ITEM 1. BUSINESS
INTRODUCTION
On November 1, 1994 the stockholders of ICN Pharmaceuticals, Inc. ("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies") approved the Merger of the Predecessor Companies ("the Merger"). On November 10, 1994, SPI, ICN and Viratek merged into ICN Merger Corp., and Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company"). For accounting purposes, SPI is the acquiring company and as a result, the newly merged company reports the historical financial data of SPI in its financial results. Subsequent to the Merger, the results of the newly merged company include the combined operations of all Predecessor Companies.
New ICN is a multinational research based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, nutritional, research and diagnostic products. The Company pursues a strategy of international expansion which includes (i) the research and development of proprietary products with the potential to be significant contributors to the Company's global operations; (ii) the penetration of major pharmaceutical markets by means of targeted acquisitions; and (iii) the expansion in these major markets through the development or acquisition of pharmaceutical products that meet the particular needs of each market.
The Company distributes and sells a broad range of prescription and over the counter ("OTC") pharmaceutical products in over 60 countries worldwide, primarily in North America, Latin America, Western Europe and Eastern Europe. These pharmaceutical products treat viral and bacterial infections, diseases of the skin, myasthenia gravis, cardiovascular disease, diabetes and psychiatric disorders. The Company's leading product is the broad spectrum antiviral agent ribavirin, which is marketed in the United States, Canada and most of Europe under the Virazole(R) trademark. Virazole(R) is currently approved for commercial sale in over 40 countries for one or more of a variety of viral infections, including respiratory syncytial virus ("RSV"), herpes simplex, influenza, chicken pox, hepatitis and HIV. In the United States, Virazole(R) is approved only for use in hospitalized infants and young children with severe lower respiratory infections due to RSV.
The Company believes it has substantial opportunities to realize growth from its internally developed compounds. These compounds are the result of significant investments in research and development activities related to nucleic acids conducted over three decades. During 1994, ICN submitted a New Drug Application ("NDA") to the Federal Drug Administration ("FDA") for Virazole(R) capsules as monotherapy in the treatment of chronic hepatitis C in the United States. In early 1995, the FDA confirmed that substantial additional drug development would be required for NDA approval. Similar conclusions were reached in other major world markets. However, the Company continues to believe that Virazole(R) has potential in the treatment of hepatitis C, and is taking all steps necessary to capitalize on its full potential.
On July 28, 1995, the Company entered into an Exclusive License and Supply Agreement (the "Agreement") and a Stock Purchase Agreement with a subsidiary of Schering-Plough Corporation ("Schering") to license the Company's proprietary anti-viral drug ribavirin as a treatment for chronic hepatitis C in combination with Schering's alpha interferon. The Agreement provided the Company an initial non-refundable payment by Schering of $23,000,000, and future royalty payments to the Company for marketing of the drug, including certain minimum royalty rates. Schering will have exclusive marketing rights for ribavirin for hepatitis C worldwide, except that the Company will retain the right to co-market in the countries of the European Economic Community. In addition, Schering will purchase up to $42,000,000 in common stock of the Company upon the achievement of certain regulatory milestones. Under the Agreement, Schering will be responsible for all clinical developments worldwide.
The Company believes it is positioned to expand its presence in the pharmaceutical markets in Eastern Europe. In 1991, a 75% interest was acquired in Galenika Pharmaceuticals, a large drug manufacturer and distributor in Yugoslavia. Galenika Pharmaceuticals was subsequently renamed ICN Galenika. This acquisition added new products and significantly expanded the sales volume of the Company. With the investment in Galenika Pharmaceuticals, the Company became one of the first Western pharmaceutical companies to establish a direct investment in Eastern Europe. ICN Galenika continues to be a significant part of the Company's operations although its sales and profitability have, at times, been substantially diminished owing principally to the imposition of sanctions on Yugoslavia by the United Nations ("UN"). However, in December 1995, the United Nations Security Council ("UNSC") adopted a resolution that suspended economic sanctions imposed on the Federal Republic of Yugoslavia since May of 1992. The suspension of economic sanctions will enable ICN Galenika to resume exporting certain of its product lines to Russia, other Eastern European markets, Africa, the Middle East and the Far East. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - ICN Galenika". Additionally, in pursuing its Eastern Europe expansion strategy, the Company acquired a 75% interest in Oktyabr, one of the largest pharmaceutical companies in the Russian Republic.
In addition to its pharmaceutical operations, the Company also develops, manufactures and sells a broad range of research chemical products, biomedical instrumentation, diagnostic reagents and radiation monitoring services. The Company markets these products internationally to major scientific, academic, health care and governmental institutions through catalog and direct mail marketing programs.
BUSINESS SEGMENTS
The Company operates in two business segments: pharmaceutical and biomedical. For financial information about business segments, see Note 10 of Notes to Consolidated Financial Statements.
PRODUCTS
ETHICAL DRUGS
ANTI-INFECTIVES: The Company sells approximately 70 antibacterial products, and sells its antiviral drug, ribavirin, under the tradename Virazole(R) in North America and most European countries. Ribavirin is sold as Vilona(R) and Virazid(R) in Latin America and Virazid(R) in Spain. References to the sale of Virazole(R) in this Form 10-K includes sales made under the trademarks Vilona(R) and Virazid(R). At the present time, the Company believes that there are fewer than ten antiviral agents marketed in the world. Antivirals are rare and more difficult to take through the regulatory approval process than antibacterials because of the nature of bacteria compared to viruses. Whereas bacteria live outside of cells, viruses live inside cells. Thus, while antibacterials can focus simply on killing bacteria, antivirals, ideally, must eliminate viruses without killing the host cell or adversely affecting the host organism.
ANTIVIRAL: Virazole(R) accounted for approximately 10%, 13% and 7% of the Company's net sales for the years ended December 31, 1995, 1994 and 1993, respectively. Virazole(R) is currently approved for sale in various pharmaceutical formulations in over 40 countries for the treatment of several different human viral diseases, including RSV, hepatitis, herpes, influenza, measles, chicken pox and HIV.
In the United States and Canada, Virazole(R) has only been approved for hospital use in aerosolized form to treat infants and young children who have severe lower respiratory infections caused by RSV. In the United States, RSV infection is sufficiently severe to require hospitalization of an estimated 100,000 children annually. Similar approvals for Virazole(R) for use in the treatment of RSV have been granted by governmental authorities in 22 other countries.
In treating RSV, Virazole(R) is administered by a small particle aerosolized generator ("SPAG"), a system that permits direct delivery of Virazole(R) to the lungs, the site of infection.
A variety of small, independent clinical studies comparing the results of combining Virazole(R) capsules and interferon alpha 2b therapies versus interferon alone in the treatment of hepatitis C, demonstrated enhanced efficacy of the combination. Based upon these clinical findings, the Company has entered into an agreement with Schering whereby Schering will assume responsibility for worldwide clinical development and registration of oral ribavirin in combination with their product, INTRON-A(R), (interferon alpha 2b) for the treatment of hepatitis C. If these larger Phase III clinical trials confirm the findings of preliminary studies, the combination regime could provide the medical community with a valuable new option and potentially, become the standard therapy for the treatment of hepatitis C.
ANTIBACTERIALS: Antibacterials accounted for approximately 21%, 22% and 24% of the Company's net sales for the years ended December 31, 1995, 1994 and 1993, respectively. Most of the antibacterials sold by the Company (excluding ICN Galenika) are proprietary, whereas many of the antibacterial products manufactured and sold by ICN Galenika are licensed from other manufacturers including Roche Holding AG, Bristol-Meyers Squibb and Eli Lilly, principally under exclusive licenses for specific geographical areas, primarily Yugoslavia.
OTHER ETHICAL DRUGS
Other ethicals accounted for approximately 40%, 41% and 40% of net sales for the years ended December 31, 1995, 1994 and 1993, respectively. The Company manufactures and/or markets a wide variety of other ethical pharmaceuticals, including analgesics, anticholinesterases, antirheumatics, cardiovasculars, dermatologicals, endocrine agents, gastrointestinals, hormonals and psychotropics. The Company manufactures and markets approximately 60 other dermatological products, primarily in North America and Eastern Europe. The Company markets three anticholinesterase product lines in North America under the trade names Mestinon(R), Prostigmin(R) and Tensilon(R). These products, manufactured by and licensed from Roche Holding AG, are used to treat myasthenia gravis, a progressive neuromuscular disorder, and in reversing the effects of certain muscle relaxants. Bensedin(R) is a tranquilizer manufactured by ICN Galenika and is used in the treatment of psychological and emotional disorders. The Company also sells insulin for the control of diabetes. Albumina(R) is sold in Spain and Mexico for use in emergency treatment of shock due to burns, trauma, operations and infections, and conditions where the restoration of blood volume is urgent.
OTHER OVER THE COUNTER PRODUCTS
Other OTC products accounted for approximately 17%, 18% and 21% of the Company's net sales for the years ended December 31, 1995, 1994 and 1993, respectively. Other OTC products encompass a broad range of ancillary products sold through the Company's existing distribution channels.
RESEARCH CHEMICALS, DIAGNOSTIC AND OTHER BIOMEDICAL PRODUCTS
Research chemicals, diagnostic and other biomedical products accounted for approximately 12% of the Company's net sales for the year ended December 31, 1995.
The Company services life science researchers throughout the world through a catalog sales operation, direct sales and distributors. The Company's general catalog lists approximately 55,000 products which are used by medical, diagnostic and scientific researchers involved in the fields of molecular biology, cell biology, immunology, biochemistry, microbiology and other areas. A majority of these products are purchased from third party manufacturers and distributed globally by the Company. Over 750 new products were added to the catalog in 1995.
The ICN diagnostic product line includes reagents that are routinely used by physicians and medical laboratories to accurately and quickly diagnose hundreds of patient samples for a variety of disease conditions.
ACQUISITIONS
The Company has pursued a strategy of targeted expansion into regional markets which are considered to have significant potential for pharmaceutical and related products. This strategy has been implemented in large part through the acquisition of compatible businesses and product lines and the formation of strategic alliances and joint ventures in targeted markets. The Company intends to continue this strategy and to expand its manufacturing potential for Virazole(R).
In May 1995, the Company acquired from Becton-Dickinson ("B-D"), the radioimmunoassay product line along with the inventory and property located in Orangeburg, New York. These products, used for anemia and thyroid diagnostic testing by B-D, primarily were distributed in North America and Western Europe. The Company believes that significant opportunity exists to extend the distribution of these highly regarded products into Latin America, Asia, Eastern Europe and the Middle East, where the Company has already established distribution networks for diagnostics.
In December 1995, the Company purchased 40% of SeaLite Sciences, Inc. ("SeaLite") and has the option to purchase the remaining 60%. SeaLite has a patented diagnostics technology which can be used to produce extremely sensitive test kits which the Company believes are superior to existing tests. SeaLite has licensed the Company to produce these tests, the first of which is a thyroid test, so sensitive that it can be used as a replacement for a battery of existing tests. Four products are already cleared by the FDA and will be marketed beginning in 1996. The Company plans to increase its ownership in SeaLite to 100% at a future date.
GALENIKA ACQUISITION: The Company believes it is positioned to expand its presence in the pharmaceutical markets in Eastern Europe. In 1991, a 75% interest was acquired in Galenika Pharmaceuticals, a large drug manufacturer and distributor in Yugoslavia. Galenika Pharmaceuticals was subsequently renamed ICN Galenika. This acquisition added new products and significantly expanded the sales volume of the Company. With the investment in Galenika Pharmaceuticals, the Company became one of the first Western pharmaceutical companies to establish a direct investment in Eastern Europe.
Until the imposition of UN sanctions in May 1992, ICN Galenika made a significant contribution to sales and net income. Approximately 20% of such sales were exports from Yugoslavia, primarily to Eastern Europe, the Middle East and certain Balkan nations. The imposition of sanctions, including the prohibition of exports, has had a negative effect on the operations and profitability of ICN Galenika. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - - ICN Galenika".
OKTYABR ACQUISITION: During 1994 and 1993, the Company acquired a 41% interest in Oktyabr, a Russian pharmaceutical company. On July 21, 1995, the Company purchased an additional 34% interest in Oktyabr, raising the Company's ownership from 41% to 75%.
FOREIGN OPERATIONS
The Company primarily operates in North America, Latin America (principally Mexico), Western Europe and Eastern Europe. For financial information about domestic and foreign operations and export sales, see Note 10 of Notes to Consolidated Financial Statements.
Foreign operations are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange controls, limitations on foreign participation in local enterprises, health-care regulation and other restrictive governmental actions. Changes in the relative values of currencies take place from time to time and may materially affect the Company's results of operations. Their effects on the Company's future operations are not predictable. The current political and economic circumstances in Yugoslavia create certain risks particular to that country. Between May 1992 and December 1995, Yugoslavia had been operating under sanctions imposed by the UN which had severely limited the ability to import raw materials for manufacturing and had prohibited all exports. While the sanctions have been suspended, certain risks such as hyperinflation, currency devaluations, wage and price controls and potential government action could have a material adverse effect on the Company's results of operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Inflation and Changing Prices".
MARKETING AND CUSTOMERS
The Company has a worldwide marketing and sales staff of approximately 1,780 persons for its pharmaceutical products, including sales representatives in North America, Latin America, Western Europe and Eastern Europe, who call on physicians, pharmacists, distributors and other health care professionals. As part of its marketing program for pharmaceuticals, the Company also uses direct mailings, advertises in trade and medical periodicals, exhibits products at medical conventions, sponsors medical education symposia, and sells through distributors in countries where it does not have its own marketing staff.
In the United States, the Company currently promotes its pharmaceutical products through its own sales force to physicians. These products are distributed to drug stores and hospitals through wholesalers. In Latin America, including Mexico, the Company promotes to physicians and distributes products either directly or indirectly to hospitals and pharmacies. The Company's Spanish subsidiary promotes and sells pharmaceutical products through its own sales force to physicians, hospitals, retail outlets, pharmacies and wholesalers. In other Western European markets, sales forces are in the process of being established and distribution methods are in transition as ICN affiliates are established. In Canada, the Company has its own sales force and promotes and sells directly to physicians, hospitals, wholesalers, and large drug store chains.
ICN Galenika sells a broad range of pharmaceutical and other products in Yugoslavia through approximately 30 wholesalers, 6 sales offices and 85 sales representatives. In December 1995, the UNSC adopted a resolution that suspended economic sanctions imposed on the Federal Republic of Yugoslavia. The suspension of economic sanctions will enable ICN Galenika to resume exporting certain of its product lines to Russia, other Eastern European markets, Africa, the Middle East and the Far East.
During 1995, approximately 81% of ICN Galenika's sales were to government sponsored entities of the Federal Republic of Yugoslavia. Future sales by ICN Galenika could be dependent on the ability of the Yugoslavian government to continue to subsidize purchases of pharmaceutical products.
The research chemical and diagnostic product lines are sold worldwide primarily through the Company's mail order catalogs, with additional sales being generated through affiliates and a network of distributors.
RESEARCH AND DEVELOPMENT
The Company's research and development activities utilize the expertise accumulated by the Company and its predecessors in over 30 years of nucleic acids research. In addition, the Company develops innovative products targeted to address the specific needs of the Company's local markets.
The Company's predecessors include one of the first firms to engage in broad based nucleic acid research, enabling the Company to compile a library of over 5,000 nucleotide-based compounds. The Company's long-term research efforts are focused on development of therapeutics and diagnostics for diseases related to DNA and RNA, such as viral infections, cancer and skin diseases.
The Company currently has 330 employees devoted to Research and Development activities.
LONG-TERM RESEARCH AND DEVELOPMENT
The Company's long-term research and development activities are targeted to the development of therapeutic and diagnostic agents for chronic viral diseases, cancer, diseases of the skin and hormonal therapy, and, as such, compliment the Company's current product lines and development efforts.
One important area of research is "antisense" technology. This approach seeks to block genetic material causing diseases such as cancer, viral infections and psoriasis by constructing longer sequences of nucleotides (oligonucleotides) that selectively bond to the disease-causing nucleic acid sequences. In this research, the Company makes use of its extensive library of nucleotide compounds. The Company is using similar technologies to develop diagnostic techniques used to screen for genetic diseases, viral infections and various forms of cancer.
SHORT AND MEDIUM-TERM RESEARCH AND DEVELOPMENT
The Company's medium-term research and development efforts involve the preclinical and clinical testing of certain nucleotide compounds with broader market applications that have shown the most promise of successful commercialization. These compounds include:
VIRAZOLE(R) (RIBAVIRIN): Virazole(R) is the only significant compound currently undergoing worldwide clinical development for the treatment of hepatitis C.
A number of small, independent clinical studies in hepatitis C comparing the results of combining Virazole(R) capsules and interferon alpha 2b, versus interferon alone, demonstrated enhanced efficacy of the combination. Based upon these clinical findings, the Company has entered into an agreement with Schering whereby Schering will assume responsibility for worldwide clinical development and registration of oral ribavirin in combination with their product, INTRON-A(R), (interferon alpha 2b) for the treatment of hepatitis C and receive certain geographically exclusive marketing rights. If these large Phase III clinical trials confirm the findings of preliminary studies, the combination regime could provide the medical community with a valuable new option and potentially, become the standard therapy for the treatment of hepatitis C.
Clinical studies have been conducted with Virazole(R) in various formulations for treatment of several other viral diseases. Among diseases for which at least one governmental health regulatory agency (in countries other than the United States) has approved commercialization of Virazole(R) are herpes zoster, genital herpes, hemorrhagic fever with renal syndrome, lassa fever, measles, chicken pox, influenza and HIV. The Company has no immediate plans to initiate new clinical studies for any of these indications. The Company intends, where appropriate, to utilize the existing clinical data as a basis for future submissions to additional governmental health authorities to expand the use of Virazole(R).
TIAZOLE(TM) (TIAZOFURIN): The Company has maintained an active research program centered on tiazofurin, which the Company is developing under the tradename Tiazole(TM) (a nucleotide chemically similar to Virazole(R)). Tiazole(TM) has been demonstrated to be an inhibitor of IMP-dehydrogenase, an enzyme whose presence in elevated concentrations is associated with a number of cancers. The Company is in the process of conducting Phase II/III clinical studies with Tiazole(TM) as a treatment for blast crisis in chronic myelogenous leukemia. The Company is also conducting research into the effectiveness of Tiazole(TM) as an anti-cancer agent when used in conjunction with other basic anti-cancer compounds, such as taxol, in end-stage ovarian carcinoma.
ADENAZOLE(TM) (8-CL-C-AMP): This nucleotide, currently in preclinical research, has been shown to control cell proliferation and differentiation in certain cancers. Human trials have been conducted by independent investigators in Scotland and Italy. The Company is planning to begin preclinical studies for use of the drug in leukemia treatment and is exploring the drug's potential as a topical treatment for psoriasis, based on its ability to inhibit rapid cell proliferation.
ONCOZOLE(TM) (3-DEAZAGUANINE): Research on animals has shown this compound to be active against a range of solid tumors, including breast and colon tumors. The Company is engaged in preclinical research of Oncozole(TM) as a treatment for solid tumors.
SELENAZOLE(TM) (SELENAZOFURIN): Selenazofurin, an anti-tumor nucleotide licensed from Brigham Young University, is related to tiazofurin. Preclinical studies suggest that selenazofurin combines synergistically with other well known agents against both leukemia and solid tumors.
GROWTH HORMONE RELEASING FACTOR (GRF): In November 1994, the Company entered into a license agreement for the rights to develop and commercialize a group of compounds related to and including human GRF for the United States and other major pharmaceutical markets. Phase III clinical trials were initiated in 1995 to evaluate the efficacy and safety of GRF in treating growth retardation.
There can be no assurance with regard to the results of the Company's research and development efforts or the commercial success of any of its products under development.
COMPETITION
The Company operates in a highly competitive environment. The Company's competitors, many of whom have substantially greater capital resources and marketing capabilities and larger research and development staffs and facilities than the Company, are actively engaged in marketing products similar to those of the Company and in developing new products similar to those proposed to be developed and sold by the Company. Competitive factors vary by product line and customer and include service, product availability and performance, price and technical capabilities. The Company does business in an industry characterized by extensive and ongoing research efforts. Others may succeed in developing products that are more effective than those presently marketed or proposed for development by the Company. Progress by other researchers in areas similar to those explored by the Company may result in further competitive challenges.
The Company is aware of several ongoing research and development programs which are attempting to develop new prophylactic and therapeutic products for treatment of RSV. Although the Company will follow publicly disclosed developments in this field, on the basis of currently available data, it is unable to evaluate whether the
technology being developed in these programs poses a threat to its current market position in the treatment of RSV or its revenue streams.
In the marketing segment relating to the treatment of chronic hepatitis C, the Company expects if Virazole(R) is approved either in combination or as a monotherapy, that it will experience competition from manufacturers who have or may introduce competing products.
Competitors of the Company's biomedical research product group include companies such as Sigma-Aldrich Corporation, Amersham International and New England Nuclear.
ORDER BACKLOG
As is customary in the pharmaceutical industry, all the Company's products are sold on an "open order" basis. Consequently, order backlog is not considered a significant factor.
RAW MATERIALS
The Company manufactures pharmaceuticals at eight facilities. Those facilities are located in Bryan, Ohio; Mexico City, Mexico (at two locations); Montreal, Canada; Zoetermeer, The Netherlands; Barcelona, Spain; Belgrade, Yugoslavia and St. Petersburg, Russia. The Company believes it has sufficient manufacturing capacity to meet its needs for the foreseeable future. All of the manufacturing facilities, which require good manufacturing practices ("GMP") approval from the FDA or foreign agencies, have obtained such approval.
In Bryan, Ohio, the Company manufactures topical and oral dosages of several pharmaceutical products for the United States market. All of the Company's dermatology products are formulated, packaged and distributed from the Bryan, Ohio facility. The Bryan, Ohio facility also packages and distributes Virazole(R) on a worldwide basis.
At the two facilities in Mexico City, the Company manufactures a variety of pharmaceuticals in topical, oral and injectable dosage forms to serve the Latin America market. In Montreal, Canada, the Company manufactures Virazole(R) and SPAG units for the administration of Virazole(R) in the treatment of RSV, and other related medical devices. At that facility, the Company also manufactures a variety of topical and oral pharmaceuticals including a line of generics to serve the Canadian and United States markets. The Canadian facility also manufactures a full line of products using the controlled drug substance morphine for the management of pain in cancer and post- surgical states. In Spain, the Company manufactures and markets pharmaceuticals principally for distribution in Spain. In Yugoslavia, ICN Galenika manufactures over 450 pharmaceutical, veterinary, dental and other products in topical, oral and injectable forms. In Russia, the Company manufactures primarily pharmaceutical products in oral and injectable forms.
The Company subcontracts all of the manufacture of bulk ribavirin to third party suppliers. Most of the finishing and packaging of Virazole(R) is done by the Company and the balance by third party subcontractors. The capacities of these manufacturers are sufficient to meet the current demand for Virazole(R).
Manufacturing of the Company's biomedical products are chiefly carried out in three domestic facilities and one foreign facility: Irvine, California (radiochemicals), Orangeburg, New York (diagnostics and immunobiologicals), Huntsville, Alabama (diagnostic, microplate and liquid handling equipment) and Eschwege, Germany (chromatography products).
In general, raw materials used by the Company in the manufacture of all of its products are obtainable from multiple sources in the quantities desired.
LICENSES, PATENTS AND TRADEMARKS (Proprietary Rights)
The Company may be dependent on the protection afforded by its patents relating to Virazole(R) and no assurance can be given as to the breadth or degree of protection which these patents will afford the Company. The Company has patent rights in the United States expiring in 1999 relating to the use of Virazole(R) to treat specified human viral diseases. If future development of Virazole(R) in combination with interferon is successful and approval granted in the United States, an additional award of exclusivity will be granted of up to three years from date of approval (Waxman-Hatch Act). The Company has patents in certain foreign countries covering use of Virazole(R) in the treatment of certain diseases, which expire at various times between 1996 and 2006. The Company has no, or limited, patent rights with respect to Virazole(R) and/or its use in certain foreign countries where Virazole(R) is currently, or in the future may be, approved for commercial sale, including France, Germany and Great Britain. However, the Company will be granted a favorable review classification (Concertation Procedure) for Virazole(R) as a treatment for chronic hepatitis C in all European Union countries (including France, Germany and Great Britain). As a result, approval of the application of Virazole(R) for treatment of chronic hepatitis C (if such approval is granted) would, in the European Union, provide the Company up to ten years of marketing exclusivity, from the date of such approval of the application, against competitors' application to manufacture, market or sell generic substitutes of Virazole(R) for treatment of chronic hepatitis C. There can be no assurance that the loss of the Company's patent rights with respect to Virazole(R) upon expiration of the Company's patent rights in the United States, Europe and elsewhere will not result in competition from other drug manufacturers or will not otherwise have a significant adverse effect upon the business and operations of the Company. Marketing approvals in certain foreign countries provide an additional level of protection for products approved for sale in such countries. As a general policy, the Company expects to seek patents, where available, on inventions concerning novel drugs, techniques, processes or other products which it may develop or acquire in the future. However, there can be no assurance that any patents applied for will be granted, or that, if granted, they will have commercial value or as to the breadth or the degree of protection which these patents, if issued, will afford the Company. Patents for pharmaceutical compounds are not available in certain countries in which the Company markets its products.
ICN Galenika manufactures and sells three of its top-selling antibacterial products, Pentrexyl(R), Longaceph(R) and Palitrex(R) under licenses from Bristol-Myers Squibb, Roche Holding AG and Eli Lilly, respectively. See "Products."
Many of the names of the Company's products are registered trademarks in the United States, Yugoslavia, Mexico, Canada, Spain, The Netherlands and other countries. The Company anticipates that the names of future products will be registered as trademarks in the major markets in which it will operate. Other organizations may in the future apply for and be issued patents or own proprietary rights covering technology which may become useful to the Company's business. The extent to which the Company, at some future date, may need to obtain licenses from others is not known.
GOVERNMENT REGULATION
The Company is subject to licensing and other regulatory control by the FDA, the Nuclear Regulatory Commission, other Federal and state agencies and comparable foreign governmental agencies.
FDA approval must be obtained in the United States and approval must be obtained from comparable agencies in other countries prior to marketing or manufacturing new pharmaceutical products for use by humans. Obtaining FDA approval for new products and manufacturing processes can take a number of years and involve the expenditure of substantial resources. To obtain FDA approval for the commercial sale of a therapeutic agent, the potential product must undergo testing programs on animals, the data from which is used to file an Investigational New Drug Application with the FDA. In addition, there are three phases of human testing. Phase I: safety tests for human clinical experiments, generally in normal, healthy people; Phase II: expanded safety tests conducted in people who are sick with a particular
disease condition that the drug is designed to treat; and Phase III: greatly expanded clinical trials to determine the effectiveness of the drug at a particular dosage level in the affected patient population. The data from these tests is combined with data regarding chemistry, manufacturing, and animal toxicology and is then submitted in the form of an NDA to the FDA. The preparation of an NDA requires the expenditure of substantial funds and the commitment of substantial resources. The review by the FDA could take up to several years. If the FDA determines that the drug is safe and effective, the NDA is approved. No assurance can be given that authorization for the commercial sale by the Company of any new drugs or compounds for any application will be secured in the United States or any other country, or that, if such authorization is secured, those drugs or compounds will be commercially successful. The FDA in the United States and other regulatory agencies in other countries also periodically inspect manufacturing facilities.
The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. To date, the Company has been affected by pricing adjustments in Spain and by the lag in allowed price increases in Yugoslavia and Mexico, which has created lower sales in U.S. dollars and reductions in gross profit. Future sales and gross profit could be materially affected if the Company is unable to obtain price increases commensurate with the levels of inflation.
LITIGATION, GOVERNMENT INVESTIGATIONS AND OTHER MATTERS
LITIGATION: The Predecessor Companies were parties to a number of lawsuits. As a result of the Merger, the Company has assumed all of the Predecessor Companies' liabilities with respect to such lawsuits. See "Item 3. Legal Proceedings."
PRODUCT LIABILITY: The Company could be exposed to possible claims for personal injury resulting from allegedly defective products. The Company generally self-insures against potential product liability exposure with respect to its marketed products, including Virazole(R). While to date no material claim for personal injury resulting from allegedly defective products, including Virazole(R), has been successfully maintained against any of the Predecessor Companies, a substantial claim, if successful, could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS: The Company has not experienced any material impact on its capital expenditures, earnings or competitive position as a result of compliance with any laws or regulations regarding the protection of the environment. The Company believes it is in compliance in all material respects with applicable laws relating to the protection of the environment.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 7,880 persons, an increase from 5,840 in 1994. The increase is due to acquiring the controlling interest of ICN Oktyabr in St. Petersburg, Russia and the decision to increase sales and marketing resources. At year-end, the Company employed 1,780 persons in sales and marketing, an increase from 1,509 in 1994. Additionally, at year-end, the Company employed 330 in research and development, 4,580 in production, and 1,190 in general and administrative matters. All of the employees employed by ICN Galenika, 245 of the employees of the Company's Mexican subsidiaries and 250 employees of the Company's Spanish subsidiary are covered by collective bargaining agreements, or similar such agreements. National labor laws in some foreign countries in which the Company has substantial operations, including Yugoslavia, Russia and Spain, govern the amount of wages and benefits paid to employees and establish severance and related provisions. The Company currently considers its relations with its employees to be satisfactory and has not experienced any work stoppage or serious labor problems.
ITEM 2.
ITEM 2. PROPERTIES
The following are the principal facilities of the Company and its subsidiaries:
During the third quarter of 1994, ICN Galenika commenced a construction and modernization program at its pharmaceutical complex outside Belgrade, Yugoslavia. This program includes the construction of two new pharmaceutical manufacturing plants (one to produce cephalosporins, which are broad spectrum penicillin resistant antibiotics, and the other to produce steroids and hormones) and the modernization of the existing facility. It is estimated that this program will have an aggregate cost of $136,000,000. ICN Galenika intends to fund their construction and modernization through existing funds and funds from local operations and locally funded debt.
In the opinion of the Company's management, all facilities occupied by the Company are adequate for present requirements, and the Company's current equipment is considered to be in good condition and suitable for the operations involved.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
See Note 7 of Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
New ICN began trading its common stock on the New York Stock Exchange beginning November 14, 1994, the first trading day after the Merger was completed and New ICN common stock was approved for listing on the New York Stock Exchange (Symbol: ICN). Prior to the Merger, SPI common stock was first listed on NASDAQ (National Association of Securities Dealers Automated Quotation System) on October 7, 1983 and was subsequently listed on the American Stock Exchange on July 22, 1988.
The following table sets forth, from November 14, 1994, the high and low sales prices of the Company's common stock on the New York Stock Exchange. Prior to November 14, 1994, the table sets forth the high and low sales prices for SPI on the American Stock Exchange. During 1995, the Company issued quarterly stock distributions which totaled 5.6%. During 1994, SPI and the Company issued quarterly stock dividends and distributions which totaled 4.8%. The market prices set forth below have been retroactively adjusted for these dividends and distributions.
As of March 13, 1996, there were 7,947 holders of record of the Company's common stock.
The Board of Directors will continue to review the Company's dividend policy. The amount and timing of any future dividends will depend upon the profitability of the Company, the need to retain earnings for use in the development of the Company's business and other factors.
Since 1993, and continuing throughout 1994 and 1995, the Company issued the majority of its annual dividend in the form of stock dividends. Beginning with the first quarter dividend of 1996, the Board of Directors elected to discontinue the issuances of stock dividends while increasing its quarterly cash dividend to 7.7 cents per quarter from 7 cents per quarter in 1995, an increase of 10%.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
On November 1, 1994, the stockholders of ICN, SPI, Viratek and Biomedicals approved the Merger of the Predecessor Companies ("the Merger"). On November 10, 1994 (effective November 1, 1994), SPI, ICN and Viratek merged into ICN Merger Corp., and Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company"). The Merger was accounted for using the purchase method of accounting. Additionally, for accounting purposes, SPI was treated as the acquiring company and as a result, the Company has reported the historic financial data of SPI in its financial results and included the results of ICN, Viratek and Biomedicals from the effective date of the Merger, November 1, 1994.
The following table sets forth certain consolidated financial data for the five years ended December 31, 1995, 1994, 1993, 1992 and 1991. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements included elsewhere in this Form 10-K (amounts in thousands, except per share information).
ITEM 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Since 1981 the ICN group of companies included a pharmaceuticals products company, SPI Pharmaceuticals, Inc. ("SPI"), a research products company, ICN Biomedicals, Inc. ("Biomedicals"), a research and development company, Viratek, Inc. ("Viratek"), and the parent company, ICN Pharmaceuticals, Inc. ("ICN") (collectively, the "Predecessor Companies"). Until November 1, 1994, the effective date of the Merger, ICN maintained a controlling interest in the subsidiary companies.
On November 10, 1994, SPI, ICN and Viratek merged into ICN Merger Corp., and Biomedicals merged into ICN Subsidiary Corp., a wholly- owned subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company"). The Merger was accounted for using the purchase method of accounting. Additionally, for accounting purposes, SPI was treated as the acquiring company and as a result, the Company has reported the historical financial data of SPI in its financial results and the results of ICN, Viratek and Biomedicals have been included with the results of the Company since the effective date of the Merger.
As part of the Merger, the Company issued approximately 6,476,770 common shares valued on November 10, 1994 at $20.75 per share, which was the publicly traded price for SPI's common shares at that date. Accordingly, the purchase price, including direct acquisition costs of $3,654,000, has been allocated to the estimated fair value of the net assets, including amounts ascribed to purchased research and development costs for which no alternative use existed of $221,000,000 or $9.55 per share, which was written-off to operations immediately following the consummation of the Merger. Net income, excluding this one-time, non-cash write-off, was $37,419,000 or $1.62 per share in 1994.
The Merger resulted in the acquisition of a biomedical business with pre-merger annual sales of approximately $58,000,000, direct access to Viratek's research and development resources including its scientific expertise, substantial tax net operating loss carryforwards and the elimination of royalty payments to Viratek on the sales of Virazole(R).
RESULTS OF OPERATIONS
For financial reporting purposes, the Company's operations are divided into two business segments, the Pharmaceutical segment and the Biomedical segment. Certain financial information for the two business segments is set forth below.
This discussion should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this document. For additional financial information by business segment, see Note 10 of Notes to Consolidated Financial Statements.
NET SALES: The increase in net sales of $88,745,000, or 25%, is primarily a result of higher sales at ICN Galenika. Net sales at ICN Galenika were $234,661,000 for the year ended December 31, 1995 compared to $172,124,000 for the same period last year. The increase in ICN Galenika sales of $62,537,000, or 36%, is primarily due to improved unit sales and favorable price increases for the year compared to 1994. ICN Galenika has also benefited from strong growth of antibiotics, where it holds a 65% market share in Yugoslavia.
Pharmaceutical net sales in 1995, excluding ICN Galenika, increased $26,208,000 compared to 1994, primarily due to increased sales in North America and Western Europe. North American sales rose to $109,505,000 in 1995 from $92,112,000 in 1994, an increase of 19%. Unit sales of virtually all pharmaceutical products increased in the United States in 1995. Sales of the Company's flagship product, Virazole(R), used in aerosol form to treat infants hospitalized with severe respiratory infection caused by respiratory syncytial virus ("RSV") and the only antiviral therapeutic for this infection, increased to $44,768,000 in 1995 from $35,868,000 in 1994, an increase of 25%. Prescription dermatologicals increased to $22,769,000 in 1995 from $18,437,000 in 1994, an increase of 24%.
Pharmaceutical net sales in Western Europe rose to $37,226,000 in 1995 from $28,949,000 in 1994. This increase in net sales of 29% is primarily a result of continued strong unit sales of Calcitonina (calcitonin) for osteoporosis and Huberdoxina(TM), an antibiotic in Spain. In addition, expanded resources were used to promote Virazole(R) sales in Western Europe for the 1995-1996 RSV season contributing to an increase in net sales of $2,151,000.
The Company's largest selling product, Virazole(R), accounts for approximately 10% of total Company sales and is sold principally in the United States for the treatment of RSV in young infants. RSV is a seasonal disease and overall sales of Virazole(R) from year to year are subject to the incidence and severity of the disease, which cannot be predicted with certainty. The incidence of RSV in the United States for the 1995-1996 season is not as prevalent as was experienced in the 1994-1995 season. The overall impact on 1996 earnings of the incidence of RSV in the 1995-1996 season is uncertain.
The increases in net pharmaceutical sales noted above were partially offset by lower sales in Latin America which were negatively impacted by inflation and the devaluation of the Mexican peso. Sales in Latin America decreased to $41,984,000 in 1995 from $56,393,000 in 1994, a decrease of 26%.
The biomedical business, acquired in the Merger, had net sales for 1995 of $61,339,000 or approximately 12% of total 1995 net sales. This represents an 8% increase over 1994 proforma net sales, assuming the Merger occurred on January 1, 1994, of $56,727,000, primarily due to the additional sales of diagnostic products acquired from Becton- Dickinson in 1995.
Net pharmaceutical sales for 1994 declined to $357,821,000 compared to $403,957,000 in 1993. This decrease in net sales was primarily a result of lower sales at ICN Galenika. Net sales at ICN Galenika were $172,124,000 in 1994 compared to $239,832,000 in 1993, primarily due to the differences in exchange rates during 1994 compared to 1993 and the reluctance of the Yugoslavian government to allow sales price increases during 1994. The decrease in sales at ICN Galenika in 1994 is partially offset by sales increases of $21,572,000, or 13%, in the Company's operating units excluding ICN Galenika. The sales in these operations increased to $185,697,000 in 1994 compared to $164,125,000 in 1993. This increase is primarily due to increased Virazole(R) sales of $16,782,000 compared to 1993. Sales and operating results for 1994 were not adversely affected by the devaluation of the Mexican peso during December 1994. As a result of the Merger, the Company acquired a biomedical research products business that contributed $9,030,000 of sales to the 1994 operating results since November 1, 1994.
GROSS PROFIT: Gross profit as a percentage of sales was 59% for 1995 compared to 50% for 1994. The increase in gross profit is primarily due to improved unit costs at ICN Galenika where gross profit margins increased to 50% in 1995 from 29% in 1994. During 1993, the unit cost of inventory had risen due to higher prices resulting from the economic conditions that existed in Yugoslavia. This higher priced inventory is reflected in cost of sales for 1994 and has been replaced with inventory having a lower unit cost in 1995, resulting from an improved economic environment in Yugoslavia and higher production levels. The gross profit margin in the Company's operating units, other than ICN Galenika, decreased to 67% in 1995 compared to 69% in 1994 due primarily to a full year impact of biomedical sales in 1995 compared to two months of biomedical sales in 1994. The biomedical business has gross profit margins of 56% compared to the pharmaceutical business gross profit margins, excluding ICN Galenika, of 71%.
Gross profit as a percentage of sales was 50% for 1994 compared to 48% in 1993. The increase in the gross profit margin is primarily due to increased sales of Virazole(R) in the United States, partially offset by decreases in the margins at ICN Galenika. Gross profit margin at ICN Galenika decreased to 29% in 1994 from 35% in 1993 primarily due to higher unit costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses as a percentage of sales were 38% in 1995 compared to 31% in 1994. This increase was primarily due to higher operating expenses at ICN Galenika resulting from inflationary pressures and the impact of a full year of biomedical operations in 1995 compared to two months of biomedical operations in 1994. The biomedical selling, general and administrative expenses as a percentage of sales is 46% compared to 29% for the pharmaceutical business.
Selling, general and administrative expenses as a percentage of sales were 31% for 1994 compared to 33% for 1993. The decrease was primarily due to expense reductions at ICN Galenika resulting from a lower provision for bad debts, lower wages and the impact of differences in the exchange rates in 1994 compared to 1993.
RESEARCH AND DEVELOPMENT COSTS: The increase in research and development costs, excluding the write-off of purchased research and development of $221,000,000, in 1995 compared to 1994 of $9,541,000 is primarily due to the acquisition of the Viratek research programs and increased spending at ICN Galenika. The decrease in research and development costs in 1994 compared to 1993 of $3,826,000 is primarily due to lower costs at ICN Galenika of $5,210,000 resulting from wage reductions for research and development personnel and differences in exchange rates. The 1994 decrease in research and development expense was partially offset by research and development expenses of $1,874,000 resulting from the Merger.
TRANSLATION AND EXCHANGE (GAINS) LOSSES, NET: Foreign exchange (gains), net, in 1995 were $(9,484,000) compared to foreign exchange losses, net, of $191,000 in 1994. Foreign exchange (gains) at ICN Galenika were $(12,063,000) in 1995 related to exchange rate fluctuations of the dinar and a devaluation of the dinar on November 24, 1995 (See "Management's Discussion and Analysis of Financial Condition and Results of Operation - ICN Galenika") which was partially offset by exchange losses of $2,688,000 on the Company's foreign denominated debt. The increase in foreign exchange loss in 1994 compared to 1993 resulted from increased losses at ICN Galenika related to exchange rate fluctuations that occurred before the implementation of the stabilization program. The 1994 exchange losses at ICN Galenika were offset by foreign exchange gains related to certain of the Company's foreign denominated debt.
INTEREST EXPENSE: The increase in interest expense in 1995 compared to 1994 of $13,572,000 is primarily due to interest expense on additional debt assumed in the Merger and the issuance of $115,000,000 Convertible Notes in November 1994, the proceeds of which were used to pay a portion of the debt assumed in the Merger. Additionally, the weighted average interest rate on short-term borrowings increased to 58% in 1995 compared to 9% in 1994. This increase reflects a hyperinflationary 66% average short-term borrowing rate at ICN Galenika in 1995 compared to a stabilized rate of 9.5% in 1994. The decrease in interest expense in 1994 compared to 1993 of $14,433,000 was primarily due to a decrease in interest expense of $15,840,000 at ICN Galenika. The economic stabilization program enacted by the Yugoslavian government early in 1994 resulted in lower interest rates in 1994 compared to 1993. This decrease in interest expense at ICN Galenika during 1994 was partially offset by increased interest expense in the United States resulting from the assumption of additional debt in connection with the Merger.
INCOME TAXES: The Company's effective income tax rate was 3%, 6% and 20% for 1995, 1994 and 1993, respectively. In 1995, the Company benefited from a devaluation of ICN Galenika's tax liability balances, utilization of construction tax credits in Yugoslavia and the revaluation of the Company's deferred tax assets. The Company's effective tax rate of 6% in 1994 was significantly different than the expected United States statutory rate of 35% due to the write-off of purchased research and development related to the Merger for which there is no related tax benefit. The Company's effective rate of 20% in 1993 was significantly less than the United States statutory rate primarily due to the utilization of foreign and alternative minimum tax credits and other deferred tax benefits for which a valuation allowance existed at January 1, 1993.
During 1995, the Company utilized $27,000,000 of acquired domestic net operating loss carryforwards ("NOLs") having a tax benefit of $9,400,000 for which a valuation allowance had been established as of the effective date of the Merger. The corresponding reduction in the valuation allowance of $9,400,000 resulted in a reduction of goodwill and intangibles acquired in connection with the Merger.
In addition to the utilization of the NOLs described above, the Company recognized a $27,000,000 tax benefit of an additional $76,000,000 of acquired NOLs and other deferred tax assets through a reduction in the Company's deferred tax asset valuation allowance. This reduction in the valuation allowance of $27,000,000 resulted in a $24,000,000 reduction in goodwill and intangibles acquired in connection with the Merger and a $3,000,000 reduction in deferred income tax expense. Realization of the deferred tax assets are dependent upon 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 remaining net deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.
Certain tax benefits that were acquired in the acquisition of ICN Galenika will expire in 1996. The expiration of these tax benefits will increase the effective tax rate for ICN Galenika. However, this increase may be partially offset by tax credits in connection with plant construction provided in Yugoslavia.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash provided by operating activities continues to be the Company's primary source of funds for its operating needs, capital expenditures and dividend payments. In 1995, cash provided by operating activities increased $36,769,000 to $79,326,000 primarily due to increased earnings before depreciation and minority interest and an advance payment from Schering-Plough of $23,000,000 related to the use of Virazole(R)for the treatment of hepatitis C, partially offset by cash payments used for the expansion of inventory levels at ICN Galenika of $23,336,000.
On July 28, 1995, the Company entered into an Exclusive License and Supply Agreement (the "Agreement") and a Stock Purchase Agreement with a subsidiary of Schering-Plough Corporation ("Schering") to license the Company's proprietary anti-viral drug ribavirin as a treatment for chronic hepatitis C in combination with Schering's alpha interferon. The Agreement provided the Company an initial non-refundable payment by Schering of $23,000,000, and future royalty payments to the Company for marketing of the drug, including certain minimum royalty rates. Schering will have exclusive marketing rights for ribavirin for the treatment of hepatitis C worldwide, except that the Company will retain the right to co-market in the countries of the European Economic Community. In addition, Schering will purchase up to $42,000,000 in common stock of the Company upon the achievement of certain regulatory milestones. Under the Agreement, Schering will be responsible for all clinical developments worldwide.
The $23,000,000 non-refundable payment has been recorded by the Company as prepaid royalty income of $10,000,000, a license fee of $8,000,000 and a liability to Schering for certain cost sharing agreements of $5,000,000. The prepaid royalty will be amortized to income based upon future sales of the product and the license fee will be amortized to income over the exclusive period of the Agreement, fifteen years.
Cash used in investing activities increased $35,635,000 to $47,025,000 due to the continuation of the plant expansion program at ICN Galenika. During 1994 and 1995, ICN Galenika has expended $51,000,000 toward an estimated $136,000,000 project that is expected to be completed in 1998. ICN Galenika intends to fund this program through existing funds and funds generated from local operations and locally funded debt.
Cash used in financing activities increased $47,599,000 to $50,518,000 reflecting principally the early retirement of the 12 7/8% Sinking Fund Debentures of $34,160,000 and a reduction of notes payable, collateralized by marketable securities, of $8,103,000. In 1995, the Company sold common stock in the amount of $5,753,000 of which approximately $3,000,000 of the proceeds were utilized to purchase the radioimmunoassay product line from Becton-Dickinson and the remainder utilized for working capital purposes. The increase in 1995 distribution payments compared to 1994 is due primarily to a greater number of shares outstanding resulting from the Merger. During 1994, cash used in financing included cash payments to the parent company of $23,718,000 which did not recur in 1995, as a result of the Merger.
PRODUCT LIABILITY: In December 1985, Management discontinued product liability insurance in the United States. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a material adverse effect on the Company's liquidity and financial performance. See Note 7 of Notes to Consolidated Financial Statements.
INVESTMENT IN RUSSIA: On July 21, 1995, the Company purchased an additional 34% interest in the Russian pharmaceutical company, Oktyabr, raising its ownership from 41% to 75%. In connection with the acquisition of the additional interest, the Company issued 225,807 shares of its common stock, valued at approximately $3,500,000, based upon the market price of the stock at the time the shares were issued, in exchange for the shares in Oktyabr. The acquisition is not material to the financial position or results of operations of the Company.
DEMANDS ON WORKING CAPITAL: Management believes that funds generated from operations will be sufficient to meet its normal operating requirements during the coming year. If these funds prove to be insufficient, or if new acquisitions or other opportunities require the Company to raise capital, the Company may seek additional financing or issue preferred stock or additional common stock.
The Company is actively engaged in the identification of new businesses and products that complement the Company's existing product lines and markets. At December 31, 1995, the Company has several preliminary acquisition prospects that could require equity or debt financing during 1996.
In January, 1996, the Company sold approximately 400,000 shares of its common stock to a foreign bank for net proceeds of $6,000,000. The proceeds were used by the Company for the acquisition of Gly Derm, a Michigan based skin care company, and several smaller acquisitions.
INFLATION AND CHANGING PRICES: Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political instability and restrictive governmental actions. Changes in the relative values of currencies occur from time to time and may, in certain instances, materially affect the Company's results of operations. The effect of these risks remains difficult to predict.
The Company is subject to foreign currency risk on its foreign denominated debt of $30,352,000, of which $28,956,000 is in Swiss francs, at December 31, 1995 and to devaluation losses on net monetary assets positions in Yugoslavia and Russia.
The effects of inflation are experienced by the Company through increases in the costs of labor, services and raw materials. While the Company attempts to raise selling prices in anticipation of inflation, adverse effects have been experienced in Yugoslavia and in Mexico as a result of price controls.
The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. To date, the Company has been affected by the lag in allowed price increases in Yugoslavia and Mexico, which has created lower sales in U.S. dollars and reductions in gross profit. Future sales and gross profit could be materially affected if the Company is unable to obtain price increases commensurate with the levels of inflation.
ICN GALENIKA
HYPERINFLATION AND DEVALUATION: ICN Galenika, a 75% owned subsidiary, operates in a highly inflationary economy and uses the dollar as the functional currency rather than the Yugoslavian dinar. Before the enactment of an economic stabilization program in January 1994, the rate of inflation in Yugoslavia was over 1 billion percent per year. The rate of inflation was dramatically reduced when, on January 24, 1994, the Yugoslavian government enacted a "Stabilization Program" designed to strengthen its currency. Throughout 1994, this program was successful in reducing inflation to approximately 5% per year, increasing the availability of hard currency, stabilizing the exchange rate of the dinar and improving the overall economy in Yugoslavia.
Throughout 1995, the effectiveness of the stabilization program weakened and ICN Galenika began experiencing a decline in the availability of hard currency in Yugoslavia and inflation levels accelerated to an approximate annual rate of 90% by the end of the year.
Through the third quarter of 1995, the net monetary asset position of ICN Galenika had increased due to rising accounts receivable balances resulting from improved sales and the lengthening of the collection period of receivables resulting from the lack of availability of dinars in Yugoslavia. From a beginning balance of $25,442,000 at December 31, 1994, the net monetary asset position of ICN Galenika had risen to $52,366,000 at September 30, 1995. Upon devaluation of the dinar, a net monetary asset position will result in translation losses. Therefore, early in the fourth quarter of 1995, ICN Galenika took action to reduce its monetary exposure by shortening the payment terms on its receivables, reducing sales levels, accelerating the purchase of inventory and accelerating the purchase of building materials for its plant expansion. On November 24, 1995, the dinar devalued from a rate of 1.4 dinars per US $1 to a rate of 4.7 dinars per US $1. On this date, ICN Galenika had a net monetary liability position that resulted in a gain of $8,724,000. As of December 31, 1995, ICN Galenika had a net monetary asset position of $7,396,000 which would be subject to foreign exchange loss if a devaluation of the dinar were to occur.
As required by Generally Accepted Accounting Principles ("GAAP"), the Company translates ICN Galenika's financial results at the dividend payment rate established by the National Bank of Yugoslavia. To the extent that changes in this rate lag behind the level of inflation, sales and expenses will, at times, tend to be inflated. Future sales and expenses can substantially increase if the timing of future devaluations falls significantly behind the level of inflation. The future of the economic and political environment of Yugoslavia is uncertain and could deteriorate to the point that a severe impact on the financial position and results of operations of the Company could occur.
SANCTIONS: A substantial majority of ICN Galenika's business is conducted in the Federal Republic of Yugoslavia (Serbia and Montenegro). In December 1995, the United Nations Security Council ("UNSC") adopted a resolution that suspended economic sanctions that had been imposed on the Federal Republic of Yugoslavia since May 1992.
Sanctions contributed to an overall deteriorating business environment in which ICN Galenika operated and denied ICN Galenika access to export sales which previously totaled approximately $30,000,000 per year. Sanctions also created restrictions on ICN Galenika's overseas investments and imposed administrative burdens in obtaining raw materials outside of Yugoslavia .
The Company believes the suspension of sanctions will provide a more favorable business environment in the future; however, the beneficial effects of the suspension will not take place immediately as the economy needs to adjust to new opportunities. If the peace process in the Balkans deteriorates there is a risk that sanctions could be reinstated.
PRICE CONTROLS: ICN Galenika is subject to price controls in Yugoslavia. The size and frequency of government approved price increases is influenced by local inflation, devaluations, cost of imported raw materials and demand for ICN Galenika products. During 1995 and 1994, ICN Galenika received fewer price increases than in the past due to lower relative levels of inflation. As inflation increases, the size and frequency of price increases is expected to increase. During the third quarter of 1995, ICN Galenika received a 30% price increase on its pharmaceutical products. This was the first price increase the government had allowed since the start of the stabilization program. Subsequent to the devaluation on November 24, 1995, ICN Galenika received an 80% price increase on its pharmaceutical products. Price increases obtained by ICN Galenika are based on economic events preceding the price increase and not on expectations of ongoing inflation. This lag in allowed price increases creates downward pressure on the gross margins that ICN Galenika receives on its products. When necessary, ICN Galenika will limit sales of products that have poor margins until an acceptable price increase is received. The impact of an inability to obtain adequate price increases in the future could have an adverse impact on the Company as a result of declining gross profit margins or declining sales in an effort to maintain existing gross margin levels.
For additional information and expanded discussion regarding the impact of ICN Galenika, see Note 12 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121 on accounting for the impairment of long lived assets. SFAS No. 121 requires the Company to review the carrying amounts of its long lived assets and certain identifiable intangible assets for impairment. If it is determined the carrying amount of the assets is not recoverable, the Company is required to recognize an impairment loss. The accounting standard will be implemented in the first quarter of 1996 and is not expected to result in a material loss.
During October 1995, the FASB issued SFAS No. 123 on accounting for stock based employee compensation plans which must be implemented for fiscal years beginning on or after December 15, 1995. The Company will elect the disclosure only alternative of SFAS No. 123 beginning with its annual financial statements for the year ended December 31, 1996.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial data for the years ended December 31, 1995 and 1994 (in thousands, except per share amounts):
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1995
Report of independent accountants....................................
Financial statements:
Consolidated balance sheets at December 31, 1995 and 1994............ For the years ended December 31, 1995, 1994 and 1993:
Consolidated statements of income.................................... Consolidated statements of stockholders' equity...................... Consolidated statements of cash flows................................ Notes to consolidated financial statements...........................
Schedule supporting the consolidated financial statements for the years ended December 31, 1995, 1994 and 1993:
II.-- Valuation and qualifying accounts..............................
The other schedules have not been submitted because they are not Applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To ICN Pharmaceuticals, Inc.:
We have audited the consolidated financial statements and the financial statement schedule of ICN Pharmaceuticals, Inc. (a Delaware corporation, formerly SPI Pharmaceuticals, Inc.) and Subsidiaries listed in the index on page 26 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company had certain transactions, through, November 1, 1994, with previously Affiliated Corporations, as more fully described in Note 4. Whether the terms of these transactions would have been the same had they been between wholly unrelated parties cannot be determined.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICN Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P. Los Angeles, California February 19, 1996
ICN PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
1.ORGANIZATION AND BACKGROUND:
On November 1, 1994, the stockholders of ICN Pharmaceuticals, Inc. ("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and ICN Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies") approved the Merger of the Predecessor Companies, ("the Merger"). On November 10, 1994 (effective November 1, 1994), SPI, ICN and Viratek merged into ICN Merger Corp., and Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("New ICN" or "the Company").
The Merger was accounted for using the purchase method of accounting. Additionally, for accounting purposes, SPI was treated as the acquiring company and as a result, the Company has reported the historical financial data of SPI in its financial results and includes the results of ICN, Viratek and Biomedicals since the effective date of the Merger, November 1, 1994.
SPI was incorporated on November 30, 1981, as a wholly-owned subsidiary of ICN and was 39%-owned by ICN prior to the Merger. Viratek and Biomedicals were 63%-owned and 69%-owned by ICN, respectively, prior to the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements for 1995 reflect the first full year results of the Company. The consolidated financial statements for 1994 include the full year financial results of SPI and majority owned subsidiaries, which includes 75% ownership in ICN Galenika (See Note 12), and the financial results of ICN, Viratek and Biomedicals, from the effective date of the Merger. The consolidated financial statements for 1993 reflect the financial results of SPI. Investments in 20% through 50% owned affiliated companies are included under the equity method where the Company exercises significant influence over operating and financial affairs. The accompanying consolidated financial statements reflect the elimination of all significant intercompany account balances and transactions.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents at December 31, 1995 and 1994, includes $1,017,000 and $36,124,000, respectively, of certificates of deposit which have maturities of three months or less. For purposes of the statements of cash flows, the Company considers highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of these assets approximates fair value due to the short-term maturity of these instruments.
MARKETABLE SECURITIES: The Company has classified its investment in corporate bond securities, with maturities ranging from 1999 to 2003, as available-for-sale. The contractual maturity value of these corporate bond securities is approximately $26,700,000. The fair value of these corporate bond securities are determined based on quoted market prices. Changes in market values are reflected as unrealized gains and losses, calculated on the specific identification method, directly in stockholders' equity.
During 1995, the Company sold $5,924,000 of corporate bond securities for a total of $6,380,000 including accrued interest resulting in a realized gain of $311,000. In January 1996, the Company sold $26,663,000 of corporate bond securities, plus accrued interest of $860,000, for a total of $27,812,000 resulting in a realized gain of $289,000.
At December 31, 1994, marketable securities had an aggregate fair value of $29,155,000.
ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995
INVENTORIES: Inventories, which include material, direct labor and factory overhead, are stated at the lower of cost or market. Cost is determined on a first-in, first-out ("FIFO") basis.
PROPERTY, PLANT AND EQUIPMENT: The Company primarily uses the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Buildings and related improvements are depreciated from 7-50 years, machinery and equipment from 3 - 20 years, furniture and fixtures from 4-10 years and leasehold improvements are amortized over their useful lives, limited to the life of the lease.
The Company follows the policy of capitalizing expenditures that materially increase the lives of the related assets and charges maintenance and repairs to expense. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in income.
GOODWILL AND INTANGIBLES: The difference between the purchase price and the fair value of net assets acquired at the date of acquisition is included in the accompanying consolidated balance sheets as goodwill and intangibles. Goodwill and intangibles amortization periods are five years for single product line businesses acquired through November 30, 1986, and 10 to 23 years for certain businesses acquired in 1987, which have other intangibles (patents and trademarks), and whose values and lives can be reasonably estimated. The Company periodically evaluates the carrying value of goodwill and intangibles including the related amortization periods. The Company determines whether there has been impairment by comparing the anticipated undiscounted future operating income of the acquired entity or product line with the carrying value of the goodwill.
As a result of the Merger, the Company acquired certain intangible assets (primarily related to patents and customer lists) and goodwill, which were being amortized over 5 to 10 years, using the straight-line method. During 1995, the Company utilized acquired net operating loss carryforwards and reassessed the carrying value of its tax net operating loss carryforwards and other deferred tax assets acquired in the Merger which resulted in the elimination of intangibles and goodwill acquired in the Merger (See Note 5).
NOTES PAYABLE: The Company classifies various borrowings with initial terms of one year or less as notes payable. The weighted average interest rate on short-term borrowings outstanding at December 31, 1995 and 1994 was 58% and 9%, respectively. This increase reflects a hyperinflationary 66% average short-term borrowing rate at ICN Galenika in 1995 compared to a stabilized rate of 9.5% in 1994.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's foreign operations, except those in highly inflationary economies, are translated at the end of period exchange rates. Revenues and expenses are translated at the average exchange rates prevailing during the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated in stockholders' equity. The monetary assets and liabilities of foreign subsidiaries in highly inflationary economies are remeasured into U.S. dollars at the year end exchange rates and non-monetary assets and liabilities at historical rates. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation", the Company has included in earnings all foreign exchange gains and losses arising from foreign currency transactions and the effects of foreign exchange rate fluctuations on subsidiaries operating in highly inflationary economies. The recorded (gains) losses from foreign exchange translation and transactions for 1995, 1994 and 1993, were $(9,484,000), $191,000 and $(3,282,000), respectively.
INCOME TAXES: In January 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than an enactment of changes in the tax law or rates. The adoption of SFAS No. 109 in 1993 did not result in a cumulative effect adjustment in the consolidated statements of income.
USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
PER SHARE INFORMATION: Per share information is based on the weighted average number of common shares outstanding and the dilutive effect of common share equivalents. Common share equivalents represent shares issuable for outstanding options, on the assumption that the proceeds would be used to repurchase shares in the open market, and also the shares issuable related to certain of the Company's convertible debentures. Such convertible debentures are considered common stock equivalents if they meet certain criteria at the time of issuance and have a dilutive effect, if converted.
During 1995, the Company issued quarterly stock distributions which totaled 5.6%. In 1994, SPI and the Company issued quarterly stock dividends and distributions which totaled 4.8%. In January 1993, SPI issued a 1992 fourth quarter stock dividend of 2%. During 1993, SPI issued additional stock dividends which totaled 6%. All share and per share amounts used in computing earnings per share have been restated to reflect these stock dividends and distributions.
RECLASSIFICATIONS: Certain prior year items have been reclassified to conform with the current year presentation.
3. ACQUISITION OF THE PREDECESSOR COMPANIES:
On November 10, 1994, SPI, ICN and Viratek merged into New ICN, and Biomedicals merged into ICN Subsidiary Corp., a wholly-owned subsidiary of New ICN. The Merger was accounted for using the purchase method of accounting. Additionally, for accounting purposes, SPI was treated as the acquiring company and as a result, the Company has reported the historical financial data of SPI in its financial results and the results of ICN, Viratek and Biomedicals have been included with the results of the Company since the effective date of the Merger, November 1, 1994.
As part of the Merger, the Company issued approximately 6,476,770 common shares valued on November 10, 1994 at $20.75 per share, which was the publicly traded price of SPI's common shares at that date. Accordingly, the purchase price, including direct acquisition costs of $3,654,000, has been allocated to the estimated fair value of the net assets, including amounts ascribed to purchased research and development costs which was charged to operations immediately following the consummation of the Merger.
The purchase price allocation, as of the effective date of the Merger, is summarized as follows (in thousands):
The Company obtained independent third party appraisals for the acquired in-process research and development costs and certain other intangible costs, primarily patents and trademarks. The $221,000,000 which represents the valuation of acquired in-process research and development for which no alternative use exists, has been charged to operations immediately upon consummation of the Merger in accordance with generally accepted accounting principles. In the fourth quarter of 1995, the purchase price allocation was finalized by recording a liability for a pre-acquisition contingency, as previously disclosed, in an amount that the Company considers adequate.
4. RELATED PARTY TRANSACTIONS:
GENERAL: Prior to the Merger, ICN controlled Biomedicals and Viratek through stock ownership and board representation and was affiliated with SPI. Certain officers of ICN occupied similar positions with SPI, Biomedicals, and Viratek and were affiliated with SPI. Prior to the Merger, ICN, SPI, Biomedicals, and Viratek engaged in certain transactions with each other.
ROYALTY AGREEMENTS: Effective December 1, 1990, SPI entered into a royalty agreement with Viratek whereby a royalty of 20% of all sales of Virazole(R) was paid to Viratek. Sales of Virazole(R), for purposes of determining royalties to Viratek, for 1994 and 1993 were $35,855,000 and $29,515,000, respectively, which generated royalties to Viratek for 1994 and 1993 of $7,171,000 and $5,903,000, respectively. As a result of the Merger, the Company is no longer required to pay future royalties on Virazole(R).
The Company, under an agreement, amended in 1993, between the Company and the employer of a director, is required to pay $20.00 for each new aerosol drug delivery device manufactured and a 2% royalty on all sales of Virazole(R) in aerosolized form. Such royalties for 1995, 1994 and 1993 were $905,000, $741,000 and $422,000, respectively.
COST ALLOCATIONS: Prior to the Merger, the affiliated corporations occupied ICN's facility in Costa Mesa, California. The accompanying consolidated statements of income include charges for rent from ICN of $230,000 for 1994 and $279,000 for 1993. In addition, the costs of common services such as maintenance, purchasing and personnel were incurred by SPI and allocated to ICN, Viratek and Biomedicals based on services utilized. The total of such costs were $2,207,000 for 1994 and $2,584,000 for 1993 of which $1,579,000 and $1,733,000 were allocated to affiliated corporations, respectively. It is management's belief that the methods used and amounts allocated for facility costs and common services were reasonable based upon the usage by the respective companies.
OTHER: Following is a summary of transactions incurred prior to the Merger, as described above, between the Company and the former affiliated corporations for 1994 and 1993 (in thousands):
The average balances due to ICN were $6,326,000 and $26,439,000 for 1994 and 1993, respectively.
In July 1995, the Company loaned the Chief Operating Officer of the Company $93,000 for the exercise of stock options, which was repaid in March 1996.
5. INCOME TAXES:
Pretax income (loss) from continuing operations before minority interest for the years ended December 31, consists of the following (in thousands):
The income tax provisions for the years ended December 31, consist of the following (in thousands):
The current federal tax provision has not been reduced for the tax benefit associated with the exercise of employee stock options of $1,300,000, $134,000, and $727,000 in 1995, 1994 and 1993, respectively, which were credited directly to additional capital.
In connection with the Merger, the Company acquired approximately $226,000,000 of net operating loss carryforwards ("NOLs"). Included in the total acquired NOLs are $191,000,000 of domestic NOLs and $35,000,000 of foreign NOLs. Internal Revenue Service Code Section 382 imposes an annual limitation on the availability of NOLs that can be used to reduce taxable income after certain substantial ownership changes of a corporation. Consequently, the Company's annual limitation on utilization of the acquired domestic NOLs is approximately $33,000,000 per year.
Included in the total acquired NOLs is approximately $9,800,000 of domestic NOLs acquired by a subsidiary in a previous business combination. Under the terms of the acquisition agreement, 50% of the tax benefit from the utilization of these acquired NOLs in excess of $500,000 is payable to the former shareholders of which none were utilized in 1995. Under the terms of the acquisition agreement, utilization is determined on a with and without basis.
In accordance with SFAS No. 109, any realization of acquired tax benefits must be used to first, reduce goodwill, secondly, reduce acquired noncurrent intangible assets and lastly, reduce income tax expense. During 1995, the Company utilized $27,000,000 of acquired domestic NOLs having a tax benefit of $9,400,000 for which a valuation allowance had been established as of the effective date of the Merger. The corresponding reduction in the valuation allowance of $9,400,000 resulted in a reduction of goodwill and intangibles acquired in connection with the Merger.
In addition to the utilization of the NOLs described above, the Company recognized a $27,000,000 tax benefit of an additional $76,000,000 of acquired NOLs and other deferred tax assets through a reduction in the Company's deferred tax asset valuation allowance. This reduction in the valuation allowance of $27,000,000 resulted in a $24,000,000 reduction in goodwill and intangibles acquired in connection with the Merger and a $3,000,000 reduction in deferred income tax expense. Realization of the deferred tax assets is dependent upon 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 remaining net deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.
At December 31, 1995, the Company's domestic NOLs were approximately $159,000,000. These domestic NOLs expire in varying amounts from 1996 to 2008.
The primary components of the Company's net deferred tax asset at December 31, 1995 and net deferred tax liability at December 31, 1994, are as follows (in thousands):
The Company's effective tax rate differs from the applicable U.S. statutory federal income tax rate due to the following:
During 1995, no U.S. income or foreign withholding taxes were provided on the undistributed earnings of the Company's foreign subsidiaries with the exception of the Company's Panamanian subsidiary, Alpha Pharmaceuticals, since management intends to reinvest those undistributed earnings in the foreign operations. Included in consolidated retained earnings at December 31, 1995, is approximately $118,000,000 of accumulated earnings of foreign operations that would be subject to U.S. income or foreign withholding taxes, if and when repatriated.
The Company is under examination by the Internal Revenue Service for the tax years ended November 30, 1991 and 1990. Currently, the proposed adjustments, if upheld, would not result in a significant additional tax liability; however, they would result in a significant reduction in NOL's available to the Company in the future. During 1995, the Company settled audits for tax years 1989 and 1988 which resulted in a reduction in net operating loss carryforwards of $5,000,000 (pretax) and a corresponding decrease in the pretax valuation allowance.
6. DEBT:
On November 17, 1994, the Company completed an underwritten public offering in the principal amount of $115,000,000 of 8.5% Subordinated Convertible Notes (the "Convertible Notes"), due in November 1999. These notes are convertible at the option of the holder either in whole or in part, at any time prior to maturity, into the Company's stock at a current conversion price of $22.117 per share, subject to adjustment in certain events. The Convertible Notes are also redeemable, in whole or in part, at the option of the Company at any time on or after November 15, 1997 at the specified redemption prices, plus accrued interest. The fair value of the Convertible Notes was approximately $127,650,000 at December 31, 1995.
In October 1986, Xr Capital Holding ("Xr Capital"), a trust established by ICN, completed an underwritten public offering in Switzerland of Swiss francs 100,000,000 principal amount of 5-5/8% Swiss Franc Exchangeable Certificates (the "Xr Certificates") of which SFr. 66,510,000 remain outstanding at December 31, 1995. Currently and as a result of the Merger, the face value of the outstanding Xr Capital are convertible into 1,501,172 shares of the Company's common stock at the exchange price of $26.69 per share using a fixed exchange rate of SFr. 1.66 to U.S. $1.00. The net proceeds of the offering were used by Xr Capital to purchase from ICN 14 series of Swiss Franc Subordinated Bonds due 1988-2001 (the "ICN-Swiss Franc Xr Bonds") for approximately $27,944,000 and SFr. 45,700,000 principal amount of cumulative coupon 5.4% Italian Electrical Agency Bonds due 2001 for approximately $27,202,000. The Company has no obligation with respect to the payment of the face amount of the Xr Certificates since these are to be paid upon maturity by the Italian Bonds (except for payment of certain additional amounts, in the event of the imposition of U.S. withholding taxes on either the Xr Certificates or ICN Swiss Franc Xr Bonds, for redemption of the Xr Certificates in the event the Company exercises its optional right to redeem). The fair value of the ICN- Swiss Franc Xr Bonds was approximately $14,816,000 at December 31, 1995.
In 1987, Bio Capital Holding ("Bio Capital"), a trust established by ICN and Biomedicals, completed a public offering in Switzerland of SFr. 70,000,000 principal amount of 5-1/2% Swiss Franc Exchangeable Certificates ("Old Certificates"). The Bio Capital debt is senior, uncollateralized indebtedness of the Company. At the option of the certificate holder, the Old Certificates are exchangeable into shares of the Company's common stock. Net proceeds were used by Bio Capital to purchase SFr. 70,000,000 face amount of zero coupon Swiss Franc Debt Notes due 2002 of the Kingdom of Denmark (the "Danish Bonds") for SFr. 33,772,000 and 15 series of zero coupon Swiss Franc Guaranteed Bonds of the Company (the "Zero Coupon Guaranteed Bonds") for SFr. 32,440,000 which are guaranteed by the Company. Each series of the Zero Coupon Guaranteed Bonds are in an aggregate principal amount of SFr. 3,850,000 maturing February of each year through 2002. The Company has no obligation with respect to the payment of the principal amount of the Old Certificates since they will be paid upon maturity by the Danish bonds. During 1990, Biomedicals offered to exchange, to all certificate holders, the Old Certificates for newly issued certificates ("New Certificates"), the terms of which remain the same except that 71 shares per SFr. 5,000 principal certificate can be exchanged at $47.15 using a fixed exchange rate of SFr. 1.49 to U.S. $1.00. Substantially all of the outstanding Old Certificates were exchanged for New Certificates (together referred to as "Certificates"). Currently, the face value of the outstanding Bio Capital (SFr. 39,615,000) are convertible into 552,992 shares of the Company's common stock at the exchange prices of $47.15 and $81.26 using fixed exchange rates of SFr. 1.49 and SFr. 1.54 to U.S. $1.00 for New and Old Certificates, respectively. The fair value of the Zero Coupon Guaranteed Bonds was approximately $9,751,000 at December 31, 1995.
On March 25, 1987, ICN completed an underwritten public offering in Switzerland of SFr. 60,000,000 principal amount of 3-1/4% Subordinated Double Convertible Bonds due 1997 ("Double Convertible Bonds"). Currently, the outstanding Double Convertible Bonds totaling SFr. 4,952,000 are convertible into 68,369 shares of the Company's common stock at the exchange price of $47.34 per share using a fixed exchange rate of SFr. 1.53 to U.S. $1.00. The bondholders can convert the Bonds equally into both Ciba Geigy stock and common stock of the Company. In connection with this offering, the Company placed in escrow 15,000 shares of Ciba Geigy Ltd. common stock. As of December 31, 1995, 6,190 shares of Ciba Geigy stock were outstanding and are reflected in the consolidated balance sheet as other non current assets. The fair value of these bonds was approximately $5,215,000 at December 31, 1995. On March 8, 1996, the Company elected to redeem all outstanding 3-1/4% Subordinated Double Convertible Bonds at par plus accrued interest to the redemption date, April 9, 1996.
The Company has the option to redeem the Zero Coupon-ECU Bonds, ICN- Swiss Franc Xr Bonds and Bio Certificates in the event that the market price of the Company's common stock meets certain conditions.
The Company has mortgage notes payable totaling $15,175,000, payable in U.S. dollars, Deutsche marks and Dutch guilders, collateralized by certain real property of the Company.
Annual aggregate maturities of long-term debt subsequent to December 31, 1995 are as follows (in thousands):
1996 $ 7,650 1997 9,854 1998 13,522 1999 119,670 2000 4,895 Thereafter 6,252 ---------- Total $ 161,843 ==========
The fair value of the Company's debt is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amount of all short-term and variable interest rate borrowings approximates fair value.
Subsidiaries of the Company have short and long-term lines of credit aggregating $12,708,000 of which $2,215,000 was outstanding at December 31, 1995.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Predecessor Companies were defendants in a number of lawsuits. As a result of the Merger, the Company has assumed all of the Predecessor Companies' liabilities with respect to such lawsuits.
Through May 1995, nineteen lawsuits were filed which named the Company, its Board of Directors, the Chairman and several other officers of the Company as defendants (the "Defendants"), all related to the Company's NDA for the use of Virazole(R) for the treatment of chronic hepatitis C (the "Hepatitis C NDA"). Eighteen of those lawsuits were consolidated into either the Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws (the "Securities Complaint") or the Second Amended Consolidated Verified Derivative Complaint (the "Derivative Complaint"). One derivative lawsuit is still pending in Delaware (collectively, the "1995 Actions").
In general, it is alleged in the Securities Complaint that Defendants made various deceptive and untrue statements of material fact and omitted material facts regarding the Hepatitis C NDA in connection with: (i) the merger of the Company, SPI, Viratek and Biomedicals in November 1994 and the issuance of convertible debentures in connection therewith; and (ii) information provided to the public. Plaintiffs also allege that the Chairman of the Company traded on inside information relating to the Hepatitis C NDA. The Securities Complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs seek unspecified compensatory damages, pre- judgment and post-judgment interest and attorneys' fees and costs. Plaintiffs seek the certification of: (i) a class of persons who purchased ICN securities from November 10, 1994 through February 17, 1995; and (ii) a subclass consisting of persons who owned SPI and/or Biomedicals common stock prior to the Merger. Defendants filed their answer to the Securities Complaint on January 8, 1996 and are actively engaged in the pre-trial discovery process.
With respect to the Derivative Complaint, plaintiffs assert claims against ICN's board (as it was composed in early 1995) and one officer for intentional breach of fiduciary duty, negligent breach of fiduciary duty, waste of corporate assets, constructive fraud, gross mismanagement, abuse of control, unjust enrichment and violation of California Corporations Code Section 25502.5, all in connection with the Hepatitis C NDA. Plaintiffs seek disgorgement, unspecified compensatory and punitive damages, attorneys' fees and costs and injunctive and equitable relief. Defendants have filed a motion to dismiss the Derivative Complaint and oral argument on that motion is scheduled for April 15, 1996. Defendants intend to vigorously defend these actions.
Four lawsuits have been filed with respect to the Merger in the Court of Chancery in the State of Delaware (the "1994 Actions"). Three of these lawsuits were filed by stockholders of SPI and, in one lawsuit, of Viratek, against ICN, SPI, Viratek (in the one lawsuit) and certain directors and officers of ICN, SPI and/or Viratek (including the Chairman) and purport to be class actions on behalf of all persons who held shares of SPI common stock and, in the one lawsuit, Viratek common stock. The fourth lawsuit was filed by a stockholder of Viratek against ICN, Viratek and certain directors and officers of ICN, SPI and Viratek (including the Chairman) and purports to be a class action on behalf of all persons who held shares of Viratek common stock. These suits allege that the consideration provided to the public stockholders of SPI and/or Viratek (as applicable) in the Merger was unfair and inadequate, and that the defendants breached their fiduciary duties in approving the Merger and otherwise. The 1994 Actions have been dormant for the past year. The Company believes that these suits are without merit and intends to defend them vigorously.
ICN, SPI and Viratek and certain of their officers and directors (collectively, the "ICN Defendants") were named defendants in certain consolidated class actions pending in the United States District Court for the Southern District of New York entitled In re Paine Webber Securities Litigation (Case No. 86 Civ. 6776 (BMW)); In re ICN/Viratek Securities Litigation (Case No. 87 Civ. 4296 (BMW)) (collectively the "1987 Actions"). In the Third Amended Complaint, plaintiffs allege that the ICN Defendants made, or aided and abetted Paine Webber, Inc. ("Paine Webber") in making, misrepresentations of material fact and omitted material facts concerning the business, financial condition and future prospects of ICN, Viratek and SPI in certain public announcements, Paine Webber research reports and filings with the Securities and Exchange Commission ("SEC"). The alleged misstatements and omissions primarily concern developments regarding Virazole(R), including the efficacy, safety and market for the drug. The plaintiffs allege that such misrepresentations and omissions violate Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and constitute common law fraud and misrepresentation. On December 15, 1995, the ICN Defendants filed a motion to dismiss in part or for partial summary judgment, and in opposition to plaintiffs' motion to amend the Third Complaint. The Court has not yet ruled on the motion.
Fact discovery is complete and expert discovery is virtually complete. On January 3, 1996, the Court affirmed a report and recommendation certifying classes of purchasers of ICN, Viratek and SPI common stock for the period January 7, 1986 through April 15, 1987. Plaintiffs' damages expert, utilizing assumptions and methodologies that the ICN Defendants' damages experts find to be inappropriate under the circumstances, has testified that assuming that classes were certified for purchasers of ICN, Viratek and SPI common stock for the entire class periods and further assuming that all of the plaintiffs' allegations were proven, potential damages against ICN, Viratek and SPI would, in the aggregate, amount to $315,000,000. The ICN Defendants' four damages experts have testified that damages are zero. A trial date has been set for May 28, 1996.
ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995
Management believes that, having extensively reviewed the issues in the above referenced matters, there are strong defenses and the Company intends to defend the litigation vigorously. While the ultimate outcome of the 1987 Actions cannot be predicted with certainty, and an unfavorable outcome could have a material adverse effect on the Company, at this time management does not expect these matters will have a material adverse effect on the financial position and results of operations of the Company.
In January 1995, an action was commenced by a former employee against ICN, SPI, Viratek and the Chairman. The complaint asserts causes of action for sex discrimination and harassment, and for violations of the California Department of Fair Employment and Housing statute and a provision of the California Government Code. The complaint seeks injunctive relief and unspecified compensatory and punitive damages. A trial date has been set for September 9, 1996. The defendants intend to vigorously defend the suit.
In February 1992, an action was filed in California Superior Court for the County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN Canada Limited ("ICN Canada"), SPI, and ICN, alleging breach of contract and related claims arising out of a manufacturing contract between Gencon and ICN Canada. ICN and SPI were dismissed from the action in March 1993 based on SPI's agreement to guarantee any judgment against ICN Canada. Following trial in 1993, the judge granted judgment in favor of Gencon for breach of contract in the amount of approximately $2,100,000 plus interest, costs and attorneys' fees (which total approximately $650,000). ICN Canada filed its Notice of Appeal and Gencon filed a Notice of Cross-Appeal, seeking approximately $145,000 in additional claimed costs. Both the appeal and cross-appeal have been fully briefed and oral argument is scheduled for April 1996. The defendants intend to vigorously prosecute their appeal.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan") in the United States District Court for the Southern District of New York. The complaint alleged, among other things, that Khan violated numerous provisions of the securities laws and breached his fiduciary duty to ICN and Viratek by attempting to effectuate a change in control of ICN while acting as an agent and fiduciary of ICN and Viratek. ICN and Viratek are seeking compensatory and punitive damages in the amount of $25,000,000. Khan has filed counterclaims, asserting causes of action for slander, interference with economic relations, a shareholders' derivative action for breach of fiduciary duties, violations of the federal securities laws and tortious interference with economic relations, and is seeking compensatory damages, interest and exemplary damages of $29,000,000. On November 4, 1994, ICN and Viratek moved to have a default judgment entered against Khan and to dismiss his counterclaims. The Company intends to vigorously defend the counterclaims.
The Company is a party to a number of other pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. In the opinion of management, amounts accrued for awards, assessments or potential losses in connection with these matters and the matters referred to above, are adequate and the ultimate resolution will not have a material effect on the Company's consolidated financial position or results of operations.
INVESTIGATIONS: Pursuant to an Order Directing Private Investigation and Designating Officers to Take Testimony, entitled In the Matter of ICN Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation is being conducted by the SEC with respect to certain matters pertaining to the status and disposition of the Hepatitis C NDA. As set forth in the Order, the investigation concerns whether, during the period June 1994 through February 1995, the Company, persons or entities associated with it and others, in the offer and sale or in connection with the purchase and sale of ICN common stock, engaged in possible violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, by having possibly: (i) made false or misleading statements or omitted material facts with respect to the status and disposition of the Hepatitis C NDA; or (ii) purchased or sold ICN common stock while in possession of material, non-public information concerning the status and disposition of the Hepatitis C NDA; or (iii) conveyed material, non-public information concerning the status and disposition of the Hepatitis C NDA, to other persons who may have purchased or sold ICN stock. The Company is cooperating with the SEC in its investigation. To date, the Company has produced documents to the SEC pursuant to its request and the SEC has begun taking depositions of certain officers, directors, and employees of the Company.
PRODUCT LIABILITY INSURANCE: The Company could be exposed to possible claims for personal injury resulting from allegedly defective products. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a material adverse effect on the Company.
LICENSE COMMITMENT: In November 1994, the Company entered into a license agreement for the rights to develop and commercialize a group of compounds related to and including human growth hormone releasing factor ("GRF"), for the United States and other major pharmaceutical markets. In connection with this agreement, the Company is obligated to pay, upon meeting certain milestones, an aggregate amount of $2,600,000. In addition, after such milestones are met, the Company is obligated to pay a royalty of 9%, subject to certain adjustments, based upon the net sales of GRF in certain territories.
BENEFITS PLANS: The Company has a defined contribution plan that provides all U.S. employees the opportunity to defer a portion of their compensation for payout at a subsequent date. The Company can voluntarily make matching contributions on behalf of participating and eligible employees. The Company's expense related to such defined contribution plan was not material in 1995, 1994 and 1993.
In connection with the Merger, the Company assumed deferred compensation agreements with certain officers and certain key employees of the Predecessor Companies, with benefits commencing at death or retirement. As of December 31,1995, the present value of the deferred compensation benefits to be paid has been accrued in the amount of $2,924,000. Interest accrues on the outstanding balance at rates ranging from 9.5% to 12.6%. No new contributions are being made; however, interest continues to accrue on the present value of the benefits expected to be paid.
OTHER: Milan Panic, the Company's Chairman of the Board, President and Chief Executive Officer, is employed under a contract expiring December 31, 1998 that provides for, among other things, certain health and retirement benefits. Mr. Panic, at his option, may provide consulting services upon his retirement for $120,000 per year for life, subject to annual cost-of-living adjustments from the base year of 1967. Including such cost-of-living adjustments, the annual cost of such consulting services is currently estimated to be in excess of $535,000. The consulting fee shall not at any time exceed the annual compensation as adjusted, paid to Mr. Panic. Upon Mr. Panic's retirement, the consulting fee shall not be subject to further cost of living adjustments.
The Company has Employment Agreements, assumed in connection with the Merger, with five key executives which contain "change in control" benefits. Upon a "change in control" of the Company as defined in the contract, the employee shall receive severance benefits equal to three times salary and other benefits.
8. COMMON STOCK:
Prior to Merger, each of the Predecessor Companies had their own stock option plans. Upon consummation of the Merger, New ICN assumed all options outstanding under the existing stock option plans. The existing stock option plans were exchanged for shares of New ICN. Each option of SPI common stock, ICN common stock, Viratek common stock and Biomedicals common stock was exchanged for 1.0, 0.512, 0.499 and 0.197 options of New ICN common stock, respectively.
New ICN assumed three, two and three Nonqualified Stock Option Plans from Biomedicals, ICN and Viratek, respectively, and two employee Incentive Stock Option Plans from each of Biomedicals, ICN and Viratek, respectively. Prior to the Merger, SPI had three Non Qualified Stock Option Plans, one of these Plans was reserved for certain officers of SPI, and two employee Incentive Stock Option Plans. At December 31, 1995, the number of options granted under plans that existed prior to the Merger were 5,159,000. Subsequent to the Merger, no new grants are being issued under these plans.
At the time of the Merger, the 1994 Stock Option Plan was adopted and is currently subject to stockholder approval. This plan provides for the granting of a maximum of 3,236,000 stock options. Under the plan each nonemployee director is granted 16,182 options on the day following the annual meeting of stockholders. Shares granted under this plan as of December 31, 1995 were 1,087,000, all of which are outstanding.
Under the terms of all stock option plans, the option price may not be less than the fair market value at the date of the grant and may not have a term exceeding 10 years. Option grants vest ratably over a four year period from the date of the grant. The options granted are reserved for issuance to officers, directors, key employees, scientific advisors and consultants.
The following table sets forth information relating to stock option plans during the years ended December 31, 1995, 1994 and 1993 (in thousands, except per share data):
In 1995, the Company issued quarterly stock distributions which totaled 5.6%. In 1994, the Company issued quarterly stock dividends and distributions which totaled 4.8%. In January 1993, SPI issued a 1992 fourth quarter stock dividend of 2%. During 1993, SPI issued additional quarterly stock dividends which totaled 6%. Accordingly, all relevant stock option data and per share data has been restated to reflect these dividends and distributions.
In January 1996, the Company sold approximately 400,000 shares of its common stock to a foreign bank for net proceeds of $6,000,000. The proceeds were used by the Company for the acquisition of Gly Derm, a Michigan based skin care company, and several smaller acquisitions.
In 1994, the Company issued common stock for certain bonuses accrued in 1993. The number of shares issued was based upon the fair value of the shares at the date of issuance and a fixed amount related to the bonuses paid.
During the third quarter of 1994, ICN Galenika commenced a construction and modernization program at its pharmaceutical complex outside Belgrade, Yugoslavia. At December 31, 1995 and 1994, construction in progress primarily relates to costs incurred to date for these facilities and includes capitalized interest of $1,978,000 in 1995 and no amounts in 1994.
(1) Includes a write-off of purchased research and development for which no alternative use exists of $221,000,000 as a result of the Merger.
GEOGRAPHIC DATA
(1) Includes a write-off of purchased research and development for which no alternative use exists of $221,000,000 as a result of the Merger.
In the fourth quarter of 1995 the purchase price allocation was finalized by recording a liability for a pre-acquisition contingency, as previously disclosed, in an amount that the Company considers adequate.
The following table sets forth the amounts of interest and income taxes paid during 1995, 1994 and 1993 (in thousands):
ICN GALENIKA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
[FN] The credit to other accounts is primarily due to the impact of devaluations on the outstanding allowance for doubtful accounts. In highly inflationary countries such as Yugoslavia, a devaluation will result in a reduction of accounts receivable and a proportionate reduction in the accounts receivable allowance. The reduction of accounts receivable is recorded as a foreign currency translation loss and the reduction of the allowance is recorded as a translation gain. Shortly after a devaluation the level of accounts receivable will rise as a result of subsequent price increases. In conjunction with the rise in receivables, additions to the allowance for receivables will be made for existing doubtful accounts. This process will repeat itself for each devaluation that occurs during the year. The effect of this process results in a high level of bad debt expense that does not necessarily reflect credit risk or difficulties in collecting receivables.
These amounts relate to acquired net operating losses and reserves for inventory obsolescence as a result of the Merger (see Note 1 and 5 of the Notes to the Financial Statements).
The credit to other accounts represents the reduction of goodwill and intangibles assets for the utilization and reevaluation of the ultimate realization of acquired net operating losses and other deferred tax assets, as a result of the Merger, and the settlement of an IRS examination for 1989 and 1988 (see Note 5 of Notes to the Financial Statements).
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1995 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Information Concerning Nominees and Directors." Information regarding the Company's executive officers is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1995 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Executive Compensation and Related Matters."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That information required under this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1995 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Ownership of the Company's Securities."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That information required under this Item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1995 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Executive Compensation and Related Matters" and "Certain Transactions."
PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
Financial Statements of the Registrant are listed in the index to Consolidate Financial Statements and filed under Item 8, "Financial Statements and Supplementary Data", included elsewhere in the Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule of the Registrant is listed in the index to Consolidated Financial Statements and filed under Item 8, "Financial Statements and Supplementary Data," included elsewhere in this Form 10-K.
3. EXHIBITS
3.1. Certificate of Incorporation of Registrant, previously filed as Exhibit 3.1 to Registration Statement No. 2-84984 on Form S-1, which is incorporated herein by reference.
3.2. Certificate of Amendment of Certificate of Incorporation, dated May 10, 1985, previously filed as Exhibit 3.2 to Registration Statement No. 2-99069, which is incorporated herein by reference.
3.3. Certificate of Amendment of Certificate of Incorporation, dated December 24, 1986, previously filed as Exhibit 3.3 to annual report on Form 10-K for the year ended November 30, 1986, which is incorporated herein by reference.
3.4. Bylaws of ICN, previously filed as Exhibit 3.2 to Registration Statement No. 2-84984 on Form S-1, which is incorporated herein by reference. Amendment of bylaws approved by stockholders on November 21, 1986, previously filed as Exhibit 3.4 to annual report on Form 10-K for the year ended November 30, 1986, which is incorporated herein by reference.
10.1. 1982 Employee Incentive Stock Option Plan, previously filed as Exhibit 10.9 to Registration Statement No. 2-84984 on Form S-1, which is incorporated herein by reference.
10.2. 1982 Non-Qualified Stock Option Plan, previously filed as Exhibit 10.10 to Registration Statement No. 2-84984 on Form S-1, which is incorporated herein by reference.
10.3. Xr Capital Holding Trust Instrument between ICN Pharmaceuticals, Inc. and Ansbacher (C.I.) Limited dated as of September 17, 1986; Subscription Agreement between Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., and Banque Gutzwiller, Kurz, Bungener S.A. and the other financial institutions named therein dated as of September 17, 1986; Bond Issue Agreement between ICN Pharmaceuticals, Inc. and Ansbacher (C.I.) Limited dated as of September 17, 1986; and Exchange Agency Agreement between ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. Banque Gutzwiller, Kurz, Bungener S.A., and the other financial institutions named therein dated as of September 17, 1986, previously filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended November 30, 1986, which is incorporated herein by reference.
10.4. Pro forma deed of sale of shares representing 100 percent of Capital Stock of Laboratorios Hubber, S.A. between ICN Pharmaceuticals, Holland B.V., Patrimonio Del Estado, an agency of the Spanish government, and Rumasa, S.A., previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K dated February 18, 1987, previously filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.5. Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated November 22, 1990 previously filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended November 30, 1990, which is incorporated herein by reference.
10.6. Closing Date Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated April 26, 1991, previously filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, which is incorporated herein by reference.
10.7. Amendment to Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated December 31, 1991, previously filed as Exhibit 10.39 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, which is incorporated herein by reference.
10.8. Additional Amendment to Foundation Agreement between SPI Pharmaceuticals, Inc. and ICN Galenika dated February 27, 1992, previously filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, which is incorporated herein by reference.
10.9. Letter of Credit issued by SPI Pharmaceuticals, Inc. in favor of ICN Galenika previously filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, which is incorporated herein by reference.
10.10 1992 Employee Incentive Stock Option Plan and Employee Incentive Stock Option Agreement Thereunder previously filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.11 1992 Non-Qualified Stock Option Plan and Non- Qualified Stock Option Agreement Thereunder previously filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.12 Leave of Absence and Reemployment Agreement between SPI Pharmaceuticals, Inc. and Milan Panic dated July 25, 1992, previously filed as Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.13 Application for Registration, Foundation Agreement, Joint Venture - ICN Oktyabr previously filed as Exhibit 10.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.14 Charter of the Joint Stock Company - ICN Oktyabr, previously filed as Exhibit 10.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference.
10.15 Supplemental Agreement to Subscription Agreement, dated October 14, 1994 between ICN Subsidiary Corp., ICN Merger Corp., DG Bank (Schweiz) AG and Bank Leu AG, previously filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.16 Supplemental Agreement to Conversion Agency Agreement dated October 14, 1994 between ICN Merger Corp. and E. Gutzwiller & Cie, previously filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.17 First Supplement To Indenture dated October 19, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and Bank of America National Trust and Savings Association, previously filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.18 Supplemental Agreement to Subscription Agreement dated October 14, 1994 between ICN Merger Corp. and Banque Parisbas S.A., previously filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.19 First Supplement To Indenture dated October 14, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and Citibank, N.A., previously filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.20 Supplemental Agreement to Subscription Agreement dated October 14, 1994 between ICN Merger Corp. and Bank Leu AG, previously filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.21 Second Supplement To Indenture dated October 14, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp., and IBJ Schroder Bank and Trust Company, previously filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.22 Supplemental Agreement to Bond Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc, ICN Subsidiary Corp., ICN Merger Corp. and Ansbacher (Guernsey) Limited, previously filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.23 Supplemental Agreement to the Bonds dated October 14, 1994 between ICN Merger Crop. and DG Bank, previously filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.24 Supplemental Agreement to the Bond Issue Agreement dated October 31, 1994 between ICN Biomedicals, Inc, ICN Pharmaceuticals, Inc., ICN Subsidiary Corp., ICN Merger Crop. and Ansbacher (Guernsey) Limited, previously filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.25 Supplemental Agreement to the Bonds dated October 31, 1994 between ICN Merger Crop. and DG Bank, previously filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.26 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and Ansbacher (Guernsey) Limited, previously filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.27 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and Ansbacher (Guernsey) Limited, previously filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.28 Supplemental Agreement to the Bonds Issue Agreement dated October 31, 1994 between ICN Pharmaceuticals, Inc., ICN Merger Corp. and Ansbacher (Guernsey) Limited, previously filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated herein by reference.
10.29 Employment Contract between ICN Pharmaceuticals, Inc. and Milan Panic dated September 6, 1995.
10.30 1994 Stock Option Plan
11. Computation of Earnings per Share.
21. Subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand L.L.P. Independent Auditors.
27. Financial Data Schedule.
(B) REPORTS ON FORM 8-K IN FOURTH QUARTER
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Date: March 30, 1996
By: /s/ Milan Panic ---------------------------------- Milan Panic, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Milan Panic Date:March 28, 1996 - ------------------------------------------------- Milan Panic Chairman of the Board and Chief Executive Officer
/s/ John E. Giordani Date:March 28, 1996 - ------------------------------------------------- John E. Giordani Executive Vice President, Chief Financial Officer and Corporate Controller
/s/ Norman Barker, Jr. Date:March 28, 1996 - ------------------------------------------------- Norman Barker, Jr., Director
/s/ Birch Bayh Date:March 28, 1996 - ------------------------------------------------- Senator Birch Bayh, Director
/s/ Alan F. Charles Date:March 28, 1996 - ------------------------------------------------- Alan F. Charles, Director
/s/ Roger Guillemin Date:March 28, 1996 - ------------------------------------------------- Roger Guillemin, M.D., Ph.D., Director
/s/ Adam Jerney Date:March 28, 1996 - ------------------------------------------------- Adam Jerney, Executive Vice President, Director
SIGNATURES - CONTINUED
/s/ Dale M. Hanson Date:March 28, 1996 - ------------------------------------------------- Dale M. Hanson, Director
/s/ Weldon B. Jolley Date:March 28, 1996 - ------------------------------------------------- Weldon B. Jolley, Ph. D., Director
/s/ Jean-Francois Kurz Date:March 28, 1996 - ------------------------------------------------- Jean-Francois Kurz, Director
/s/ Thomas Lenagh Date:March 28, 1996 - ------------------------------------------------- Thomas Lenagh, Director
/s/ Charles T. Manatt Date:March 28, 1996 - ------------------------------------------------- Charles T. Manatt, Director
/s/ Stephen Moses Date:March 28, 1996 - ------------------------------------------------- Stephen Moses, Director
/s/ Michael Smith Date:March 28, 1996 - ------------------------------------------------- Michael Smith, Ph.D., Director
/s/ Roberts A. Smith Date:March 28, 1996 - ------------------------------------------------- Roberts A. Smith, Ph.D., Director
/s/ Richard W. Starr Date:March 28, 1996 - ------------------------------------------------- Richard W. Starr, Director
EXHIBIT INDEX
Sequential Numbering Exhibit Page No. - -------- -----------
10.29 Employment Contract between ICN Pharmaceuticals, Inc. and Milan Panic dated September 6, 1995.
10.30 1994 Stock Option Plan
11. Computation of Earnings Per Share
21. Subsidiaries of the Registrant
23. Consent of Coopers & Lybrand L.L.P. Independent Auditors
27. Financial Data Schedule