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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999. COMMISSION FILE NUMBER 1-11397
ICN PHARMACEUTICALS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0628076
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 HYLAND AVENUE, COSTA MESA, CALIFORNIA 92626
- ------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 545-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------------------------------ ------------------------
Common Stock, $.01 par value New York Stock Exchange
(Including associated preferred stock purchase rights)
9-1/4% Senior Notes Due 2005 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant on March 23, 2000, was approximately
$2,069,069,000.
The number of outstanding shares of the Registrant's Common Stock as of
March 23, 2000 was 79,006,936.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain financial information for the Company's business segments is
set forth below. This discussion should be read in conjunction with the
consolidated financial statements of the Company included elsewhere in this
document. The Company decided to manage its Central European businesses from the
Western European headquarters, in anticipation of the entry of Poland, Hungary
and the Czech Republic into the European Union. As a result, the Company
integrated ICN Hungary, ICN Czech Republic and ICN Poland into the Western and
Central Europe segment. Therefore, the financial results of these entities are
included in the Western and Central Europe segment for all segment presentations
in this Form 10-K. For additional financial information by business segment, see
Note 13 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
REVENUE
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Pharmaceuticals
North America ................. $254,694 $182,778 $117,355
Western and Central Europe(1) . 185,417 154,346 118,010
Latin America ................. 100,325 85,351 63,668
Russia ........................ 91,648 163,691 134,688
Yugoslavia .................... -- 141,740 225,530
Asia, Africa, Australia ....... 54,131 48,649 22,036
-------- -------- --------
Total Pharmaceuticals .... 686,215 776,555 681,287
Biomedicals ...................... 61,197 61,509 70,915
-------- -------- --------
Total revenues ........... $747,412 $838,064 $752,202
======== ======== ========
Product sales .................... $638,475 $800,639 $752,202
Royalty revenues ................. 108,937 37,425 --
-------- -------- --------
Total revenues ........... $747,412 $838,064 $752,202
======== ======== ========
Cost of product sales .............. $256,146 $353,600 351,978
Gross profit margin on product sales 60% 56% 53%
</TABLE>
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(1) In 1999, the Western and Central Europe segment includes Czech Republic,
Hungary and Poland, which were previously included in the Other Eastern
Europe segment. All amounts for 1998 and 1997 have been restated to conform
with the current year presentation.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998
Revenues: The decrease in revenues for the Company's Pharmaceutical
segments of $90,340,000 (or 12%) for 1999 reflects the impact of the loss of the
Yugoslavian operations ($141,740,000 in 1998) and the decrease in revenues of
$72,043,000 in Russia, which was adversely impacted by the Russian economic
situation. The decrease was partially offset by the increase in royalty revenues
of $71,512,000 and the increase in product sales from acquisitions in 1999 and
1998 of $80,528,000.
In the North America Pharmaceuticals segment, revenues were
$254,694,000 for 1999, compared to $182,778,000 for 1998, an increase of
$71,916,000 (or 39%). Revenues for 1999 reflect a $71,460,000 increase in
royalty revenues from sales of Rebetol(R) (ribavirin) by Schering-Plough
Corporation ("Schering-Plough") and the increase in sales of $12,993,000,
resulting from the product acquisition from F. Hoffman-La Roche Ltd. ("Roche")
in October 1998. In addition, product sales of Kinerase(R), which the Company
introduced in March 1999, generated sales of $10,062,000. The increase was
partially offset by a decrease of $11,327,000 in sales of the products obtained
from Roche in 1997, as a result of the Company's effort to manage inventory at
the distributors. In addition, the decrease reflects a decline in units and
revenues primarily from Virazole(R) and the Company's Bleach product line.
Royalty revenues represent amounts earned under the Company's Exclusive
License and Supply Agreement (the "License Agreement") with Schering-Plough.
Under the License Agreement, Schering-Plough licensed all oral forms of
ribavirin for the treatment of chronic hepatitis C ("HCV") in combination with
Schering-Plough's alpha interferon (the "Combination Therapy"). In 1998,
Schering-Plough received approval from the United States Food and Drug
Administration ("FDA") to market Rebetron(TM)
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Combination Therapy. Rebetron(TM) combines Rebetol(R) (ribavirin) Capsules and
Intron(R)A (interferon alfa-2b, recombinant) Injection, for the treatment of HCV
in patients with compensated liver disease. In May 1999, the European Union's
("EU") Commission of the European Communities granted marketing 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 commenced marketing Rebetol(R) in Germany (May 1999),
the United Kingdom (July 1999), and in Italy (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 1999 were $108,937,000 compared to $37,425,000 for
1998. The 1999 royalty amount reflects 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 European Union and an
increase in compassionate use sales, primarily in Western Europe. Royalty
revenues for 1998 also include a one-time payment of $16,500,000 which the
Company received from Schering-Plough for the sale to Schering-Plough of the
additional marketing rights in the European Union, in settlement of past
royalties, and as reimbursement for expenses incurred by the Company in
preparation for the launch of ribavirin capsules in the European Union.
In the Western and Central Europe Pharmaceuticals segment, revenues for
1999 were $185,417,000 compared to $154,346,000 for 1998. The increase of
$31,071,000 (or 20%) is primarily due to the Company's acquisition of the rights
to certain products from Roche in October 1998, which generated additional sales
of $18,625,000. In addition, $8,368,000 of the sales increase resulted from the
inclusion of the full year results of ICN Czech Republic, which was acquired in
June 1998.
In the Latin America Pharmaceuticals segment, revenues were
$100,325,000 for 1999 as compared to $85,351,000 for 1998, an increase of
$14,974,000 (or 18%). The increase is primarily due to the product acquisitions
in 1998 as well as continued growth in the base business. The acquisitions
included products acquired from Roche in October 1998 and a portfolio of 32
dermatology products acquired from Laboratorio 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 1999 were
$91,648,000 compared with $163,691,000 for 1998, a decrease of $72,043,000 (or
44%). The Company's Russian operations continue to be impacted by the Russian
economic situation, which the Company believes has affected the liquidity and
purchasing power of many of its Russian customers. In addition, the 77% decline
in the value of the Russian ruble in relation to the United States dollar since
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 Asia, Africa and Australia Pharmaceuticals segment, revenues for
1999 were $54,131,000 compared to $48,649,000 in 1998, an increase of $5,482,000
(or 11%). The increase is primarily related to sales of products acquired from
Roche and SmithKline Beecham plc. ("SKB") in 1998, which generated additional
sales of $10,125,000 in 1999. 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 1999 were
$61,197,000 compared to $61,509,000 in 1998, a decrease of $312,000. This
decrease is primarily related to lower sales volume in the Company's diagnostic
and radiochemical product lines, partially offset by increased revenues from
radiation monitoring services.
Gross Profit: Gross profit margin on product sales increased to 60% for
1999 compared to 56% for 1998. The improvement in gross profit margin is
primarily due to increased sales of the products acquired from Roche 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 improved by the loss of the Company's Yugoslavian operations, which
achieved a 43% gross profit margin for 1998. Gross profit margins in the North
America Pharmaceuticals segment were 85% for 1999 compared to 82% in 1998,
reflecting the effect of the acquired products. In the Western and Central
Europe Pharmaceuticals segment, the gross profit margins were 49% for 1999
compared to 53% for 1998. The decrease in margin over 1998 was the result of the
decrease in gross profit margins in Hungary and Poland. The Company's operations
in Hungary and Poland have reduced export sales to the Russian market,
temporarily lowering operating efficiencies as the Company shifts its efforts
toward European Union markets. The decrease in Western and Central Europe was
partially offset by the effect of the acquired Roche products, which generally
yield higher gross profit margins. The overall gross margins for the Company's
Russia Pharmaceuticals segment were 36% for 1999 compared to 42% for 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
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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.
In an effort to diminish the impact of the decline in gross profit margin, the
Company has also improved its product mix for the Russian market to focus on
higher-margin products.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $252,207,000 for 1999, compared to $291,776,000 for
1998, a decrease of $39,569,000. The decrease primarily reflects the impact of
the loss of the Company's Yugoslavian operations, which incurred expenses of
$24,844,000 during 1998. In the Company's Russian operations, selling, general
and administrative expenses decreased by $27,519,000 (excluding the effect of
acquisitions), principally due to the 77% 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 $18,270,000 decline in corporate
expenses related to a reduction of legal expenses and some non-recurring
expenses recorded in 1998. These amounts were partially offset by additional
costs resulting from acquisitions of business and product rights, which totaled
$19,182,000. The Company's selling, general and administrative expenses in 1999
also include approximately $11,981,000 of additional costs associated with the
Hungarian business.
Amortization of goodwill and intangibles: Amortization of goodwill and
intangibles expenses were $29,239,000 for 1999, compared to $20,601,000 for
1998, an increase of $8,638,000. The increase principally reflects the increase
in the amortization of intangibles related to the products acquired from Roche
in 1998.
Research and Development: Research and development expenditures for
1999 were $10,963,000, compared to $20,835,000 for the same period in 1998. The
decrease reflects lower spending at the Company's facilities in the United
States and Hungary, and the impact of the loss of the Company's Yugoslavian
operations. In 1998, research and development at ICN Yugoslavia totaled
$3,141,000. Additionally, the Company slowed its spending as it evaluated its
overall research strategy.
Translation and Exchange Losses, Net: Translation and exchange losses,
net, were $11,823,000 for the year ended December 31, 1999 compared to
$80,501,000 for the same period in 1998. In 1999, translation losses principally
consisted of losses of $6,738,000 related to the net monetary asset position of
the Company's Russian subsidiaries and losses of $2,650,000 in Hungary and
Poland resulting from foreign-denominated debt, which was repaid in the second
half of 1999. For the year ended December 31, 1998, the Company's translation
and exchange losses principally reflect the August 1998 devaluation of the
Russian ruble and ICN Yugoslavia's net monetary asset position.
Interest Income and Expense: For 1999, interest expense increased
$17,874,000 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 from the Senior
Notes. The net increase in interest expense also reflects a decrease in the
amount of interest cost capitalized related to certain construction projects.
During 1998, the Company capitalized interest of $3,540,000; no interest cost
was capitalized in 1999. Interest income decreased to $8,894,000 in 1999 from
$13,057,000 in 1998. In 1998, interest income included $4,022,000 of interest
earned at ICN Yugoslavia on its cash balances and accounts receivable.
Income Taxes: The Company's effective income tax rate for 1999 was 21%
compared to 1% for 1998. The provision for income taxes increased as a result of
the effect of higher 1999 taxable income in the United States, and the effect of
the losses in Hungary and China 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 taxed at rates lower than the U.S.
Federal statutory rate of 35%.
The provision for income taxes for 1999 includes a deferred tax benefit
of $25,286,000 resulting from the recognition of certain deferred tax assets
through the reduction of the related valuation allowance. During 1998, the
Company acquired certain product rights from Roche and SKB and in 1998, its
partner, Schering-Plough, received FDA approval to market Rebetron(TM), for
which the Company receives royalties. These new products and royalties are
expected to generate future taxable income that will result in the Company
realizing its net operating loss carryforwards. Additionally, the Company has
announced its intention to review its strategic options with regards to its
Biomedicals businesses. These options include the potential sale of all or a
portion of the Biomedicals businesses which is expected to result in a net
capital gain. The Company will be able to utilize its capital loss carryforwards
to offset the gain generated on disposal. Ultimate realization of the deferred
tax assets is dependent upon the Company generating sufficient taxable income
prior to expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax assets will be realized.
4
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In Russia, the Company continues to benefit from special tax relief
that benefits pharmaceutical companies. Under this relief approximately 75% of
the income generated in Russia related to the manufacture and sale of
prescription medicines is exempt from taxation. This reduces the statutory rate
to approximately 8%. The continuing tax benefits in Russia are subject to
potential changes in tax law that may be enacted in the future. Should these
benefits be repealed, income generated in Russia would require the Company to
provide taxes at the current statutory rate of 35%, which could have a material
impact on the consolidated results of operation and cashflows of the Company.
ICN Hungary generated tax loss carryforwards in 1999 and in 1998. In
1998, the Company's Russian subsidiaries also generated deferred income tax
assets, primarily related to bad debt reserves. Management believes that it is
more likely than not that these future tax benefits will not be realized prior
to expiration as a result of the seizure of ICN Yugoslavia and the economic
crisis affecting Eastern Europe. Accordingly, the Company recorded a valuation
allowance against these loss carryforwards and deferred income tax assets,
resulting in no tax benefit being recorded in 1999 and 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Revenues: The increase in revenues for the Company's Pharmaceuticals
segments of $95,268,000 (or 14%) for 1998 reflects growth in product sales
driven by the Company's successful acquisition program and increased royalty
revenues, partially offset by lower sales in the Yugoslavia Pharmaceuticals
segment. Despite the Russian economic crisis, revenues in the Russia
Pharmaceuticals segment increased $29,003,000 (or 22%) primarily due to
additional revenues from the Company's 1998 and 1997 acquisitions in Russia. The
increase in revenues of $36,336,000 in the Western and Central Europe
Pharmaceuticals segment were primarily due to additional revenues from
acquisitions in Poland in 1997 and Czech Republic in 1998 and the acquisition of
products from Roche. Revenues in the Yugoslavia Pharmaceuticals segment, which
were adversely affected by the suspension of sales to the Yugoslavian government
in April 1998, decreased by $83,790,000 (or 37%) compared to 1997. The
acquisition of products from Roche and increased royalty revenues were the major
contributors to revenue increases in North America and Western and Central
Europe. Latin America Pharmaceuticals revenues reflect continued growth in the
Company's base business as well as sales of the products acquired from Roche and
Laboratorio Pablo Cassara. The acquisition of products from SKB and Roche
contributed to the revenue increase in the Asia, Africa, and Australia
Pharmaceuticals segment.
In the North America Pharmaceuticals segment, revenues were
$182,778,000 for 1998, compared to $117,355,000 for 1997. The $65,423,000 (or
56%) increase in revenues for the year was primarily the result of the Company's
acquisition of the rights to certain products from Roche in 1997 and 1998. In
1997, the Company acquired the worldwide rights (except India) to nine products
- -- Alloferin(R), Ancobon(R)/Ancotil(R), Efudix(R)/Efudex(R), Glutril(R),
Librium(R), Limbitrol(R), Mestinon(R), Prostigmin(R) and Protamin(R) -- and the
worldwide rights to Levo-Dromoran(R) and Tensilon(R). Effective October 1, 1998,
the Company obtained the worldwide rights to Dalmane(R)/Dalmadorm(R),
Fluorouracil(R), Librax(R), and Mogadon(R). Sales of the acquired products
generated additional revenues of $61,827,000 in the North America
Pharmaceuticals segment for 1998. In addition, the 1998 amounts include
$37,425,000 of royalty revenues from sales of ribavirin by Schering-Plough under
the License Agreement. These amounts were partially offset by lower sales in
several of the Company's existing product lines, including an $8,982,000 decline
in Virazole(R) sales and lower sales of certain dermatological and hormone
replacement products, principally due to increased competition from generic
products.
In the Western and Central Europe Pharmaceuticals segment, revenues for
1998 were $154,346,000 compared to $118,010,000 in 1997. The increase in
revenues of $36,336,000 (or 31%) is primarily due to the Company's acquisition
of the rights to certain products from Roche in the third and fourth quarters of
1997, which generated additional sales of $19,582,000 in 1998 as well as the
inclusion in 1998 of a full year's operations of Polfa Rzeszow, S.A. in Poland
and the 1998 acquisition of ICN Czech Republic. The effect of these acquisitions
was partially offset by a decline in revenues of $8,384,000 at Alkaloida in
Hungary resulting from lower export sales due to the Russian economic crisis.
In the Latin America Pharmaceuticals segment, revenues were $85,351,000
for 1998, compared to $63,668,000 for 1997. The increase of $21,683,000 (or 34%)
is primarily due to price increases and higher unit volume, partially offset by
unfavorable currency exchange fluctuations. The increase also reflects 1998
sales of $13,636,000 generated by products that the Company acquired from
Cassara and Roche during 1997 and 1998. Excluding the effect of the acquired
products, revenues for Latin America for 1998 increased 13% from their 1997
level.
In the Russia Pharmaceuticals segment, revenues for 1998 were
$163,691,000, compared with $134,688,000 for 1997, an increase of $29,003,000
(or 22%). The inclusion in 1998 of a full year's results for the Company's 1997
acquisitions of AO Tomsk and Marbiopharm (acquired in the fourth quarter of
1997) provided additional revenues of $44,804,000. The effect of these
acquisitions was partially offset by lower volumes in the Company's existing
Russian operations and the effect of unfavorable currency exchange fluctuations
due to the economic crisis in Russia during 1998.
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The Yugoslavia Pharmaceuticals segment was adversely affected by the
economic events in the region during 1998 and the effect of the November 26,
1998 seizure of the Company's Yugoslavia operations by the Yugoslavian
government. Prior to the seizure, the Yugoslavia Pharmaceuticals segment
generated revenues of $141,740,000 for 1998, compared to $225,530,000 in 1997.
The decrease of $83,790,000 (or 37%) reflects lower domestic sales resulting
from the effects of the April 1998 devaluation of the dinar and the continued
suspension of sales to the Yugoslavian government. The decrease also reflects
lower export sales, principally to customers in Russia, due to the economic
crisis in Russia during the year.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for
1998 were $48,649,000 compared to $22,036,000 for 1997, an increase of
$26,613,000 (or 121%). The increase is primarily due to the 1998 acquisition of
the rights to 39 prescription and OTC pharmaceutical products from SKB, which
generated sales of $22,553,000, and sales of the products acquired from Roche,
which generated additional sales of $10,241,000 in this segment in 1998. The
effect of these acquisitions was partially offset by lower sales of certain
hormone replacement products and lower revenues at Wuxi ICN Pharmaceuticals in
China.
In the Company's Biomedicals segment, revenues for 1998 were
$61,509,000 compared to $70,915,000 for 1997, a decrease of $9,406,000 (or 13%).
The decrease is primarily due to lower unit sales volume in certain diagnostics
product lines. The decrease is also affected by the 1997 revenue amounts
including dosimetry product shipments made to fulfill the higher than normal
order backlog that existed at the beginning of 1997.
Gross Profit: Gross profit margin on product sales increased to 56% for
1998, compared to 53% for 1997. The improvement in gross profit margin is
primarily due to increased sales of the products acquired from Roche and SKB in
1997 and 1998, which generally yield higher gross profit margins than were
previously achieved by the Company's base business. Gross profit margins in the
North America Pharmaceuticals segment increased to 82% from 81% in the prior
year, reflecting the effect of the acquired products. The Company's gross profit
margin for 1998 was also affected by gross margin declines in the Yugoslavia
Pharmaceuticals segment. Subsequent to the April 1998 devaluation of the
Yugoslavian dinar, gross profit margins at ICN Yugoslavia suffered as sales were
translated at higher exchange rates, while no significant price increases were
received. Gross profit margins at ICN Yugoslavia were further impacted as
inventories manufactured prior to the devaluation were charged to cost of
product sales at the higher historical exchange rate. The overall gross margins
for the Company's Russia Pharmaceuticals segment were 42% for 1998, compared to
39% for 1997. Improvements in operating efficiency at most of the Company's
Russian factories offset the adverse impact of the weakening of the ruble. While
the Company is generally able to set its prices for Russian markets without
government approval, the severe liquidity crisis in Russia and the reduced
purchasing power of Russian consumers after the devaluation of the ruble
restricted price increases to a level that does not fully offset the impact of
the devaluation. Gross profit margins at ICN Russia were further impacted as
inventories manufactured prior to the devaluation were charged to cost of
product sales at the higher historical exchange rate. The gross profit margin in
ICN Hungary also improved to 45% from 32% in 1997 due to the improved operating
efficiency at its factory.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $291,776,000 (or 35% of revenues) for 1998 compared
to $249,206,000 (or 33% of revenues) for 1997. The Company's 1997 and 1998
acquisition of two pharmaceutical companies in Russia, one company in Poland,
one company in Czech Republic and the acquisition of product rights from Roche
and SKB generated additional expenses of $36,604,000 in 1998. 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 $13,095,000 in 1998. Other increases in selling, general and
administrative expenses reflect increased expenditures, primarily at the
Company's United States corporate offices, to support the Company's recent
acquisitions and increased sales volume in the base business. These changes were
partially offset by lower expenses in the Yugoslavia Pharmaceuticals and Russia
Pharmaceuticals segments, reflecting the effect of exchange rate changes during
the year.
Amortization of goodwill and intangibles: Amortization of goodwill and
intangibles expenses were $20,601,000 for 1998, compared to $7,028,000 for 1997,
an increase of $13,573,000. The increase was primarily due to the increase in
the amortization of intangibles related to the products acquired from Roche in
1998 and 1997.
Research and Development Costs: Research and development costs were
$20,835,000 for 1998, compared to $18,692,000 for 1997. The increase reflects
the Company's continued investment in the development of products, primarily at
its facilities in the United States.
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Translation and Exchange Losses, Net: Translation and exchange losses,
net, were $80,501,000 for the year ended December 31, 1998. The Company incurred
losses of $53,848,000 related to its Russian operations, principally due to the
third quarter 1998 devaluation of the ruble. ICN Yugoslavia recorded foreign
exchange losses of $23,865,000 in 1998, including the effect of the April 1998
devaluation of the dinar. Additionally, the Company recorded foreign currency
transaction losses of $2,966,000 in Hungary, principally related to long-term
debt denominated in currencies other than the forint, the Hungarian subsidiary's
functional currency.
Interest Income and Expense: For 1998, interest expense increased
$15,220,000 compared to the same period in 1997, primarily due to interest
expense on the Company's $200,000,000 8 3/4% Senior Notes issued in August 1998
and the inclusion in 1998 of a full year's interest on the Company's 9 1/4%
Senior Notes issued in August 1997. The additional interest expense on the
Senior Notes was partially offset by interest savings resulting from the
conversion of certain long-term debt to common stock and capitalization of
interest costs related to plant construction in Russia and Yugoslavia. Interest
income for the year ended December 31, 1998 decreased to $13,057,000 in 1998
from $15,912,000 in 1997 due to lower interest income earned on notes receivable
from the Yugoslavian government, which was partially offset by increased
earnings from the investment of a significant portion of the proceeds of the
Senior Notes.
Income Taxes: The Company's effective income tax rate (benefit) was 1%
for 1998 compared to (26%) for 1997. The Company operates in many regions where
the tax rate is low or it benefits from a tax holiday. In 1998, the provision
for income taxes reflects the effect of income in Russia, Yugoslavia and other
jurisdictions taxed at rates lower than the U.S. Federal statutory rate of 35%.
Offsetting these benefits was an increase in the valuation allowance associated
with the write-off of the Company's Yugoslavian subsidiary. In addition, the
Company received no tax benefit for the foreign currency translation losses
included in the Company's 1998 net loss.
In 1998, the provision for income taxes reflects a deferred tax benefit
of $8,223,000 resulting from the recognition of certain deferred tax assets and
the reduction of the related valuation allowance. During 1997 and 1998, the
Company acquired certain products from Roche and SKB. Also in 1998,
Schering-Plough's sales of Rebetron(R) Combination Therapy for HCV commenced
following receipt of FDA approval to market the drug and the Company began to
receive royalty revenues under the License Agreement. These new products and
royalties are expected to generate future taxable income that resulted in a
deferred tax benefit in 1998 and 1997.
The Company received the benefit of certain favorable tax laws that
resulted in income taxes at a rate lower than the current 25% Yugoslavian
statutory rate. Under Yugoslavian law, taxable earnings attributed to foreign
investments are exempt from taxation for a five-year period. Accordingly, 75% of
ICN Yugoslavia's taxable income, the Company's ownership in ICN Yugoslavia, was
exempt from taxation for the five years ended December 31, 1996. The Company
also received tax credits in Yugoslavia for certain capital investments,
including investments in short-term government bonds and plant and equipment,
which can only be used in the year in which the investment is made. Effective
January 1, 1997, additional changes in the Yugoslavian tax law resulted in
benefits to the Company in the form of a reduction in taxes otherwise payable as
a result of its foreign investment in ICN Yugoslavia. The effect of these items
was to reduce the 1997 effective tax rate at ICN Yugoslavia to 2%. In 1998, the
effective tax rate of ICN Yugoslavia was approximately 1%.
In Russia, the Company continues to benefit from special tax relief
that benefits pharmaceutical companies. Under this relief, approximately 75% of
the income generated in Russia related to the manufacture and sale of
prescription medicines is exempt from taxation. This reduced the effective rate
to approximately 1% in 1998 and 1997. In Hungary, the Company benefited from a
tax holiday, which expired on December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, cash provided by operating activities totaled $87,123,000
compared to $9,624,000 in 1998. Operating cash flows reflect the Company's net
income of $118,626,000 and net non-cash charges (including depreciation,
minority interest, and foreign exchange gains and losses) of $76,662,000,
partially offset by working capital increases totaling approximately
$108,165,000. The working capital increases principally consist of a $66,927,000
increase in accounts receivable, mainly resulting from increased royalties
receivable under the Company's license agreement with Schering-Plough and the
increase in receivable balances in the Western and Central Europe and Asia,
Africa and Australia regions related to the timing of the collections. In
addition, the Company's trade payables decreased by $24,601,000 resulting from
the timing of payments to certain vendors. The working capital changes also
include an increase in inventories of $13,236,000 mainly related to the
Company's distribution of Roche and SKB products in 1999.
7
<PAGE> 8
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
December 31, 1999, the Company believes that adequate provision has been made
for inventory obsolescence and for anticipated losses on uncollectible accounts
receivable.
Cash used in investing activities was $50,360,000 for 1999 compared to
$295,046,000 for 1998. In 1999, the Company incurred capital expenditures of
$44,083,000, principally representing the continuation of its plant expansion
efforts and investment in information systems. The Company also used cash of
$23,588,000 (net of cash acquired of $288,000) for acquisitions, including
acquiring a chain of 88 pharmacies in Russia, the purchase of a pharmaceutical
distributor in Hungary and acquired product rights in certain Western European
markets. These amounts were partially offset by the decrease in restricted cash
in the amount of $15,144,000 which was required to collateralize the Company's
obligation under certain letters of credit. After the Company settled its
obligation in the fourth quarter of 1999, the restriction was removed. In 1998,
net cash used in investing activities of $295,046,000 principally consisted of
payments for acquisitions totaling $171,815,000 (net of cash acquired of
$1,111,000), capital expenditures of $110,281,000, and a $15,009,000 increase in
restricted cash. Cash used in investing activities in 1998 also reflects the
effect of the Yugoslavian government's seizure of the Company's Yugoslavian
operations, which resulted in the loss of ICN Yugoslavia's cash balances of
$22,101,000. These amounts were partially offset by proceeds from the sale of
marketable securities of $22,958,000.
Cash provided by financing activities totaled $36,399,000 during 1999.
Proceeds from long-term borrowings totaled $145,490,000, including net proceeds
of $118,485,000 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. The
Company used cash (including a portion of the proceeds of the 8 3/4% Senior
Notes) for principal payments of $87,632,000 on long-term debt and for payments
of $31,695,000 on notes payable. Other sources of cash also included $42,000,000
from the sale to Schering-Plough of 2,041,498 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 $12,894,000. These amounts were partially offset by the payment of
dividends on common stock of $21,017,000, the repurchase of 614,167 shares of
common stock for $15,304,000, under the Stock Repurchase Program authorized by
the Company's Board of Directors in 1998 and the repurchase of the Company's
Series D Preferred Stock in settlement of the remaining obligation to SKB.
During 1998, cash provided by financing activities of $186,019,000 principally
consisted of proceeds from long-term borrowings totaling $225,082,000. Other
sources of funds included $6,783,000 proceeds from exercise of stock options and
$4,299,000 proceeds from issuance of common stock. These amounts were partially
offset by the principal payments on long-term debt of $27,381,000 and dividend
payments of $17,069,000. Certain of the Company's 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 Hungary, as its Russian customers
continue to experience liquidity problems. The Company may need to invest
additional working capital in Russia and Hungary 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.
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 anticipated that its stock price would
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 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 put options and the corresponding call options each
expire from August 2000 through December 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 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 call options entitle the
Company to buy 1,064,085 shares of its common stock for approximately
$33,519,000. The net settlement obligation of the Company, based on the closing
market price of the stock at December 31, 1999, was approximately
8
<PAGE> 9
$7,200,000 or 285,714 shares. 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 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 negative impact on the
Company's liquidity and financial performance.
FOREIGN OPERATIONS
Approximately 64%, 76%, and 82% of the Company's revenues for the years
ended December 31, 1999, 1998 and 1997 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 possible
nationalization or expropriation, 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 have and may, in certain instances, materially affect
the Company's results of operations. The effect of these risks remains difficult
to predict. 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.
RUSSIA
Russia continues to experience economic difficulties following the
financial crisis of August 1998. Consequently, the ruble continues to devalue,
there is continued volatility in the debt and equity market, hyperinflation
persists, confidence in the banking sector has yet to be restored and there
continues to be general lack of liquidity in the economy. In addition, laws and
regulations affecting businesses operating within Russia continue to evolve.
Russia's return to economic stability is dependent to a large extent on the
effectiveness of the measures taken by the government, decisions of
international lending organizations, and other actions, including regulatory and
political developments, which are beyond the Company's control.
Since August 1998, the ruble fell sharply from a rate of 6.3 rubles to
$1 to rate of 20.7 rubles to $1 at December 31, 1998 and has further declined to
a rate of 27.5 rubles to $1 at December 31, 1999. As a result of these declines
in the ruble exchange rate, the Company recorded translation and exchange losses
of $6,738,000 and $53,848,000 related to its Russian operations during 1999 and
1998, respectively. As of December 31, 1999, ICN Russia had a net monetary asset
position of approximately $15,427,000, which is subject to foreign exchange loss
as further declines in the value of the ruble in relation to the dollar occur.
Due to the extremely large fluctuation in the ruble exchange rate, the ultimate
amount of any future translation and exchange loss the Company may incur cannot
presently be determined and such loss may have a negative impact on the
Company's results of operations. The Company's management continues to work to
reduce its net monetary exposure by reducing account receivable balances and
lengthening its payments to suppliers. However, there can be no assurance that
such efforts will be successful.
The Company's collections on accounts receivable in Russia have been
adversely affected by the Russian economic situation. Prior to the August 1998
devaluation of the 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 1999 compared to 1998.
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 has led to a
number of business failures in the region. In addition, the devaluation has
reduced the purchasing power of Russian companies and consumers, thus increasing
pressure on the Company and other producers to limit price increases in hard
currency terms. As a result of the Russian economic situation, the Company
recorded a charge in 1998 of $42,289,000 among several of its operating
segments, which is included in Eastern European charges ($39,884,000) and cost
of product sales ($2,405,000) in the consolidated statements of income. The
charge consisted of reserves of $37,873,000 for losses on accounts receivable,
the write-off of certain investments of $2,011,000, and a reduction in the value
of certain inventories of $2,405,000.
9
<PAGE> 10
YUGOSLAVIA
On February 6, 1999, the government of the Federal Republic of
Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of
Health of Serbia, seized control of the Company's 75% owned subsidiary, ICN
Yugoslavia. This action, based on a decision by the Ministry for Economic and
Property Transformation that was reached on November 26, 1998, effectively
reduced the Company's equity ownership of ICN Yugoslavia from 75% to 35%. The
Ministry of Economic and Property Transformation decision was based on a
unilaterally imposed recalculation of the Company's original capital
contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court
of Belgrade issued an order stating that a change in control had occurred. These
actions were taken, contrary to Yugoslavian law, without any notification to or
representation by the Company. Since the change of control, representatives of
the Company and ICN Yugoslavia's management have been denied access to the
premises and any representation as to the management of ICN Yugoslavia.
Prior to the seizure, ICN Yugoslavia's operations were adversely
affected by the April 1998 devaluation of the dinar, which resulted in foreign
exchange losses of $23,865,000 for the year. ICN Yugoslavia's domestic sales
were adversely affected by the Company's previously announced suspension of
sales to the Yugoslavian government. In addition, ICN Yugoslavia's export sales
for the second half of 1998 were adversely affected by the Russian economic
crisis. In the second and third quarters of 1998, the Yugoslavian government
defaulted on its obligations to the Company on $176,204,000 of accounts and
notes receivable. As a result of the government's default and the suspension of
sales to the government, the Company recorded a $173,440,000 charge against
earnings at ICN Yugoslavia in the second quarter of 1998. The charge is included
in Eastern European charges ($165,646,000), cost of product sales ($3,667,000)
and interest income ($4,127,000) in the consolidated statements of income. The
charge consists of $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.
The Company has commenced litigation in the United States District
Court of the District of Columbia against the government of Yugoslavia and
related agencies to recover damages and obtain injunctive relief. In addition,
the government of Yugoslavia, through a related agency, filed an arbitration
proceeding against the Company before the International Chamber of Commerce for
damages related to the Company's acquisition of majority control of ICN
Yugoslavia. The resolution of these matters may affect the status of certain
compounds, which were contributed to ICN Yugoslavia by the Company, pursuant to
the agreement that led to the formation of ICN Yugoslavia.
ACQUIRED PRODUCTS
The majority of products acquired by the Company in 1997 and 1998 were
mature products with no effective patents, either because of expirations or the
absence of legal protections provided by the local governments in the respective
markets. Under the Company's ownership, price increases and additional
advertising and promotions were planned for certain selected products, as the
Company believes that they were not marketed to their greatest potential. The
Company believes that certain of these products in specific markets have an
adequate growth potential, and intends to develop a product strategy for each
product.
The Company believes that these products will continue to generate
significant sales even without patent protection because the trademarks under
which they are marketed are well-established and enjoy substantial customer
brand-loyalty. Moreover, the relatively small sales volumes and market sizes for
some of these products pose significant barriers to entry of generic
competition.
The Company estimated the remaining life of these products based on
anticipated future profits assuming a constant profit margin for the remaining
product cycle. It should be noted, however, any sales growth or increase in
profitability attained by additional marketing efforts is expected to be
relatively short-lived. After a temporary boost, these products will revert to
their gradually declining trend in accordance with the product cycle model. The
acquired products' historical operating results demonstrated their ability to
earn substantial excess profits. Excess profits are directly related to their
competitive advantage primarily attributable to the product quality and
reputation. The useful life was defined as the number of years for the
forecasted annual product sales to reach 50% of the cumulative historical amount
through 1997. During the forecasted period, only gradual declines are expected
due to the absence of immediate threats from competition of generic or/and
alternative products. Based upon the Company's analysis, the useful lives of
products acquired during 1997 and 1998 were estimated to be 18 years.
10
<PAGE> 11
INFLATION AND CHANGING PRICES
The effects of inflation are experienced by the Company through
increases in the costs of labor, services and raw materials. The Company is
subject to price control restrictions on its pharmaceutical products in the
majority of countries in which it operates. While the Company attempts to raise
selling prices in anticipation of inflation, the Company has been affected by
the lag in price increases in Russia and Mexico, which has created lower sales
in U.S. dollars and reductions in gross profit. Future sales and gross profit
will be reduced if the Company is unable to obtain price increases commensurate
with the levels of inflation.
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 negative impact on the
Company's results of operations and cash flows in Russia.
THE YEAR 2000 ISSUE
Many computer systems and equipment or instruments with embedded
microprocessors were designed to recognize only the last two digits of a
calendar year. As previously reported, the Company undertook an extensive
project to remediate or replace its date-sensitive systems and microprocessors
that might have encountered operational problems due to their inability to
distinguish the years after 1999 from years preceding 1999.
Since January 1, 2000 the Company's computer systems and other
potentially date sensitive types of equipment have operated properly and there
has been no adverse impact on operations. In addition, there was no material
impact from Year 2000 related issues at any of the Company's customers,
suppliers, or other outside service providers.
The Company did not experience any significant impact on product sales
or revenues as a result of Year 2000 concerns. As of December 31, 1999, the
Company has spent approximately $8,300,000 on the overall Year 2000 remediation
and equipment upgrade project. The project is now complete and no future costs
are planned. All systems have functioned properly since January 2000 and the
Company's management believes that future operations will be unaffected by the
Year 2000 issue.
The Company believes that the most reasonable likely worst case
scenario would be a year 2000 induced failure among one of its key suppliers,
vendors, or customers, which could result in a slowdown or temporary disruption
of manufacturing operations at one or more of the Company's facilities and/ or a
temporary inability to process and fulfill customer orders.
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 for at least one more year. 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.
11
<PAGE> 12
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and becomes
effective for the Company for the first quarter of 2001. The Company does not
currently engage in any program of hedging and consequently the Company does not
expect the adoption of SFAS No. 133 to have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by
fluctuations in world financial markets. The Company evaluates its exposure to
such risks on an ongoing basis, and reviews its risk management policy to manage
these risks to an acceptable level, based on management's judgment of the
appropriate trade-off between risk, opportunity and costs. The Company does not
hold any significant amount of market risk sensitive instruments whose value is
subject to market price and currency risk.
In the normal course of business, the Company also faces risks that are
either non-financial or non-quantifiable. Such risks principally include country
risk, credit risk, and legal risk and are not discussed or quantified in the
following analysis.
INTEREST RATE RISK: The Company currently 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. At year-end 1999, the Company does not have any significant foreign
denominated debt that would subject it to both interest and currency risk. The
principal 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 due
2008 and its 9 1/4% Senior Notes due 2005) totaling approximately $600 million.
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 1999 pretax earnings. However, such a change would reduce the fair
value of the Company's fixed-rate debt instruments by approximately $27,040,000
as of December 31, 1999.
12
<PAGE> 13
THE "SAFE HARBOR" STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION ACT OF 1995.
This Annual Report on Form 10-K contains statements that constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those statements appear in a number of places in
this Annual Report on Form 10-K and include statements regarding, among other
matters, the Company's growth opportunities, the Company's acquisition strategy,
regulatory matters pertaining to governmental approval of the marketing or
manufacturing of certain of the Company's products and other factors affecting
the Company's financial condition or results of operations. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements. Such factors are discussed in this Annual Report on Form
10-K and also include, without limitation, the Company's dependence on foreign
operations (which are subject to certain risks inherent in conducting business
abroad, including possible nationalization or expropriation, price and exchange
control, limitations on foreign participation in local enterprises, health-care
regulations and other restrictive governmental conditions); the risk of
operations in Eastern Europe, Latin America, as well as Russia and China in
light of the unstable economic, political and regulatory conditions in such
regions; the risk of potential claims against certain of the Company's research
compounds; the Company's ability to successfully develop and commercialize
future products; the limited protection afforded by the patents relating to
Virazole(R), and possibly on future drugs, techniques, processes or products the
Company may develop or acquire; the potential impact of the Year 2000 issue; the
potential impact of the Euro currency; the Company's ability to continue its
expansion plan and to integrate successfully any acquired companies; the results
of lawsuits or the outcome of investigations pending against the Company; the
Company's potential product liability exposure and lack of any insurance
coverage thereof; government regulation of the pharmaceutical industry
(including review and approval for new pharmaceutical products by the FDA in the
United States and comparable agencies in other countries) and competition.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current Board of Directors consists of fifteen members: Messrs. Guillemin,
Kurz, Panic and M. Smith continue until the 2000 Annual Meeting of Stockholders;
Messrs. Jolley, Lenagh, R. Smith, Starr and Kozyrev will serve until the 2001
Annual Meeting of Stockholders; and the terms of office of Messrs. Barker,
Batchelder, Bayh, Charles, Jerney and Moses all serve until the 2002 Annual
Meeting of Stockholders.
Set forth below with respect to each director is certain personal information,
including the present principal occupation and recent business experience, age,
year commenced service as a director of the Company (including service as a
director of a Predecessor Company) and other corporate directorships.
<TABLE>
<CAPTION>
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
- ----------------------------- --- ----------- -------------
<S> <C> <C> <C>
NORMAN BARKER, JR. 77 1988 Bank Plus, Inc.; TCW
Mr. Barker is the retired Chairman of the Board of First Convertible Securities, Inc.
Interstate Bank of California and Former Vice Chairman of the
Board of First Interstate Bancorp. Mr. Barker joined First
Interstate Bank of California in 1957 and was elected
President and Director in 1968, Chief Executive Officer in
1971 and Chairman of the Board in 1973. He retired as Chairman
of the Board at the end of 1985.
BIRCH E. BAYH, JR., ESQ. 72 1992 Simon Property Group
Sen. Bayh is a senior partner in the Washington, D.C. law firm
of Oppenheimer, Wolff, Donnelly & Bayh, L.L.P. He previously
was head of the Washington, D.C. office of Bayh, Connaughton &
Stewart, L.L.P.(1991-1997) and Rivkin, Radler, Bayh, Hart &
Kremer (1985-1991), and a partner in the Indianapolis, Indiana
and Washington, D.C. law firm of Bayh, Tabbert & Capehart
(1981-1985). Mr. Bayh served as a United States Senator from
the state of Indiana from 1963-1981.
ALAN F. CHARLES 62 1986 Rand Institute of Civil
Mr. Charles was Vice Chancellor of University Relations at the Justice
University of California, Los Angeles from 1980 to 1993 and
served in various administrative capacities at that university
since 1972. He is now an independent consultant in higher
education management.
ADAM JERNEY 58 1992
Mr. Jerney is Chief Operating Officer and President of ICN. He
served as Chairman of the Board and Chief Executive Officer of
ICN, SPI, Viratek and Biomedicals from July 14, 1992 to March
4, 1993 during Milan Panic's leave of absence. Mr. Jerney
joined ICN in 1973 as Director of Marketing Research in Europe
and assumed the position of General Manager of ICN Netherlands
in 1975. In 1981, he was elected Vice President -- Operations
and in 1987 he became President and Chief Operating Officer of
SPI. He became President of the Company in 1997. Prior to
joining ICN, he spent four years with F. Hoffmann-LaRoche &
Company.
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
- ----------------------------- --- ----------- -------------
<S> <C> <C> <C>
STEPHEN D. MOSES 65 1988 The Central Asian-American
Mr. Moses is Chairman of the Board of Stephen Moses Interests. Enterprise Fund; Steadfast
He was formerly Chairman of the Board of National Investment Ventures, Inc.
Development Corporation and Brentwood Bank in Los Angeles,
California. Mr. Moses serves on the Board of Directors of The
Central Asian-American Enterprise Fund and is Chair of its
investment committee. He is a member of the Board of Directors
of Steadfast Ventures, Inc. He also serves on the Board of
Trustees of Franklin and Marshall College and the Board of
Counselors of The UCLA Foundation.
ROGER GUILLEMIN, M.D., PH.D. 76 1989 Theratechnologies, Inc.;
Dr. Guillemin has been an Adjunct Professor of Medicine at the CEREP S.A.
University of California College of Medicine in San Diego
since 1970. He was a Distinguished Scientist at the Whittier
Institute in La Jolla, California from March 1989 to 1995 and
was Resident Fellow and Chairman of the Laboratories for
Neuroendocrinology at the Salk Institute in La Jolla,
California. Dr. Guillemin was awarded the Nobel Prize in
Medicine in 1977 and, in the same year, was presented the
National Medal of Science by the President of the United
States. He was affiliated with the Department of Physiology at
Baylor College of Medicine in Houston, Texas from 1952 to
1970. Dr. Guillemin is a member of the National Academy of
Sciences, and a Fellow of the American Association for the
Advancement of Science. He has also served as President of the
American Endocrine Society.
JEAN-FRANCOIS KURZ 66 1989 Board of Banque Pasche S.A.,
Mr. Kurz was a member of the Board of Directors and the Geneva
Executive Committee of the Board of DG Bank Switzerland Ltd.
from 1990 to 1992. In 1988 and 1989, Mr. Kurz served as a
General Manager of TDB American Express Bank of Geneva and
from 1969 to 1988, he was Chief Executive Officer of Banque
Gutzweiler, Kurz, Bungener in Geneva. Mr. Kurz is also
Chairman of the Board of Banque Pasche S.A., Geneva.
MILAN PANIC 70 1960
Mr. Panic, the founder of ICN, has been Chairman of the Board
and Chief Executive Officer of ICN since its inception in 1960
and served as President until 1997; except for a leave of
absence from July 14, 1992 to March 4, 1993 while he was
serving as Prime Minister of Yugoslavia and a leave of absence
from October 1979 to June 1980. Mr. Panic served as Chairman
of the Board and Chief Executive Officer of SPI, Viratek and
Biomedicals from their respective inceptions (except for such
leaves of absence) prior to the Merger, and he may be deemed
to be a "control person" of the Company.
MICHAEL SMITH, PH.D. 68 1994 Pasteur-Merieux-Counaught,
Dr. Smith is Director of the Biotechnology Laboratory, an North America
interdisciplinary unit, at the University of British Columbia.
He is a Peter Wall Distinguished Professor of Biotechnology
and University Professor at the University. He has been a
Career Investigator of the Medical Research Council of Canada
since 1966 and was awarded the Nobel Prize in Chemistry in
1993 for the development of site-directed mutagenesis.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
YEAR
COMMENCED
SERVING AS
DIRECTOR OF OTHER CORPORATE
NAME AND PRINCIPAL OCCUPATION AGE THE COMPANY DIRECTORSHIPS
- ----------------------------- --- ----------- -------------
<S> <C> <C> <C>
WELDON B. JOLLEY, PH.D. 73 1960
Dr. Jolley is President of Golden Opportunities and was
President of the Nucleic Acid Research Institute, a former
division of ICN, from 1985 to 1989. Dr. Jolley was a Vice
President of ICN until 1991. Prior to that, he was, for eleven
years, Professor of Surgery at the Loma Linda University
School of Medicine in Loma Linda, California and a
physiologist at the Veterans Hospital in Loma Linda,
California.
THOMAS H. LENAGH 81 1979 Adams Express, V-Band Corp.
Mr. Lenagh is an independent financial advisor. He was ASD Group Fund; Clemente
Chairman of the Board of Greiner Engineering, Inc. from 1982 Global Fund; Inrad Corp.
to 1985. Mr. Lenagh served as Financial Vice President to the
Aspen Institute from 1978 to 1980, and since then as an
independent financial consultant. From 1964 to 1978, he was
Treasurer of the Ford Foundation.
ROBERTS A. SMITH, PH.D. 71 1960 PLC Medical Systems
Dr. Smith was President of Viratek and Vice President--
Research and Development of SPI through 1992. For more than
eleven years, Dr. Smith was Professor of Chemistry and
Biochemistry at the University of California at Los Angeles.
RICHARD W. STARR 79 1983
Mr. Starr is the retired Executive Vice President and Chief
Credit Officer Worldwide of First Interstate Bank of
California. Mr. Starr spent 31 years with First Interstate
before retiring in 1983 and has over 44 year of experience in
commercial banking.
ANDREI KOZYREV, PH.D. 49 1998
Mr. Kozyrev joined ICN's Board in early 1998. Prior to that,
he had served as a member of the Russian Parliament and
several other senior level posts in Russia. Dr. Kozyrev earned
his PH.D. in History. He is also an author, having published
several works on the Russian economy and international
affairs.
DAVID H. BATCHELDER 50 1999 Apria Healthcare, Inc.;
Mr. Batchelder is a Principal and Managing Member of Relational Morrison Knudsen
Investors, LLC, of which he was a founder in 1996. He has served Corporation; Neuvo Energy
as the Chairman and Chief Executive Office of Batchelder & Corporation
Partners, Inc., a financial advisory and investment-banking
firm based in San Diego, California since 1988.
</TABLE>
None of the directors are related by blood or marriage to one another or to an
executive officer of the Company.
16
<PAGE> 17
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
---- --- ---------------------------------
<S> <C> <C>
Milan Panic..................................... 70 Chairman of the Board and Chief Executive Officer
Adam Jerney..................................... 58 Director, President and Chief Operating Officer
Richard A. Meier................................ 40 Executive Vice President and Chief Financial Officer
David C. Watt................................... 47 Executive Vice President, General Counsel and Corporate
Secretary
John E. Giordani................................ 57 Executive Vice President
Bill A. MacDonald............................... 52 Executive Vice President, Strategic Planning
Jack L. Sholl................................... 58 Senior Vice President, Corporate Human Resources
Johnson Y.N. Lau................................ 40 Senior Vice President, Research and Development
</TABLE>
Milan Panic, the founder of ICN, has been Chairman of the Board and Chief
Executive Officer of the Company since its inception in 1960 and President until
1997, except for a leave of absence from July 14, 1992 to March 4, 1993 while he
was serving as Prime Minister of Yugoslavia and a leave of absence from October
1979 to June 1980. Mr. Panic has also served as Chairman of the Board and Chief
Executive Officer of SPI, Viratek and Biomedicals since their respective
inceptions (except for such leaves of absence).
Adam Jerney has been President of the Company since January 1997 and has served
as a director of ICN since 1992, at the time of Milan Panic's leave of absence.
Prior to the Merger, he had served as an officer of ICN, Viratek and Biomedicals
since 1987, and as President and Chief Operating Officer of SPI. He served as
Chairman of the Board and Chief Executive Officer of ICN, SPI, Viratek and
Biomedicals from July 14, 1992 to March 4, 1993 during Milan Panic's leave of
absence (as discussed below). Mr. Jerney joined ICN in 1973 as Director of
Marketing Research in Europe and assumed the position of General Manager of ICN
Netherlands in 1975. In 1981, he was elected Vice President Operations. Prior to
joining ICN, he spent four years with F. Hoffmann-LaRoche & Company.
Richard A. Meier joined ICN in May 1998 as Senior Vice President - Finance and
Corporate Treasurer. In January 2000, Mr. Meier was promoted to Executive Vice
President and Chief Financial Officer. Before joining ICN, Mr. Meier was a
Senior Vice President with the investment banking firm of Schroder & Co. Inc. in
New York, New York. From 1985 to 1996, Mr. Meier served in various banking and
private equity capacities at Salomon Smith Barney, Inc., Manufacturers Hanover
Trust Corporation, Australian Capital Equity, Inc., and Windsor Hall Partners in
New York and Dallas, Texas.
David C. Watt joined ICN in March 1988 as Assistant General Counsel and
Secretary. He was elected Vice President Law and Secretary in December 1988. In
January 1992, Mr. Watt was promoted to Senior Vice President of ICN. On February
1, 1994, Mr. Watt was elected Executive Vice President, General Counsel and
Corporate Secretary of ICN. From 1986 to 1987, he was President and Chief
Executive Officer of Unitel Corporation. He also served as Executive Vice
President and General Counsel and Secretary of Unitel Corporation during 1986.
From 1983 to 1986, he served with ICA Mortgage Corporation as Vice President,
General Counsel and Corporate Secretary. Prior to that time, he served with
Central Savings Association as Assistant Vice President and Associate Counsel
from 1981 to 1983 and as Assistant Vice President from 1980 to 1981.
John E. Giordani joined ICN Pharmaceuticals, Inc. in June of 1986 as Senior Vice
President and Chief Financial Officer. He served as ICN's Executive Vice
President and Chief Financial Officer from 1992 to 2000. He is an Executive Vice
President of the Company. Prior to joining ICN, Mr. Giordani served as Vice
President and Corporate Controller of Revlon, Inc. in New York from 1982 through
1986 and Deputy and Assistant Corporate Controller with Revlon from 1978 through
1982. He was with the public accounting firm of Peat, Marwick, Mitchell & Co.
(now known as "KPMG Peat Marwick LLP") from 1969 to 1978.
Bill A. MacDonald joined ICN in March 1982 as Director of Taxes. In 1983, he
became Vice President - Taxes and Corporate Development. In 1987, Mr. MacDonald
became Senior Vice President - Tax and Corporate Development, and in 1992 was
promoted to Executive Vice President - Strategic Planning. Prior to the Merger
in November 1994, he had been President of Biomedicals since March 18, 1993.
From 1980 to 1982, he served as the Tax Manager of Pertec Computer Corporation.
From 1973 to 1980, he was Tax Manager and Assistant Treasurer of Republic
Corporation.
Jack L. Sholl joined ICN in August 1987 as Vice President, Public Relations.
Prior to the Merger, he was promoted to Senior Vice President of SPI. He was
elected Senior Vice President-Corporate Human Resources in September 1994. From
1979 to August 1987, he served as Director of Financial and Media Communications
with Warner-Lambert Company of Morris Plains, New Jersey, and from 1973 to 1979
as Manager, Department of Communications with Equibank, N.A. of Pittsburgh,
Pennsylvania. Prior to that time, he served on the Public Relations staff of the
New York Stock Exchange (1971-1973) and in editorial positions with The
Associated Press (1968-1971), the last as Supervising Business and Financial
Editor in New York.
17
<PAGE> 18
Johnson Y.N. Lau, M.D., Ph.D., joined ICN in March 2000 as Senior Vice
President, Research and Development. Before joining ICN, he was a Senior
Director in Antiviral Research at the Schering-Plough Research Institute. He
served as a faculty member at the University of Florida from 1992 to 1996. From
1989 to 1991, he served as a faculty member at the Institute of Liver Studies,
King's College Hospital School of Medicine and Dentistry, University of London.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange act requires ICN's executive officers and
directors, and persons who own more than ten percent of a registered class of
ICN's equity securities, to file reports of ownership and changes in ownership
with the Commission and the New York Stock Exchange. Such executive officers,
directors and stockholders are required by Commission regulation to furnish ICN
with copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by ICN, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, ICN believes that during fiscal year 1999 all filing requirements
applicable to its executive officers, directors and ten percent beneficial
owners were timely satisfied with the exception of Richard W. Starr.
11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the annual and long-term compensation awarded to,
earned by, or paid to the Chief Executive Officer and the four most highly paid
executive officers of the Company (the "Named Executive Officers"), for services
rendered to the Company in all capacities during the years ended December 31,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------------ ---------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($)(2) OPTIONS(#)(3) ($)(4)
- ------------------ ---- --------- --------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Milan Panic 1999 701,277 413,821 -- 100,000 304,157(5)
Chairman and Chief 1998 701,277 1,336,000 4,013,966 253,542 193,366
Executive Officer 1997 644,680 1,787,000 -- 279,000 190,473
Adam Jerney 1999 422,940 450,000 -- 30,000 27,597(6)
President and Chief 1998 422,940 235,773 1,204,183 50,000 40,144
Operating Officer 1997 402,800 669,200 -- 111,600 26,729
Richard A. Meier 1999 246,128 155,000 -- 150,000 7,714(7)
Executive Vice 1998 155,538 285,000 -- -- 7,215
President and 1997 -- -- -- -- --
Chief Financial
Officer
David Watt 1999 224,700 150,000 -- 30,000 2,563(8)
Executive Vice 1998 224,700 354,449 802,800 45,000 2,256
President, General 1997 214,000 562,000 -- 69,750 4,657
Counsel and Corporate
Secretary
John E. Giordani 1999 312,375 50,000 -- 30,000 19,413(9)
Executive Vice 1998 312,375 423,900 802,800 45,000 14,490
President 1997 297,500 376,800 -- 69,750 15,499
</TABLE>
- ---------------------
(1) Unless otherwise indicated, with respect to any individual named in the
above table, the aggregate amount of perquisites and other personal
benefits, securities or property was less than either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
(2) Includes award of restricted stock under the Company's Long Term Incentive
Plan. The values of restricted stock awards presented in the table are based
upon the market value of the common stock as of the date awarded. The
restricted shares vest 25% per year, starting one year from the date of
grant. At December 31, 1999, the aggregate number of shares of restricted
stock and the value thereof were: Mr. Panic, 91,690 shares, $2,320,903; Mr.
Jerney, 27,507 shares, $696,271; Mr. Giordani, 18,338 shares, $464,181; Mr.
MacDonald, 18,338 shares, $464,181; Mr. Watt, 18,338 shares, $464,181.
Dividends are paid on the restricted shares to the same extent paid on the
Company's common stock, and are held in escrow until the related shares are
vested.
18
<PAGE> 19
(3) Includes grants of options to purchase shares of the Company's common stock.
(4) Except where otherwise indicated, the amounts in this column represent
matching contributions to the Company's 401(K) plan, amounts accrued under
an executive deferral plan and medical benefits and medical and life
insurance premiums.
(5) In 1999, the $304,157 of "All Other Compensation" Mr. Panic received
consisted of the following: executive medical ($5,448), life insurance
($36,195), interest paid pursuant to a collateral agreement ($163,166) and
legal expenses ($99,348).
(6) In 1999, the $27,597 of "All Other Compensation" Mr. Jerney received
consisted of the following: accounting-tax ($5,700), executive medical
($16,365), tennis club ($420) and life insurance ($5,112).
(7) In 1999, the $7,714 of "All Other Compensation" Mr. Meier received consisted
of the following: executive medical ($6,008) and life insurance ($1,706).
(8) In 1999, the $2,563 of "All Other Compensation" Mr. Watt received consisted
of life insurance.
(9) In 1999, the $19,413 of "All Other Compensation" Mr. Giordani received
consisted of the following: executive medical ($14,621) and life insurance
($4,792).
OPTION GRANT TABLE
The following table sets forth information with respect to options to purchase
shares of Common Stock granted to Named Executive Officers in 1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE PRESENT VALUE(3)
- ---- ---------- -------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Milan Panic 100,000 8.9% $26.88 4/09/09 $1,310,490
Adam Jerney 30,000 2.7% $26.88 4/09/09 $ 393,147
Richard A. Meier 30,000 2.7% $26.88 4/09/09 $ 393,147
Richard A. Meier 120,000(4) 10.7% $18.25 10/08/09 $1,067,904
David C. Watt 30,000 2.7% $26.88 4/09/09 $ 393,147
John E. Giordani 30,000 2.7% $26.88 4/09/09 $ 393,147
</TABLE>
- -----------------
(1) Unless otherwise noted, the options granted have ten year terms. The options
granted to the executive officers excluding Mr. Panic vest according to the
following schedule: 25% on the first anniversary of the date of grant and
25% on each of the next succeeding three anniversary dates of the grant
date. The grants received by Mr. Panic were vested as of the date of grant.
Except as otherwise noted, all options were granted with an exercise price
equal to the fair market value of the underlying shares on the date of
grant.
(2) Options to purchase a total of 1,125,285 shares were granted to employees,
including executive officers, during fiscal 1999.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated values under that model are based on
arbitrary assumptions as to variables such as interest rates, stock price
volatility and future dividend yield.
(4) These options were granted in conjuction with Mr. Meier's promotion to
Executive Vice President and Chief Financial Officer.
19
<PAGE> 20
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding (i) stock option exercises
by the Named Executive Officers during 1999 and (ii) unexercised stock options
held by the Named Executive Officers at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/99 AT 12/31/99(2)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Milan Panic 103,642 1,931,764 2,321,092 100,000 $21,442,825 $ --
Adam Jerney -- -- 1,051,043 123,300 16,349,702 649,836
Richard A. Meier -- -- 25,000 225,000 262,500 1,635,000
David Watt 42,090 827,467 157,201 81,187 1,823,866 203,068
John E. Giordani 50,000 964,042 78,795 81,187 734,232 203,068
</TABLE>
- -----------------
(1) Difference between the fair market value of the shares of common stock of
the Company at the date of exercise and the exercise price.
(2) Difference between the fair market value of the shares of common stock of
the Company on December 31, 1999 and the exercise price.
COMPENSATION OF DIRECTORS
Members of the Board of Directors of ICN, other than employees, were paid an
annual fee of $30,000, payable quarterly, plus a fee of $1,000 for every Board
meeting attended and an additional fee of $1,000 for every committee meeting
attended, and were reimbursed for their out-of-pocket expenses in attending
meetings. In addition, non-employee directors on each April 18th are granted
options to purchase 15,000 shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Barker, Bayh, Charles, Moses, and
R. Smith, each a non-employee director. Sen. Bayh (or the law firm with which he
is affiliated), and Dr. R. Smith received $219,058 and $60,000, respectively, in
1999 from ICN for consulting services rendered.
CERTAIN EMPLOYMENT AGREEMENTS
On March 18, 1993, the Board of Directors of ICN adopted Employment Agreements
("Employment Agreements") which contained "Change in Control" benefits for five
current key senior executive officers of ICN. The executives include Messrs.
Jerney, Giordani, MacDonald and Watt, then officers of ICN, and Mr. Sholl, then
an officer of SPI. The Employment Agreements were assumed by ICN in connection
with the Merger. In addition, the Company entered into an Employment Contract
with Richard A. Meier, Executive Vice President and Chief Financial Officer, on
December 31, 1998, and Johnson Y. N. Lau, Senior Vice President, Research and
Development, on February 24, 2000, containing identical provisions to the
"Employment Agreements".
The Employment Agreements are intended to retain the services of these
executives and provide for continuity of management in the event of any actual
or threatened Change in Control. Each agreement with Messrs. Jerney, Giordani,
MacDonald, Watt and Sholl had an initial term which ended March 30, 1996. The
Agreement with Mr. Meier has an initial term extending through December 31,
2000. The Agreement with Mr. Lau has an initial term extending through December
31, 2001. The Employment Agreements automatically extend for one year terms each
year thereafter unless either the executive or ICN elects not to extend it
(provided that any notice by ICN not to extend the agreement cannot cause the
agreement to be terminated prior to the expiration of the third anniversary of
the date of the Agreements). These Employment Agreements provide that each
executive shall receive severance benefits equal to three times salary and bonus
(and certain other benefits) if the executive's employment is terminated without
cause, if the executive terminates employment for certain enumerated reasons
following a Change in Control of ICN (including a significant reduction in the
executive's compensation, duties, title or reporting responsibilities or a
change in the executive's job location), or the executive leaves ICN for any
reason or without reason during a sixty day period commencing six months after
the Change in Control. The executive is under no obligation to mitigate amounts
payable under the Employment Agreements.
20
<PAGE> 21
For purposes of the Employment Agreements, a "Change in Control" means any of
the following events: (i) the acquisition (other than from ICN) by any person,
subject to certain exceptions, of beneficial ownership, directly or indirectly,
of 20% or more of the combined voting power of ICN's then outstanding voting
securities; (ii) the existing Board of Directors cease for any reason to
constitute at least two-thirds of the Board, unless the election, or nomination
for election by ICN's stockholders, of any new director was approved by a vote
of at least two-thirds of the existing Board of Directors; or (iii) approval by
stockholders of ICN of (a) a merger or consolidation involving ICN if the
stockholders of ICN, immediately before such merger or consolidation, do not, as
a result of such merger or consolidation, own, directly or indirectly, more than
80% of the combined voting power of the then outstanding voting securities of
the corporation resulting from such merger or consolidation in substantially the
same proportion as their ownership of the combined voting power of the voting
securities of ICN outstanding immediately before such merger or consolidation,
or (b) a complete liquidation or dissolution of ICN or an agreement for the sale
or other disposition of all or substantially all of the assets of ICN. Removal
of ICN's Board of Directors would also constitute a Change in Control under the
Employment Agreements. If the employment of such key senior executives is
terminated under any of the circumstances described above the executives would
be entitled to receive the following approximate amounts (based upon present
compensation): Adam Jerney $3,365,235; John Giordani $2,231,700; Bill MacDonald
$2,292,972; David Watt $2,646,000; Jack Sholl $1,645,500; Richard A. Meier
$1,815,000; and Johnson Y.N. Lau $805,000. In addition, the vesting of certain
options granted to the executives would be accelerated. The value of the
accelerated options would depend upon the market price of the shares at that
time.
CHAIRMAN EMPLOYMENT AGREEMENT
ICN and Milan Panic entered into an Employment Agreement effective October 1,
1988, which, as amended and extended, terminates on December 31, 2002 (the
"Panic Employment Agreement"). The base amount of salary for Mr. Panic was
determined by the Compensation Committee of the Board of Directors of ICN in
1988. In setting the base amount, the Compensation Committee took into
consideration Mr. Panic's then-current base salary, the base salaries of chief
executives of companies of similar scope and complexity and the Compensation
Committee's desire to retain Mr. Panic's services, given his role as founder of
ICN. Upon consummation of the merger, the Panic Employment Agreement was assumed
by ICN. The Panic Employment Agreement provides for an annual salary, currently
$750,366, with an annual 7% increase payable under certain circumstances. The
Panic Employment Agreement provides that during the period of his employment,
Mr. Panic will not engage in businesses competitive with ICN without the
approval of the Board of Directors. Under the Panic Employment Agreement, Mr.
Panic agreed to waive and eliminate retirement benefits contained in his prior
employment contract with ICN. Instead, Mr. Panic may, at his option, retire upon
termination of the Panic Employment Agreement.
Upon retirement, Mr. Panic may, at his option, provide consulting services to
ICN for $120,000 per year for life, which amount is subject to annual
cost-of-living adjustments from the base year of 1967 until the date of
retirement. Mr. Panic will be entitled when serving as a consultant to
participate in the Company's medical and dental plans. Including such
cost-of-living adjustments, the annual cost of such consulting services is
currently estimated to be in excess of $584,000. The consulting fee shall not at
any time exceed the highest annual compensation, as adjusted, paid to Mr. Panic
during his employment by ICN. Upon Mr. Panic's retirement, the consulting fee
shall not be subject to further cost-of-living adjustments. The Panic Employment
Agreement includes a severance compensation provision in the event of a Change
in Control of ICN. The Panic Employment Agreement provides that if within two
years after a Change in Control of ICN, Mr. Panic's employment with ICN is
terminated, except as a result of death, disability or illness, or if Mr. Panic
leaves the employ of ICN within such two-year period, then Mr. Panic will
receive as severance compensation, five times his annual salary, as adjusted,
and Mr. Panic will be deemed to have retired and will receive the same
consulting fees to which he would otherwise have been entitled under the Panic
Employment Agreement. A Change in Control of ICN would occur, for purposes of
the Panic Employment Agreement, if (i) a Change in Control shall occur of a
nature which would be required to be reported in response to Item 6(e) of
Schedule 14A under the Exchange Act (for purposes of that Item, "control" is
defined as the power to direct or cause the direction of the management and
policies of ICN, whether through the ownership of voting securities, by
contract, or otherwise) unless two-thirds of the Existing Board of Directors, as
defined below, decide in their discretion that no Change in Control has occurred
for purposes of the agreement; (ii) any person is or becomes the beneficial
owner, directly or indirectly, of securities of ICN representing 15% or more of
the combined voting power of ICN's then outstanding securities; (iii) the
persons constituting the Existing Board of Directors, as defined below, cease
for any reason to constitute a majority of ICN's Board of Directors; or (iv)
shares of ICN common stock cease to be registered under the Exchange Act.
"Existing Board of Directors" is defined in the Panic Employment Agreement as
those persons constituting the Board of Directors at the date of the Panic
Employment Agreement, together with each new director whose election or
nomination for election by ICN's stockholders was previously approved, or is
approved within thirty days of such election or nomination, by a vote of at
least two-thirds of the directors in office prior to such person's election as a
director. If Mr. Panic's employment is terminated under any of the circumstances
described above following such a Change in Control, in addition to the
consulting fee as described above, Mr. Panic would be entitled to receive (based
upon present compensation) $7,612,098.
21
<PAGE> 22
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
As of March 23, 2000, the following stockholders were known to management to be
beneficial owners of more than 5% of the outstanding shares of the Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING(1)
- ------------------- ------------------ ----------------
<S> <C> <C>
Special Situations Partners, Inc.(2) 5,064,600 6.5%
Bank of Nova Scotia, 4th Floor
PO Box 268
Grand Cayman (Cayman Islands)
British West Indies
Heartland Advisors, Inc.(3) 4,403,391 5.6%
Heartland Value Fund
790 North Milwaukee Street
Milwaukee, WI 53202
</TABLE>
- -------------------
(1) Total outstanding shares of Common Stock for purposes of this table include
79,006,936 shares outstanding on March 23, 2000.
(2) As reported on Form 13G filed with the Securities and Exchange Commission
(the "Commission"), 5,064,600 shares may be deemed beneficially owned by
Special Situations Partners, Inc. within the meaning of Rule 13d-3 of the
Securities Act of 1934. The interests of Sterling Investment Group Ltd., a
services investment company for which Special Situations Partners, Inc.
serves as investment advisor, relates to more than 5% of the class.
(3) As reported on Form 13G filed with the Securities and Exchange Commission
(the "Commission"), 4,403,391 shares may be deemed beneficially owned by
Heartland Advisors within the meaning of Rule 13d-3 of the Securities Act of
1934. The interests of Heartland Group, Inc., a services investment company
for which Heartland Advisors serves as investment advisor, relates to more
than 5% of the class.
22
<PAGE> 23
Ownership by Management
The following table sets forth, as of April 14, 2000, certain information
regarding the beneficial ownership of the Company's common stock and the percent
of shares owned beneficially by each Director and each Named Executive Officer
and all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND NATURE OF
BENEFICIAL
OWNERSHIP
OF ICN PERCENTAGE
IDENTITY OF OWNER OR GROUP COMMON STOCK(1) OF CLASS
- -------------------------- ---------------- ----------
<S> <C> <C>
Norman Barker, Jr............................ 159,942(3) (2)
David H. Batchelder.......................... 1,563,900(4) 2.0%
Birch E. Bayh, Jr............................ 110,391(5) (2)
Alan F. Charles.............................. 113,672(6) (2)
Roger Guillemin, M.D., Ph.D.................. 173,634(7) (2)
Adam Jerney.................................. 1,189,296(8) 1.5%
Weldon B. Jolley, Ph.D....................... 154,448(9) (2)
Andrei Kozyrev............................... 45,000(10) (2)
Jean-Francois Kurz........................... 140,841(11) (2)
Thomas H. Lenagh............................. 149,242(12) (2)
Stephen D. Moses............................. 97,933(13) (2)
Milan Panic.................................. 2,841,474(14) 3.6%
Michael Smith, Ph.D.......................... 145,938(15) (2)
Roberts A. Smith, Ph.D....................... 228,858(16) (2)
Richard W. Starr............................. 132,458(17) (2)
Richard A. Meier............................. 253,500(18) (2)
David C. Watt................................ 243,349(19) (2)
John E. Giordani............................. 162,890(20) (2)
Bill A. MacDonald............................ 106,422(21) (2)
Jack L. Sholl................................ 171,780(22) (2)
Johnson Y.N. Lau M.D., Ph.D.................. 75,000 (2)
Directors and executive officers of the
Company as a group (21 persons)............ 8,259,968(23) 10.5%
</TABLE>
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(1) Except as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess sole
voting and investment power. However, under the laws of California and
certain other states, personal property owned by a married person may be
community property which either spouse may manage and control, and the
Company has no information as to whether any shares shown in this table are
subject to community property laws.
(2) Less than 1%.
(3) Includes 98,565 shares of ICN common stock which Mr. Barker has the right
to acquire within 60 days upon the exercise of stock options.
(4) All of the above shares are held by Relational Investors, LLC ("RILLC"),
separate accounts which it manages or by limited partnerships (Relational
Coast Partners, L.P., Relational Investors, L.P., Relational Fund Partners,
L.P., or Relational Partners, L.P.) of which RILLC is the sole general
partner. Mr. Batchelder is one of three managing members of RILLC and
shares voting and dispositive power as to the shares. For certain purposes,
Mr. Batchelder may be deemed to be the beneficial owner of shares held by
RILLC and its related managed accounts and limited partnerships.
(5) Includes 54,141 shares of ICN common stock which Sen. Bayh has the right to
acquire within 60 days upon the exercise of stock options.
(6) Includes 57,355 shares of ICN common stock which Mr. Charles has the right
to acquire within 60 days upon the exercise of stock options.
(7) Includes 116,556 shares of ICN common stock which Dr. Guillemin has the
right to acquire within 60 days upon the exercise of stock options.
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(8) Includes 1,058,543 shares of ICN common stock which Mr. Jerney has the
right to acquire within 60 days upon the exercise of stock options.
(9) Includes 97,973 shares of ICN common stock which Dr. Jolley has the right
to acquire within 60 days upon the exercise of stock options.
(10) Includes 5,625 shares of ICN common stock which Dr. Kozyrev has the right
to acquire within 60 days upon the exercise of stock options.
(11) Includes 84,591 shares of ICN common stock which Mr. Kurz has the right to
acquire within 60 days upon the exercise of stock options.
(12) Includes 84,591 shares of ICN common stock which Mr. Lenagh has the right
to acquire within 60 days upon the exercise of stock options.
(13) Includes 46,615 shares of ICN common stock which Mr. Moses has the right to
acquire within 60 days upon the exercise of stock options.
(14) Includes 2,346,092 shares of ICN common stock which Mr. Panic has the right
to acquire within 60 days upon the exercise of stock options.
(15) Includes 89,688 shares of ICN common stock which Dr. Michael Smith has the
right to acquire within 60 days upon the exercise of stock options.
(16) Includes 165,608 shares of ICN common stock which Dr. Roberts A. Smith has
the right to acquire within 60 days upon the exercise of stock options.
(17) Includes 5,626 shares of ICN common stock which Mr. Starr has the right to
acquire within 60 days upon the exercise of stock options.
(18) Includes 32,500 shares of ICN common stock which Mr. Meier has the right to
acquire within 60 days upon the exercise of stock options.
(19) Includes 164,701 shares of ICN common stock which Mr. Watt has the right to
acquire within 60 days upon the exercise of stock options.
(20) Includes 79,919 shares of ICN common stock which Mr. Giordani has the right
to acquire within 60 days upon the exercise of stock options.
(21) Includes 26,813 shares of ICN common stock which Mr. MacDonald has the
right to acquire within 60 days upon the exercise of stock options.
(22) Includes 102,233 shares of ICN common stock which Mr. Sholl has the right
to acquire within 60 days upon the exercise of stock options.
(23) Includes 4,717,735 shares of ICN common stock which directors and executive
officers have the right to acquire within 60 days upon the exercise of
stock options.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1996, the Company made a short-term loan to Mr. Panic in the amount of
$3,500,000 for certain personal obligations. During August 1996, this amount was
repaid to the Company. In connection with this transaction, the Company
guaranteed $3,600,000 of debt of Mr. Panic with a third party bank. In addition
to the guarantee, the Company deposited $3,600,000 with this bank as collateral
to Mr. Panic's debt. This deposit is recorded as a long-term asset on the
balance sheet. Mr. Panic has provided collateral to the Company's guarantee in
the form of a right to the proceeds of the exercise of stock options in the
amount of 150,000 options with an
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exercise price of $15.17 and the rights to a $4,000,000 life insurance policy
provided by the Company. In the event of any default on the debt to the bank,
the Company has recourse that is limited to the collateral described above. Both
the transaction and the sufficiency of the collateral for the guarantee were
approved by the Board of Directors.
During 1999, Sen. Bayh, or the law firm with which he is affiliated, received
legal or consulting fees from ICN in the amount of $219,058. In addition in
1999, Dr. R. Smith received $60,000 from ICN for consulting services rendered
for acting as Vice President of R&D during the period which the Company was
actively searching for a permanent head of R&D.
In 1998, Mr. David H. Batchelder was elected as a member of the Board of
Directors of the Company. Mr. Batchelder is a Principal and Managing Member of
Relational Investors, LLC ("RILLC") which currently owns 1,563,900 shares of the
Company's common stock. The Company has entered into a Standstill Agreement with
RILLC whereby RILLC agrees not to acquire in excess of 10% of the outstanding
common stock of the Company, directly or indirectly. In addition, should RILLC
seek to nominate an additional director prior to the 2000 Annual Meeting, the
Company will propose three independent candidates, one of whom will be selected
by RILLC to be nominated to stand for election at the Company's 2000 Annual
Meeting.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Date: April 28, 2000
By: /s/ DAVID C. WATT
---------------------------------
David C. Watt
Executive Vice President, General
Counsel and Corporate Secretary
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