<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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 10, 1999 was 78,364,853.
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<PAGE> 2
ICN PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - September 30, 1999 and
December 31, 1998 3
Consolidated Condensed Statements of Income - Three months and nine months
ended September 30, 1999 and 1998 4
Consolidated Condensed Statements of Comprehensive Income - Three months
and nine months ended September 30, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998 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 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
2
<PAGE> 3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 180,264 $ 104,921
Restricted cash 15,567 15,558
Accounts receivable, net 214,472 180,001
Inventories, net 144,606 126,545
Prepaid expenses and other current assets 15,727 13,723
----------- -----------
Total current assets 570,636 440,748
Property, plant and equipment, net 333,934 327,756
Deferred income taxes, net 73,712 77,933
Other assets 38,543 45,706
Goodwill and intangibles, net 448,636 464,253
----------- -----------
$ 1,465,461 $ 1,356,396
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 64,095 $ 92,287
Accrued liabilities 76,266 60,644
Notes payable 9,559 17,584
Current portion of long-term debt 442 28,097
Income taxes payable 545 5,142
----------- -----------
Total current liabilities 150,907 203,754
Long-term debt, less current portion 594,820 510,808
Deferred license and royalty income 350 6,061
Other liabilities 23,886 22,160
Minority interest 21,894 27,449
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized;
1 shares Series D issued and outstanding
($22,988 liquidation preference at September 30, 1999) 1 1
Common stock, $.01 par value; 100,000 shares authorized;
78,342 (September 30, 1999) and 76,411
(December 31, 1998) shares outstanding
(after deducting shares in treasury of
424 and 200, respectively) 783 764
Additional capital 970,968 928,956
Accumulated deficit (235,962) (295,211)
Accumulated other comprehensive income (62,186) (48,346)
----------- -----------
Total stockholders' equity 673,604 586,164
----------- -----------
$ 1,465,461 $ 1,356,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE> 4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 148,125 $ 156,360 $ 459,209 $ 610,047
Royalties 33,527 6,631 75,678 26,683
--------- --------- --------- ---------
Total revenues 181,652 162,991 534,887 636,730
Costs and expenses:
Cost of product sales 54,133 70,972 186,178 278,585
Selling, general and administrative expenses 68,245 81,373 200,389 228,999
Research and development costs 2,613 5,139 7,875 16,640
Eastern European charges -- 39,884 -- 205,530
--------- --------- --------- ---------
Total expenses 124,991 197,368 394,442 729,754
--------- --------- --------- ---------
Income (loss) from operations 56,661 (34,377) 140,445 (93,024)
Translation and exchange losses, net 54 35,259 8,114 59,983
Interest income (2,166) (2,353) (7,060) (9,576)
Interest expense 14,920 12,890 41,794 24,698
--------- --------- --------- ---------
Income (loss) before income
taxes and minority interest 43,853 (80,173) 97,597 (168,129)
Provision (benefit) for income taxes 12,469 (4,840) 24,369 5,147
Minority interest (426) (10,110) (7,046) (44,503)
--------- --------- --------- ---------
Net income (loss) $ 31,810 $ (65,223) $ 80,274 $(128,773)
========= ========= ========= =========
Basic earnings (loss) per common share $ 0.41 $ (0.89) $ 1.03 $ (1.77)
========= ========= ========= =========
Shares used in per share computation 78,193 73,478 77,603 72,680
========= ========= ========= =========
Diluted earnings (loss) per common share $ 0.39 $ (0.89) $ 0.98 $ (1.77)
========= ========= ========= =========
Shares used in per share computation 82,288 73,478 82,055 72,680
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE> 5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 31,810 $ (65,223) $ 80,274 $(128,773)
Other comprehensive income:
Foreign currency translation adjustments 1,138 (4,213) (13,840) (10,842)
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 1,138 (4,213) (13,840) (10,842)
--------- --------- --------- ---------
Comprehensive income (loss) $ 32,948 $ (69,436) $ 66,434 $(139,615)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
<PAGE> 6
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 80,274 $(128,773)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 48,922 36,080
Eastern European charges -- 215,729
Provision for losses on accounts receivable 1,072 6,105
Provision for inventory obsolescence 3,558 2,831
Translation and exchange losses, net 8,114 59,983
Deferred income (4,983) (5,778)
(Gain) loss on sale of assets (506) 270
Other non-cash (gains) losses 3,089 (249)
Deferred income taxes 4,198 (1,197)
Minority interest (7,046) (44,503)
Change in assets and liabilities,
net of effects of acquisitions:
Accounts and notes receivable (38,770) (111,265)
Inventories (14,975) (29,817)
Prepaid expenses and other assets (2,451) (20,219)
Trade payables and accrued liabilities (28,365) 20,791
Income taxes payable 1,172 (578)
Other liabilities (2,446) 1,764
--------- ---------
Net cash provided by operating activities 50,857 1,174
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities -- 22,958
Capital expenditures (32,661) (84,908)
Proceeds from sale of assets 802 938
Increase in restricted cash (9) (15,000)
Acquisition of product rights and businesses (8,960) (69,411)
--------- ---------
Net cash used in investing activities (40,828) (145,423)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 144,574 215,573
Payments on long-term debt (87,477) (22,192)
Net decrease in notes payable (9,410) 1,188
Proceeds from exercise of stock options 11,849 6,707
Proceeds from issuance of stock 27,000 4,299
Purchase of treasury stock (5,550) --
Dividends paid (15,540) (12,629)
--------- ---------
Net cash provided by financing activities 65,446 192,946
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (132) (3,154)
--------- ---------
Net increase in cash and cash equivalents 75,343 45,543
Cash and cash equivalents at beginning of period 104,921 209,896
--------- ---------
Cash and cash equivalents at end of period $ 180,264 $ 255,439
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
6
<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) 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, 1998.
7
<PAGE> 8
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 are included under the equity method
where the Company exercises significant influence over operating and financial
affairs. Investments in less than 20% owned companies are recorded at the lower
of cost or realizable value. All significant intercompany account balances and
transactions have been eliminated.
Effective November 26, 1998, the Yugoslavian Ministry of Economic and Property
Transformation issued a decree reducing the Company's equity ownership in ICN
Yugoslavia from 75% to 35%. Although the Company disputes such action,
representatives of the Company and ICN Yugoslavia's management have been denied
access to the premises and any representation as to the management of ICN
Yugoslavia. As a result, the Company is no longer able to influence the
operating and financial affairs of ICN Yugoslavia. Accordingly, the Company has
deconsolidated the financial statements of ICN Yugoslavia as of November 26,
1998, and reduced the carrying value of its investment to fair value, currently
estimated to be zero. The Company will account for its ongoing investment in ICN
Yugoslavia under the cost method. The Company did not recognize any revenues or
expenses related to its investment in ICN Yugoslavia in the quarter or nine
months ended September 30, 1999.
Comprehensive Income: The balance of accumulated other comprehensive income at
September 30, 1999 and December 31, 1998 consists of accumulated foreign
currency translation adjustments. None of the components of other comprehensive
income have been recorded net of any tax provision or benefit as the Company
does not expect to realize any significant tax benefit or expense from these
items.
Per Share Information: In January 1999, the Company's Board of Directors
declared a fourth quarter 1998 cash dividend of $0.06 per share, which was paid
in February 1999. In 1999, the Company's Board of Directors has declared a
quarterly cash dividend of $0.07 per share for each quarter, including a third
quarter cash dividend of $0.07 per share paid on October 27, 1999, to
stockholders of record on October 13, 1999.
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. ACQUISITIONS
Effective January 1, 1999, the Company acquired 97% ownership of Fuzio-Pharma
Rt., a Hungarian distributor of pharmaceutical products with both wholesale
distribution and retail pharmacy operations, for approximately $2,230,000. The
acquisition was accounted for as a purchase and is not material to the financial
position or results of operations of the Company.
Effective September 1, 1999, the Company acquired a chain of 88 retail outlets
in Moscow and St. Petersburg, Russia, for consideration of $7,350,000 in cash.
The acquisition was accounted for as a purchase and is not material to the
financial position or results of operations of the Company.
8
<PAGE> 9
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Net income (loss) $ 31,810 $ (65,223) $ 80,274 $(128,773)
Dividends and accretion on preferred stock -- -- -- (34)
--------- --------- --------- ---------
Numerator for basic earnings per share--
income available to common stockholders 31,810 (65,223) 80,274 (128,807)
Effect of dilutive securities 6 -- -- --
--------- --------- --------- ---------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 31,816 $ (65,223) $ 80,274 $(128,807)
========= ========= ========= =========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding 78,193 73,478 77,603 72,680
Effect of dilutive securities:
Employee stock options 2,366 -- 2,810 --
Written put options 1,092 -- 364 --
Series D Preferred Stock 616 -- 616
Convertible debt 21 -- 21 --
Other dilutive securities -- -- 641 --
--------- --------- --------- ---------
Dilutive potential common shares 4,095 -- 4,452 --
--------- --------- --------- ---------
Denominator for diluted earnings per
share--adjusted weighted-average shares
outstanding and assumed conversions 82,288 73,478 82,055 72,680
========= ========= ========= =========
Basic earnings (loss) per common share $ 0.41 $ (0.89) $ 1.03 $ (1.77)
========= ========= ========= =========
Diluted earnings (loss) per common share $ 0.39 $ (0.89) $ 0.98 $ (1.77)
========= ========= ========= =========
</TABLE>
Other dilutive securities represent the effect of shares which had been
contingently issuable in satisfaction of guarantees made in connection with the
issuance of shares for the acquisition of the rights to certain products from
SmithKline Beecham plc ("SKB") and from F. Hoffmann - La Roche Ltd. ("Roche")
during 1998. Under the terms of the agreements, in the event that the market
value of the Company's common stock at the respective guarantee dates does not
meet the specified guarantee prices, the Company will be obligated to satisfy
the aggregate guarantee amounts in cash or, in certain circumstances, in
additional shares of its common stock. Based upon the market price of the
Company's common stock at September 30, 1999, the aggregate guaranteed value of
the shares subject to such guarantees exceeded their market value by
approximately $17,634,000. Through June 30, 1999, the shares contingently
issuable to SKB were included in the computation of diluted earnings per share
because the Company could satisfy the guarantee either in cash or in shares of
its common stock. However, no contingently issuable shares were treated as
outstanding for the quarter ended September 30, 1999 because the Company intends
to satisfy its remaining obligation under the guarantee in cash.
9
<PAGE> 10
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. DETAIL OF CERTAIN ACCOUNTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
(in thousands)
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable $ 189,479 $ 201,102
Royalties receivable 30,898 8,342
Other receivables 20,461 19,305
--------- ---------
240,838 228,749
Allowance for doubtful accounts (26,366) (48,748)
--------- ---------
$ 214,472 $ 180,001
========= =========
INVENTORIES, NET:
Raw materials and supplies $ 31,686 $ 33,915
Work-in-process 16,454 13,372
Finished goods 108,378 90,846
--------- ---------
156,518 138,133
Allowance for inventory obsolescence (11,912) (11,588)
--------- ---------
$ 144,606 $ 126,545
========= =========
PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, at cost $ 406,201 $ 385,211
Accumulated depreciation and amortization (72,267) (57,455)
--------- ---------
$ 333,934 $ 327,756
========= =========
</TABLE>
5. LONG-TERM DEBT
In July 1999, the Company completed a private placement of $125,000,000
principal amount of its 8-3/4% Senior Notes due 2008. Net proceeds to the
Company, after discounts and costs of issuance, were $117,624,000. These
additional notes are issued under the indenture governing the Company's existing
$200,000,000 8-3/4% Senior Notes, issued in August 1998.
6. COMMON STOCK
In February 1999, the Company sold 1,141,498 shares of its common stock to
Schering-Plough Corporation ("Schering-Plough") for $27,000,000. The sale was
pursuant to the terms of the Stock Purchase Agreement made between the Company
and Schering-Plough in 1995, in connection with the licensing to Schering-Plough
of all oral forms of ribavirin for the treatment of chronic hepatitis C ("HCV")
in combination with Schering-Plough's alpha interferon. Although the shares are
initially unregistered, under the terms of the agreement Schering-Plough is
entitled to certain registration rights.
In March 1999, the Company repurchased 223,967 shares of its common stock for
$5,550,000, completing the initial $10,000,000 portion of the Stock Repurchase
Program authorized by the Company's Board of Directors in 1998. The Company's
Board of Directors has also authorized a long-term stock repurchase program that
allows the Company to repurchase up to 3,000,000 shares of its common stock. In
executing the repurchase programs, the Company is limited by certain covenants
contained in the indentures relating to the Company's Senior Notes. Under the
terms of the indentures, the Company is not currently permitted to repurchase
additional shares of its common stock, and repurchases under the second program
will only be permitted as the Company generates specified levels of cumulative
net income.
The Company, as part of its previously-authorized stock repurchase program, has
entered into certain option transactions which are intended to provide the
Company with the flexibility to implement its repurchase program when favorable
market conditions exist, without immediately impacting the Company's cash
resources. During the quarter ended September 30, 1999, the Company sold certain
put options to an independent third party; the proceeds were used to purchase
call options from the same party in a private placement transaction not
requiring any net cash outlay at the time.
10
<PAGE> 11
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
The put options and the corresponding call options each expire from March 2000
through August 2000 and are exercisable only at the expiration dates. The
Company may, at its option, make either a physical settlement, a cash
settlement, or a net share settlement of its positions under the put options and
the call options. The Company has a maximum potential obligation under the put
options to purchase 2,380,953 shares of its common stock for an aggregate price
of approximately $67,500,000. The call options entitle the Company to buy
1,064,085 shares of its common stock for approximately $33,519,000. The net
shares issuable in settlement of the put options are considered outstanding for
purposes of computing diluted earnings per share, based upon the market price of
the Company's common stock on September 30, 1999.
7. COMMITMENTS AND CONTINGENCIES
On August 11, 1999, the United States Securities and Exchange Commission filed a
complaint in the United States District Court for the Central District of
California captioned Securities and Exchange Commission v. ICN Pharmaceuticals,
Inc., Milan Panic, Nils O. Johannesson, and David C. Watt, Civil Action No. SACV
99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint alleges that the
Company and the individual named defendants made untrue statements of material
fact or omitted to state material facts necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading and engaged in acts, practices, and courses of business which
operated as a fraud and deceit upon other persons in violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The action concerns the status and disposition of the Company's 1994 Hepatitis C
monotherapy NDA. The SEC Complaint seeks injunctive relief, unspecified civil
penalties, and an order barring Mr. Panic from acting as an officer or director
of any publicly-traded company. Defendants have filed a motion to dismiss or in
the alternative for summary judgement. A hearing on the motion is currently
scheduled for December 1999.
The Company has received subpoenas from a Grand Jury in the United States
District Court for the Central District of California requesting the production
of documents covering a broad range of matters over various time periods. The
Company understands that the Company, Mr. Panic, two current senior executive
officers, a current employee, and a former employee of the Company are targets
of the investigation. The Company also understands that a senior executive
officer and a director are subjects of the investigation. The United States
Attorney's office has advised counsel for the Company that the areas of its
investigation include disclosures made and not made concerning the 1994
Hepatitis C monotherapy 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 monotherapy NDA had
been found not approvable; possible violations of the economic embargo imposed
by the United States upon the Federal Republic of Yugoslavia, based upon alleged
sales by the Company and Mr. Panic of stock belonging to Company employees; and,
with respect to Mr. Panic, personal disposition of assets of entities associated
with Yugoslavia, including possible misstatements and/or omissions in federal
tax filings. The Company has, and continues to, cooperate in the Grand Jury
investigation. A number of current and former employees of the Company have been
interviewed by the government in connection with the investigation. The United
States Attorney's office has issued subpoenas requiring various current and
former officers and employees of the Company to testify before the Grand Jury.
Certain current and former officers and employees testified before the Grand
Jury beginning in July 1998.
On or about February 9, 1999, the Company commenced an action in the United
States District Court for the District of Columbia ("District Court") against
the Federal Republic of Yugoslavia ("FRY"), the Republic of Serbia ("ROS"), and
the State Health Fund of Serbia ("State Fund") seeking damages in the amount of
at least $500,000,000 and declaratory relief arising out of the FRY and ROS's
seizure of the Company's majority ownership interest in ICN Yugoslavia and the
failure of the ROS and State Fund to pay ICN Yugoslavia for goods sold and
delivered. On or about March 9, 1999, the State Fund commenced an arbitration
against the Company before the International Chamber of Commerce ("ICC") for
unquantified damages due to alleged breaches of the agreement pursuant to which
the Company acquired its majority ownership interest in ICN Yugoslavia, and for
unspecified injunctive relief. The Company, in turn, counterclaimed against the
State Fund, and commenced an arbitration against the FRY and the ROS in the ICC
arising out of the seizure of ICN Yugoslavia and the failure to pay for goods
sold and delivered, seeking damages and other relief. By Stipulation and Order
dated August 10, 1999, the District Court stayed the action for 180 days (while
retaining jurisdiction) so that issues of jurisdiction by and among the parties
can be resolved at the ICC. The Company intends to prosecute vigorously its
claims against the FRY, the ROS, and the State Fund, and to defend against the
State Fund's claims against the Company, which
11
<PAGE> 12
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
the Company believes to be meritless and filed solely as a response to the
action filed earlier by the Company in the District Court.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation cannot be predicted with certainty,
and an unfavorable outcome could have a material adverse effect on the Company,
at this time in the opinion of management, the ultimate resolution of these
matters will not have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
8. BUSINESS SEGMENTS
The following table sets forth the amounts of segment revenues and operating
income of the Company for the three months and nine months ended September 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Pharmaceuticals
North America $ 71,482 $ 40,820 $ 181,630 $ 131,205
Western Europe 21,941 10,595 65,898 38,882
Latin America 24,010 19,380 70,742 59,882
Russia 18,962 34,329 63,320 131,282
Yugoslavia -- 11,133 -- 125,860
Other Eastern Europe 21,689 19,434 68,969 65,113
Asia, Africa, Australia 9,033 12,445 38,281 37,255
--------- --------- --------- ---------
Total Pharmaceuticals 167,117 148,136 488,840 589,479
Biomedicals 14,535 14,855 46,047 47,251
--------- --------- --------- ---------
Consolidated revenues $ 181,652 $ 162,991 $ 534,887 $ 636,730
========= ========= ========= =========
OPERATING INCOME (LOSS)
Pharmaceuticals
North America $ 51,066 $ 20,089 $ 123,818 $ 70,261
Western Europe 7,117 966 20,729 8,868
Latin America 8,490 6,390 24,174 18,743
Russia 2,899 (17,533) 3,980 (4,998)
Yugoslavia -- (7,647) -- (143,520)
Other Eastern Europe 119 (12,613) (12,557) (2,169)
Asia, Africa, Australia 3,014 1,811 10,926 8,110
--------- --------- --------- ---------
Total Pharmaceuticals 72,705 (8,537) 171,070 (44,705)
Biomedicals 1,295 61 5,365 4,258
--------- --------- --------- ---------
Consolidated segment
operating income (loss) 74,000 (8,476) 176,435 (40,447)
Corporate expenses 17,339 25,901 35,990 52,577
Interest income (2,166) (2,353) (7,060) (9,576)
Interest expense 14,920 12,890 41,794 24,698
Translation and exchange losses, net 54 35,259 8,114 59,983
--------- --------- --------- ---------
Income (loss) before income
taxes and minority interest $ 43,853 $ (80,173) $ 97,597 $(168,129)
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
The following table sets forth the segment total assets of the Company as of
September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ASSETS
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
<S> <C> <C>
Pharmaceuticals
North America $ 508,025 $ 520,017
Western Europe 57,544 34,816
Latin America 82,690 66,486
Russia 167,400 155,368
Other Eastern Europe 169,528 190,675
Asia, Africa, Australia 95,971 79,274
---------- ----------
Total Pharmaceuticals 1,081,158 1,046,636
Biomedicals 65,509 76,671
Corporate 318,794 233,089
---------- ----------
$1,465,461 $1,356,396
========== ==========
</TABLE>
9. ICN RUSSIA
The Company's Russian operations consist of five production facilities, four
regional distribution centers, and 126 retail locations. The Company's Russian
operations represented 12% and 21% of the Company's total revenues for the nine
months ended September 30, 1999 and 1998, respectively.
The Company's Russian operations continue to be impacted by the recent economic
events in the region. While the ruble remained relatively stable in the third
quarter of 1999 (the exchange rate was 25.235 rubles to $1 as of September 30,
1999) the ruble has declined more than 75% from its June 1998 level.
Fluctuations in the value of the ruble caused the Company to record foreign
exchange losses of $5,056,000 and $34,955,000 related to its Russian operations
during the nine months ended September 30, 1999 and 1998, respectively.
Foreign exchange risk: ICN Russia operates in a highly inflationary economy and
uses the dollar as the functional currency rather than the ruble. During
the three year period ended December 31, 1998, the cumulative rate of inflation
was approximately 180%. All foreign exchange gains and losses arising from
foreign currency transactions and translation are included in income. As of
September 30, 1999, ICN Russia had a net monetary asset position of
approximately $10,996,000 which would be subject to foreign exchange loss if a
further decline in the value of the ruble in relation to the United States
dollar were to occur.
Credit Risk: The Company believes that the economic and political environment in
Russia has affected the pharmaceutical industry in the region. Many Russian
companies, including many of the Company's customers, continue to experience
liquidity problems as monetary policy has limited the money supply, and Russian
companies often lack access to an effective banking system. As a result, many
Russian companies have limited ability to pay their debts, which may lead to a
number of business failures in the region.
10. EASTERN EUROPEAN CHARGES
In the second quarter of 1998, the Yugoslavian government defaulted on its
obligations to the Company on $176,204,000 of accounts and notes receivable. As
a result of the government's default and the Company's suspension of sales to
the Yugoslavian government, the Company recorded a $173,440,000 charge against
earnings at ICN Yugoslavia in the second quarter of 1998. The charge is included
in Eastern European charges ($165,646,000), cost of product sales ($3,667,000),
and interest income ($4,127,000) in the accompanying consolidated condensed
statements of income. The charge consists of a $151,204,000 reserve for losses
on notes receivable (including accrued interest), reserves of $7,757,000 for
losses on accounts receivable from government-sponsored entities, and a
$14,479,000 write-down of the value of certain related investments and assets.
13
<PAGE> 14
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
In the third quarter of 1998, as a result of the devaluation of the ruble, the
Company recorded a charge of $42,289,000, which is included in Eastern European
Charges ($39,884,000) and cost of product sales ($2,405,000) in the accompanying
consolidated statements of income. The charge consists of reserves of
$37,873,000 for losses on accounts receivable, a $2,011,000 write-off of certain
investments, and a $2,405,000 reduction in the value of certain inventories.
11. 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 SFr
14,390,000 principal amount of the New Certificates were exchanged for an
aggregate of approximately 306,000 shares of the Company's common stock. 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
$11,937,000, became available to the Company. The exchange increased
stockholders' equity by $13,734,000 and reduced long-term debt and accrued
interest by $1,797,000.
Cash paid for income taxes for the nine months ended September 30, 1999 and 1998
was $14,256,000 and $8,286,000, respectively. Cash paid for interest, net of
amounts capitalized, for the nine months ended September 30, 1999 and 1998 was
$39,090,000 and $27,448,000 respectively.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
During 1998, the Company completed several product acquisitions which
contributed to revenues for the quarter and nine months ended September 30, 1999
compared to 1998. Principal acquisitions include the purchase of the worldwide
rights (except India) to four products from Roche (November 1998); the Asian,
African and Australian rights to 39 prescription and over-the-counter
pharmaceutical products from SKB (February 1998); the Latin American rights to
market three products from SKB (October 1998); and the rights to a portfolio of
32 dermatology products sold in the Latin American market from Laboratorios
Pablo Cassara (March 1998). In addition, in 1998 the Company obtained worldwide
rights to market Kinetin(R) (marketed by the Company as Kinerase(TM)) from
Senetek plc. Sales of Kinerase(TM), a skin cream to help reduce signs of aging,
began in March 1999. The acquired products generated additional sales of
$18,867,000 and $57,733,000 for the quarter and nine months ended September 30,
1999, respectively.
ROYALTY REVENUES
Royalty revenues earned under the Company's Exclusive License and Supply
Agreement (the "License Agreement") with Schering-Plough were also a major
contributor to the Company's revenue. 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. In 1998, Schering-Plough received approval from the FDA to market
Rebetron(TM) Combination Therapy, containing Rebetol(R) (ribavirin) Capsules and
Intron(R)A (interferon alfa-2b, recombinant) Injection, for the treatment of HCV
and began selling Rebetron(TM) in the United States.
In May 1999, the European Union's (EU) Commission of the European Communities
granted authorization to Schering-Plough to market Rebetol(R) (ribavirin)
Capsules for use in combination with interferon alfa-2b injection (marketed as
Intron(R) A in certain countries) for the treatment of both relapsed and
previously untreated (naive) HCV patients. The Commission's approval resulted in
a single Marketing Authorization with unified labeling that is immediately valid
in all 15 European Union-Member States. Schering-Plough has commenced marketing
Rebetol(R) in Germany (in May 1999), in the United Kingdom (in July 1999), and
in Italy (in October 1999). The Company anticipates that Schering-Plough will
introduce Rebetol(R) in the other EU markets upon receiving pricing approvals,
where necessary, from individual EU countries.
Royalty revenues for the quarter and nine months ended September 30, 1999 were
$33,527,000 and $75,678,000, respectively, compared to $6,631,000 and
$26,683,000 for the comparable 1998 periods. The 1999 royalty amounts reflect
increasing United States commercial sales of Rebetron(TM) by Schering-Plough
subsequent to receipt of initial FDA approval in June 1998, inception of
commercial sales in the EU, and an increase in compassionate use sales,
primarily in Western Europe. The 1998 amounts include a one-time payment of
$16,500,000 received from Schering-Plough for past royalties and as
reimbursement of expenses incurred by the Company in preparation for the launch
of ribavirin capsules in the EU.
RUSSIA
The Company's Russian operations continue to be impacted by recent economic
events in the region. While the ruble's value was relatively stable in the third
quarter of 1999 (the exchange rate was 25.235 rubles to $1 as of September 30,
1999) the ruble has declined more than 75% from the its June 1998 level. The
decline in the ruble's value was the principal reason for the decrease in 1999
sales and operating income in the Company's Russian operations compared to 1998
levels. In addition, the devaluation of the ruble 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 adversely affected, and may continue to adversely affect, sales and gross
margins in the Company's Russian operations and export sales to Russia by the
Company's Hungarian and Polish operations.
YUGOSLAVIA
In the fourth quarter of 1998, the Company wrote off its investment in ICN
Yugoslavia (a 75%-owned subsidiary), following the Yugoslavian government's
seizure of those operations. The Company has not recognized any
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
revenues or expenses related to its investment in ICN Yugoslavia in the quarter
or nine months ended September 30, 1999. The following table presents certain
financial information for the quarter and nine months ended September 30, 1999
compared to 1998, excluding the 1998 contribution from ICN Yugoslavia.
<TABLE>
<CAPTION>
EXCLUDING ICN YUGOSLAVIA: QUARTER ENDED NINE MONTHS ENDED
(in thousands) SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product sales $ 148,125 $ 145,227 $ 459,209 $ 484,187
Operating income (loss) 56,661 (26,730) 140,445 50,496
Net income (loss) 31,810 (58,826) 80,274 (6,195)
</TABLE>
RESULTS OF OPERATIONS
Certain financial information for the Company's business segments is set forth
below. This discussion should be read in conjunction with the consolidated
condensed financial statements of the Company included elsewhere in this
document. For additional financial information by business segment, see Note 8
of Notes to Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Pharmaceuticals
North America $ 71,482 $ 40,820 $181,630 $131,205
Western Europe 21,941 10,595 65,898 38,882
Latin America 24,010 19,380 70,742 59,882
Russia 18,962 34,329 63,320 131,282
Yugoslavia -- 11,133 -- 125,860
Other Eastern Europe 21,689 19,434 68,969 65,113
Asia, Africa, Australia 9,033 12,445 38,281 37,255
-------- -------- -------- --------
Total Pharmaceuticals 167,117 148,136 488,840 589,479
Biomedicals 14,535 14,855 46,047 47,251
-------- -------- -------- --------
Consolidated revenues $181,652 $162,991 $534,887 $636,730
======== ======== ======== ========
Product sales $148,125 $156,360 $459,209 $610,047
Royalty revenues 33,527 6,631 75,678 26,683
-------- -------- -------- --------
Total revenues $181,652 $162,991 $534,887 $636,730
======== ======== ======== ========
Cost of product sales $ 54,133 $ 70,972 $186,178 $278,585
Gross profit margin on product sales 63% 55% 59% 54%
Gross profit margin on product
sales, excluding the Russia,
Yugoslavia, and Other Eastern Europe
Pharmaceuticals segments 72% 67% 71% 67%
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
REVENUES: In the North America Pharmaceuticals segment, revenues for the three
months ended September 30, 1999 were $71,482,000, compared to $40,820,000 for
the same period of 1998. Third quarter 1999 revenues reflect a $26,867,000
increase in royalty revenues from sales of Rebetol(R) (ribavirin) by
Schering-Plough. Product sales for the third quarter of 1999 include sales
resulting from the Company's October 1998 acquisition of the rights to four
products from Roche, which generated sales of $7,610,000.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In the Western Europe Pharmaceuticals segment, revenues for the three months
ended September 30, 1999 were $21,941,000 compared to $10,595,000 in the same
period of 1998. The increase in revenues of $11,346,000 (107%) was primarily due
to the Company's acquisition of the rights to certain products from Roche in
October 1998, which generated sales of $5,406,000 in 1999. In addition, the
Company experienced increased sales in several product lines, including products
for vision care, myasthenia gravis, and Virazole(R).
In the Latin America Pharmaceuticals segment, revenues for the three months
ended September 30, 1999 were $24,010,000, compared to $19,380,000 for the same
period of 1998. The increase of $4,630,000 (24%) primarily reflects sales of
products acquired from Roche in October 1998 and other acquisitions subsequent
to September 30, 1998, which generated additional sales of $2,733,000. In
addition, this region benefited from continued strong sales of Bedoyecta(R), an
injectable vitamin B-12 supplement, and other products.
In the Russia Pharmaceuticals segment, revenues for the three months ended
September 30, 1999 were $18,962,000, compared with $34,329,000 for the same
period of 1998, a decrease of $15,367,000 (45%). The Company's Russian
operations continue to be impacted by the Russian economic situation, which the
Company believes has affected the liquidity and the purchasing power of many of
its customers. Since June 30, 1998, the Russian ruble has declined over 75% in
relation to the United States dollar. The Company's Russian revenues are
generally denominated in rubles and the 75% decline in the ruble's value has
reduced the dollar amount of these revenues.
In the Other Eastern Europe Pharmaceuticals segment, revenues for the three
months ended September 30, 1999 were $21,689,000, compared with $19,434,000 for
the same period of 1998, an increase of $2,255,000 (12%). The sales increase
compared to the 1998 third quarter level reflects the impact of the
ruble devaluation on this segment in the 1998 period. Sales in this segment
continue to reflect lower export sales to Russia due to the devaluation.
Domestic sales have also been, and may continue to be, affected by the overall
political and economic events transpiring in this region of the world.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended September 30, 1999 were $9,033,000 compared to $12,445,000
for the same period of 1998. The decrease of $3,412,000 (27%) is primarily due
to order backlog resulting from temporary delays in shipments of certain
products from manufacturers with whom the Company contracts. The effect of order
backlog was partially offset by sales of the products acquired from Roche in
October 1998.
In the Company's Biomedicals segment, revenues for the three months ended
September 30, 1999 were $14,535,000 compared to $14,855,000 for the same period
of 1998, a decrease of $320,000 (2%). The change reflects slightly lower
dosimetry revenues and lower sales volume in the Company's diagnostics product
line due to a continuing trend toward the use of non-isotopic technology.
GROSS PROFIT: Gross profit margin on product sales increased to 63% for the
three months ended September 30, 1999, compared to 55% for 1998. The improvement
in gross profit margin is primarily due to increased sales of the products
acquired from Roche and SKB in 1998, which generally yield higher gross profit
margins than were previously achieved by the Company's base business. The
Company's gross profit margin for 1999 was also affected by the loss of the
Company's Yugoslavian operations, which achieved a 34% gross profit margin for
the 1998 third quarter. Gross profit margins in the North America
Pharmaceuticals segment were 87% for the three months ended September 30, 1999
compared to 83% in the 1998 third quarter, principally reflecting strong margins
on sales of the products acquired in 1998. The overall gross margins for the
Company's Russia Pharmaceuticals segment improved to 43% for 1999, compared to
28% for the 1998 third quarter. In the 1998 third quarter, gross profit margins
in the Company's Russian operations were affected by the decline in sales volume
resulting from the devaluation of the ruble. While the Company has historically
been able to set its prices for Russian markets without government approval, the
ruble devaluation has reduced the purchasing power of Russian consumers,
effectively restricting price increases to a level that does not fully offset
the impact of the devaluation. The Company has improved its product mix for the
Russian market to focus on higher-margin products. In the Other Eastern Europe
Pharmaceuticals segment, the gross profit margin for the quarter ended September
30, 1999 was 36% compared with 57% for 1998. The Company's
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
operations in Poland and Hungary have reduced export sales to the Russian
market, temporarily lowering operating efficiency as the Company shifts its
efforts toward European Union markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $68,245,000 for the three months ended September
30, 1999, compared to $81,373,000 for the same period in 1998, a decrease of
$13,128,000. The decrease primarily reflects the effect of the decline in the
value of the Russian ruble and the Company's ongoing cost-control efforts, which
reduced selling, general and administrative expenses in the Company's Russian
operations by $11,781,000. The decrease also reflects the exclusion of the
Company's Yugoslavian operations, which incurred expenses of $3,148,000 in the
1998 third quarter, and a $5,982,000 decline in corporate expenses. These
amounts were partially offset by additional costs resulting from acquisitions of
business and product rights subsequent to September 30, 1998, which totaled
$8,514,000 (including amortization of goodwill and intangibles of $2,366,000).
RESEARCH AND DEVELOPMENT: Research and development expenditures for the 1999
third quarter were $2,613,000, compared to $5,139,000 for the same period in
1998. The decrease reflects lower spending at the Company's facilities in the
United States and Hungary, and the exclusion of the Company's Yugoslavian
operations. The Company has slowed its spending as it evaluates its research
strategy, including greater emphasis on clinical development of existing
compounds.
TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, were $54,000
for the three months ended September 30, 1999 compared to $35,259,000 for the
same period in 1998. In the third quarter of 1998, the Company's translation
losses were primarily related to the August 1998 devaluation of the Russian
ruble.
INTEREST INCOME AND EXPENSE: Interest expense during the three months ended
September 30, 1999 increased $2,030,000 compared to the same period in 1998,
primarily due to additional interest expense resulting from the issuance of the
Company's 8-3/4% Senior Notes due 2008. The Company issued $200,000,000
principal amount of the 8-3/4% Senior Notes in August 1998 and an additional
$125,000,000 in July 1999. Interest expense on the Senior Notes was partially
offset by lower interest expense on obligations of the Company's subsidiaries
which were repaid using a portion of the proceeds. Interest income was
$2,166,000 in 1999 compared with $2,353,000 in 1998.
INCOME TAXES: The Company's effective income tax rate for the 1999 third quarter
was 28% compared to 4% for the comparable period of 1998 (excluding the Eastern
European charges). The provision for income taxes reflects higher 1999 taxable
income in the United States, and the effect of the losses in Hungary, for which
no tax benefit was recorded. These increases in the effective tax rate were
partially offset by higher 1999 taxable income in Puerto Rico and other
jurisdictions where tax rates are lower than the U.S. Federal statutory rate of
35%.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
REVENUES: In the North America Pharmaceuticals segment, revenues for the nine
months ended September 30, 1999 were $181,630,000, compared to $131,205,000 for
the same period of 1998. Revenues for the nine months ended September 30, 1999
reflect a $48,943,000 increase in royalty revenues from sales of Rebetol(R)
(ribavirin) by Schering-Plough, as well as increased product sales. Product
sales for the nine months ended September 30, 1999 include sales of $12,993,000
resulting from the Company's October 1998 acquisition of the rights to four
products from Roche. In addition, in March 1999 the Company commenced sales of
Kinerase(TM), which generated 1999 sales of $7,823,000. However, these increases
were offset by lower sales in certain of the Company's existing product lines.
In the dermatologicals product line, sales of bleaches and oxsoralens were lower
than the 1998 period, primarily due to increased competition from other
products, including generics, and order backlog. Product sales for 1999 were
also affected by lower sales of Virazole(R) than in the comparable 1998 period.
In the Western Europe Pharmaceuticals segment, revenues for the nine months
ended September 30, 1999 were $65,898,000 compared to $38,882,000 in the same
period of 1998. The increase in revenues of $27,016,000 (69%) is primarily due
to the Company's acquisition of the rights to certain products from Roche in
October 1998, which
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
generated additional sales of $18,000,000 in 1999. The region also recorded
sales gains in several products including Mestinon(R), Ancotil(R) (an
antifungal), and in the vision care product line.
In the Latin America Pharmaceuticals segment, revenues for the nine months ended
September 30, 1999 were $70,742,000, compared to $59,882,000 for the same period
of 1998. The increase of $10,860,000 (18%) primarily reflects sales of products
acquired during or subsequent to the quarter ended March 31, 1998 as well as
continued growth in the base business. Principal acquisitions contributing to
the Latin America Pharmaceuticals segment included the products acquired from
Roche in October 1998 and a portfolio of 32 dermatology products acquired from
Laboratorios Pablo Cassara ("Cassara") effective March 1, 1998. The acquired
products generated additional sales of $8,167,000 over the 1998 period.
In the Russia Pharmaceuticals segment, revenues for the nine months ended
September 30, 1999 were $63,320,000, compared with $131,282,000 for the same
period of 1998, a decrease of $67,962,000 (52%). In 1999, the Company's Russian
operations continue to be impacted by the Russian economic situation, which the
Company believes has affected the liquidity and the purchasing power of many of
its customers. In addition, the Company's Russian revenues are generally
denominated in rubles and the 75% decline in the value of the ruble in relation
to the dollar subsequent to June 1998 has reduced the dollar amount of the
Company's Russian revenues. The Company has partially offset the effect of the
exchange rate changes through price increases and improvement in its product
mix.
In the Other Eastern Europe Pharmaceuticals segment, revenues for the nine
months ended September 30, 1999 were $68,969,000, compared with $65,113,000 for
the same period of 1998, an increase of $3,856,000 (6%). The increase is
principally the result of the June 1998 acquisition of ICN Czech Republic, which
generated revenues of $8,594,000. The effect of these revenue gains was
partially offset by lower sales at ICN Poland ($4,753,000), principally
resulting from lower export sales to Russia due to the Russian economic
situation. Domestic sales have also been, and may continue to be, adversely
affected by the overall political and economic events transpiring in this region
of the world.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the nine
months ended September 30, 1999 were $38,281,000 compared to $37,255,000 for the
same period of 1998, an increase of $1,026,000 (3%). The increase is primarily
due to sales of the products acquired from Roche and SKB in 1998. This increase
was partially offset by order backlog resulting from temporary delays in
shipments of certain products from contracted manufacturers, and by lower
revenues at Wuxi ICN Pharmaceuticals in China.
In the Company's Biomedicals segment, revenues for the nine months ended
September 30, 1999 were $46,047,000 compared to $47,251,000 for the same period
of 1998, a decrease of $1,204,000 (3%). The decrease is primarily due to lower
sales volume in the Company's diagnostics and radiochemicals product lines,
partially offset by increased revenues from dosimetry services.
GROSS PROFIT: Gross profit margin on product sales increased to 59% for the nine
months ended September 30, 1999, compared to 54% for 1998. The improvement in
gross profit margin is primarily due to increased sales of the products acquired
from Roche and SKB in 1998, which generally yield higher gross profit margins
than were previously achieved by the Company's base business. The Company's
gross profit margin for 1999 was also affected by the loss of the Company's
Yugoslavian operations, which achieved a 41% gross profit margin for the nine
months ended September 30, 1998. Gross profit margins in the North America
Pharmaceuticals segment were 85% for the nine months ended September 30, 1999
compared to 81% in 1998, reflecting the effect of the acquired products. The
overall gross margins for the Company's Russia Pharmaceuticals segment were 34%
for 1999, compared to 39% for the nine months ended September 30, 1998. In 1999,
gross profit margins in the Company's Russian operations continue to be affected
by the decline in sales volume resulting from the devaluation of the ruble.
While the Company has historically been able to set its prices for Russian
markets without government approval, the ruble devaluation has reduced the
purchasing power of Russian consumers, effectively restricting price increases
to a level that does not fully offset the impact of the devaluation. The Company
has also improved its product mix for the Russian market to focus on
higher-margin products. In the Other Eastern Europe Pharmaceuticals segment, the
gross profit margin for the nine months ended September 30, 1999 was 29%
compared with 53% for 1998. The Company's operations in Poland and Hungary have
reduced
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
export sales to the Russian market, temporarily lowering operating efficiency as
the Company shifts its efforts toward European Union markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $200,389,000 for the nine months ended September
30, 1999, compared to $228,999,000 for the same period in 1998, a decrease of
$28,610,000. The decrease primarily reflects the exclusion of the Company's
Yugoslavian operations, which incurred expenses of $18,773,000 during the nine
months ended September 30, 1998. In the Company's Russian operations, selling,
general and administrative expenses decreased by $29,933,000, principally due to
the 75% decline in the value of the ruble and the Company's cost-control
efforts. The decrease in selling, general and administrative expenses also
reflects an $11,536,000 decline in corporate expenses. These amounts were
partially offset by additional costs resulting from acquisitions of business and
product rights subsequent to September 30, 1998, which totaled $25,046,000
(including amortization of goodwill and intangibles of $8,373,000). The
Company's selling, general and administrative expenses also include
approximately $11,981,000 of costs associated with the asset revaluation in the
Hungarian business.
RESEARCH AND DEVELOPMENT: Research and development expenditures for the nine
months ended September 30, 1999 were $7,875,000, compared to $16,640,000 for the
same period in 1998. The decrease reflects lower spending at the Company's
facilities in the United States and Hungary, and the exclusion of the Company's
Yugoslavian operations. The Company has slowed its spending as it evaluates its
research strategy, including greater emphasis on clinical development of
existing compounds.
TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, were
$8,114,000 for the nine months ended September 30, 1999 compared to $59,983,000
for the same period in 1998. In 1999, translation losses principally consisted
of losses of $5,056,000 related to the net monetary asset position of the
Company's Russian subsidiaries and losses of $2,557,000 in Hungary and Poland
resulting from foreign-denominated debt. In the nine months ended September 30,
1998, the Company's foreign exchange losses reflect the August 1998 devaluation
of the Russian ruble and ICN Yugoslavia's net monetary asset position.
INTEREST INCOME AND EXPENSE: Interest expense during the nine months ended
September 30, 1999 increased $17,096,000 compared to the same period in 1998,
primarily due to the additional interest expense resulting from the Company's
8-3/4% Senior Notes due 2008, issued in August 1998 and July 1999. Interest
expense on the Senior Notes was partially offset by lower interest expense on
obligations of the Company's subsidiaries which were repaid using a portion of
the proceeds. The net increase in interest expense also reflects a decrease in
the amount of interest cost capitalized. During the nine months ended September
30, 1998, the Company capitalized interest of $3,540,000; no interest cost was
capitalized in 1999. Interest income decreased to $7,060,000 in 1999 from
$9,576,000 in 1998, principally due to lower invested cash balances.
INCOME TAXES: The Company's effective income tax rate for the nine months ended
September 30, 1999 was 25% compared to 18% for 1998 (excluding Eastern European
charges). The provision for income taxes reflects higher 1999 taxable income in
the United States, and the effect of the losses in Hungary, for which no tax
benefit was recorded. In addition, no benefit has been recognized in the
financial statements for Russian tax losses resulting from allowances for bad
debts or from currency translation losses. These increases in the effective tax
rate were partially offset by higher 1999 taxable income in Puerto Rico and
other jurisdictions taxed at rates lower than the U.S. Federal statutory rate of
35%.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, cash provided by operating
activities totaled $50,857,000 compared to cash provided by operations of
$1,174,000 in 1998. Operating cash flows reflect the Company's net income of
$80,274,000 and net noncash charges (including depreciation, minority interest,
and foreign exchange gains and losses) of $56,418,000, partially offset by
working capital increases (after the effect of business acquisitions and
currency translation adjustments) totaling approximately $85,835,000. The
working capital increases principally consist of a $28,365,000 decrease in trade
accounts payable resulting from the timing of payments to certain vendors, and a
$38,770,000 increase in accounts receivable, mainly resulting from increased
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
royalties receivable under the Company's license agreement with Schering-Plough.
In addition, inventories increased $14,975,000 as the Company has assumed
distribution of recently-acquired products.
Cash used in investing activities was $40,828,000 for the nine months ended
September 30, 1999 compared to $145,423,000 for the same period of 1998. In
1999, the Company made capital expenditures of $32,661,000, principally
representing the continuation of its plant expansion efforts and investment in
information systems. In addition, the Company used cash of $8,960,000 (net of
cash acquired of $469,000) for the acquisition of a chain of 88 pharmacies in
Russia and the purchase of a pharmaceutical distributor in Hungary. These
amounts were partially offset by proceeds from the sale of assets, and other
items. In 1998, net cash used in investing activities principally consisted of
payments for acquisitions totaling $69,411,000, capital expenditures of
$84,908,000, and a $15,000,000 increase in restricted cash, which was partially
offset by proceeds from the sale of marketable securities of $22,958,000 and
proceeds from sales of other assets of $938,000.
Net cash provided by financing activities totaled $65,446,000 for the nine
months ended September 30, 1999. Proceeds from long-term borrowings totaled
$144,574,000, including net proceeds of $117,624,000 from a private placement of
$125,000,000 principal amount of its 8-3/4% Senior Notes due 2008, which the
Company completed in July 1999. Other sources of cash included $27,000,000 from
the sale to Schering-Plough of 1,141,498 shares of its common stock (as provided
for under the terms of a Stock Purchase Agreement entered into with
Schering-Plough in 1995) and proceeds from the exercise of employee stock
options of $11,849,000. The Company used cash (including a portion of the
proceeds of the 8-3/4% Senior Notes) for principal payments of $87,477,000 on
long-term debt and for a net $9,410,000 reduction of short-term borrowings. Cash
was also used for the payment of dividends on common stock of $15,540,000 and
the repurchase of 223,967 shares of common stock for $5,550,000, completing the
initial $10,000,000 portion of the Stock Repurchase Program authorized by the
Company's Board of Directors in 1998. During the nine months ended September 30,
1998, cash provided by financing activities of $192,946,000 principally
consisted of proceeds from long-term borrowings of $215,573,000. Other sources
of funds included $4,299,000 from the issuance of common stock, proceeds of
$6,707,000 from the exercise of employee stock options, and a net increase in
short-term borrowings of $1,188,000. These amount were partially offset by
principal payments on long-term debt of $22,192,000 and dividend payments of
$12,629,000.
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, 1999 totaled $180,264,000 compared to $104,921,000 at December 31,
1998. Working capital at September 30, 1999 was $419,729,000, compared to
$236,994,000 at December 31, 1998. The $182,735,000 increase in working capital
is primarily due to cash and working capital generated by operating activities
during the nine months ended September 30, 1999. Certain of the Company's lines
of credit and long term borrowings include covenants restricting payment of
dividends, issuance of new indebtedness and repurchase of the Company's common
stock, and requiring the maintenance of certain financial ratios.
The current economic environment in Russia continues to affect the Company's
operating cash flows in Russia and Eastern Europe, as its Russian customers
continue to experience liquidity problems. The Company may need to invest
additional working capital in Eastern Europe (including Russia) to sustain its
operations, to provide increasing levels of working capital necessary to support
renewed growth, and to fund the purchase or upgrading of facilities. The Company
also has several preliminary acquisition prospects that may require significant
funds through the year 2000. However, there can be no assurance that any such
acquisitions will be consummated. In March 1999, the Company repurchased an
additional 223,967 shares of its common stock for $5,550,000, completing the
first part of its stock repurchase program. Under the terms of the indentures
related to the Company's Senior Notes, the Company is not currently permitted to
repurchase additional shares of its common stock.
During 1999, the Company entered into certain option transactions which allow
the Company to establish a price range in which the Company has the option to
repurchase its stock at a later date, without any immediate outlay of its cash
resources. The Company entered into these option positions when the Company
believed its stock to be undervalued, and anticipates its stock price will
appreciate. Under this program, the Company sold put options which entitle the
holder to sell the Company's stock to the Company at a specified price. At the
same time, in a cashless transaction, the Company purchased call options which
entitle the Company to purchase its stock at a
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
specified price from the same party. The put and call positions have essentially
established a price range within which the Company can repurchase its stock. If
the stock price rises above the call option strike price, the repurchase of
stock will be at a favorable price compared to the market price. Conversely, if
the stock price falls below the put option strike price, the repurchase of stock
is more costly than the market price. The Company may, at its option, make
either a physical settlement, a cash settlement, or a net share settlement of
its positions under the put options and call options. The Company has a maximum
potential obligation under the put options to buy back 2,380,953 shares of its
common stock for an aggregate price of approximately $67,500,000. The Company
continually reevaluates the potential impact of these option positions and
believes its capital resources are sufficient to meet the potential obligations
of these option positions.
Management believes that the Company's existing cash and cash equivalents and
funds generated from operations will be sufficient to meet its operating
requirements in the near term 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 evaluates the carrying value of its inventories at least quarterly,
taking into account such factors as historical and anticipated future sales
compared with quantities on hand, the price the Company expects to obtain for
its products in their respective markets compared with historical cost, and the
remaining shelf life of goods on hand. The Company also evaluates the
collectibility of its receivables at least quarterly, based upon various factors
including the financial condition and payment history of major customers, an
overall review of collections experience on other accounts, and economic factors
or events expected to affect the Company's future collections experience. As of
September 30, 1999, the Company believes that adequate provision has been made
for inventory obsolescence and for anticipated losses on uncollectible accounts
receivable.
The Company is currently self-insured with respect to product liability claims.
While to date no material adverse claim for personal injury resulting from
allegedly defective products has been successfully maintained against the
Company, a substantial claim, if successful, could have a material adverse
effect on the Company's liquidity and financial performance.
FOREIGN OPERATIONS
Approximately 64% and 78% of the Company's revenues for the nine months ended
September 30, 1999 and 1998, respectively, were generated from operations
outside the United States. All of the Company's foreign operations are subject
to certain risks inherent in conducting business abroad, including price and
currency exchange controls, fluctuations in the relative values of currencies,
political instability and restrictive governmental actions. Changes in the
relative values of currencies occur from time to time and may, in certain
instances, materially affect the Company's results of operations. The effect of
these risks remains difficult to predict.
The Russian political and economic situation continues to be unstable. The
recent turmoil in the Russian government may delay or prevent further financial
assistance from the International Monetary Fund or the World Bank and the
greater uncertainty in the Russian political and economic situation may
contribute to further declines in the value of the ruble. The Russian government
has recently instituted a process for establishing prices for pharmaceutical
products which may lead to price controls in the Russian market in the future.
Currently, this process requires the Company to register the prices for certain
of its products included on the government's list of "products important for
health." The next procedure for registration includes the negotiation and
approval of such prices between the Company and the relevant state bodies. The
Company is currently working with all relevant state bodies to approve its
prices and the Company is not presently able to determine the effect, if any,
that this process may have on its results of operations. However, such
developments could have a material adverse effect on the Company's results of
operations in Russia.
The Company believes that the economic and political environment in Russia has
affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience liquidity
problems as monetary policy has limited the money supply, and Russian companies
often lack access to an effective banking system. As a result, many Russian
companies have limited ability to pay their debts, which may lead to a number of
business failures in the region.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's collections on accounts receivable in Eastern Europe (including
Russia) have been adversely affected by the Russian economic situation. Prior to
the August 1998 devaluation of the Russian ruble, the Company had favorable
experience with the collection of receivables from its customers in the region.
Subsequently, the Company has taken additional steps to ensure the
creditworthiness of its customers and the collectibility of accounts receivable
by tightening its credit policies in the region. These steps include a
shortening of credit periods, suspension of sales to customers with past-due
balances, and discounts for cash sales. The adoption of these more restrictive
credit policies has contributed to the decline in sales in Russia for the nine
months ended September 30, 1999 compared with the same period of 1998.
ICN Russia operates in a highly inflationary economy and uses the dollar as the
functional currency rather than the Russian ruble. During the three year period
ended December 31, 1998, the cumulative rate of inflation in Russia was
approximately 180%. All foreign exchange gains and losses arising from foreign
currency transactions and translation are included in income. As of September
30, 1999, ICN Russia had a net monetary asset position of approximately
$10,996,000 which would be subject to foreign exchange loss if a further decline
in the value of the ruble in relation to the dollar were to occur. Due to the
extremely large fluctuation in the ruble exchange rate, the ultimate amount of
any future foreign exchange loss the Company may incur cannot presently be
determined and such loss may have a material adverse effect on the Company's
financial position and results of operations. The Company's management continues
to work to reduce its net monetary exposure, including the tightening of credit
policies and increased accounts receivable collection efforts including, in some
cases, discounts for early payment from customers. However, there can be no
assurance that such efforts will be successful.
The Company does not currently provide any hedges on its foreign currency
exposure and, in certain countries in which the Company operates, no effective
hedging programs are available. At September 30, 1999, the Company and its
subsidiaries are also subject to foreign currency risk on its
foreign-denominated debt of approximately $1,684,000, principally U.S.
dollar-denominated obligations of the Company's subsidiary in the Czech
Republic.
INFLATION AND CHANGING PRICES
The effects of inflation are experienced by the Company through increases in the
costs of labor, services and raw materials. The Company is subject to price
control restrictions on its pharmaceutical products in a majority of countries
in which it operates. While the Company attempts to raise selling prices in
anticipation of inflation, the Company has been adversely affected by the lag in
allowed price increases in Mexico and other regions, which has created lower
sales in U.S. dollars and reductions in gross profit. The Company's operations
in Russia and other regions may be subject to price controls in the future.
Future sales and gross profit could be materially affected if the Company is
unable to obtain price increases commensurate with the levels of inflation.
THE YEAR 2000 ISSUE
Many computer systems and equipment and instruments with embedded
microprocessors were designed to recognize only the last two digits of a
calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. Systems that are not
"Year 2000 compliant" could malfunction, potentially resulting in an adverse
impact on the Company's business.
The Company is pursuing an action plan to be Year 2000 compliant in all
locations by December 1999. The Company does not have significant reliance on
custom, internally generated software; the Company principally uses third party
software that is, in most cases, already Year 2000 compliant. The Company has
completed an assessment of its worldwide information systems and has determined
that it will be required to perform some modification or replacement of software
so that all systems will properly utilize dates beyond December 31, 1999. The
Company has spent approximately $8,200,000 to upgrade its information systems to
be Year 2000 compliant, and currently considers its information systems to be
99% Year 2000 compliant. The Company recently completed conversions to Year
2000-compliant software at its facilities in Russia, Hungary, the Czech
Republic, Poland, Puerto Rico and Mexico.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The remaining projects that must be completed for full Year 2000 compliance are
upgrades to certain automated manufacturing equipment containing embedded
microprocessors at the Company's plants in Hungary, Mexico, and Puerto Rico. The
estimated additional cost to complete the conversion to full Year 2000
compliance is estimated to be approximately $100,000 which will be spent in 1999
and funded with cash from operations. There can be no assurance that the
conversion will be completed within internal or external deadlines.
The Company's operations may also be impacted in the event that computer
disruption is encountered by third parties with whom the Company conducts
significant business. These third parties include suppliers and service
providers on whom the Company relies, and the wholesalers, distributors, health
care providers, and others from whom the Company derives its revenues. The
Company has identified the most critical of these third parties and has
communicated with these third parties concerning their state of readiness.
However, the Company can provide no assurance that these third parties will not
experience business disruption. If a number of these third parties experience
business disruption due to a Year 2000 computer problem, the Company's results
of operations and cash flows could be materially adversely affected.
The Company has evaluated the need for contingency plans to address potential
business disruptions at these third parties. Contingency planning may include
establishing secondary sources of supply and manufacturing, modifying production
schedules, and maintaining backup lines of communications with our customers.
Should the Company determine that important third parties may experience
business interruption, appropriate contingency plans will be implemented.
However, it is unlikely that any contingency plan can fully mitigate the impact
of significant business disruptions among these third parties.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced a new currency called the "euro". The conversion rates between the
euro and the participating nations' existing legacy currencies were fixed
irrevocably as of January 1, 1999. Prior to full implementation of the new
currency on January 1, 2002, there will be a transition period during which
parties may, at their discretion, use either the legacy currencies or the euro
for financial transactions.
The Company expects its affected subsidiaries to continue to operate primarily
in their respective legacy currencies through December 2000. The majority of the
Company's affected subsidiaries currently can accommodate transactions for
customers or suppliers operating in either the legacy currency or the euro.
Action plans are currently being implemented which are expected to result in
full compliance with all laws and regulations relating to the euro conversion.
Such plans include the adaptation of information technology and other systems to
accommodate Euro-denominated transactions as well as the requirements of the
transition period. The Company is also addressing the impact of the euro on its
currency exchange-rate risk, taxation, contracts, competition and pricing. While
it is not possible to accurately predict the impact the euro will have on the
Company's business or on the economy in general, management currently does not
anticipate that the euro conversion will have a material adverse impact on the
Company's market risk with respect to foreign exchange, its results of
operations, or its financial condition.
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by fluctuations in
world financial markets. The Company evaluates its exposure to such risks on an
ongoing basis, and reviews its risk management policy to manage these risks to
an acceptable level, based on management's judgment of the appropriate trade-off
between risk, opportunity and costs.
INTEREST RATE RISK: The Company does not hold financial instruments for trading
or speculative purposes. The financial assets of the Company are not subject to
significant interest rate risk due to their short duration. The financial
liabilities of the Company that are subject to interest rate risk are its
fixed-rate long-term debt (principally its 8-3/4% Senior Notes and its 9-1/4%
Senior Notes). The Company does not use any derivatives or similar instruments
to manage its interest rate risk. A 90 basis-point increase in interest rates
(approximately 10% of the Company's weighted-average interest rate on fixed-rate
debt) affecting the Company's financial instruments would have an immaterial
effect on the Company's pretax earnings for the nine months ended September 30,
1999 and 1998. However, such a change would reduce the fair market value of the
Company's fixed-rate debt instruments (principally its 8-3/4% and 9-1/4% Senior
Notes) by approximately $26,300,000 as of September 30, 1999.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Quarterly Report on 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
Quarterly Report on Form 10-Q and include statements regarding, among other
matters, the Company's growth opportunities, the Company's acquisition strategy,
regulatory matters pertaining to governmental approval of the marketing or
manufacturing of certain of the Company's products and other factors affecting
the Company's financial condition or results of operations. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements. Such factors are discussed in this Quarterly Report on 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, restrictions on the
exchange of currencies, limitations on foreign participation in local
enterprises, health-care regulations, price controls, and other restrictive
governmental conditions); the risk of operations in Eastern Europe, Russia,
Latin America, and China in light of the unstable economic, political and
regulatory conditions in such regions; the potential impact of the Year 2000
issue; the potential impact of the euro currency; the Company's ability to
continue its expansion plan and to integrate successfully any acquired
companies; the Company's ability to maintain adequate supply of products to meet
customer demand; the results of lawsuits or the outcome of investigations
pending against the Company; the Company's potential product liability exposure
and lack of any insurance coverage thereof; government regulation of the
pharmaceutical industry (including review and approval for new pharmaceutical
products by the FDA in the United States and comparable agencies in other
countries) and competition.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 of Notes to Consolidated Condensed Financial Statements
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on September 22, 1999 in
New York, New York.
<TABLE>
<CAPTION>
Withheld/
For Against Abstentions
---------- ----------- -----------
<S> <C> <C> <C>
Election of Directors:
Norman Barker, Jr. 53,933,911 8,500,329
David H. Batchelder 60,544,420 1,889,829
Birch E. Bayh, Jr., Esq. 53,452,287 8,981,953
Alan F. Charles 57,325,401 5,108,839
Adam Jerney 57,993,966 4,440,274
Stephen D. Moses 57,368,821 5,065,419
Stockholder proposal to amend the Company's
bylaws to provide for a mandatory retirement
policy for directors of the Company 17,310,397 24,475,525 1,129,565
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
10.1 Indenture, dated as of August 20, 1998, by and among ICN and
United States Trust Company of New York, relating to the
Company's 8-3/4% Senior Notes due 2008, previously filed as
Exhibit 4.2 to the Company's Registration Statement No. 333-63721
on Form S-4, which is incorporated herein by reference.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K dated July 7, 1999, reporting the Company's proposed offering
of an additional $100 million of its 8-3/4% Senior Notes due 2008.
26
<PAGE> 27
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 15, 1999 /s/ Milan Panic
------------------------------------
Milan Panic
Chairman of the Board and
Chief Executive Officer
Date: November 15, 1999 /s/ John E. Giordani
------------------------------------
John E. Giordani
Executive Vice President and
Chief Financial Officer
27
<PAGE> 28
EXHIBIT INDEX
EXHIBIT
- -------
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
27.1 Financial Data Schedule
28
<PAGE> 1
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 its subsidiaries as of September 30, 1999 and the
related consolidated condensed statements of income, comprehensive income and
cash flows for each of the three month and nine month periods ended September
30, 1999 and 1998. These consolidated condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed interim financial statements
for them to be in conformity with United States generally accepted accounting
principles.
We previously audited in accordance with United States generally accepted
auditing standards, the consolidated balance sheet as of December 31, 1998, 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 4, 1999, which included an emphasis of matter paragraph related to the
Company's change in method of accounting for ICN Yugoslavia, a previously
consolidated subsidiary, as more fully described in Notes 2 and 14 to the
consolidated 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, 1998, 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 3, 1999
<PAGE> 1
EXHIBIT 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
November 15, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated November 3, 1999 on our review of interim
financial information of ICN Pharmaceuticals, Inc. (the "Company") as of and for
the three month and nine month periods ended September 30, 1999 and included in
the Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in its Registration Statements on Form S-8 (File Nos.
33-56971 and 333-81383), Form S-4 (File No. 333-63721) and on Form S-3 (File
Nos. 333-10661 and 333-49665).
Very truly yours,
/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, 1999 Consolidated Condensed Financial
Statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 180,264 180,264
<SECURITIES> 0 0
<RECEIVABLES> 240,838 240,838
<ALLOWANCES> (26,366) (26,366)
<INVENTORY> 144,606 144,606
<CURRENT-ASSETS> 570,636 570,636
<PP&E> 406,201 406,201
<DEPRECIATION> (72,267) (72,267)
<TOTAL-ASSETS> 1,465,461 1,465,461
<CURRENT-LIABILITIES> 150,907 150,907
<BONDS> 0 0
0 0
1 1
<COMMON> 783 783
<OTHER-SE> 672,820 672,820
<TOTAL-LIABILITY-AND-EQUITY> 1,465,461 1,465,461
<SALES> 148,125 459,209
<TOTAL-REVENUES> 181,652 534,887
<CGS> 54,133 186,178
<TOTAL-COSTS> 54,133 186,178
<OTHER-EXPENSES> 2,613 7,875
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,920 41,794
<INCOME-PRETAX> 43,853 97,597
<INCOME-TAX> 12,469 24,369
<INCOME-CONTINUING> 31,810 80,274
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 31,810 80,274
<EPS-BASIC> .41 1.03
<EPS-DILUTED> .39 .98
</TABLE>
