusal or should subsequently held negotiations
between Seller and Buyer fail, Seller shall make good faith-efforts to
divest the Competing Products to a third party.
6.6 Further Assurances: Seller shall use all reasonable efforts to
implement the provisions of this Agreement, and for such purpose
Seller, at the request of Buyer, at or after Closing, will, without
further consideration, execute and deliver, or cause to be executed
and delivered, to Buyer such deeds, assignments, bills of sale,
consents and other instruments in addition to those required by this
Agreement, in form and substance satisfactory to Buyer, as Buyer may
reasonably deem necessary or desirable to implement any provision of
this Agreement.
7 BUYER'S COVENANTS
7.1 Consents: Buyer shall use all reasonable best efforts to obtain the
consents of the third parties to the assignment to Buyer of the
Assumed Agreements, to the extent they relate to the Products, at the
same terms as currently contained in the Assumed Agreements; provided,
however, Buyer shall not be required to make any payment of any kind
whatsoever to Seller or any third party, or waive any rights or assume
any obligations other than those obligations set forth in the Assumed
Agreements, in connection with obtaining any such required consents.
If Buyer is unable to obtain a required consent within a reasonable
period of time, Seller may, but is not obliged to terminate the
pertaining Assumed Agreement (for the Products or as a whole). For as
long as an Assumed Agreement has neither been assumed nor terminated
with respect to the Products, Seller shall continue to honor the terms
of the relevant Assumed Agreement, for the Products for the account
<PAGE>
19
and benefit of Buyer, and Buyer shall indemnify Seller for all
liability relating to the Products (and only the Products) under such
Assumed Agreement other than any liability arising from Seller's
negligence or failure to perform. Buyer shall give Seller all licenses
and marketing authorizations necessary or required and deliver all
active substances and Products received from Buyer or its Affiliates
or manufactured by Buyer or its Affiliates or third parties to
continue to fulfill its obligations under these Assumed Agreements and
any other agreement which by mistake was not listed under Schedule 2.7
(but which shall be added to Schedule 2.7) until such Assumed
Agreements (or other agreement) expire, terminate or are assigned to
Buyer with respect to the Products.
7.2 Transfer of Products: Following Closing, Buyer shall use all
reasonable best efforts and, except as otherwise set forth herein, at
its own expense, to obtain as expeditiously as possible such
governmental approvals and registrations from the competent regulatory
authorities in the Territory, as may be necessary with respect to the
manufacture and sale of the Products by Buyer or its designee (other
than Seller or an Affiliate of Seller). Notwithstanding the foregoing,
Seller shall at its expense assist with such transfers by (a) making
available to Buyer the equivalent in man-hours of time with DRAC
company (Dr. Peter) for up to an amount of Swiss Francs 20,000
(twenty-thousand)and (b) providing in an expeditious manner all
information in Seller's possession reasonably requested by Buyer to
facilitate the registration transfers. If such governmental approvals
and registrations from the competent regulatory authorities in the
Territory are not obtained by Buyer within five months from Closing
due to Buyer's failure to obtain such approvals and registrations as
expeditiously as possible, Seller and its Affiliates shall be entitled
to do anything necessary to avoid the duty, if any, to distribute the
Products concerned in the Territory concerned, including, as action of
last resort and only if Buyer fails to use its reasonable best efforts
to obtain such approvals as expeditiously as possible, the right to
de-register the Products concerned in such Territory.
7.3 Labeling: Following Closing, Buyer shall at its own expense and as
expeditiously as possible use all reasonable efforts to obtain such
approvals of competent government authorities in the Territory as may
be necessary to change Buyer's labeling for each Product in such a way
that any reference to Seller or its Affiliates are removed as well as
implement such change of labeling. Buyer may use the current Labeling
on the Inventory existing at Closing approved by Seller prior to such
use until such inventory is exhausted, subject to applicable laws and
regulations in the Territory. Buyer may, however, use the Roche
labeling only in connection with clearly identifying Buyer as the
responsible person for commercializing the Products in a way which is
customary in the industry and is to be approved in advance by Seller.
7.4 References to Seller: Other than as set forth in Article 7.3
hereinabove, any reference to Seller or its Affiliates or any use of
the trademarks, tradenames, or logos of Seller or its Affiliates by
Buyer in connection with the Products after Closing must be approved
by Seller prior to such use. It is understood that the Trademarks do
not fall under this provision.
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20
7.5 Further Assurances: Buyer shall use all reasonable efforts to
implement the provisions of this Agreement, and for such purpose
Buyer, at the request of Seller, at or after Closing, will, without
further consideration, execute and deliver, or cause to be executed
and delivered, to Seller such consents and other instruments in
addition to those required by this Agreement, in form and substance
satisfactory to Seller, as Seller may reasonably deem necessary or
desirable to implement any provision of this Agreement.
8 COVENANTS BY BUYER AND SELLER
8.1 Technology Transfer: Buyer and Seller shall work together to commence
transfer of the Know-How to Buyer promptly after Closing. Seller shall
use all reasonable efforts to assist Buyer in assuming manufacture of
the Products, provided, however, that Seller cannot ensure Buyer's
ability to successfully manufacture the Products. Seller shall have no
obligation to provide manufacturing support for any Product and Seller
shall not be responsible for any delay and other consequences, if
Buyer elects to use a process that is materially different from a
Roche Process. If Buyer elects to transfer a Roche Process, Seller
shall provide reasonable access to Seller's manufacturing facilities
and for a period of up to two years up to 50 (fifty)total man-days of
technical support free-of-charge. Thereafter, Buyer shall reimburse
Seller for providing such technical assistance at Seller's
then-standard hourly charge for rendering technical assistance, which
as of the date of this Agreement is US$ 150.00 (one hundred fifty
United States Dollars) per hour, plus all reasonable out-of-pocket
expenses incurred by Seller in rendering such assistance. Seller's
obligation to provide hands-on manufacturing support for a transferred
Product shall cease following successful manufacture of the
registration batch for such Product.
8.2 Stability Studies: As soon as possible following execution of this
Agreement, Buyer shall qualify appropriate testing sites for future
stability studies. Seller shall continue through completion all
on-going stability studies for the Products and provide Buyer with
copies of the resulting data as available.
8.3 Assignment of Trademarks: By or before Closing, Buyer and Seller shall
prepare in good faith an assignment pursuant to which Seller agrees
the Trademarks shall be assigned to Buyer. Schedule 2.1 contains
trademark registrations and applications which, as indicated by
Seller, are not supported by use and therefore may unavoidably expire
due to non-use prior to Closing. Following Closing, Buyer shall
prepare and Seller shall execute such documents as Buyer may
reasonably request in order to assign and record the assignment of the
Trademarks. Buyer shall use all reasonable efforts to record, as
expeditiously as possible, the transfer of the Trademarks in the major
markets with the competent authorities in the Territory, provided that
Buyer shall not have an obligation to transfer Trademarks in minor
markets which Buyer may not want to use. Buyer will inform Seller
within a reasonable period of time about the Trademarks Buyer does not
wish to transfer. The responsibility and expense of preparing and
filing such documents and any actions required ancillary thereto,
shall be borne solely by Buyer. Notwithstanding anything contained
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21
elsewhere herein, Buyer shall hold Seller and its Affiliates harmless
from and against any loss or damage, including but not limited to
fees, penalties, fines or third party claims, due to Buyer's failure
to record any assignment of any such Trademarks pursuant to this
Article, except if such loss or damage is due to the conduct of
Seller. The aforesaid is applicable accordingly in case that an
assignment has to be made regarding a trademark which is listed in
Schedule 2.1(a), 2.1(b) and 2.1(c).
8.4 Assignment of Registrations: As soon as practicable and in any event
within 45 (forty five) days from Closing Seller shall deliver to Buyer
current box, label and package inserts for each pack of Products as
registered in the Territory. At or following Closing, Buyer shall
prepare and Seller shall execute such documents as Buyer may
reasonably request in order to record the assignment of the
Registrations. Buyer shall pay any user fees associated with any
Product that accrues after Closing but prior to transfer of such
Registration. Notwithstanding anything contained elsewhere herein,
Buyer shall hold Seller and its Affiliates harmless from and against
any loss or damage, including but not limited to fees, penalties,
fines or third party claims, due to Buyer's failure to record any
assignment of any such Registrations pursuant to this Article, except
if such loss or damage is due to the conduct of Seller.
8.5 Access to Information: Buyer and Seller will, upon reasonable prior
notice, make available to the other, to the extent reasonably required
for the purpose of assisting Seller or Buyer in obtaining governmental
approvals and preparation of tax returns relating to the Assets, and
prosecuting or defending or preparing for the prosecution or defense
of any action, suit, claim, complaint, proceeding or investigation at
any time brought by or pending against Seller or Buyer relating to the
Assets or the Toll Manufacturing Agreements, other than in the case of
litigation between the parties hereto, such information or records (or
copies thereof) in their possession after Closing, it being understood
that attorney-client privileged information shall be excepted. In the
event Buyer or ICN are required under accounting Regulation S-X of the
U.S. Securities and Exchange Commission to file audited financial
statements of the business acquired hereunder, Buyer and Seller shall
cooperate to produce any required documents and Seller shall use all
reasonable efforts to provide Buyer in a timely manner with all
information available to Seller and necessary for Buyer to prepare
such financial statements, it being understood that Buyer shall be
responsible and pay for preparing and auditing such financial
statements. Notwithstanding any provision of this Agreement it is
understood that neither party shall be required to have any
information audited or to reconcile such information with the
accounting standards used by the receiving party or required by any
government authority.
8.6 Press Releases: Neither the Seller nor the Buyer, nor any Affiliate
thereof, will issue or cause publication of any press release or other
announcement or public communication with respect to this Agreement or
the transactions contemplated hereby without the prior written consent
of the other party, which consent will not be unreasonably withheld or
delayed. Unless otherwise required by applicable law, the Purchase
Price shall not be disclosed.
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22
8.7 Customer Information: Buyer and Seller shall agree on the text of a
joint announcement informing the customers in the Territory of the
transfer of the Products to Buyer or its relevant Affiliate. Should it
be appropriate for any party to make an announcement on its own, it
will have to be approved by the other party, which approval will not
be unreasonably withheld or delayed.
8.8 Government Filings: Each of the parties will use its respective
reasonable good faith efforts to obtain, and to cooperate with the
other in obtaining, all authorizations, consents, orders and approvals
of any governmental agencies, that may be or become necessary in
connection with the consummation of the transactions contemplated by
this Agreement prior to or after Closing, and to take all reasonable
actions to avoid the entry of any order or decree by any governmental
agency prohibiting the consummation of the transactions contemplated
hereby, provided, however, that Seller and its Affiliates shall not be
required to agree to any consent decree or order in connection with
the objections of the FTC or DOJ to the transactions contemplated by
the Agreement.
8.9 Toll Manufacturing Arrangements and Supply of active substances and
Products:
Before Closing Buyer and the Affiliates of Seller which manufacture
the Products shall enter into the Toll Manufacturing Agreements,
effective as from the Effective Date, in the form and with the Roche
Affiliates as attached as Schedule 8.9 (a) hereto, under which Seller
or Seller's Affiliates shall toll manufacture for Buyer or its
Affiliates the Products on the basis of active substances and/or other
necessary materials supplied by Buyer or its Affiliates free of charge
(existing toll manufacturing agreements are not renegotiated; e.g.
Taiwan). If not all Toll Manufacturing Agreements are signed until
Closing Date they shall be signed until November 30, 1999, at the
latest. The manufacturing fee for the Basel site and the fee for the
Nutley site for Fluoro-Uracil is attached under Schedule 8.9 (aa).
If the parties cannot agree otherwise, such Toll Manufacturing
Agreements shall expire 18 month after Effective Date at the latest.
Until 18 month after Effective Date Seller or its Affiliates will
supply to Buyer or its Affiliates free of charge Ex Works Basel
(Incoterms 1990) the quantities of active substances for the Products
(U.S Products excluded; see below) as set forth in Schedule 8.9 (b).
Neither Seller nor its Affiliates will manufacture and/or supply any
additional active substances.
The above does not relate to the Products Dalmane/Dalmadorm and Librax
for the U.S.-market. Seller and its Affiliates have stopped producing
active substance and galenical production of these Products. There
will therefore be no supply of active substances or finished Products
for the U.S.-market of these Products other than the inventory of such
finished Products which is purchased under this Agreement.
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23
Seller represents and warrants that the above mentioned active
substances shall be manufactured in accordance with the Know-How, the
applicable laws and regulations and cGMPs, and that as of the date
shipped, shall meet the specifications. Each such shipment shall be
analyzed in accordance with Seller's methods of analysis. Seller makes
no further representations and disclaims any warranties of any kind,
express or implied, to Buyer for any active substance supplied by
Seller hereunder, including without limitation any warranties of
merchantability or fitness for a particular purpose.
Subject to the following limitations, with respect to the active
substances mentioned above, Seller shall be liable for and shall
indemnify and hold harmless Buyer in respect of any and all
liabilities, losses, damages, claims or lawsuits, including but not
limited to any liabilities, losses, damages, claims or lawsuits
arising out of the manufacture, use, sale or marketing of these active
substances, including but not limited to any claims made (directly or
indirectly) by or on behalf of consumers who have purchased or
otherwise obtained and/or used the Products containing the active
substances, arising from Seller's (i) breach of this Agreement, (ii)
negligence or willful misconduct, (iii) breach of statutory duty or
(iv) act, omission or default howsoever caused on the part of Seller,
its Affiliates, employees and agents. Notwithstanding the foregoing,
(i) Seller shall not be liable to Buyer, whether in contract, tort or
otherwise, for any consequential, indirect, economic or financial loss
or damage (including, without prejudice to the generality of the
foregoing, any loss of turnover, revenue, profits, business or
goodwill) howsoever caused, and (ii) Seller's liability in respect of
shipments of active substances which do not conform to specifications
shall be limited as set out hereinabove.
Subject to the following limitations, with respect to the active
substances mentioned above, Buyer shall be liable for and shall
indemnify and hold harmless Seller in respect of any and all
liabilities, losses, damages, claims or lawsuits, including but not
limited to any liabilities, losses, damages, claims or lawsuits
arising out of the manufacture, use, sale or marketing of these active
substances, including but not limited to any claims made (directly or
indirectly) by or on behalf of consumers who have purchased or
otherwise obtained and/or used the active substances or Products
containing the active substances, arising from Buyer's (i) breach of
this Agreement, (ii) negligence or willful misconduct, (iii) breach of
statutory duty or (iv) act, omission or default howsoever caused on
the part of Buyer, its employees and agents. Notwithstanding the
foregoing, Buyer shall not be liable to Seller, whether in contract,
tort or otherwise, for any consequential, indirect, economic or
financial loss or damage (including, without prejudice to the
generality of the foregoing, any loss of turnover, revenue, profits,
business or goodwill) howsoever caused.
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24
8.10 Distribution Arrangements: Buyer and Seller, or their Affiliates, at
Closing shall enter into the Distribution Agreement, effective as from
the Effective Date, attached as Schedule 8.10 hereto, under which
Seller or its Affiliates shall distribute for Buyer or its Affiliates
the Products for a period of up to six month after Effective Date in
geographical areas in which such Products are currently sold and
distributed by Seller and its Affiliates (not by third parties), but
in which Buyer and its Affiliates have not yet obtained the necessary
approvals for the distribution of the Products.
8.11 Returns: Until the Closing Date, Seller shall be responsible for all
returns. From and after the Closing Date, Seller shall be responsible
for all returns arising from sales before Closing and Buyer shall be
responsible for all returns arising from sales after Closing. The
situation whereby returns after Closing increase materially beyond the
level of the previous business year, shall be governed by particular
provisions in the Distribution Agreement, the principle thereof being
to split the responsibility of such returns in a fair way between the
parties.
8.12 Adverse Events Reports. Seller shall, for as long as Seller or an
Affiliate of Seller markets products identical with the Products
outside the Territory, provide Buyer with a copy of all serious (as
defined by the International Conference on Harmonization) adverse
events concerning the Products which come to the attention of Seller.
Buyer shall, for as long as Buyer or an Affiliate of Buyer markets the
Products, provide Seller with a copy of all serious (as defined by the
International Conference on Harmonization) adverse events concerning
the Products which come to the attention of Buyer. The copies shall be
supplied as CIOMS I forms within 2 days of being processed by either
Seller or Buyer, as the case may be.
9 CONDITIONS PRECEDENT TO CLOSING
9.1 Conditions to Obligations of Buyer: The obligation of Buyer to
complete the transactions contemplated hereby is subject to the
satisfaction on or prior to the Closing Date of the following
conditions (all or any of which may be waived in whole or in part by
Buyer):
9.1.1 Representations and Warranties: The representations and warranties
made by Seller in this Agreement shall have been true and correct in
all respects as of the Closing Date with the same force and effect as
though said representations and warranties had been made on the
Closing Date (except for representations and warranties made as of a
specified date, which will be true and correct in all respects as of
the specified date).
9.1.2 Performance: Seller shall have performed and complied in all material
respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by it prior to or
at Closing.
9.1.3 HSR Act Approvals: All required waiting periods under the HSR Act
shall have expired or been terminated or approval has been received
from the FTC or DOJ.
<PAGE>
25
9.1.4 Government Approvals: All approvals of the competent authorities in
the Territory required for the consummation of the transactions
contemplated by this Agreement, if any, have been obtained and all
waiting periods under applicable laws, if any, shall have expired or
been terminated.
9.1.5 Litigation: No investigation, suit, action, or other proceeding shall
be threatened or pending before any court or governmental agency that
seeks the restraint, prohibition, damages, or other relief in
connection with this Agreement or the consummation of the transactions
contemplated by this Agreement unless such action would not have a
Material Adverse Effect.
9.1.6 No Adverse Change: During the period from the date of this Agreement
to the Closing Date there shall not have occurred or been discovered,
and there shall not exist on the Closing Date except for that which
has been otherwise disclosed elsewhere in this Agreement or in the
Disclosure Schedule, any condition or fact that would have a Material
Adverse Effect.
9.1.7 SEC Accounting Requirements: Seller shall provide Buyer prior to
Closing with information sufficient to allow Buyer to prepare any
financial statements concerning the business to be acquired by Buyer,
required under accounting Regulation S-X of the U.S. Securities and
Exchange Commission, to be filed by Buyer.
9.2 Conditions to Obligations of Seller: The obligation of Seller to
complete the transactions contemplated hereby is subject to the
satisfaction on or prior to the Closing Date of the following
conditions (all or any of which may be waived in whole or in part by
Seller):
9.2.1 Representations and Warranties: The representations and warranties
made by Buyer in this Agreement shall have been true and correct in
all respects as of the Closing Date with the same force and effect as
though said representations and warranties had been made on the
Closing Date (except for representations and warranties made as of a
specified date, which will be true and correct in all respects as of
the specified date).
9.2.2 Performance: Buyer shall have performed and complied in all material
respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by it prior to or
at Closing.
9.2.3 HSR Act Approvals: All required waiting periods under the HSR Act
shall have expired or been terminated or approval has been received
from the FTC or DOJ.
9.2.4 Government Approvals: All approvals of the competent authorities in
the Territory required for the consummation of the transactions
contemplated by this Agreement, if any, have been obtained and all
waiting periods under applicable laws, if any, shall have expired or
been terminated.
<PAGE>
26
9.2.5 Litigation: No investigation, suit, action, or other proceeding shall
be threatened or pending before any court or governmental agency that
seeks the restraint, prohibition, damages, or other relief in
connection with this Agreement or the consummation of the transactions
contemplated by this Agreement unless such action would not have a
Material Adverse Effect.
9.2.6 No Adverse Change: During the period from the date of this Agreement
to the Closing Date there shall not have occurred or been discovered,
and there shall not exist on the Closing Date except for that which
has been otherwise disclosed elsewhere in this Agreement any condition
or fact that would have a Material Adverse Effect.
10 THE CLOSING
10.1 The Closing: Subject to the satisfaction of all of the conditions to
each party's obligations set forth in Article 9 hereof (or, with
respect to any condition not satisfied, the waiver in writing thereof
by the party or parties for whose benefit the condition exists), the
closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at 10.00 a.m. (local time) on 1 November
1998 or, if any approval from any competent authority in the Territory
required for the consummation of the present transaction has not been
obtained or any waiting period to be observed has not expired or
terminated by 1 November 1998, the Closing shall take place after the
receipt of all required government approvals and after the expiry or
termination of all waiting periods agreed between the parties in good
faith (the "Closing Date"). The transfer of the Assets shall be deemed
to have occurred as of 00.01 a.m. of the Closing Date.
10.2 Deliveries by Seller. At Closing, Seller shall deliver to Buyer:
10.2.1 the General Conveyance, Assignment and Assumption document as set
forth in Schedule 10.2.1
10.2.2 The general form of assignment of the Trademarks as set forth in
Article 8.3;
10.2.3 a general form of assignment of the Registrations;
10.2.4 subject to the Distribution Agreement the Inventory and the statement
of the quantity and location of the Inventory as set forth in Article
2.6;
10.2.5 subject to contrary provisions in the Distribution Agreement the
Marketing and Promotional Documents as set forth in Article 2.5;
10.2.6 to the extent available and possible/practicable hard copies of the
registration files, Know-How documents, World-wide Safety Reports, all
as set forth in Article 2 hereinabove. All such documents, which
cannot be delivered to Buyer at Closing, shall be delivered by Seller
to Buyer as soon as practicable after Closing.
<PAGE>
27
10.2.7 the Toll Manufacturing Agreements (if signed until Closing Date);
10.2.8 the Distribution Agreement;
10.2.9 except as otherwise provided herein, such agreements, licenses,
notices, and authorizations as may be necessary and sufficient to
enable Buyer to use or operate under the Registrations (if legally
permissible) and Know-How and that Buyer has requested from Seller;
and
10.2.10 the Registration Rights Agreement
10.2.11 a receipt for the Purchase Price in accordance with Art. 3.
10.3 Deliveries by Buyer. At Closing, Buyer shall deliver or cause to be
delivered to Seller:
10.3.1 the General Conveyance, Assignment and Assumption document as set
forth in Schedule 10.2.1
10.3.2 The Purchase Price payable in accordance with Article 3 including
certificates representing the Original Common Stock;
10.3.3 the Toll Manufacturing Agreements(if signed until Closing Date);
10.3.4 the Distribution Agreement;
10.3.5 the Registration Rights Agreement.
10.4 Effects of Closing: Upon Closing the ownership of the Assets as well
as the full responsibility for the use of the Assets and the full
responsibility for the conduct of the business comprising the use of
the Assets shall pass from Seller to Buyer. Seller shall remain
exclusively responsible for the conduct of the Business prior to
Closing (including any consequences therefrom which may appear after
the Closing). Buyer shall be exclusively responsible for the conduct
of the Business from Closing. Buyer acknowledges that as per the
Closing the product liability insurance of Seller and its Affiliates
will terminate and Buyer shall be responsible for proper insurance of
the product liability and other risks relating to the Products.
The Closing shall further have the other effects provided for in this
Agreement.
11 TERMINATION
11.1 Termination: This Agreement and the transactions contemplated hereby
may be terminated at any time prior to the Closing Date:
11.1.1 By the mutual written consent of Seller and Buyer;
<PAGE>
28
11.1.2 By either Seller or Buyer if Closing shall not have occurred on or
before 26 February 1999;
11.1.3 By either Seller or Buyer if consummation of the transactions
contemplated hereby shall violate any non-appealable final order,
decree or judgment of any court or governmental body having competent
jurisdiction; or
11.1.4 By either Seller or Buyer if there has been a material violation or
breach by the other party of any of the agreements, representations or
warranties contained in this Agreement that has not been waived in
writing, or if there has been a material failure of satisfaction of a
condition to the obligations of the other party that has not been
waived in writing, and such violation, breach, or failure has not been
cured within sixty (60) days of written notice to the other party.
11.2. Effect of Termination: If this Agreement is terminated pursuant to
Article 11.1, all further obligations of Seller and Buyer under this
Agreement shall terminate without further liability of Seller or Buyer
except (a) for the obligations of Buyer and Seller under Articles 8.6,
14, and 15.2; and (b) that such termination shall not constitute a
waiver by any party of any claim it may have for damages caused by
reason of a breach by the other party of a representation, warranty,
covenant or agreement.
12 INDEMNIFICATION
12.1 Remedy for Breach:
12.1.1 General Principle: After the Closing, the sole and exclusive remedy of
Buyer and Seller for any breach or inaccuracy of any representation or
warranty or any breach of any covenant under this Agreement by the
other party hereto shall be the indemnities contained in this Article
12.
12.1.2 Notice: Any claims that a party may have arising out of the other
party's breach of its representations and warranties or breach of a
covenant hereunder shall be notified to the other party promptly, but
in no event later than 90 (ninety) days after having reasonably
sufficient knowledge of the existence of a potential claim, by written
notice describing the claim in reasonable detail then known. Failure
to give such notice on time shall not affect the other party's
indemnification obligations hereunder except to the extent it is
prejudiced thereby.
12.1.3 Survival of representations and warranties: The representations,
warranties, covenants of Seller and Buyer contained in this Agreement
shall survive the Closing Date, but any claim for breach of
representations and warranties or of a covenant shall be entitled to
indemnification hereunder only if written notice of such claim is
given to the other party hereto no later than 18 (eighteen) months
following Closing Date except that (i) the representations and
warranties contained in Art. 5.6 and 5.7 shall survive indefinitely
and (ii) Buyer's right to notify claims with respect to the following
matters shall only terminate as follows:
<PAGE>
29
a) Claims for breach of warranties and representations
concerning Litigation (Art. 4.13) insofar as such Litigation
relatesto product liability matters shall be notified to
Seller no later than 5 (five) years following the Closing
Date;
b) Claims for breach of warranties and representations
concerning Trademarks (Art. 4.15) shall be notified to
Seller no later than 2 (two) years following the Closing
Date;
c) Claims for breach of warranties and representations
concerning taxes (Art. 4.8) may be notified to the Seller
until the expiration of the applicable statutes of
limitations for taxes relevant to such claims.
It is understood that if and when either party has done the
notification for the pertaining matter within the applicable
notification time, it may start court proceedings pursuant to Art. 14
at any time within one year of the date such claim was duly notified.
Seller and Buyer shall agree to use all reasonable efforts to mitigate
any loss or damage for which they may seek indemnification under this
Article 12.
12.2 Indemnification by Seller:
12.2.1 Claims: Subject to the limitations set forth in Article 12.2.2 to the
fullest extent permitted under applicable law, Seller shall indemnify
Buyer and its Affiliates against and agrees to hold Buyer and its
Affiliates harmless from any and all damage, loss, liability, third
party claims, and expense (collectively, "Damages") (including,
without limitation, reasonable expenses of investigation and
attorneys' fees and expenses in connection with any action, suit or
proceeding brought against Buyer or its Affiliates) incurred or
suffered by Buyer or its Affiliates arising out of (a) any
misrepresentation or breach of a warranty or covenant made by Seller
herein, (b) the maintenance of the Assets by Seller prior to Closing
or (c) the conduct of the Business by Seller or its Affiliates prior
to Closing (collectively, "Indemnifiable Claims").
12.2.2 Limitations: Notwithstanding anything to the contrary set forth
elsewhere herein, Buyer and its Affiliates shall not be entitled to
indemnification hereunder with respect to any Indemnifiable Claim
brought under Article 12.2.1 unless the amount of Damages with respect
to such Indemnifiable Claim exceeds US$ 30,000. However, Seller shall
in no event be required to pay Buyer and its Affiliates more than half
of the Purchase Price (Art. 3.1) in respect of aggregate damages
asserted pursuant to Article 12.2.1 (a) and (b) except that the
aforesaid limitation in respect of aggregate damages shall not apply
to any Indemnifiable Claim based on breach of Seller's warranties and
representations concerning Litigation in the field of product
liability.
12.2.3 Form of Indemnification: Indemnification by Seller to Buyer shall, at
Seller's option, be effected in ICN Shares, valued at the Guaranteed
Price as of the Guaranty Date next preceding such indemnification plus
pro rata 6% p.a., and/or cash. To effect any such payment in ICN
Shares, Seller shall surrender to ICN one or more certificates
representing such number of shares of Original Common Stock as shall
represent the aggregate value of the amount of any such
indemnification payment and ICN shall promptly thereupon issue to
Seller new certificates representing such number of shares of Common
Stock retained by Seller.
<PAGE>
30
12.3 Indemnification by Buyer. Buyer shall indemnify Seller and its
Affiliates against and agrees to hold Seller and its Affiliates
harmless from any and all Damages (including without limitation,
reasonable expenses of investigation and attorneys' fees and expenses
in connection with any action, suit or proceeding brought against
Seller or its Affiliates) incurred or suffered by Seller or its
Affiliates arising out of (a) any misrepresentation or breach of
warranty or covenant made by Buyer herein; or (b) the conduct of the
Business by Buyer and its Affiliates after Closing (collectively,
"Indemnifiable Claims"). Notwithstanding the foregoing, Buyer shall in
no event be required to pay Seller and its Affiliates more than half
of the Purchase Price (Art. 3.1) in respect of aggregate damages
asserted pursuant to Article 12.3 (a) and (b), except that the
aforesaid limitation shall not apply to Buyer's obligation to pay the
Purchase Price under Art. 3.1 above and the Inventory under Art. 3.5
above and all provisions related to these payments, including but not
limited to all obligations of Buyer relating to the shares of Common
Stock set forth in this Agreement and its Exhibits.
12.4 Notice: A party seeking indemnification pursuant to Article 12.2 or
12.3 (an "Indemnified Party") shall give prompt notice to the party
from whom such indemnification is sought (the "Indemnifying Party") of
the assertion of any claim, or the commencement of any action, suit or
proceeding, in respect of which indemnity is or may be sought
hereunder (whether or not the limits set forth in Article 12.2.2 have
been exceeded) and will give the Indemnifying Party such information
with respect thereto as the Indemnifying Party may reasonably request,
but no failure to give such notice shall relieve the Indemnifying
Party of any liability hereunder (except to the extent the
Indemnifying Party has suffered actual prejudice thereby).
12.5 Participation in Defense: The Indemnifying Party may, at its expense,
participate in or assume the defense of any such action, suit or
proceeding involving a third party. In such case the Indemnified Party
shall have the right (but not the duty) to participate in the defense
thereof, and to employ counsel, at its own expense, separate from
counsel employed by the Indemnifying Party in any such action and to
participate in the defense thereof. The Indemnifying Party shall be
liable for the fees and expenses of one firm as counsel (and
appropriate local counsel) employed by the Indemnified Party if the
Indemnifying Party has not assumed the defense thereof. Whether or not
the Indemnifying Party chooses to defend or prosecute any claim
involving a third party, all the parties hereto shall cooperate in the
defense or prosecution thereof and shall furnish such records,
information and testimony, and attend such conferences, discovery
proceedings, hearings, trials and appeals, as may be reasonably
requested in connection therewith.
12.6 Settlements: The Indemnifying Party shall not be liable under this
Article for any settlement effected without its consent of any claim,
litigation or proceedings in respect of which indemnity may be sought
hereunder, unless the Indemnifying Party refuses to acknowledge
liability for indemnification under this Article 12 and/or declines to
defend the Indemnified Party in such claim, litigation or proceeding.
<PAGE>
31
3 NOTICES
Any notice required or permitted to be given hereunder shall be deemed
sufficient if sent by facsimile letter or overnight courier, or
delivered by hand to Seller or Buyer at the respective addresses and
facsimile numbers set forth below or at such other address and
facsimile number as either party hereto may designate. If sent by
facsimile letter, notice shall be deemed given when the transmission
is completed if the sender has a confirmed transmission report and if
the sender has sent a confirmation copy by registered mail. If a
confirmed transmission report does not exist, then the notice will be
deemed given when the notice is actually received by the person to
whom it is sent. If delivered by overnight courier, notice shall be
deemed given when it has been signed for. If delivered by hand, notice
shall be deemed given when received.
if to Buyer, to:
ICN Puerto Rico, Inc.
c/o ICN Pharmaceuticals, Inc.
. 3300 Hyland Avenue
. Costa Mesa, California, USA
Attention: Bill A. MacDonald
Fax: ++1 714 641 7207
if to ICN, to:
ICN Pharmaceuticals, Inc.
3300 Hyland Avenue
Costa Mesa, California, USA
. Attention: General Counsel
Fax: ++1 714 641 7274
if to Seller, to:
F.Hoffmann-La Roche Ltd
CH-4070-Basel, Switzerland
Attention: Head of Corporate
Finance Business Development (CFD) department
Fax: ++41 61 688 4169
with a copy to:
F.Hoffmann-La Roche Ltd
CH-4070 Basel, Switzerland
Attention: Corporate Law Department
Fax: ++41 61 688 1396
<PAGE>
32
14 ARBITRATION AND GOVERNING LAW
14.1 Except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order to preserve the status
quo or prevent irreparable harm pending the selection and confirmation
of a panel of arbitrators, any dispute, controversy, or claims arising
under, out of or relating to this Agreement (and subsequent amendments
thereof), its valid conclusion, binding effect, interpretation,
performance, breach or termination, including tort claims, shall be
referred to and finally determined by arbitration, to the exclusion of
any courts of law, in accordance with the Rules of Arbitration of the
International Chamber of Commerce as in force at the time when
initiating the arbitration. The arbitral tribunal shall consist of
three arbitrators. The place of arbitration shall be Paris, France.
The language to be used in the arbitral proceedings shall be English.
The arbitration decision shall be final and binding upon the parties
and the parties agree that any award granted pursuant to such decision
may be entered forthwith in any court of competent jurisdiction. This
arbitration clause and any award rendered pursuant to it shall be
governed by the United Nations Convention on the Recognition and
Enforcement of Foreign Arbitration Awards signed in New York of 10
June, 1958. The party to whom a favorable ruling is awarded shall be
entitled to reimbursement of all its reasonable costs and expenses in
arbitration by the other party.
14.2 The present Agreement shall be subject to the substantive law of
Switzerland (regardless of its or any other jurisdiction's choice of
law principles).
15 ADDITIONAL TERMS
15.1 Brokers: Buyer represents to Seller that it has not employed any
investment banker, broker, finder or intermediary in connection with
the transactions contemplated hereby who might be entitled to a fee or
any commission from Seller upon consummation of the transactions
contemplated hereby. Seller represents to Buyer that it has not
employed any such Person in such connection who might be entitled to a
fee or any commission from Buyer upon consummation of the transactions
contemplated hereby.
15.2 Expenses, Taxes and Fees: Except as otherwise expressly provided in
this Agreement, all legal, accounting and other costs and expenses
incurred in connection herewith and the transactions contemplated
hereby shall be paid by the party incurring such expenses. Any
possible value added, excise or transfer taxes or HSR filing fees or
similar filing fees in other countries levied in connection with the
present Agreement shall be paid and borne solely by Buyer and are not
included in the Purchase Price according to Art. 3 above.
<PAGE>
33
15.3 Successors and Assigns: This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successors
and assigns; provided that this Agreement may not be assigned by any
party without the written consent of the other party except that
either party may assign the Agreement to any of its Affiliates
provided it guarantees due performance of the Agreement by such
Affiliate.
15.4 Amendments; No Waiver: No provision of this Agreement may be amended,
revoked or waived except by a writing signed and delivered by an
authorized officer of each party. No failure or delay on the part of
either party in exercising any right hereunder will operate as a
waiver of, or impair, any such right. No single or partial exercise of
any such right will preclude any other or further exercise thereof or
the exercise of any other right. No waiver of any such right will be
deemed a waiver of any other right hereunder.
15.5 Counterparts: This Agreement may be executed in one or more
counterparts all of which shall together constitute one and the same
instrument and shall become effective when a counterpart has been
signed by Buyer and delivered to Seller and a counterpart has been
signed by Seller and delivered to Buyer.
IN WITNESS WHEREOF, this Agreement has been signed by duly authorized
representatives of each of the parties hereto as of the date first above
written.
F.Hoffmann-La Roche Ltd ICN Puerto Rico, Inc.
By /s/Dr. Max Brauchli By /s/ Bill A. MacDonald
------------------------ --------------------------------
Name Dr. Max Brauchli Name Bill A. MacDonald
------------------------ --------------------------------
Title: Title: Executive Vice President
------------------------ --------------------------------
ICN Pharmaceuticals, Inc.
By /s/ Bill A. MacDonald
---------------------------------
Name Bill A. MacDonald
---------------------------------
Title Executive Vice President
---------------------------------
<PAGE>
GUARANTY
The undersigned hereby irrevocably and unconditionally guarantees the
performance by ICN Puerto Rico, Inc. and its Affiliates of all their respective
obligations under this Agreement and the ancillary documents entered pursuant
thereto.
ICN Pharmaceuticals, Inc.
By /s/ Bill A. MacDonald
-----------------------------------
Name Bill A. MacDonald
-----------------------------------
Title Executive Vice President
-----------------------------------
<PAGE>
List of Schedules
Schedules
Schedule 1.1 (chemical names of transferred compounds)
Disclosure Schedule (Section 1.9)
Schedule 1.31 (monthly Roche Net Sales by Product for the 12 month
ended July 31, 1998)
Schedule 2.1 (Trademarks owned by Seller or an Affiliate)
Schedule 2.1(a) (Other trademark license agreements)
Schedule 2.1(b) (Trademarks combined with Roche)
Schedule 2.1(c) (Other exclusions)
Schedule 2.2 (Registrations without current sales)
Schedule 2.6 (Supply Agreement)
Schedule 2.7 (Assumed Agreements)
Schedule 3.1 (Allocation of Purchase Price)
Schedule 3.2.1 (Promissory Note)
Schedule 3.2.9 (Registration Rights Agreement)
Schedule 4.3 (Title to Assets)
Schedule 4.10 (Violations of Law)
Schedule 5.4 (Government Restrictions)
Schedule 6.1 (Maintenance of Assets)
Schedule 8.9 (a) (Toll Manufacturing Agreements)
Schedule 8.9 (aa) (Toll Fees)
Schedule 8.9 (b) (Supplied active substances)
Schedule 8.10 (Distribution Agreement)
Schedule 10.2.1 (General Conveyance, Assignment and Assumption)
Exhibit 15.1
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
ICN Pharmaceuticals, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of ICN
Pharmaceuticals, Inc. and subsidiaries as of September 30, 1998 and the related
consolidated condensed statements of income and comprehensive income for the
three and nine month periods ended September 30, 1998 and 1997 and the
consolidated condensed statements of cash flows for the nine months ended
September 30, 1998 and 1997. 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 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, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated March 5,
1998, which included an emphasis of matter paragraph relating to the Company's
net monetary assets at ICN Yugoslavia which would be subject to foreign exchange
loss if a devaluation of the Yugoslavian dinar were to occur, as more fully
described in Note 14 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 condensed balance sheet as of
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Newport Beach, California
November 9, 1998
Exhbit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
November 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: ICN Pharmaceuticals, Inc.
Registrations on Form S-8 (File No. 33-56971), Form S-4 (File No.
333-63721) and Form S-3(File Nos. 333-10661 and 333-49665)
We are aware that our report dated November 9, 1998, on our review of interim
financial information of ICN Pharmaceuticals, Inc. for the three and nine month
periods ended September 30, 1998 and included in the Company's quarterly report
on Form 10-Q for the period then ended is incorporated by reference in the
Registrations on Form S-8 (File No. 33-56971), Form S-4 (File No. 333-63721) and
on Form S-3 (File Nos. 333-10661 and 333-49665). Pursuant to Rule 436(c) under
the Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Newport Beach, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from ICN
Pharmaceuticals, Inc.'s September 30, 1998 Consolidated Condensed Financial
Statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000930184
<NAME> ICN Pharmaceuticals, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 255,439
<SECURITIES> 0
<RECEIVABLES> 280,291
<ALLOWANCES> (67,323)
<INVENTORY> 171,171
<CURRENT-ASSETS> 707,141
<PP&E> 482,818
<DEPRECIATION> (67,349)
<TOTAL-ASSETS> 1,560,418
<CURRENT-LIABILITIES> 206,446
<BONDS> 0
0
1
<COMMON> 735
<OTHER-SE> 714,322
<TOTAL-LIABILITY-AND-EQUITY> 1,560,418
<SALES> 610,047
<TOTAL-REVENUES> 636,730
<CGS> 278,585
<TOTAL-COSTS> 278,585
<OTHER-EXPENSES> 16,640
<LOSS-PROVISION> 205,530
<INTEREST-EXPENSE> 24,698
<INCOME-PRETAX> (168,129)
<INCOME-TAX> 5,147
<INCOME-CONTINUING> (128,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128,773)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
