-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MGhri6IxnWJoREfLcG8CzxIpzRyODbjr+89iIj8+bTxa0VHkyS1fgY9q75WjqkGG IarvFj/nkCidzhbYCFeFMg== 0000930184-97-000006.txt : 19970401 0000930184-97-000006.hdr.sgml : 19970401 ACCESSION NUMBER: 0000930184-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICN PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000930184 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330628076 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11397 FILM NUMBER: 97570351 BUSINESS ADDRESS: STREET 1: 3300 HYLAND AVE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145450100 MAIL ADDRESS: STREET 1: 3300 HYLAND AVE CITY: COSTA MESA STATE: CA ZIP: 92626 FORMER COMPANY: FORMER CONFORMED NAME: ICN MERGER CORP DATE OF NAME CHANGE: 19940915 10-K 1 ICN PHARMACEUTICALS, INC. - FORM 10-K ================================================================================ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-11397 ICN PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0628076 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3300 HYLAND AVENUE, COSTA MESA, CALIFORNIA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 545-0100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------- ---------------- COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE (INCLUDING ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) 8 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 1999 NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of the Registrant's voting stock held by non-affiliates on March 14, 1997, was approximately $870,503,000. The number of outstanding shares of common stock as of March 14, 1997 was 34,320,429. ================================================================================ List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is incorporated: ICN Pharmaceuticals, Inc.'s definitive Proxy Statement for the 1997 Annual Meeting of Stockholders, to be filed not later than 120 days after the end of the fiscal year covered by this report, is incorporated by reference into Part III. ================================================================================ ii
TABLE OF CONTENTS ITEM NUMBER AND CAPTION PART I PAGE NO. -------- 1. Business ............................................................................ 2 2. Properties .......................................................................... 12 3. Legal Proceedings ................................................................... 12 4. Submission of Matters to a Vote of Security Holders ................................. 12 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters ........... 13 6. Selected Financial Data ............................................................. 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 8. Financial Statements and Supplementary Data ......................................... 25 9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure ... 61 PART III 10. Directors and Executive Officers of the Registrant .................................. 62 11. Executive Compensation and Related Matters .......................................... 62 12. Security Ownership of Certain Beneficial Owners and Management ...................... 62 13. Certain Relationships and Related Transactions ...................................... 62 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 63 (ii)
2 PART I 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. ("the Company"). For accounting purposes, SPI is the acquiring company and, as a result, has reported 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. The Company is a multinational research based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research products and related services, immunodiagnostic reagents and instrumentation and provides radiation monitoring services. The Company pursues a strategy of international expansion which includes (i) the research and development of proprietary products which have 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 a broad range of conditions including viral and bacterial infections, diseases of the skin, myasthenia gravis, cardiovascular disease, diabetes and psychiatric disorders. Among the Company's products 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 and Europe, 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. 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 is responsible for all clinical development and regulatory activities worldwide. During 1996, clinical trials commenced with the enrollment of more than 2,000 patients. The Company believes it is positioned to expand its presence in the pharmaceutical markets of Eastern and Central Europe. In 1991, a 75% interest was acquired in Galenika Pharmaceuticals, a large drug 3 ITEM 1. BUSINESS-CONTINUED manufacturer and distributor in Yugoslavia. Galenika Pharmaceuticals was subsequently renamed ICN Yugoslavia. This acquisition added new products and significantly expanded the sales volume of the Company. With the investment in ICN Yugoslavia, the Company became one of the first Western pharmaceutical companies to establish a direct investment in Eastern Europe. ICN Yugoslavia 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 1992. The suspension of economic sanctions enabled ICN Yugoslavia 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 Yugoslavia". In 1995, the Company acquired a 75% interest in Oktyabr, one of the largest pharmaceutical companies in the Russian Federation. In 1996, the Company purchased an additional 15% interest in Oktyabr, raising its ownership to 90%. Additionally, the Company greatly expanded its Russian presence through the acquisition of two additional pharmaceutical companies: Leksredstva, located in Kursk and Polypharm, located in Chelyabinsk. The combined sales of these three companies establish the Company among the largest pharmaceutical companies in Russia today and a pioneer and leader in the privatization movement. In 1996, the Company acquired a 60% interest in Alkaloida, one of the largest pharmaceutical companies in Hungary and a major world producer of morphine and related compounds. (See "Acquisitions" below for a description of additional acquisitions in 1996.) In addition to its pharmaceutical operations, the Company also develops, manufactures and sells a broad range of research products and related services, immunodiagnostic reagents and instrumentation 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 11 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 include sales made under the trademarks Vilona(R) and Virazid(R). ANTIVIRALS: Virazole(R) accounted for approximately 5%, 10% and 13% of the Company's net sales for the years ended December 31, 1996, 1995 and 1994, respectively. Virazole(R) is currently approved for sale in various pharmaceutical formulations in over 40 countries, depending upon the particular country, 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 90,000 children annually. Similar approvals for the use of Virazole(R) for the treatment of RSV have been granted by governmental authorities in 22 other countries. 4 ITEM 1. BUSINESS-CONTINUED 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 monotherapy for 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 has assumed 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. Phase III clinical trials are underway. ANTIBACTERIALS: Antibacterials accounted for approximately 22%, 21% and 22% of the Company's net sales for the years ended December 31, 1996, 1995 and 1994, respectively. Most of the antibacterials manufactured and sold by the Company are primarily exclusive licenses held by ICN Yugoslavia for specific geographical areas from manufacturers that include Roche Holding AG, Bristol-Meyers Squibb and Eli Lilly. OTHER ETHICAL DRUGS: Other ethicals accounted for approximately 41%, 40% and 41% of net sales for the years ended December 31, 1996, 1995 and 1994, 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 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 Yugoslavia and is used in the treatment of psychological and emotional disorders. ICN Yugoslavia 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 22%, 17% and 18% of the Company's net sales for the years ended December 31, 1996, 1995 and 1994, respectively. Other OTC products encompass a broad range of ancillary products sold through the Company's existing distribution channels. RESEARCH CHEMICALS, DIAGNOSTIC AND RADIATION MONITORING SERVICES Research chemicals, diagnostic and other biomedical products accounted for approximately 10% and 12% of the Company's net sales for the years ended December 31, 1996 and 1995, respectively. The Company serves 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. The diagnostic product line includes instruments and 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. 5 ITEM 1. BUSINESS-CONTINUED The dosimetry product line provides radiation monitoring services to dentists, veterinarians, chiropractors, podiatrists, hospitals, universities, governmental institutions, nuclear power plants and small office practitioners and others exposed to ionizing radiation. The Company's service includes both Film and Thermo Luminescent badges in several configurations to accommodate a broad scope of users. This service includes the manufacture of badges, distribution to and from clients, analysis of badges and a radiation report including exposure. 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. During 1996, the Company undertook a series of strategic acquisitions designed to strengthen its product lines and geographic presence. GLYDERM ACQUISITION: In February 1996, the Company acquired 100% of GlyDerm, Inc., a dermatological business specializing in skin care products containing alpha hydroxy acid. This acquisition further strengthened the Company's North American dermatological presence and provided a substantial opportunity for international development. LEKSREDSTVA ACQUISITION: During 1996, the Company acquired its second pharmaceutical company in Russia with its purchase of a 95% interest in Leksredstva, headquartered in Kursk. Leksredstva manufactures a broad line of products including analgesics, antibiotics, cardiovasculars and gastroenterology related compounds. POLYPHARM ACQUISITION: During 1996, the Company further enhanced its presence in Russia with the purchase of a 84% interest in Polypharm, located in Chelyabinsk. Polypharm manufactures a wide assortment of products including analgesics, cardiovasculars, antiallergy products, sedatives, antispasmodics, and anti-infectives. The combined product lines of Polypharm, Oktyabr, and Leksredstva reflect very little overlap and make ICN Russia one of the largest pharmaceutical companies operating in Russia today. SIEMENS ACQUISITION: In July 1996, the Company acquired the radiation monitoring services division of Siemens Medical Systems, Inc. This acquisition greatly enhances the current ICN dosimetry business, making it the number two provider in the U.S. and giving it the critical mass required for international expansion. ALKALOIDA ACQUISITION: In September 1996, the Company acquired a 60% interest in Alkaloida, a pharmaceutical company located in Tiszavasvari, Hungary. Alkaloida is a major producer of medicinal opiates and morphine, as well as raw materials used in pharmaceutical manufacturing. CAPPEL ACQUISITION: In September 1996, the Company acquired the Cappel Division ("Cappel") of Organon Teknika Corporation. Cappel manufactures and sells immunochemical reagents used in biotechnology and biomedical laboratories around the world. WUXI ACQUISITION: In October 1996, ICN China, Inc., a wholly-owned subsidiary of the Company, entered into a joint venture agreement with Wuxi Pharmaceutical Corporation for the production and sale of pharmaceutical products. The Chinese Joint Venture Entity is 75% owned by ICN China and 25% owned by Wuxi. The terms and conditions of the joint venture were finalized in the first quarter of 1997. 6 ITEM 1. BUSINESS-CONTINUED 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 11 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 Company does not currently provide a hedge on its foreign currency exposure as it is too costly or not readily available. 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 United Nations 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 operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Inflation and Changing Prices and ICN Yugoslavia". MARKETING AND CUSTOMERS The Company has a worldwide marketing and sales staff of approximately 1,900 persons, including sales representatives in North America, Latin America, Western Europe and Eastern Europe, who promote its pharmaceutical products. Sales representatives 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 sales staff. In the United States, the Company currently promotes its pharmaceutical products to physicians through its own sales force. These products are distributed to drug stores and hospitals through wholesalers. In Latin America, the Company promotes to physicians and distributes products either directly or indirectly to hospitals and pharmacies. The Company's Spanish and Dutch subsidiaries promote and sell pharmaceutical products through their own sales forces to physicians, hospitals, retail outlets, pharmacies and wholesalers. In other Western European markets, namely the United Kingdom and Germany, sales forces have been recently established and distribution methods are in transition as ICN affiliates are formed. In Canada, the Company has its own sales force and promotes and sells directly to physicians, hospitals, wholesalers, and large drug store chains. ICN Yugoslavia 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 United Nations Security Council adopted a resolution that suspended economic sanctions imposed on the Federal Republic of Yugoslavia. The suspension of economic sanctions enabled ICN Yugoslavia to resume exporting certain of its product lines to Russia, other Eastern European markets, Africa, the Middle East and the Far East during this past year. During 1996, approximately 80% of ICN Yugoslavia's domestic sales were to government sponsored entities of the Federal Republic of Yugoslavia. Future domestic sales by ICN Yugoslavia could be dependent on the ability of the Yugoslavian government to continue to subsidize purchases of pharmaceutical products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - ICN Yugoslavia". 7 ITEM 1. BUSINESS-CONTINUED 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 resources accumulated by the Company and its predecessors in over thirty years of research involving nucleic acids. In addition, the Company develops a variety of innovative products targeted to address the specific needs of the Company's various local markets. The Company's predecessors include one of the first firms to engage in the study of analogs of nucleic acid precursors. This effort provided a large library of compounds which provide a resource for continued evaluation as new research reveals additional therapeutic opportunities. LONG-TERM RESEARCH AND DEVELOPMENT The Company's long-term research and development activities are focused on the identification and development of novel therapeutic and diagnostic agents for the treatment of viral diseases, cancer, immunologic dysfunction, diseases of the skin, hormonal therapy, and cardiovascular diseases. The Company is engaged in two research areas which both involve nucleic acids. One area is based on extending the library of nucleoside analogs through new synthesis and screening efforts. This is a proven approach which led to the identification of Virazole(R) by the Company and to other nucleoside therapeutics by other companies. The second area is the use of "antisense" oligonucleotide technology. This approach seeks to block the undesirable expression of genetic material in a highly selective way through the construction of short sequences of nucleotides which uniquely bind and inactivate the disease-causing genetic material. Both these approaches take advantage of the Company's knowledge base in nucleic acids. NEAR AND MEDIUM-TERM RESEARCH AND DEVELOPMENT The Company's short-term development pipeline includes the registration of a number of products in regional markets, including, but not limited to, Latin America and Eastern and Central Europe. This ongoing activity introduces both high quality generic and licensed proprietary products into under-served markets. The Company's medium-term research and development pipeline involves the preclinical and clinical evaluation of certain nucleotide compounds which have broad market attractiveness and which have shown promise for successful commercialization (although there can be no assurances that these products will be commercialized successfully). The majority of these compounds arose from the nucleic acids programs, but certain other compounds are in development to broaden the portfolio of the Company. These compounds include: VIRAZOLE(R) (RIBAVIRIN): A number of small, independent clinical studies which compared the results of combining Virazole(R) capsules with interferon alpha versus interferon alpha alone, found enhanced efficacy for the combination. Based on these clinical findings, the Company entered into an agreement with Schering whereby Schering assumes responsibility for worldwide clinical development and registration of oral ribavirin in combination with their product Intron A (interferon alpha 2b), for the treatment of hepatitis C virus infections and receives certain geographically exclusive marketing rights. Phase III clinical trials are underway. Clinical studies have been performed with Virazole(R) in various formulations for the 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, chicken pox, hemorrhagic fever with 8 ITEM 1. BUSINESS-CONTINUED renal syndrome, Lassa Fever, measles, influenza and HIV. The Company is initiating carefully focused clinical studies evaluating the use of Virazole(R) in the treatment of papilloma virus infections and for early intervention against RSV infections in persons whose immune defenses are compromised as a consequence of bone marrow transplantation. TIAZOLE(TM) (TIAZOFURIN): The Company has maintained an active research program centered on tiazofurin, which the Company is developing under the tradename Tiazole(TM). This product is a nucleoside analog demonstrated to cause inhibition of IMP-dehydrogenase, whose activity is elevated in a number of cancers. Studies of Tiazole(TM) by independent investigators indicate significant activity in myelogenous leukemia. The Company is in the process of conducting Phase II/III evaluation of Tiazole(TM) for use in the treatment of the late stages of refractory chronic myelogenous leukemia. The Company is also evaluating Tiazole(TM) for the treatment of ovarian carcinoma. ADENAZOLE(TM) (8-CL-C-AMP): This nucleotide has been shown to control cell proliferation and differentiation in certain cancers. Independent investigators in Italy and Scotland have conducted human trials which indicate significant utility of this compound. The Company is planning to continue to pursue the development of Adenazole(TM). SOMATORELIN (HGRF1-44): Somatorelin is a peptide which causes the synthesis and release of human growth hormone. The Company believes that somatorelin offers advantages over treatment with growth hormone. Notable among these advantages are the induction of a normal daily cycle of growth hormone levels and the induction of the ability of the body to produce growth hormone, which should offer significant benefit to patients. The Company is currently sponsoring Phase III trials in short stature pediatric patients. A2545: This compound was acquired as part of the 1996 purchase of Alkaloida. A2545 has a favorable preclinical profile and has shown good activity in Phase I/II studies for the treatment of irregular heartbeat. The Company is in the process of extending these studies. There can be no assurance of the results of the Company's research and development efforts or the ultimate commercial success of any of the products in development. COMPETITION The Company operates in a highly competitive environment. The Company's competitors, many of whom have substantially greater capital resources, marketing capabilities and larger research and development staffs and facilities, 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 being explored by the Company may result in further competitive challenges. 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. 9 ITEM 1. BUSINESS-CONTINUED RAW MATERIALS The Company manufactures pharmaceuticals at 11 facilities. Those facilities are located in Bryan, Ohio; Mexico City, Mexico (at two locations); Montreal, Canada; Zoetermeer, The Netherlands; Barcelona, Spain; Belgrade, Yugoslavia; St. Petersburg, Chelyabinsk and Kursk, Russia; and Tiszavasvari, Hungary. The Company believes it has sufficient manufacturing capacity to meet its needs for the foreseeable future. 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 U.S. sales 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) for RSV 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 medical devices units for the administration of Virazole(R) in the treatment of RSV, and other related medical devices, a variety of topical and oral pharmaceuticals including a line of generics to serve the Canadian and United States markets and a 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 ethical pharmaceuticals principally for distribution in Spain and Holland. In Yugoslavia, ICN manufactures over 450 pharmaceutical, veterinary, dental and other products in topical, oral and injectable forms. At its three manufacturing sites in Russia, the Company manufactures primarily pharmaceutical products in oral and injectable forms. In Hungary, ICN manufactures a broad line of products for the domestic and international market and is one of the foremost producers of morphine on a worldwide basis. 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 Company believes that capacities of these manufacturers are sufficient to meet the current demand for Virazole(R). The Company's biomedical products are primarily manufactured in three domestic facilities and one foreign facility: Irvine, California (radiochemicals), Orangeburg, New York (diagnostics and immunobiologicals), Aurora, Ohio (biochemicals and immunobiologicals) and Eschwege, Germany (chromatography products). In general, raw materials used by the Company in the manufacturing 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 should 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 through 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, it is expected that the Company will be granted a favorable review classification 10 ITEM 1. BUSINESS-CONTINUED (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) could, in the European Union, provide the Company six or more 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 Yugoslavia 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 involves 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. 11 ITEM 1. BUSINESS-CONTINUED 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 permitted 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: See Note 7 of Notes to Consolidated Financial Statements for a description of the Company's litigation. 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 the Company or 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. For a description of environmental exposure related to the Company's acquisition of Alkaloida Chemical, see Note 7 of Notes to Consolidated Financial Statements. EMPLOYEES As of December 31, 1996, the Company employed 12,784 persons, an increase from 7,880 in 1995. The increase is primarily due to acquiring the controlling interest in ICN Russia, Kursk, ICN Russia, Chelyabinsk, and ICN Alkaloida. At year-end, the Company employed 1,901 persons in sales and marketing, an increase from 1,780 in 1995. Additionally, at year-end, the Company employed 572 in research and development, 8,633 in production and 1,678 in general and administrative matters. All of the employees employed by ICN Yugoslavia and ICN Alkaloida, 1,740 of the employees of ICN Russia, St. Petersburg, 1,250 of the employees of ICN Russia, Kursk, 99 of the employees of ICN Russia, Chelyabinsk, 222 of the employees of the Company's Mexican subsidiaries, 247 employees of the Company's Spanish subsidiary and 38 employees of the Company's German 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. 12 ITEM 2. PROPERTIES The following are the principal facilities of the Company and its subsidiaries:
OWNED OR SQUARE LOCATION PURPOSE LEASED FOOTAGE - -------- ------- ------ ------- Costa Mesa, California Corporate headquarters and administrative offices Owned 178,000 Moscow, Russia Administrative and sales office Leased 8,450 Budapest, Hungary Administrative and sales office Leased 8,740 High Wycombe, United Kingdom Administrative office Leased 5,000 Irvine, California Manufacturing facility Leased 27,000 Orangeburg, New York Manufacturing facility Owned 100,000 Aurora, Ohio Manufacturing and repackaging facility Leased 67,000 Montreal, Canada Offices and manufacturing facility Owned 93,519 Zoetermeer, The Netherlands Offices and manufacturing facility Owned 23,430 Eschwege, Germany Offices and manufacturing facility Owned 13,278 Mexico City, Mexico Offices and manufacturing facility Owned 290,000 Belgrade, Yugoslavia Offices and manufacturing facility Owned 781,000 St. Petersburg, Russia Offices and manufacturing facility Owned 319,102 Kursk, Russia Offices and manufacturing facility Leased 167,791 Chelyabinsk, Russia Offices and manufacturing facility Owned 157,873 Tiszavasvari, Hungary Offices and manufacturing facility Owned 623,489 Barcelona, Spain Offices and manufacturing facility Owned 93,991 Brussels, Belgium Sales Office Leased 6,000 Paris, France Sales Office Leased 3,885 Thame, United Kingdom Offices and warehouse Leased 19,500 Opera, Italy Sales Office and warehouse Owned 153,777 Bryan, Ohio Warehouse and manufacturing facility Owned 37,000 Sydney, Australia Sales Office Leased 10,650
During the third quarter of 1994, ICN Yugoslavia 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 Yugoslavia 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. LEGAL PROCEEDINGS LITIGATION See Note 7 of Notes to Consolidated Financial Statements ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company 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 the high and low sales prices of the Company's common stock on the New York Stock Exchange. During 1995, the Company issued stock distributions which totaled 5.6%. The market prices set forth below have been retroactively adjusted for these distributions. 1995 HIGH LOW ---- ---- --- First Quarter $ 22 7/8 $ 12 1/8 Second Quarter 17 3/8 13 7/8 Third Quarter 24 1/8 15 Fourth Quarter 22 1/8 17 1/4 1996 ---- First Quarter 24 1/2 17 Second Quarter 28 21 1/4 Third Quarter 25 20 1/8 Fourth Quarter 20 3/4 17 5/8 As of March 14, 1997, there were 6,598 holders of record of the Company's common stock. In 1995, the Company issued the majority of its annual dividend in the form of stock distributions. Beginning with the first quarter dividend of 1996, the Board of Directors elected to discontinue the issuances of stock distributions while increasing its quarterly per share cash dividend to 7.7 cents per quarter from 7 cents per quarter in 1995, an increase of 10%. In March 1997, the Company increased its quarterly per share cash dividend to 8 cents per quarter from 7.7 cents per quarter. 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 financial condition and profitability of the Company, the need to retain earnings for use in the development of the Company's business, contractual restrictions and other factors. ITEM 6. SELECTED FINANCIAL DATA 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. 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. 14 ITEM 6. SELECTED FINANCIAL DATA - CONTINUED The following table sets forth certain consolidated financial data for the five years ended December 31, 1996, 1995, 1994, 1993 and 1992. 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).
DECEMBER 31 ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------------------------------------------------------- Statement of OPERATIONS DATA: - ---------------- Net sales(1) $614,080 $507,905 $366,851 $403,957 $476,118 Cost of sales 291,807 206,049 182,946 211,923 208,745 ---------------------------------------------------------------- Gross profit 322,273 301,856 183,905 192,034 267,373 Selling, general and administrative expenses 192,441 191,459 112,919 134,895 172,395 Royalties to affiliates, net -- -- 7,468 6,121 5,511 Research and development 15,719 17,231 7,690 11,516 7,836 Purchased research and development(2) -- -- 221,000 -- -- --------------------------------------------------------------- Income (loss) from operations 114,113 93,166 (165,172) 39,502 81,631 Interest income (3,001) (6,488) (4,728) (8,033) (9,679) Interest expense 15,780 22,889 9,317 23,750 13,065 Translation and exchange (gains) losses, net 2,282 (9,484) 191 (3,282) 25,039 --------------------------------------------------------------- Income (loss) before provision for income taxes and minority interest 99,052 86,249 (169,952) 27,067 53,206 Provision (benefit) for income taxes (6,815) 2,997 10,360 5,368 9,095 Minority interest 18,939 15,915 3,269 189 9,608 --------------------------------------------------------------- Net income (loss) $ 86,928 $67,337 $(183,581) $ 21,510 $ 34,503 =============================================================== PER SHARE INFORMATION: (3) - -------------------------- Net income (loss) $ 2.40 $ 2.20 $ (7.93) $ .99 $ 1.61 =============================================================== Common shares used in computation(3) 34,919 30,623 23,138 21,746 21,413 =============================================================== Cash dividends paid $ .23 $ .28 $ .26 $ .24 $ .74 =============================================================== Historical dividends declared(4) $ .31 $ 1.26 $ 1.19 $ 1.12 $ 1.06 =============================================================== BALANCE SHEET DATA: - ------------------- Working capital $306,764 $190,802 $137,802 $127,259 $120,942 Total assets 778,651 518,298 441,473 302,017 333,218 Long-term debt 176,489 154,193 195,181 16,980 21,016 Stockholders' equity 315,350 162,172 88,908 155,879 135,427 See accompanying notes to Selected Financial Data.
15 ITEM 6. SELECTED FINANCIAL DATA - CONTINUED NOTES TO SELECTED FINANCIAL DATA: (1) ICN Yugoslavia's sales have been adversely affected since the imposition in May 1992 of United Nations sanctions on Yugoslavia, suspended in December 1995. (2) The Merger resulted in $221,000,000 or $9.55 per share being ascribed to purchased research and development for which no alternative use existed and was written-off immediately. This write-off was a one-time, non-cash charge and is not related to the Company's ongoing research and development activities for Virazole(R). Net income, excluding this one-time, non-cash write-off, was $37,419,000 or $1.62 per share in 1994. (3) In January 1993, SPI issued a fourth quarter 1992 stock dividend of 2%. During 1993, SPI issued additional stock dividends which totaled 6%. During 1994, SPI and the Company issued additional stock dividends and distributions which totaled 4.8%. During 1995, the Company issued quarterly stock distributions which totaled 5.6%. All share and per share amounts have been restated to reflect these stock dividends and distributions, except for historical dividends issued which are unadjusted for stock, dividends and distributions. (4) On a historical basis, dividends for 1996 equaled cash distributions of $.31, including the fourth quarter dividend declared on January 31, 1997 of $.077 per share. Dividends for 1995 include cash distributions of $.28 on a historical basis and stock distributions of $.98. Dividends for 1994 include cash dividends of $.26 on a historical basis and stock dividends and distributions of $.93. Dividends for 1993 include cash dividends of $.25 on a historical basis and stock dividends equivalent to $.87. The dividends in 1992 include cash dividends of $.86 on a historical basis and stock dividends equivalent to $.20 per share. The stock dividends and distributions are based upon the market value of SPI's and the Company's common stock at the declaration date. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Prior to November 1994, 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"). Until November 1, 1994, the effective date of the Merger, ICN maintained a controlling interest in the subsidiary companies. 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. (the "Merger"). In conjunction with the Merger, ICN Merger Corp. was renamed ICN Pharmaceuticals, Inc. 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 11 of Notes to Consolidated Financial Statements. 1996 1995 1994 ---- ---- ---- NET SALES (IN THOUSANDS) - ------------------------ Pharmaceutical.............. $ 549,753 $ 446,566 $ 357,821 Biomedical.................. 64,327 61,339 9,030 ---------- ----------- ----------- Total Company............... $ 614,080 $ 507,905 $ 366,851 ========== =========== =========== 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED NET SALES: Eastern Europe was the major contributor for sales growth in 1996. Pharmaceutical net sales in Eastern Europe for the year ended December 31, 1996 were $355,415,000 compared to $254,961,000 for the same period in 1995. The increase of $100,454,000 or 39% reflects an active expansion program that includes three acquisitions in 1996. In Russia, the Company acquired and began consolidating Leksredstva in the second quarter which added $21,068,000 of sales and in the third quarter it acquired and began consolidating Polypharm which added $7,397,000 of sales. In Hungary, the Company acquired and began consolidating Alkaloida in the fourth quarter which added $21,461,000 of sales. Sales at ICN Oktyabr in Russia have increased $18,023,000 due to price and volume increases and the inclusion of a full twelve months of activity this year compared to three quarters of ICN Oktyabr sales in 1995. During 1996, ICN Yugoslavia has been recovering from the effects of a November 1995 devaluation. Net sales at ICN Yugoslavia amounted to $267,166,000 in 1996, an increase of $32,505,000 or 14% over the previous year, primarily due to higher prices partially offset by currency fluctuations due to the impact of the 1995 devaluation. With the lifting of United Nations sanctions, ICN Yugoslavia was able to begin exporting in 1996, which contributed $20,227,000 of sales. See discussion regarding ICN Yugoslavia at "Management's Discussion and Analysis of Financial Condition and Results of Operations - ICN Yugoslavia". Pharmaceutical net sales in Eastern Europe for the year ended December 31, 1995 were $254,961,000 compared to $172,124,000 for the same period in 1994. The increase of $82,837,000 or 48% is primarily due to increased sales of $62,537,000 or 36% at ICN Yugoslavia due to improved unit sales and favorable price increases for the year compared to 1994. Also contributing to the increase in sales in 1995 compared to the previous year were the sales of $20,300,000 contributed by the second quarter 1995 acquisition of ICN Oktyabr. Pharmaceutical net sales in North America for the year ended December 31, 1996 were $106,442,000 compared to $109,505,000 for the same period in 1995. The decrease of $3,063,000 or 3% reflects a decrease in unit sales of Virazole(R) in the amount of $22,393,000, partially offset by an increase in unit sales primarily in the dermatological, medicinal, and myasthenia gravis product lines. Virazole(R) is used in aerosol form to treat infants hospitalized with severe respiratory infection caused by respiratory syncytial virus ("RSV") and is the only antiviral therapeutic for this infection. RSV is a seasonal illness which occurs primarily in late fall through early spring. Early in the 1995/1996 season, the number of hospital admissions and positive cultures for RSV suggested a heavy incidence of infection. However, the severity of infection in this season was not as high as the prior seasons nor as heavy as such earlier evidence indicated resulting in a lower hospital demand for Virazole(R) and consequently an increased level of inventory at the wholesale level. The increased wholesale inventory levels combined with trends in the industry toward managed health care during the first part of the 1996/1997 season adversely impacted total 1996 Virazole(R) sales despite additional sales promotional efforts which included more favorable credit terms and sales discounts. Additionally, sales of Virazole(R) may have been (and may continue to be) affected by a January 1996 change in the American Academy of Pediatrics guidelines for the use of Virazole(R) in RSV from "should be used" to "may be considered". Future sales may also be impacted by the severity of the next RSV season and the increased level of inventory still remaining at the wholesale level as well as by a recently approved product designed to prevent RSV. Sales of Virazole(R) in the first quarter of 1997 are expected to be negligible compared to $8,100,000 in the first quarter of 1996. Due to the fact that RSV is a seasonal disease, Virazole(R) sales from year to year are subject to the incidence and severity of the disease which cannot be predicted with certainty. Pharmaceutical net sales in North America for the year ended December 31, 1995 were $109,505,000 compared to $92,112,000 for the same period in 1994, an increase of $17,393,000 or 19%. Unit sales of virtually all pharmaceutical products increased in the United States in 1995. Sales of Virazole(R) 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 for the year ended December 31, 1996 were $35,826,000 compared to $37,226,000 in 1995. The decrease of $1,400,000 or 4% reflects primarily a decline in vision care sales in Holland and decline in other pharmaceutical sales, partially offset by an increase in Virazole(R) sales. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Pharmaceutical 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 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. Pharmaceutical net sales in Latin America for the year ended December 31, 1996 were $47,359,000 compared to $41,984,000 for the same period in 1995, an increase of $5,375,000 or 13%. Such increases were primarily due to price increases, partially offset by a small decrease in unit sales and currency exchange fluctuations. Pharmaceutical net sales in Latin America decreased to $41,984,000 in 1995 from $56,393,000 in 1994, a decrease of 26%. In 1995, sales were negatively impacted by inflation and the devaluation of the Mexican peso. The biomedicals business had net sales for 1996 of $64,327,000 compared to $61,339,000 in 1995, an increase of $2,988,000 or 5%. This increase is primarily due to the effect of the additional sales of diagnostic products acquired from Becton-Dickinson in May 1995 of $1,837,000 and additional Dosimetry sales resulting from the acquisition of the former Siemens Dosimetry Service in July 1996 of $446,000, which were partially offset by a decrease in Instrument sales of approximately $4,423,000 resulting from the sale of the instrument business division in March 1996. Biomedicals net sales for 1995 of $61,339,000, were $4,612,000 or 8% higher than 1994 net sales of $56,727,000, assuming the Merger occurred on January 1, 1994, primarily due to the additional sales of diagnostic products acquired from Becton-Dickinson in 1995. GROSS PROFIT: Gross profit as a percentage of sales was 52% for 1996 compared to 59% for 1995. The decrease in gross profit margins is primarily due to a decrease in gross margins at ICN Yugoslavia reflecting the impact of the November 1995 devaluation which was partially offset by an 83% price increase in December 1995 and a 30% price increase in April 1996. Typically, sales made subsequent to a devaluation are lower due to higher exchange rates and a lack of sufficient price increases while the cost of sales for inventory manufactured prior to the devaluation is expensed at a higher historical exchange rate. Margins will begin to improve after a devaluation if price increases are obtained and when older, higher priced inventory is replaced with inventory manufactured after the devaluation. ICN Yugoslavia's gross margins for the first, second, third and fourth quarters of 1996 were 29%, 37%, 43% and 53%, respectively. Additionally, the gross profit margin of the newly acquired companies of Leksredstva, Polypharm and Alkaloida, 36%, 36% and 22%, respectively, also contributed to the relative decline. The gross profit margin in the Company's operating units outside of Eastern Europe remained consistent with 1995 at 69%. Gross profit as a percentage of sales was 59% for 1995 compared to 50% for 1994. The increase in gross profit was primarily due to improved unit costs at ICN Yugoslavia 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 material prices resulting from the economic conditions that existed in Yugoslavia. This higher priced inventory is reflected in cost of sales for 1994 and in 1995 was replaced with inventory having a lower unit cost, as a result of an improved economic environment in Yugoslavia and higher production levels. The gross profit margin in the Company's operating units, other than ICN Yugoslavia, decreased to 67% in 1995 from 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 gross profit margins were 56% compared to the pharmaceutical business gross profit margins, excluding ICN Yugoslavia, of 71%. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses were $192,441,000 or 31% of sales in 1996 compared to $191,459,000 or 38% in 1995. For 1996, these costs reflect decreasing expenses primarily at ICN Yugoslavia principally due to differences in exchange rates of the Yugoslavian dinar in 1996 compared to 1995 and lower level of expenditures. Offsetting such decrease are increases in selling, general and administrative expenses in North America and Western Europe due to expanded marketing efforts in these regions and a charge of $3,500,000 related to the settlement of a commercial dispute and a penalty imposed by the Canadian Patent Price Review Board. Additionally, the new Eastern European acquisitions contributed $4,504,000 of expenses in 1996. Under the Exclusive License and Supply Agreement with a subsidiary of Schering Plough Corporation ("Schering") to develop Virazole(R) for the treatment of hepatitis C, the Company retains the right to co-market in the countries of the European Economic Community. The Company expects to incur significant pre-launch marketing expenses over the next two years. These efforts may cause the ratio of selling, general and administrative expenses to sales to increase during this period of time resulting from additional expenses without immediate incremental revenues. Selling, general and administrative expenses were $191,459,000 or 38% of sales in 1995 compared to $112,919,000 or 31% of sales in 1994. This increase was primarily due to higher operating expenses at ICN Yugoslavia 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 were 46% compared to 29% for the pharmaceutical business. RESEARCH AND DEVELOPMENT COSTS: Research and development costs decreased $1,512,000 in 1996 compared to 1995. Such decrease occurred primarily at ICN Yugoslavia and is principally due to differences in exchange rates of the Yugoslavian dinar. 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 in the Merger and increased spending at ICN Yugoslavia. TRANSLATION AND EXCHANGE GAINS AND LOSSES, NET: Foreign exchange losses, net, in 1996 were $2,282,000 compared to foreign exchange gains, net, of $9,484,000 in 1995. For the year ended December 31, 1996, ICN Yugoslavia's and ICN Oktyabr's translation losses were $4,290,000 and $1,033,000, respectively, which related to changes in local currency and its impact on their net monetary asset position. Partially offsetting these losses were translation gains of $3,276,000 related to the Company's foreign denominated debt. 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 Yugoslavia of $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 Yugoslavia") which was partially offset by foreign exchange losses of $2,688,000 on the Company's foreign denominated debt. INTEREST EXPENSE: The decrease in interest expense in 1996 compared to 1995 of $7,109,000 is primarily due to the effect of the retirement of $34,160,000 of the Company's 12 7/8% Sinking Fund Debentures during 1995 and the capitalization of interest related to plant construction at ICN Yugoslavia. For the year ended 1996, the Company capitalized $3,770,000 compared to $1,978,000 in 1995. The increase in interest expense in 1995 compared to 1994 of $13,752,000 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 Yugoslavia in 1995 compared to a stabilized rate of 9.5% in 1994. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED INCOME TAXES: The Company's effective income tax rate was (7%), 3% and 6% for 1996, 1995 and 1994, respectively. The Company operates in many regions where the tax rate is low or it benefits from a tax holiday. In Yugoslavia, the Company benefited from tax credits arising from the acquisition of ICN Yugoslavia and in Russia the tax rate was low due to special tax relief afforded to pharmaceutical companies. In 1996, the Company recorded a tax benefit of $6,815,000 primarily resulting from the favorable outcome of tax audits and the tax benefit from the Company's current year tax loss in the U.S which was carried back to prior tax years resulting in the recovery of taxes previously paid. This trend of low tax rates may not continue in the future. The special tax relief for Russia applied to only 1996. In 1995, the Company benefited from a devaluation of ICN Yugoslavia'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. In 1997, certain tax benefits that were acquired in the acquisition of ICN Yugoslavia will expire. The expiration of these tax benefits will raise the overall effective tax rate for ICN Yugoslavia. However, this increase may be partially offset by tax credits provided by Yugoslavia for plant construction. LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities in 1996 was $25,548,000, reflecting the effect of increased levels of accounts receivable of $181,726,000 primarily at ICN Yugoslavia and North America, partially offset by a decrease in inventory levels of $43,306,000 primarily at ICN Yugoslavia. The increase in accounts receivable at ICN Yugoslavia of $136,571,000 relates to increasing sales and the lengthening of the collection period of receivables resulting from the lack of availability of dinars in Yugoslavia. See Management's Discussion and Analysis of Financial Condition and Results of Operations - ICN Yugoslavia for expanded discussion regarding liquidity at ICN Yugoslavia. Additionally, the level of accounts receivable at December 31, 1995 was relatively low due to the devaluation in November 1995, the postponement of sales in anticipation of a December price increase and the effect of actions to reduce its overall monetary exposure. Cash provided by operations in 1995 was $79,326,000. Included in cash from operations for 1995 is an advance payment from Schering of $23,000,000 related to the use of Virazole(R) for the treatment of hepatitis C and cash payments used for increased inventory levels at ICN Yugoslavia 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 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 is responsible for all clinical developments worldwide. The $23,000,000 non-refundable payment was 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 is being amortized to income based upon future sales of the product and the license fee is being amortized on a straight line basis to income over the exclusive period of the Agreement, fifteen years. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Cash used in investing activities decreased $5,063,000 to $41,962,000. The Company reduced its level of capital expenditures by $23,477,000 compared to 1995, primarily at ICN Yugoslavia, where the Company has an on-going plant expansion program. However, as a result of certain liquidity problems in Yugoslavia, the Company made a decision to reduce its 1996 capital expenditures. While the capital expenditures related to this expansion were substantially lower in 1996 compared to 1995, the estimated cost of completing this project is approximately $100,000,000, with a planned completion date in 2000. From the beginning of the project in 1994, ICN Yugoslavia has expended $52,360,000. ICN Yugoslavia intends to fund this program through existing funds and funds generated from local operations and locally funded debt. Additionally, $51,222,000 was used in 1996 for acquisitions primarily in Eastern Europe and the United States which was partially offset by the sale of marketable securities of $27,663,000. Cash provided by financing activities was $82,680,000. Included in 1996 are $32,842,000 and $47,392,000 of net proceeds from the issuance of common stock and preferred stock, respectively, primarily used to fund acquisitions in the United States and Eastern Europe and working capital, $10,167,000 of proceeds from the exercise of stock options partially offset by payment of short term and long term debt of $42,288,000 and $6,999,000 of dividends paid. In 1995, cash used by financing activities includes 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. PRODUCT LIABILITY: In December 1985, the Company 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. DEMANDS ON LIQUIDITY: Management believes that funds generated from operations will be sufficient to meet its normal operating requirements during the coming year. The Company's recent acquisitions in Hungary, Russia and China will require $23,000,000 of cash in 1997. Also, if the historic rate of growth in Eastern Europe continues, these operations will require increasing levels of working capital and funds for additional facilities or upgrading of existing facilities. Additionally, the Company has several preliminary acquisition prospects that may require significant funds in 1997. Management believes that funds generated from operations will not be sufficient for all of these needs and will seek refinancing of existing short term debt, some of which was assumed in the 1996 acquisitions, and additional financing through debt or equity issues, although there can be no assurance that the Company can raise additional funds. 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. During the last three years, the cumulative inflation rate in Mexico has exceeded 100%. Starting in 1997, the Company will begin translating the financial statements of its operations in Mexico using accounting methods that apply to hyperinflationary economies. At December 31, 1996, Mexico had a net monetary asset position of $7,459,000 which would be subject to loss if a devaluation were to occur. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED The Company is subject to foreign currency risk on its foreign denominated debt of $19,134,000, which is primarily denominated in Swiss francs, at December 31, 1996 and to devaluation losses on net monetary assets positions in Yugoslavia and Russia. See "ICN Yugoslavia" below and Note 13 of Notes to Consolodated Financial Statements for further discussion. At December 31, 1996, the net monetary asset position of the Company's Russian operations was $9,744,000 which would be subject to a loss if a devaluation were to occur. The effects of inflation are experienced by the Company through increases in the costs of labor, services and raw materials. The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. While the Company attempts to raise selling prices in anticipation of inflation, the Company has been affected by the lag in allowed price increases in Yugoslavia and Mexico, which has created lower sales in U.S. dollars and reductions in gross profit. Future sales and gross profit could be materially affected if the Company is unable to obtain price increases commensurate with the levels of inflation. From a global perspective the Russian pharmaceutical market and the United States market are unique in that pharmaceutical prices are not heavily regulated by the government. ICN YUGOSLAVIA ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that is subject to significant economic volatility and political instability. The current economic trend in Yugoslavia is toward unfavorable economic conditions that includes continuing liquidity problems, inflation and monetary exposures, potential devaluation, government spending limitations, credit risk, political instability, sanctions and price controls. The future of the economic and political environment of Yugoslavia is uncertain and could deteriorate to the point that a material adverse impact on the Company's financial position and results of operations could occur. The Company is pursuing actions to reduce its monetary exposure. These actions include converting $50,000,000 of dinar denominated receivables from the government into a one year note, with interest at LIBOR plus 1%. The note would be in dinars equivalent to $50,000,000 at the time of payment. The Company is currently seeking to convert an additional $50,000,000 of receivables into a one year note payable in dinars equivalent to $50,000,000. Yugoslavia is subject to political instability. With Presidential and parliamentary elections taking place later in 1997 and with the potential for continued economic deterioration, political instability may continue. Management believes that the 1997 elections may result in political change that would lead to economic reform. Management believes that economic reform and privatization is necessary before the Yugoslavian economy will improve. The lifting of sanctions has provided opportunities to export outside of Yugoslavia; however, Yugoslavia has not fully recovered the international status it held before sanctions. The Yugoslavian government is still negotiating to regain membership in the International Monetary Fund and World Bank. For additional information and expanded discussion regarding the impact of ICN Yugoslavia, see Note 13 of Notes to Consolidated Financial Statements. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 on the computation and presentation of earnings per share ("EPS"). SFAS No. 128 simplifies the computation for and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED face of the income statement. The statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period earnings per share data presented. Earlier application is not permitted. The Company will implement the accounting standard beginning with its annual financial statements for the year ended December 31, 1997. "THE SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995. This Annual Report on Form 10-K contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Annual Report on Form 10-K and include statements regarding, among other matters, the Company's growth opportunities, the Company's acquisition strategy, regulatory matters pertaining to governmental approval of the marketing or manufacturing of certain of the Company's products and other factors affecting the Company's financial condition or results of operations. Stockholders are cautioned that any such forward looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from the future results, performance or achievements, expressed or implied in such forward looking statements. Such factors are discussed in this Annual Report on Form 10-K and also include, without limitation, the Company's dependence on foreign operations (which are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange control, limitations on foreign participation in local enterprises, health-care regulations and other restrictive governmental conditions); the risk of operations in Yugoslavia, Eastern Europe, Russia and China in light of the unstable economies, political and regulatory conditions in such countries; the Company's ability to successfully develop and commercialize future products; the limited protection afforded by the patents relating to Virazole(R), and possibly on future drugs, techniques, processes or products the Company may develop or acquire; the Company's ability to continue its expansion plan and to integrate successfully any acquired companies; the results of lawsuits pending against the Company; the Company's dependence on its management, including Milan Panic, its Chairman and Chief Executive Officer; the Company's potential product liability exposure and lack of any insurance coverage thereof; government regulation of the pharmaceutical industry (including review and approval for new pharmaceutical products by the FDA in the United States and comparable agencies in other countries) and competition. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly financial data for the years ended December 31, 1996 and 1995 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER - ---- ------- ------- ------- ------- Net sales $ 138,162 $ 143,746 $ 157,917 $ 174,255 Gross profit 70,134 71,439 87,402 93,298 Net income 22,003 14,893 20,835 29,197 Net income per share - primary $ .65 $ .42 $ .60 $ .74 Net income per share - fully diluted $ .64 $ .41 $ .59 $ .69 1995 - ---- Net sales $ 132,243 $ 128,773 $ 137,503 $ 109,386 Gross profit 77,927 72,398 83,972 67,559 Net income 17,034 13,894 16,933 19,476 Net income per share(1) - primary $ .57 $ .44 $ .52 $ .61 Net income per share(1) - fully diluted $ -- $ .43 $ .51 $ .59 (1) Net income per share has been restated to reflect quarterly stock dividends and distributions totaling 5.6% during 1995.
25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1996 Report of independent accountants ........................................ 26 Financial statements: Consolidated balance sheets at December 31, 1996 and 1995.............. 27 For the years ended December 31, 1996, 1995 and 1994: Consolidated statements of income...................................... 28 Consolidated statements of stockholders' equity........................ 29 Consolidated statements of cash flows.................................. 30 Notes to consolidated financial statements............................. 31 Schedule supporting the consolidated financial statements for the years ended December 31, 1996, 1995 and 1994: II.-- Valuation and qualifying accounts................................ 60 The other schedules have not been submitted because they are not applicable. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and stockholders of 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 25 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. As discussed in Note 13 to the financial statements, as of December 31, 1996, the Company has net monetary assets of $134,000,000 at ICN Yugoslavia which would be subject to foreign exchange loss if a devaluation of the Yugoslavian dinar were to occur. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 March 4, 1997 27 ICN PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS 1996 1995 ---- ---- Current Assets: Cash and cash equivalents $ 39,366 $ 24,094 Restricted cash 552 538 Marketable securities -- 27,536 Receivables, net 258,531 68,513 Inventories, net 120,973 138,756 Prepaid expenses and other current assets 24,979 24,179 ------------ ----------- Total current assets 444,401 283,616 Property, plant and equipment (at cost), net 234,209 172,487 Deferred taxes, net 34,334 34,692 Other assets 32,230 21,828 Goodwill and intangibles, net 33,477 5,675 ------------ ----------- $ 778,651 $ 518,298 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade payables $ 62,049 $ 33,402 Accrued liabilities 55,383 39,031 Notes payable 13,231 4,426 Current portion of long-term debt 5,961 7,650 Income taxes payable 1,013 8,305 ------------ ----------- Total current liabilities 137,637 92,814 Long-term debt, less current portion: Convertible into common stock 130,941 140,951 Other long-term debt 45,548 13,242 Deferred license and royalty income 13,850 15,139 Other liabilities 15,622 31,444 Minority interest 96,583 62,536 Common stock subject to Put Agreement, 1,065 shares 23,120 -- Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value; 10,000 shares authorized; 50 shares of Series B issued and outstanding at December 31, 1996 ($50,000 liquidation preference) 1 -- Common stock, $.01 par value; 100,000 shares authorized; 33,422 and 30,420 shares issued and outstanding at December 31, 1996 and 1995, respectively (including shares subject to Put Agreement) 324 304 Additional capital 368,187 290,106 Retained deficit (25,915) (105,844) Foreign currency translation adjustment (27,247) (22,624) Unrealized gain on marketable securities -- 230 ------------ ----------- Total stockholders' equity 315,350 162,172 ------------ ----------- $778,651 $ 518,298 ============ =========== The accompanying notes are an integral part of these consolidated statements. 28 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 ---- ---- ---- Net sales $ 614,080 $ 507,905 $ 366,851 Cost of sales 291,807 206,049 182,946 ----------- ----------- ----------- Gross profit 322,273 301,856 183,905 Selling, general and administrative expenses 192,441 191,459 112,919 Royalties to affiliates, net -- -- 7,468 Research and development costs 15,719 17,231 7,690 Write-off of purchased research and development -- -- 221,000 ----------- ----------- ----------- Income (loss) from operations 114,113 93,166 (165,172) Translation and exchange (gain) loss, net 2,282 (9,484) 191 Interest income (3,001) (6,488) (4,728) Interest expense 15,780 22,889 9,317 ----------- ----------- ----------- Income (loss) before provision (benefit) for income taxes and minority interest 99,052 86,249 (169,952) Provision (benefit) for income taxes (6,815) 2,997 10,360 Minority interest 18,939 15,915 3,269 ----------- ----------- ----------- Net income (loss) $ 86,928 $ 67,337 $ (183,581) =========== =========== =========== Primary: Net income (loss) per share $ 2.40 $ 2.20 $ (7.93) =========== =========== =========== Common shares used in computation 34,919 30,623 23,138 =========== =========== =========== Fully Diluted: Net income per share $ 2.27 $ 2.19 =========== =========== Common shares used in computation 40,138 37,981 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 29 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS), EXCEPT PER SHARE DATA)
FOREIGN UNREALIZED GAIN RETAINED CURRENCY (LOSS) ON PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS TRANSLATION MARKETABLE SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS SECURITIES TOTAL ------ ------ ------ ------ ------- --------- ----------- ----------- ----- BALANCE AT DECEMBER 31, 1993 -- $ -- 20,101 $ 202 $ 91,449 $ 70,973 $ (6,745) $ -- $ 155,879 Exercise of stock options -- -- 80 1 587 -- -- -- 588 Translation adjustments -- -- -- -- -- -- (9,964) -- (9,964) Tax benefit of stock options exercised -- -- -- -- 134 -- -- -- 134 Stock issued in Merger -- -- 6,477 65 134,328 -- -- -- 134,393 Net unrealized loss on marketable securities -- -- -- -- -- -- -- (3,432) (3,432) Shares issued as employee compensation -- -- 70 1 1,090 -- -- -- 1,091 Cash dividend ($.26 per share) -- -- -- -- -- (6,181) -- -- (6,181) Effect of 1994 quarterly stock dividends and distributions -- -- 832 8 17,410 (17,437) -- -- (19) Effect of stock distribution declared in March 1995 -- -- 468 5 6,715 (6,720) -- -- -- Net loss -- -- -- -- -- (183,581) -- -- (183,581) --------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 -- -- 28,028 282 251,713 (142,946) (16,709) (3,432) 88,908 Exercise of stock options -- -- 503 4 3,698 -- -- -- 3,702 Translation adjustments -- -- -- -- -- -- (5,915) -- (5,915) Issuance of common stock in connection with acquisitions -- -- 715 7 11,073 -- -- -- 11,080 Net unrealized gain on marketable securities -- -- -- -- -- -- -- 3,662 3,662 Tax benefit of stock options exercised -- -- -- -- 1,300 -- -- -- 1,300 Cash dividends ($.28 per share) -- -- -- -- -- (7,902) -- -- (7,902) Effect of 1995 quarterly stock distributions -- -- 1,174 11 22,322 (22,333) -- -- -- Net income -- -- -- -- -- 67,337 -- -- 67,337 ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 -- -- 30,420 304 290,106 (105,844) (22,624) 230 162,172 Exercise of stock options -- -- 868 9 10,158 -- -- -- 10,167 Translation adjustments -- -- -- -- -- -- (4,623) -- (4,623) Issuance of preferred stock 50 1 -- -- 47,391 -- -- 47,392 Issuance of common stock in connection with acquisitions -- -- 357 4 6,841 -- -- -- 6,845 Issuance of common stock -- -- 712 7 12,091 -- -- 12,098 Net unrealized gain on marketable securities -- -- -- -- -- -- -- (230) (230) Tax benefit of stock options exercised -- -- -- -- 1,600 -- -- -- 1,600 Cash dividends ($.23 per share) -- -- -- -- -- (6,999) -- -- (6,999) Net income -- -- -- -- -- 86,928 -- -- 86,928 ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 50 $ 1 32,357 $ 324 $ 368,187 $ (25,915) $(27,247) -- $315,350 ==============================================================================================
The accompanying notes are an integral part of these consolidated statements. 30 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 86,928 $ 67,337 $ (183,581) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,292 13,814 9,248 (Decrease) increase in allowance for losses on accounts receivable 4,345 (1,262) 1,410 Write-off of purchased research and development -- -- 221,000 Foreign exchange (gains) losses, net 2,282 (9,484) 191 Loss (gain) on sale of fixed assets 982 10 (294) (Decrease) increase in inventory allowances 106 (2,310) 3,835 Other non-cash gains (387) (331) -- Minority interest 18,939 15,915 3,451 Change in assets and liabilities, net of effects of acquired companies: Receivables (181,726) 524 (30,270) Inventories 43,306 (33,950) 25,823 Prepaid expenses and other assets (11,618) (11,461) (20,137) Proceeds from license and royalty fees -- 23,000 -- Other liabilities and deferred income taxes (10,795) 19,120 699 Trade payables and accrued liabilities 13,683 5,410 6,795 Income taxes payable (7,885) (7,006) 4,387 ---------- ---------- --------- Net cash (used in) provided by operating activities (25,548) 79,326 42,557 ---------- ---------- --------- Cash flows from investing activities: Capital expenditures (26,216) (49,693) (20,205) Proceeds from sale of fixed assets 6,954 64 164 Sale of marketable securities 27,663 6,204 -- Decrease in restricted cash -- 887 -- Cash acquired in connection with acquisitions (including $1,425 of restricted cash in 1994) 859 -- 9,921 Acquisition of foreign license rights, product lines and businesses (51,222) (4,495) -- Other, net -- 8 (1,270) ---------- ---------- --------- Net cash used in investing activities (41,962) (47,025) (11,390) ---------- ---------- --------- Cash flows from financing activities: Net increase (decrease) in notes payable (10,908) 268 (9,174) Proceeds from issuance of long-term debt 20,975 284 117,008 Payments on long-term debt (13,984) (52,623) (82,409) Payments to former affiliates -- -- (23,718) Proceeds from issuance of preferred stock 47,392 -- -- Proceeds from stock issuance 32,842 5,753 -- Proceeds from issuance of stock put right 3,195 0 0 Proceeds from exercise of stock options 10,167 3,702 588 Dividends paid (6,999) (7,902) (5,214) ---------- ----------- --------- Net cash (used in) provided by financing activities 82,680 (50,518) (2,919) ---------- ---------- --------- Effect of exchange rate changes on cash 102 (65) (649) ---------- ---------- --------- Net (decrease) increase in cash and cash equivalents 15,272 (18,282) 27,599 Cash and cash equivalents at beginning of year 24,094 42,376 14,777 ---------- ---------- --------- Cash and cash equivalents at end of year $ 39,366 $ 24,094 $ 42,376 ========== ========== ========= The accompanying notes are an integral part of these consolidated statements.
31 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 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"). 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. ("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. 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 1996 and 1995 include the accounts of the Company and all of its majority owned subsidiaries. The consolidated financial statements for 1994 include the full year financial results of SPI and majority owned subsidiaries and the financial results of ICN, Viratek and Biomedicals from the effective date of the Merger. Investments in 20% through 50% owned affiliated companies are included under the equity method where the Company exercises significant influence over operating and financial affairs. Investments in less than 20% owned companies are recorded at cost. 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, 1996 and 1995 includes $28,687,000 and $1,017,000, 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: In 1995, the Company classified its investment in corporate bond securities, with maturities ranging from 1999 to 2003, as available for sale. Changes in market values were reflected as unrealized gains and losses, calculated on the specific identification method, in stockholders' equity. The contractual maturity value of these securities was $26,700,000. In January 1996, the Company sold $26,663,000 of corporate bond securities for a total of $26,952,000 resulting in a realized gain of $289,000. INVENTORIES: Inventories, which include material, direct labor and factory overhead, are stated at the lower of cost or market. Cost is determined on a first-in, first-out ("FIFO") basis. PROPERTY, PLANT AND EQUIPMENT: The Company primarily uses the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Buildings and related improvements are depreciated from 7-50 years, machinery and equipment from 3-30 years, furniture and fixtures from 3-15 years and leasehold improvements and capital leases are amortized over their useful lives, limited to the life of the related lease. 32 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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. The Company capitalizes interest on borrowed funds during construction periods. Capitalized interest is charged to Property, Plant and Equipment and amortized over the lives of the related assets. 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 range from 5 to 23 years depending upon the nature of the business or products acquired. 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. Based on its review, the Company does not believe that an impairment of its goodwill and intangibles has occurred. 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, 1996 and 1995 was 17% and 58%, respectively. The December 31, 1995 weighted average interest rate reflects a hyperinflationary 66% rate at ICN Yugoslavia. 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 end of period exchange rates and non-monetary assets and liabilities at historical exchange 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 1996, 1995 and 1994, were $2,282,000, $(9,484,000) and $191,000 respectively. INCOME TAXES: Income taxes are calculated in accordance with Statement of Financial Accounting Standards ("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. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. 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. 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: Net income (loss) per share is based on net income (loss) after preferred stock dividend requirements, the weighted average number of common shares outstanding, including shares issued subject to put option, and 33 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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 the shares issuable related to the Company's convertible preferred stock and to certain of the Company's convertible debentures. Such convertible preferred stock and 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 1996, the Company's Board of Directors declared quarterly cash distributions for the first, second and third quarters totaling $.23 per share. On January 31, 1997, the Company's Board of Directors declared a fourth quarter cash distribution of $.077 per share, payable to stockholders of record on February 13, 1997. In 1995, the Company issued quarterly stock distributions which totaled 5.6%. In 1994, the Company issued stock dividends and distributions which totaled 4.8%. All share and per share amounts used in computing earnings per share have been restated to reflect these stock dividends and distributions. STOCK BASED COMPENSATION: The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. Pro forma disclosures for entities that elect to continue to measure compensation cost under the intrinsic method provided by Accounting Principles Board No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. RECLASSIFICATIONS: Certain prior year items have been reclassified to conform with the current year presentation. 3. ACQUISITION OF THE PREDECESSOR COMPANIES: 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 were 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): Current assets (including cash of $9,921 of which $1,425 was restricted)... $ 37,711 Property, plant and equipment.............................................. 44,335 Acquired intangibles and goodwill.......................................... 35,000 Other non-current assets................................................... 8,724 Current liabilities........................................................ (52,931) Long-term liabilities...................................................... (155,792) Purchased research and development......................................... 221,000 --------- Total purchase price................................................... $ 138,047 =========
34 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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, 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. 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 were $35,855,000, which generated royalties to Viratek for 1994 of $7,171,000. As a result of the Merger, the Company is no longer required to pay this royalty on Virazole(R). The Company, under an agreement amended in 1993 between the Company and the employer of a former 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 and 1994 were $905,000 and $741,000, 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 a charge for rent from ICN of $230,000 in 1994. 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 was $2,207,000 for 1994 of which $1,579,000 was allocated to affiliated corporations. 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. As a result of the Merger, such cost allocations are no longer required. 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 (in thousands) : 1994 ---- Cash payments to former affiliates, net........................ $ 23,718 Royalties to affiliates, net.................................... (7,469) Allocation of common service costs to ICN and its subsidiaries.. 1,579 Rent charged by ICN............................................. (230) Interest expense with affiliates, net........................... (359) Dividends payable to ICN........................................ (967) Other, net ................................................... 2,041 ------------ $ 18,313 =========== 35 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 In July 1995, the Company loaned the Chief Operating Officer $93,000 for the exercise of stock options which was repaid in March 1996. In August 1996, the Company loaned the Chairman and CEO $428,000 in regards to tax matters relating to the exercise of stock options. This loan along with accrued interest was repaid in November 1996. In June 1996, the Company made a short-term loan to the Chairman and CEO in the amount of $3,500,000 for certain personal obligations. During August 1996, this amount was repaid to the Company. In connection with this transaction, the Company guaranteed $3,600,000 of debt of the Chairman with a third party bank. In addition to the guarantee, the Company deposited $3,600,000 with this bank as collateral to the Chairman's debt. This deposit is recorded as a long-term asset on the balance sheet. The Chairman has provided collateral to the Company's guarantee in the form of a right to the proceeds of the exercise of stock options in the amount of 100,000 options with an exercise price of $22.75 and the rights to a $4,000,000 life insurance policy provided by the Company. In the event of any default on the debt to the bank, the Company has recourse that is limited to the collateral described above. Both the transaction and the sufficiency of the collateral for the guarantee were approved by the Board of Directors. 5. INCOME TAXES: Pretax income (loss) from continuing operations before minority interest for each of the years ended December 31, consists of the following (in thousands): 1996 1995 1994 ---- ---- ---- Domestic..................... $ 5,039 $ 7,145 $ (194,756) Foreign...................... 94,013 79,104 24,804 ----------- ----------- ---------- $ 99,052 $ 86,249 $ (169,952) =========== =========== ========== The income tax (benefit) provision for each of the years ended December 31, consist of the following (in thousands): 1996 1995 1994 ---- ---- ---- Current Federal................... $ (9,469) $ -- $ 5,829 State..................... 68 425 100 Foreign................... 2,228 4,392 4,931 ---------- ---------- ---------- (7,173) 4,817 10,860 Deferred Federal................... -- (1,820) -- Foreign................... 358 -- (500) ---------- ---------- ---------- 358 (1,820) (500) ---------- ---------- ---------- Total $ (6,815) $ 2,997 $ 10,360 ========== ========== ========== The current federal tax provision has not been reduced for the tax benefit associated with the exercise of employee stock options of $1,600,000, $1,300,000, and $134,000 in 1996, 1995 and 1994, respectively, which were credited directly to additional capital. 36 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 In connection with the Merger, the Company acquired approximately $226,000,000 of net operating loss carryforwards ("NOLs"). Included in the total acquired NOLs were $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. 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 during 1995 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 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, 1996, the Company's domestic NOLs were approximately $160,000,000. These domestic NOLs expire in varying amounts from 1998 to 2008. 37 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The primary components of the Company's net deferred tax asset at December 31, 1996 and 1995 are as follows (in thousands): 1996 1995 ---- ---- Deferred tax assets: NOL carryforward $ 71,019 $ 69,260 Inventory and other reserves 11,011 13,229 Tax credit carryover 554 554 Deferred income 4,848 7,776 Long-term debt 4,745 3,921 Other 855 -- Valuation allowance (55,769) (54,181) ----------- ----------- Total deferred tax asset 37,263 40,559 Deferred tax liabilities: Property, plant and equipment (223) (3,886) Inventory (1,770) (1,249) Other (936) (732) ----------- ----------- Total deferred tax liability (2,929) (5,867) ----------- ----------- Net deferred tax asset $ 34,334 $ 34,692 =========== =========== The Company's effective tax rate differs from the applicable U.S. statutory federal income tax rate due to the following:
1996 1995 1994 ------ ------ ------ Statutory rate (benefit) 35% 35% (35%) Write-off of purchased research and development -- -- 46 Foreign source income taxed at lower effective rates (31) (24) (3) Utilization of foreign NOL -- (1) -- Recognition of fully reserved deferred tax debits -- (4) (1) Utilization of foreign tax/AMT credits -- -- (1) Favorable audit settlement (5) (2) (1) State Income taxes, net of federal income taxes benefit -- (1) -- Domestic NOL loss carryback (5) -- -- Other, net (1) -- 1 ------- ------ ------ Effective rate (7)% 3% 6% ======= ====== ======
During 1996, 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 deficit at December 31, 1996, is approximately $192,000,000 of accumulated earnings of foreign operations that would be subject to U.S. income or foreign withholding taxes, if and when repatriated. 38 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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 or a significant reduction in NOLs 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: Long-term debt consists of the following (in thousands):
1996 1995 ---- ---- Convertible debt: 8.5% Convertible Subordinated Notes due 1999 $ 114,980 $ 115,000 Swiss Franc Subordinated Bonds due 1988-2001 with effective interest rate of 8.5% (net of unamortized discount of $542 and $890 in 1996 and 1995, respectively) 11,149 14,965 Zero Coupon Guaranteed Swiss Franc Bonds with an effective interest rate of 8.5%, maturing in 2002 (net of unamortized discount of $261 and $495 in 1996 and 1995, respectively) 7,536 9,751 3-1/4% Subordinated Double Convertible Swiss Franc Bonds due 1997 (net of unamortized discount of $53 in 1995) -- 4,240 Zero Coupon ECU Subordinated Bonds due 1987-1996 with an effective interest rate of 8.5% -- 1,396 ---------- ---------- 133,665 145,352 Other Debt: Hungarian mortgages with interest rates ranging from LIBOR + 1.5% to LIBOR + 2% due in various installments through 2001 assumed in connection with the acquisition of Alkaloida 6,625 -- U.S. mortgages with variable interest rates ranging from 7.1% to 8.9% interest and principal payable monthly through 2022 13,098 11,318 U.S. capital leases with interest rates ranging from 4.91% to 6.12% payable monthly through 1999 2,589 -- Loans from various Hungarian banks collateralized by property, plant and equipment and inventory having a net book value of $23,599 at December 31, 1996, with interest rates ranging from LIBOR +0.75% to 25.5% maturing at various dates through 2001 assumed in connection with the acquisition of Alkaloida 24,328 -- Other long-term debt due in U.S. dollars and various foreign currencies with interest rates ranging from 5.75% to 9.4% 2,145 5,173 ---------- ---------- 182,450 161,843 Less current portion 5,961 7,650 ---------- ---------- Total long-term debt $ 176,489 $ 154,193 ========== ==========
39 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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. During 1996, $20,000 of the Convertible Notes were converted into 904 shares of common stock of the Company. The fair value of the Convertible Notes was approximately $125,903,000 at December 31, 1996. 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, 1996. 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 $43.62 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 $11,691,000 at December 31, 1996. 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 "Bio Certificates"). Currently, the face value of the outstanding Bio Capital, SFr. 39,615,000, is 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 $7,611,000 at December 31, 1996. During 1996, SFr. 4,952,000 of the 3-1/4% Subordinated Double Convertible Bonds due 1997 were converted into 6,190 shares of Ciba Geigy Ltd. Common stock. The Company has the option to redeem the ICN-Swiss Franc Xr Bonds and Bio Certificates in the event that the market price of the Company's common stock meets certain conditions. 40 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The Company has mortgage notes payable totaling $20,842,000, payable in U.S. dollars, Deutsche marks, Dutch guilders and Hungarian forints, collateralized by certain real property of the Company, having a net book value of $30,828,000 at December 31, 1996. Annual aggregate maturities of long-term debt subsequent to December 31, 1996 are as follows (in thousands): 1997 $ 5,961 1998 21,104 1999 126,973 2000 11,602 2001 8,580 Thereafter 8,230 ------------- Total $ 182,450 ============= 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, classified in notes payable, aggregating $18,901,000 of which $10,857,000 was outstanding at December 31, 1996. 7. COMMITMENTS AND CONTINGENCIES: LITIGATION In the Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws (the "Securities Complaint") (the "1995 Actions"), plaintiffs allege that Defendants made various deceptive and untrue statements of material fact and omitted material facts regarding its 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 I 10b-5 promulgated thereunder. Plaintiffs seek unspecified compensatory damages, pre-judgment and post-judgment interest and attorneys' fees and costs. Plaintiffs motion seeking 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 was granted. Defendants filed their answer to the Securities Complaint, and are actively engaged in the pre-trial discovery process. This trial is currently scheduled to commence in January 1998. Defendants intend to vigorously defend this action. 41 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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 and 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 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 inactive. The Company believes that these suits are without merit and intends to defend them vigorously. Management believes that, having extensively reviewed the issues in the above referenced matters, there are strong defenses and the Company has and continues to defend the litigation vigorously. While the ultimate outcome of the 1995 Actions and 1994 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. ICN, SPI and Viratek and certain of their current and former officers and directors (collectively, the "ICN Defendants") were named defendants in certain consolidated class actions. Plaintiffs alleged that the ICN Defendants made, or aided and abetted PaineWebber, Inc. 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, PaineWebber research reports and filings with the Securities and Exchange Commission. In October, 1996, the Company entered into a settlement agreement with the plaintiffs. Under the terms of the settlement, the Company agreed to pay $4,500,000 in cash and $10,000,000 in common stock of the Company, based upon the fair market value of the stock on the date of settlement. On January 6, 1997, the court approved the settlement and signed the order and judgment dismissing the amended complaint with prejudice. 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 42 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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. The Company has and continues to produce documents to the SEC pursuant to its request and the SEC has taken the depositions of certain current and former officers, directors, and employees of the Company. In addition, the Company received a Subpoena from a Grand Jury of the United States District Court, Central District of California, requesting the production of documents covering a broad range of matters over various time periods. The Company and Milan Panic are subjects of the investigation. The Company has and continues to cooperate in the production of documents pursuant to the Subpoena. A number of current and former employees of the Company have been interviewed by the government in connection with the investigation. The Company is a party to a number of other pending or threatened lawsuits. In the opinion of management, the ultimate resolution of these other matters will not have a material effect on the Company's consolidated financial position or results of operations. 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. 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 1996, 1995 and 1994. 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, 1996, the present value of the deferred compensation benefits to be paid has been accrued in the amount of $2,914,000. 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. ENVIRONMENTAL ISSUES IN HUNGARY: In connection with the acquisition of Alkaloida from the government of Hungary, an environmental remediation fund (the "Fund") of approximately $7,200,000 was established by the government from the proceeds that the Company tendered. This Fund will be used to remediate a waste disposal site adjacent to Alkaloida, contaminated by past plant operations, by 1998. If the cash from this Fund is insufficient to fully remediate the waste disposal site, the Company is liable for the shortfall. The Company believes, based upon current third party studies and estimates, that the cash in the Fund is adequate to remediate the waste disposal site. 43 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 OTHER: Milan Panic, the Company's Chairman of the Board and Chief Executive Officer, is employed under a contract expiring December 31, 1998 that provides for, among other things, certain health and retirement benefits. The contract is automatically extended at the end of each year for successive one year periods unless either the Company or Mr. Panic terminates the contract upon six months prior written notice. 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, and will be entitled when serving as a consultant to participate in the Company's medical and dental plans. Including such cost-of-living adjustments, the annual cost of such consulting services is currently estimated to be in excess of $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 with six 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 the Merger, each of the Predecessor Companies had their own stock option plans. Upon consummation of the Merger, the Company assumed all options outstanding under the existing stock option plans. The existing stock option plans were exchanged for shares of the Company. 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 the Company common stock, respectively. Subsequent to the Merger, no new grants are being issued under these plans. The 1994 Stock Option Plan was adopted on January 26, 1995 and subsequently approved by stockholders. This plan provides for the granting of a maximum of 3,236,000 stock options. Under the plan each nonemployee director is granted 15,000 options on the day following the annual meeting of stockholders. 44 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 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 Company has adopted the disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 --------- --------- Net income as reported $ 86,928 $ 67,337 pro forma 82,835 63,856 Primary earnings per share as reported 2.40 2.20 pro forma 2.28 2.09 Fully diluted earnings per share as reported 2.27 2.19 pro forma 2.17 2.09 The schedule below reflects the number of outstanding and exercisable shares as of December 31, 1996 segregated by price range: OUTSTANDING EXERCISABLE -------------------- -------------------- Number Average Number Average of Exercise of Exercise Dollar Range Shares Price Shares Price - ------------ ------ ----- ------ ----- $3.80 to $12.76 1,272,925 9.48 1,007,029 9.43 $13.38 to $22.88 3,548,935 17.93 1,882,234 17.95 $23.00 to $43.63 988,140 29.32 883,737 29.77 --------- --------- 5,810,000 3,773,000 ========= ========= The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: Dividend yield of 1.4%, expected volatility of 60.42%; risk-free interest rate of 6.25%; and expected lives of 6.5 years. Because the determination of the fair value of all options granted includes the factors described in the preceding paragraph and, because additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects of reported net income for future years. 45 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The following table sets forth information relating to stock option plans during the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share data): AVERAGE OPTION TOTAL PRICE -------- ----- Shares under option, December 31, 1993 3,212 $ 15.67 Granted 1,277 Exercised (84) $ 6.95 Canceled (159) Effect of Merger 2,086 -------- Shares under option, December 31, 1994 6,332 $ 17.66 Granted 621 Exercised (515) $ 8.02 Canceled (192) -------- Shares under option, December 31, 1995 6,246 $ 16.86 Granted 532 Exercised (868) $ 12.01 Canceled (100) -------- Shares under option, December 31, 1996 5,810 $ 18.13 ======== Exercisable at December 31, 1996 3,773 ======== Options available to grant at December 31, 1995 2,149 ======== Options available to grant at December 31, 1996 1,717 ======== 46 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 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 GlyDerm, a Michigan based skin care company, and several smaller acquisitions. In conjunction with and conditioned upon the consummation of the sale of the Siemens Shares (See Note 15), the Company entered into an agreement (the "Put Agreement") with the Purchasers pursuant to which the Company sold 100,000 additional shares of common stock for $1,950,000 (together with the Siemens shares, the "Purchaser Shares") and sold the Purchaser the right to put (the "Put Right") 1,064,833 shares of common stock, valued at $23,120,000 at December 31, 1996, to the Company at $30 per share on January 10, 2000 for $3,200,000. The exercisability of the Put Right is subject to acceleration under certain circumstances as described in the Put Agreement. If an acceleration event occurs, the exercise price of the put would be $22.50 per share plus an incremental increase at the annual rate of 10% for the period from the closing date to the date of exercise of the Put Right. Additionally, the number of shares subject to the Put Right would be reduced by one third during each of the three years after the closing date if certain closing price thresholds and conditions as specified in the Put Agreement are achieved. The number of shares subject to the Put Right may also be reduced if the Purchaser sells any Purchaser Shares in excess of certain specified prices during each of the years after the closing date and until the Put Right expires. In connection with the Merger, the Company adopted a Stockholder Rights Plan to protect stockholders' rights in the event of a proposed or actual acquisition of 15% or more of the outstanding shares of the Company's common stock. As part of this plan, each share of the Company's common stock carries a right to purchase one one-hundredth (1/100) of a share of Series A Preferred Stock (the "Right"), par value $.01 per share, of the Company at a price of $125 per one one-hundredth of a share, subject to adjustment, which becomes exercisable only upon the occurence of certain events. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per right until the occurrence of certain events. The Rights expire on November 1, 2004. 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%. Accordingly, all relevant stock option data and per share data have been restated to reflect these dividends and distributions. 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. 9. PREFERRED STOCK In October, 1996, the Company issued 50,000 shares of Series B preferred stock for net proceeds of $47,392,000 with a liquidation preference of $1,000 per share. The preferred stock is convertible at the option of the holder into common stock based on a conversion price calculated using the average daily low for the five trading days preceding the conversion date and applying a discount ranging from 3% to 13%. The preferred stock has a 6% annual dividend that is cumulative and payable quarterly. The Company has the option to pay the dividend in either cash or common stock of the Company. The aggregate amount of preferred stock that can be converted within the first two six-month periods following the issuance of the preferred stock is restricted. The preferred stock is also mandatorily convertible into common stock on the fifth anniversary of its issuance. However, this provision is subject to extension under certain circumstances. Dividends paid in common stock are based on the fair value of common stock at the time of declaration. Net income attributable to common stock reflects for purposes of computing earnings per share adjustments for cumulative preferred dividends and an embedded dividend arising from discounted conversion terms of the Series B preferred stock. The preferred stock was issued as a private placement. 47 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10 . DETAIL OF CERTAIN ACCOUNTS (IN THOUSANDS): 1996 1995 ---- ---- RECEIVABLES, NET: Trade accounts receivable............... $ 257,619 $ 71,539 Other receivables....................... 9,782 5,044 --------- --------- 267,401 76,583 Allowance for doubtful accounts (8,870) (8,070) --------- --------- $ 258,531 $ 68,513 ========= ========= INVENTORIES, NET: Raw materials and supplies.............. $ 48,656 $ 56,227 Work-in-process......................... 14,625 14,865 Finished goods.......................... 67,845 80,373 --------- --------- 131,126 151,465 Allowance for inventory obsolescence (10,153) (12,709) --------- --------- $ 120,973 $ 138,756 ========= ========= PREPAID EXPENSES AND OTHER CURRENT ASSETS: Advances to inventory suppliers........ $ 14,335 $ 14,088 Tax receivable......................... 6,100 -- Prepaid expenses and other current assets.. 4,544 10,091 --------- --------- $ 24,979 $ 24,179 ========= ========= 48 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 PROPERTY, PLANT AND EQUIPMENT: Land................................... $ 17,708 $ 18,173 Buildings.............................. 84,054 62,967 Machinery and equipment................ 91,602 62,965 Furniture and fixtures................. 18,819 12,418 Leasehold improvements................. 3,019 2,603 ---------- --------- 215,202 159,126 Accumulated depreciation and amortization.. (46,420) (37,358) Construction in progress................... 65,427 50,719 ---------- --------- $ 234,209 $ 172,487 ========== ========= During the third quarter of 1994, ICN Yugoslavia commenced a construction and modernization program at its pharmaceutical complex outside Belgrade, Yugoslavia. At December 31, 1996 and 1995, construction in progress primarily relates to costs incurred to date for these facilities and includes capitalized interest of $3,770,000 in 1996 and $1,978,000 in 1995. 1996 1995 ---- ---- ACCRUED LIABILITIES: Payroll and related items.............. $ 18,149 $ 11,579 Interest............................... 3,687 3,739 Legal Settlement....................... 10,000 -- Other.................................. 23,547 23,713 ---------- --------- $ 55,383 $ 39,031 ========== ========= 49 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 11. BUSINESS SEGMENTS AND GEOGRAPHIC DATA: The Company is a multinational pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research chemical and diagnostic products. The principal markets for its products are Yugoslavia and the United States. For 1996, approximately 44% of the Company's sales are from Yugoslavia while sales in the United States represent 20% of total Company sales. Operations in Yugoslavia are subject to business risks described in Note 13. The Company's largest selling product, Virazole(R), accounts for approximately 5% of total Company sales for 1996 and is sold principally in the United States for the treatment of respiratory syncytial virus ("RSV") in young infants. In July 1995, the Company entered into a licensing agreement with a subsidiary of Schering-Plough Corporation ("Schering") to license Virazole(R) as a treatment for chronic hepatitis C in combination with alpha interferon. Under an agreement, Schering is responsible for all clinical developments worldwide. The Company operates in two business segments: pharmaceutical (the "Pharmaceutical group") and, since the effective date of the Merger, biomedical (the "Biomedical group"). The Pharmaceutical group produces and markets pharmaceutical products principally in the United States, Mexico, Canada and Europe. The Biomedical group markets research products and related services, immunodiagnostic reagents and instrumentation, and provides radiation monitoring services. The following tables set forth the amount of net sales, operating income (loss), identifiable assets of the Company by business segment and geographical areas for 1996, 1995 and 1994 (in thousands): BUSINESS SEGMENTS 1996 1995 1994 ---- ---- ---- NET SALES Pharmaceutical ........ $ 549,753 $ 446,566 $ 357,821 Biomedical............. 64,327 61,339 9,030 ------------ ----------- ----------- Total.................. $ 614,080 $ 507,905 $ 366,851 ============ =========== =========== OPERATING INCOME (LOSS): Pharmaceutical......... $ 155,344 $ 129,753 $ (152,092)(1) Biomedical............. 4,985 5,707 410 Corporate.............. (46,216) (42,294) (13,490) ------------ ----------- ------------ Total.................. $ 114,113 $ 93,166 $ (165,172) ============ =========== ============ (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. IDENTIFIABLE ASSETS: Pharmaceutical........ $ 600,019 $ 373,027 $ 314,517 Biomedical............ 78,095 51,407 49,769 Corporate............. 100,537 93,864 77,187 ------------ ----------- ----------- Total................. $ 778,651 $ 518,298 $ 441,473 ============ =========== =========== 50 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) DEPRECIATION AND AMORTIZATION: 1996 1995 1994 ---- ---- ---- Pharmaceutical.................... $ 11,305 $ 9,549 $ 8,303 Biomedical........................ 2,718 2,221 524 Corporate......................... 2,269 2,044 421 ---------- ---------- -------- Total............................. $ 16,292 $ 13,814 $ 9,248 ========== ========== ======== CAPITAL EXPENDITURES: Pharmaceutical..................... $ 15,785 $ 56,363 $ 19,745 Biomedical......................... 5,230 2,680 299 Corporate.......................... 8,317 450 161 ---------- ---------- -------- Total.............................. $ 29,332 $ 59,493 $ 20,205 ========== ========== ======== GEOGRAPHIC DATA SALES: United States....................... $ 121,782 $ 124,865 $ 81,563 Canada.............................. 18,953 18,765 15,973 ---------- --------- --------- North America ................... 140,735 143,630 97,536 Latin America (principally Mexico).. 49,444 43,684 56,737 Western Europe...................... 59,294 58,170 31,789 Yugoslavia.......................... 267,166 234,661 172,124 Russia.............................. 66,788 20,300 -- Hungary............................. 21,461 -- -- ---------- --------- --------- Eastern Europe................... 355,415 254,961 172,124 Asia, Africa, and Australia ..... 9,192 7,460 8,665 ---------- --------- --------- Total............................ $ 614,080 $ 507,905 $ 366,851 ========== ========= ========= OPERATING INCOME (LOSS): United States.................... $ 52,461 $ 64,810 $(183,681)(1) Canada........................... 1,399 4,501 3,771 ----------- --------- --------- North America................ 53,860 69,311 (179,910) Latin America (principally Mexico 11,246 8,757 9,318 Western Europe................... 607 4,712 1,496 Yugoslavia....................... 70,616 46,296 15,505 Russia........................... 22,021 6,179 -- Hungary.......................... 1,964 -- -- ----------- --------- --------- Eastern Europe............... 94,601 52,475 15,505 Asia, Africa, and Australia ..... 15 205 1,909 Corporate........................ (46,216) (42,294) (13,490) ----------- --------- --------- Total............................ $ 114,113 $ 93,166 $(165,172) =========== ========= ========= (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. 51 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) IDENTIFIABLE ASSETS: United States.................... $ 105,670 $ 57,070 $ 66,942 Canada........................... 7,433 8,865 8,858 ---------- --------- --------- North America................. 113,103 65,935 75,800 Latin America (principally Mexico) 30,691 23,823 26,787 Western Europe................... 56,578 57,950 52,469 Yugoslavia....................... 342,983 262,272 203,357 Russia........................... 54,990 12,668 -- Hungary.......................... 77,245 -- -- ---------- ---------- --------- Eastern Europe............... 475,218 274,940 203,357 Asia, Africa, and Australia ..... 2,524 1,786 3,773 Corporate........................ 100,537 93,864 79,287 ---------- ---------- --------- Total............................ $ 778,651 $ 518,298 $ 441,473 ========== ========== ========= 52 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 12. SUPPLEMENTAL CASH FLOWS DISCLOSURES: NON-CASH TRANSACTIONS: - ---------------------- During 1996, a principal amount of SFr. 4,952,000 of the 3-1/4% Subordinated Double Convertible Bonds due 1997 were converted into 6,190 shares of Ciba-Geigy Ltd. common stock. The effect of the conversion was to reduce long term debt by $4,240,000 and other assets by $3,988,000. On March 29, 1996, the Company sold its instrument business division to Titertek Instruments, Inc. ("Titertek"), an Alabama corporation, for approximately $4,400,000 in the form of a note receivable from Titertek. Such amount represents the net book value of the assets and liabilities of the division, excluding certain assets and liabilities as specified in the contract, plus a deferred gain of $2,000,000 to be recognized as cash is collected. As of December 31, 1996, approximately $500,000 has been recognized into income. During 1996, the Company issued 964,833 shares of common stock for the acquisition of the Siemens dosimetry business, 213,385 shares for the Cappel acquisition and 144,000 shares for the GlyDerm acquisition (See Note 15). The increase in goodwill and intangibles from the beginning of the year is principally due to these acquisitions. During 1996, the Company entered into capital leases of approximately $2,973,000 for the purchase of computer equipment. In November 1995, ICN Yugoslavia exchanged, in a non-recourse transaction, accounts receivable for $10,900,000 of inventories and $9,800,000 for construction materials for its plant expansion. During 1995 and 1994, the Company issued common stock dividends and distributions of $29,187,000 and $24,157,000, respectively. There were none issued in 1996. Cash and non-cash financing activities consisted of the following (in thousands): MERGER OF PREDECESSOR COMPANIES: 1994 ---- Fair value of assets acquired (other than cash)....... $ 336,849 Fair value of liabilities assumed..................... (208,723) ----------- 128,126 Stock issued in connection with Merger................ (134,393) Direct acquisition costs........................... (3,654) ----------- Cash received......................................... $ (9,921) =========== In the fourth quarter of 1995 the purchase price allocation was finalized by recording a liability for a pre-acquisition contingency, in an amount that the Company considers adequate. 53 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 The following table sets forth the amounts of interest and income taxes paid during 1996, 1995 and 1994 (in thousands): 1996 1995 1994 ---- ---- ---- Interest paid (including amounts capitalized in 1996 and 1995 of $3,770 and $1,978, respectively)............... $ 24,247 $ 23,308 $ 5,237 ========= ========= ========= Income taxes paid......................... $ 6,845 $ 6,915 $ 2,062 ========= ========= ========= 13. ICN YUGOSLAVIA: The summary balance sheets of ICN Yugoslavia as of December 31, 1996 and 1995, and the summary statements of income before provision for income taxes and minority interest for the years ended December 31, 1996, 1995 and 1994, are presented below. ICN YUGOSLAVIA SUMMARY BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) 1996 1995 ---- ---- Cash............................... $ 27,074 $ 2,696 Marketable securities.............. -- 27,374 Receivables, net................... 158,292 21,721 Inventories, net................... 53,016 103,511 Other current assets............... 11,452 14,267 Other long-term assets............. 104,983 104,112 ---------- ---------- $ 354,817 $ 273,681 ========== ========== Current liabilities................ $ 38,386 $ 22,424 Minority interest and long term liabilities........... 76,344 59,680 Stockholders' equity............... 240,087 191,577 ---------- ---------- $ 354,817 $ 273,681 ========== ========== 54 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 ICN YUGOSLAVIA SUMMARY STATEMENTS OF INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS) 1996 1995 1994 ---- ---- ---- Sales....................................... $ 267,166 $ 234,661 $ 172,124 Cost of sales............................... 157,981 116,748 121,701 --------- ---------- --------- Gross profit................................ 109,185 117,913 50,423 Operating expenses.......................... 38,569 71,617 34,918 --------- ---------- --------- Income from operations...................... 70,616 46,296 15,505 Interest income............................. (2,132) (4,087) (2,049) Interest expense............................ 1,478 3,610 933 Translation and exchange losses (gains), net 4,290 (12,063) 1,417 --------- ---------- --------- Income before provision for income taxes and minority interest............ $ 66,980 $ 58,836 $ 15,204 ========== ========== ========= BUSINESS ENVIRONMENT: ICN Yugoslavia, a 75% owned subsidiary, operates in a business environment that is subject to significant economic volatility and political instability. The current trend in Yugoslavia is toward unfavorable economic conditions that include continuing liquidity problems, inflationary pressures, unemployment, a weakened banking system and a high trade deficit. The future of the economic and political environment of Yugoslavia is uncertain and could deteriorate to the point that a material adverse impact on the Company's financial position and results of operations could occur. LIQUIDITY PROBLEMS: In an effort by the Central Bank of Yugoslavia to control inflation through tight monetary controls, Yugoslavia is now experiencing severe liquidity problems. This has resulted in longer collection periods on ICN Yugoslavia's receivables. Most of ICN Yugoslavia's customers are slow to pay due to delays of health care payments by the government. This has also resulted in ICN Yugoslavia being unable to make timely payments on its payables. In 1997, ICN Yugoslavia will attempt to reduce its receivables and improve its cash flow by restricting future sales; however, these actions may result in sales and earnings in 1997 that are lower than 1996. ICN Yugoslavia holds approximately $26,000,000 of cash in a bank outside of Yugoslavia originally intended to be used for future plant expansion in Yugoslavia. These funds may be available for working capital purposes if necessary. INFLATION AND MONETARY EXPOSURE: ICN Yugoslavia 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 Yugoslavia began experiencing a decline in the availability of hard currency and inflation levels accelerated to an approximate annual rate of 90% by the end of the year. In expectation of a devaluation late in 1995, ICN Yugoslavia took action early in the fourth quarter of 1995 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 U.S. $1 to a rate of 4.7 dinars per U.S. $1. On this date, ICN Yugoslavia had a net monetary liability position that resulted in a gain of $8,724,000. 55 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 Throughout 1996, the level of inflation in Yugoslavia has been relatively stable with a Yugoslavian government reported inflation rate of 60%. During this time the government has exercised restraint on the amount of dinars in circulation. The net monetary asset position of ICN Yugoslavia has increased due to rising accounts receivable balances resulting from higher sales and a lengthening of the collection period of receivables. From a beginning balance of $7,396,000 at December 31, 1995, the net monetary asset position of ICN Yugoslavia has risen to $134,000,000 at December 31, 1996 which is 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 Yugoslavia 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 increase substantially if the timing of future devaluations falls significantly behind the level of inflation. POTENTIAL DEVALUATION: The potential loss arising from a devaluation will depend on the size of the devaluation and the magnitude of the net monetary asset position at the time of the devaluation. The timing and the size of a devaluation are strongly influenced by the amount of inflation and length of time from the last devaluation. Since the last devaluation on November 24, 1995, the overall level of inflation has been at an approximate annual rate of 60%. The risk of devaluation increases as time passes and inflation continues. The Company is unable to predict when a devaluation will occur. GOVERNMENT SPENDING LIMITATIONS: The government has expressed its intention to limit total 1997 health care spending on pharmaceuticals. Currently, ICN Yugoslavia maintains a 50% market share for pharmaceutical products in Yugoslavia. With approximately 80% of ICN Yugoslavia sales arising from government or government funded entities, ICN Yugoslavia is economically dependent on the government. If the government continues to follow this course of action it could result in a significant decrease in 1997 domestic sales. ICN Yugoslavia plans to partially mitigate the effects of decreased domestic spending by placing more emphasis on its export business and by promoting sales to privately funded pharmacies. The extent that these actions will mitigate the decreases in government spending is uncertain. The government decision to reduce health care spending could have a material adverse affect on the financial results of the Company. CREDIT RISK: ICN Yugoslavia is subject to credit risk in that 80% or $196,873,000 of 1996 Yugoslavian domestic sales are to the government or government funded entities of which $123,706,000 is included in accounts receivable at December 31, 1996. Included in Yugoslavian domestic sales and accounts receivable to government funded entities are $82,001,000 and $88,069,000, respectively, to three major customers. 56 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 SANCTIONS: In December 1995, the United Nations Security Council adopted a resolution that suspended economic sanctions that had been imposed on the Federal Republic of Yugoslavia since May 1992. A substantial majority of ICN Yugoslavia's business is conducted in the Federal Republic of Yugoslavia. Sanctions had contributed to an overall deteriorating business environment in which ICN Yugoslavia operated and denied ICN Yugoslavia access to export sales which previously totaled approximately $30,000,000 a year. Sanctions also created restrictions on ICN Yugoslavia's overseas investments and imposed administrative burdens in obtaining raw materials outside of Yugoslavia. The Company believes the suspension of sanctions continues to provide a more favorable business environment; however, the beneficial effects of the suspension will not take place immediately as the economy needs to adjust to new opportunities. If Yugoslavia does not fully comply with the Dayton Accords, there is a risk that sanctions could be reinstated. PRICE CONTROLS: ICN Yugoslavia 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 Yugoslavia products. During 1996 and 1995, ICN Yugoslavia received fewer price increases than in the past due to relatively lower levels of inflation. As inflation rises, the size and frequency of price increases are expected to increase. During the third quarter of 1995, ICN Yugoslavia 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 Yugoslavia received an 80% price increase on its pharmaceutical products. Price increases obtained by ICN Yugoslavia are based on economic events preceding the price increase and not on expectations of ongoing inflation. This lag in permitted price increases creates downward pressure on the gross margins that ICN Yugoslavia receives on its products. When necessary, ICN Yugoslavia 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. DIVIDENDS: In 1992, ICN Yugoslavia paid a $10,000,000 dividend of which the Company received 75% or $7,500,000. Yugoslavian law allows free distribution of earnings whether to domestic (Yugoslavian) or international investors. Under this law a dividend must be declared and paid immediately after year end. Earnings that are not immediately paid as a dividend cannot be used for future dividends. Additionally, ICN Yugoslavia is allowed to pay dividends out of earnings calculated under local statutory tax basis rules, not earnings calculated under GAAP. ICN Yugoslavia dividends are payable in dinars which must be exchanged for dollars before the dividend is repatriated. During high levels of inflation the dinar denominated dividend could devalue substantially by the time the dividend is exchanged for dollars. Under GAAP, ICN Yugoslavia had accumulated earnings, which are not available for distributions, of approximately $165,521,000 at December 31, 1996. However, additional repatriation of cash could be declared from contributed capital for Yugoslavian purposes of $360,000,000 at December 31, 1996, as provided for in the original purchase agreement. In 1992, the Company made the decision to no longer repatriate the earnings of ICN Yugoslavia and instead will use these earnings for local operations, plant expansion, reduction of debt and additional investment in Eastern Europe. 57 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 14. CONCENTRATIONS OF CREDIT RISK: Financial instruments that potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of cash deposits and marketable securities. The Company places its cash and cash equivalents with respected financial institutions and limits the amount of credit exposure to any one financial institution. (See also Note 13.) 15. ACQUISITIONS: In September 1996, the Company acquired a majority interest in Alkaloida, a pharmaceutical company in Hungary. The Company is investing $22,115,000 for a 60% interest in Alkaloida. An initial payment of $9,115,000 was made in September 1996 and the final payment of $13,000,000 for this acquisition was paid in January 1997. Alkaloida is a major producer of medicinal opiates and morphine, as well as raw materials used in pharmaceutical manufacturing. The purchase price allocation is preliminary pending the outcome of environmental remediation studies expected to be completed in 1997. (See also Note 7.) In September 1996, the Company acquired the assets and liabilities of the Cappel Division ("Cappel") of Organon Teknika Corporation. Cappel manufactures and sells immunochemical reagents used in biotechnology and biomedical laboratories around the world. The Company acquired the assets and liabilities of Cappel, with a net book value of $2,078,000, for 213,385 shares of the Company's common stock valued at approximately $4,327,000 based upon the market price of the stock at the time the shares were issued. In July 1996, the Company acquired the assets and liabilities of the Dosimetry Service Division ("Dosimetry") of Siemens Medical Systems, Inc. ("Siemens") with a net book value of approximately $3,882,000, for $23,668,000, for 964,833 shares of the Company's common stock, valued at approximately $22,616,000, based upon the market price of the stock at the time the shares were issued and a $982,000 cash payment. Under the terms of the purchase agreement, Siemens had the right, exercisable on or before December 23, 1996, to require the Company to repurchase the 964,833 shares of common stock owned by Siemens (the "Siemens Shares") for $23.51 per share in cash. On December 23, 1996, Siemens sold 964,833 shares of the Company's common stock to certain accounts over which an investment company exercises investment authority (collectively the "Purchasers") for $19.50 per share. Upon the consummation of the sale of the Company's shares to the Purchasers, the Company paid Siemens $4,378,000, which represented the excess of $23.51 above $19.50 for the 964,833 shares ($3,869,000), plus interest, as specified in the purchase agreement. (See also Note 8.) During July 1996, the Company acquired a 49% interest in Polypharm, a Russian pharmaceutical company located in Chelyabinsk. The Company paid approximately $1,100,000 in exchange for shares of Polypharm. During the third quarter of 1996, the Company acquired an additional 16% interest in Polypharm for approximately $500,000, raising its ownership to 65%. During the fourth quarter, the Company acquired an additional 19% interest, raising its ownership to 84%. Polypharm produces analgesics, antibiotics and antihistamines. In June 1996, the Company acquired a 73% interest in Leksredstva, a Russian pharmaceutical company, headquartered in Kursk, for approximately $5,700,000 in cash. During the third quarter of 1996, the Company acquired an additional 22% interest in Leksredstva for $500,000, from existing stockholders, increasing its interest in Leksredstva to 95%. Leksredstva manufactures chemical products, pharmaceutical raw materials and finished form drugs that include cardiovasculars, anticancer drugs, analgesics and iodine preparations. 58 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 On February 29, 1996, the Company acquired the assets and liabilities of GlyDerm, Inc. ("GlyDerm"), a Michigan based privately held company that develops proprietary glycolic acid and other skin care products, with a net book value of $1,093,000, for a total purchase price of approximately $7,670,000, consisting of a $2,250,000 cash payment, 144,000 shares of the Company's common stock valued at approximately $3,000,000 and $2,420,000 which represents the adjusted earn-out payable, as provided in the acquisition agreement, of which the first $1,000,000 is payable in cash and the balance payable 50% in cash and 50% in shares of common stock. To fund the acquisition of GlyDerm and several other small acquisitions in January 1996, the Company sold approximately 400,000 common shares to a foreign bank for net proceeds of $6,000,000. The following table presents unaudited consolidated pro forma financial information for the twelve months ended December 31, 1996 and 1995, as though the acquisitions made in 1996 had occurred on January 1, 1995. (Unaudited) YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ---- ---- Net sales $ 672,222 $ 618,795 Income before provision for income taxes and minority interest $ 105,306 $ 101,332 Net income $ 90,523 $ 77,297 Net income per share $ 2.59 $ 2.21 The unaudited pro forma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions taken place on January 1, 1995. In addition, the pro forma results are not intended to be a projection of the future results and do not reflect any synergies that might be achieved from the combined operations. All acquisitions have been accounted for as purchases; operations of the companies and businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The excess of the purchase price over the fair value of net assets acquired is included in goodwill and is being amortized on a straight-line basis over 5 to 23 years based upon the nature of the business or products acquired. These acquisitions do not, in the aggregate, constitute the acquisition of a significant business as defined by Regulation S-K promulgated by the Securities and Exchange Commission. A summary of the purchase price allocation of the above mentioned 1996 acquisitions is a follows (in thousands): TOTAL ----- Current assets (excluding cash of $1,214) $ 62,798 Property, plant and equipment 52,044 Goodwill and intangibles 28,687 Other non-current assets 640 Current liabilities (48,261) Long-term liabilities (15,037) Minority interest (16,505) ---------- Total purchase price $ 64,366 ========== 59 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 In March 1996, the Company purchased an additional 15% interest in the Russian pharmaceutical company, ICN Oktyabr, thereby raising the Company's ownership from 75% to 90%. On October 1, 1996, ICN China, Inc. ("ICN China"), a wholly-owned subsidiary of the Company, entered into a joint venture agreement with Wuxi Pharmaceutical Corporation ("Wuxi"), a Chinese state-owned company, to establish a limited liability company (the "Chinese Joint Venture Entity") for the production and sale of pharmaceutical products. The Chinese Joint Venture Entity is 75% owned by ICN China and 25% owned by Wuxi. Wuxi is a supplier of injectable antibiotics. Wuxi will contribute its existing operation, with an approximate net book value of $6,000,000, to the Chinese Joint Venture Entity and ICN China will contribute a total of $24,000,000 in cash over three years, primarily for the construction of a new pharmaceutical production plant and the purchase of related machinery and equipment. The terms and conditions of the joint venture were finalized in the first quarter of 1997. 16. AGREEMENT WITH SCHERING-PLOUGH CORPORATION: 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 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 is 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 on a straight line basis to income over the fifteen year exclusive period of the Agreement. 60 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (In thousands)
ADDITIONS ---------------------- BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE BEGINNING COSTS AND TO OTHER FROM AT END OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD --------- -------- -------- -------- --------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful receivables $ 8,070 $ 4,345 $ 557 $ (4,102) $ 8,870 ======== ======== ======== ======== ======== Reserve for inventory obsolescence $ 12,709 $ 106 $ -- $ (2,662) $ 10,153 ======== ======== ======== ======== ======== Deferred tax asset valuation allowance $ 54,181 $ -- 1,588 $ -- $ 55,769 ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful receivables $ 10,036 $ (1,262) $ (197) $ (507) $ 8,070 ======== ======== ======== ======== ======== Reserve for inventory obsolescence $ 15,390 $ (2,310) $ 550 $ (921) $ 12,709 ======== ======== ======== ======== ======== Deferred tax asset valuation allowance $ 86,492 $ -- $(29,123)(1) $ (3,188) $ 54,181 ======== ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful receivables $ 7,633 $ 1,410 $ 1,507 $ (514) $ 10,036 ======== ======== ======== ======== ======== Reserve for inventory obsolescence $ 1,317 $ 3,835 $ 11,431(2) $ (1,193) $ 15,390 ======== ======== ========= ======== ======== Deferred tax asset valuation allowance $ 2,307 $ -- $ 84,643(2) $ (458) $ 86,492 ======== ======== ========= ======== ========
(1) 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 Consolidated Financial Statements). (2) 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 Consolidated Financial Statements). 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 62 PART III 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 1996 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. 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 1996 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Executive Compensation and Related Matters." 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 1996 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Ownership of the Company's Securities." 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 1996 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled "Executive Compensation and Related Matters" and "Certain Transactions." 63 PART IV 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 Consolidated 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. Restated Certificate of Incorporation of Registrant previously filed as Exhibit 3.1 to Registration Statement No. 33-84534 on Form S-4, which is incorporated herein by reference, as amended by the Certificate of Merger, dated November 10, 1994, of ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Viratek, Inc. with and into ICN Merger Corp. previously filed as Exhibit 4.1 to Registration Statement No. 333-08179 on Form S-3, which is incorporated herein by reference. 3.2 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of the Registrant previously filed as Exhibit 4.4 to Registration Statement No. 333-16409 on Form S-3, which is incorporated herein by reference. 3.3. Bylaws of the Registrant previously filed as Exhibit 3.2 to Registration Statement No. 33-84534 on Form S-4, which is incorporated herein by reference. 3.4 Rights Agreement, dated as of November 2, 1994, between the Registrant and American Stock Transfer and Trust Company, as trustee, previously filed as Exhibit 4.3 to the Company's Registration Statement on Form 8-A, dated November 10, 1994, which is incorporated herein by reference. 10.1 Indenture between ICN Pharmaceuticals, Inc. and American Stock Transfer and Trust Company, as trustee, relating to $115,000,000 8 1/2% Convertible Subordinated Notes due 1999.* 10.2 Leave of Absence and Reemployment Agreement between SPI Pharmaceuticals, Inc. and Milan Panic dated July 25, 1992 previously filed as Exhibit 10.44 to SPI Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.3 Application for Registration, Foundation Agreement, Joint Venture - ICN Oktyabr previously filed as Exhibit 10.46 to ICN Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. * None of the other indebtedness of the Registrant exceeds 10% of its total consolidated assets. The Registrant will furnish copies of the instruments relating to such other indebtedness upon request. 64 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED 10.4 Charter of the Joint Stock Company - ICN Oktyabr previously filed as Exhibit 10.47 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.5 Agreement between ICN Pharmaceuticals, Inc. and Milan Panic, dated October 1, 1988 previously filed as Exhibit 10.51 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended November 30, 1989, which is incorporated herein by reference. 10.6 Amendment to Employment Contract between ICN Pharmaceuticals, Inc., and Milan Panic, dated September 6, 1995 previously filed as Exhibit 10.29 to ICN Pharmaceutical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, which is incorporated herein by reference. 10.7 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Adam Jerney, dated March 18, 1993 previously filed as Exhibit 10.49 to SPI Pharmaceuticals, Inc.'s Amendment No. 2 to the Annual Report on Form 10-K for the year ended on December 31, 1992, which is incorporated herein by reference. 10.8 Agreement among ICN Pharmaceuticals, Inc., Viratek, Inc. and John Giordani, dated March 18, 1993 previously filed as Exhibit 10.3 to Registration Statement No. 33-84534 on Form S-4 dated September 28, 1994, which is incorporated herein by reference. 10.9 Agreement among ICN Pharmaceuticals, Inc., ICN Biomedicals, Inc., SPI Pharmaceuticals, Inc. and Bill MacDonald, dated March 18, 1993 previously filed as Exhibit 10.4 to Registration Statement No. 33-84534 on Form S-4 dated September 28, 1994, which is incorporated herein by reference. 10.10 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Jack Sholl dated March 18, 1993, previously filed as Exhibit. 10.49 to Amendment No. 2 of SPI Pharmaceuticals, Inc.'s Annual Report on Form 10-K filed on December 31, 1992, which is incorporated herein by Reference. 10.11 Agreement between ICN Pharmaceuticals, Inc. and John Julian, dated May 2, 1995, filed herewith. 10.12 Agreement between ICN Pharmaceuticals, Inc. and Devron Averett dated June 14, 1996, filed herewith. 10.13 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and David Watt dated March 18, 1993, previously filed as Exhibit. 10.49 to Amendment No. 2 of SPI Pharmacuticals, Inc.'s Annual Report on Form 10-K filed on December 31, 1992, which is incorporated herein by reference. 10.14 ICN Pharmaceuticals, Inc. 1992 Employee Incentive Stock Option Plan, previously filed as Exhibit 10.56 to ICN Pharmaceuticals, Inc.'s Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.15 ICN Pharmaceuticals, Inc. 1992 Non-Qualified Stock Plan, previously filed as Exhibit 10.57 to ICN Pharmaceuticals, Inc.'s Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 65 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED 10.16 SPI Pharmaceuticals, Inc. 1992 Employee Incentive Stock Option Plan previously filed as Exhibit 10.42 to SPI Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.17 SPI Pharmaceuticals, Inc. 1992 Non-Qualified Stock Option Plan previously filed as Exhibit 10.43 to SPI Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.18 Viratek, Inc. 1992 Employee Incentive Stock Option Plan previously filed as Exhibit 10.22 to Viratek, Inc.'s Registration Statement No. 33-54678 on Form S-2, which is incorporated herein by reference. 10.19 Viratek, Inc. 1992 Non-Qualified Stock Plan previously filed as Exhibit 10.23 to Viratek, Inc.'s Registration Statement No. 33-54678 on Form S-2, which is incorporated herein by reference. 10.20 ICN Biomedicals, Inc. 1992 Employee Incentive Stock Option Plan previously filed as Exhibit 10.22 to ICN Biomedicals, Inc.'s Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.21 ICN Biomedicals, Inc. 1992 Non-Qualified Stock Option Plan previously filed as Exhibit 10.23 to ICN Biomedicals, Inc.'s Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.22 ICN Pharmaceuticals, Inc. 1981 Employee Incentive Stock Option Plan, as amended, previously filed as Exhibit 4.1 to Registration Statement No. 33-60866 on Form S-3 dated April 9, 1993, which is incorporated herein by reference. 10.23 SPI Pharmaceuticals, Inc. 1982 Employee Incentive Stock Option Plan, as amended and restated as of January 21, 1992, previously filed as Exhibit 4.1 to SPI's Registration Statement No. 33-60872 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 10.24 SPI Pharmaceuticals, Inc. 1982 Non-Qualified Stock Option Plan, as amended and restated as of January 21, 1992, previously filed as Exhibit 4.2 to SPI's Registration Statement No. 33-60872 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 10.25 Viratek, Inc. 1982 FDA Employee Special Stock Option Plan previously filed as Exhibit 10.14 to Viratek, Inc.'s Form 10-K for the year ended November 30, 1982, which is incorporated herein by reference. 10.26 Viratek, Inc. 1981 Employee Incentive Stock Option Plan as amended on January 21, 1992, previously filed as Exhibit 4.1 to Viratek, Inc.'s Registration Statement No. 33-60876 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 10.27 Viratek, Inc. 1980 Employee Stock Option Plan, as amended, previously filed as Exhibit 4.2 to Viratek, Inc.'s Registration Statement No. 33-60870 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 66 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED 10.28 ICN Biomedicals, Inc. 1992 Employee Incentive Stock Option Plan previously filed as Exhibit 4.1 to ICN Biomedicals, Inc.'s Registration Statement No. 33-60862 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 10.29 ICN Biomedicals, Inc. 1983 Non-Qualified Stock Option Plan and 1983 Incentive Stock Option Plan, as amended and restated as of January 21, 1992, previously filed as Exhibits 4.1 and 4.2 to ICN Biomedicals, Inc.'s Registration Statement No. 33-34943 on Form S-8 dated April 9, 1993, which is incorporated herein by reference. 10.30 ICN Pharmaceuticals, Inc. 1994 Stock Option Plan previously filed as Exhibit 10.30 to the Registrant's Form 10-K for the year ended December 31, 1995, which is incorporated herein by reference. 10.31 Exclusive License and Supply Agreement between ICN Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July 28, 1995 previously filed as Amendment 3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, which is incorporated herein by reference. 10.32 Collateral Agreement between Milan Panic and the Registrant, dated August 14, 1996, filed herewith. 10.33 Agreement dated December 23, 1996 by and among the Registrant and those persons identified as purchasers on Schedule A thereto, previously filed as Exhibit 4 (c) (1) to the Registrant's Current Report on Form 8-K dated December 24, 1996, which is incorporated herein by reference. 11. Computation of Earnings per Share. 21. Subsidiaries of the Registrant. 23. Consent of Coopers & Lybrand L.L.P. Independent Accountants. 27. Financial Data Schedule. (B) REPORTS ON FORM 8-K IN FOURTH QUARTER Form 8-K dated October 28, 1996 Form 8-K dated December 24, 1996 67 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 27, 1997 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 27, 1997 - ---------------------------------------------- Milan Panic Chairman of the Board and Chief Executive Officer /S/ JOHN E. GIORDANI Date: March 27, 1997 - ---------------------------------------------- John E. Giordani Executive Vice President, Chief Financial Officer and Corporate Controller /S/ NORMAN BARKER, JR. Date: March 27, 1997 - ---------------------------------------------- Norman Barker, Jr., Director /S/ BIRCH BAYH Date: March 27, 1997 - ---------------------------------------------- Senator Birch Bayh, Director /S/ ALAN F. CHARLES Date: March 27, 1997 - ---------------------------------------------- Alan F. Charles, Director /S/ ROGER GUILLEMIN Date: March 27, 1997 - ---------------------------------------------- Roger Guillemin, M.D., Ph.D., Director /S/ ADAM JERNEY Date: March 27, 1997 - ---------------------------------------------- Adam Jerney, President, Director /S/ DALE M. HANSON Date: March 27, 1997 - --------------------------------------------- Dale M. Hanson, Director 68 SIGNATURES - CONTINUED /S/ WELDON B. JOLLEY Date: March 27, 1997 - --------------------------------------------- Weldon B. Jolley, Ph. D., Director /S/ JEAN-FRANCOIS KURZ Date: March 27, 1997 - --------------------------------------------- Jean-Francois Kurz, Director /S/ THOMAS LENAGH Date: March 27, 1997 - --------------------------------------------- Thomas Lenagh, Director /S/ CHARLES T. MANATT Date: March 27, 1997 - --------------------------------------------- Charles T. Manatt, Director /S/ STEPHEN MOSES Date: March 27, 1997 - --------------------------------------------- Stephen Moses, Director /S/ MICHAEL SMITH Date: March 27, 1997 - --------------------------------------------- Michael Smith, Ph.D., Director /S/ ROBERTS A. SMITH Date: March 27, 1997 - ---------------------------------------------- Roberts A. Smith, Ph.D., Director /S/ RICHARD W. STARR Date: March 27, 1997 - ---------------------------------------------- Richard W. Starr, Director EX-10 2 INDENTURE ICN PHARMACEUTICALS, INC. AND AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE ----------------------------- INDENTURE DATED AS OF NOVEMBER 18, 1994 ----------------------------- $ 115,000,000 8-1/2% CONVERTIBLE SUBORDINATED NOTES DUE 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CROSS-REFERENCE TABLE TRUST INDENTURE ACT SECTION SECTION OF INDENTURE - --------------------------- -------------------- 310(a)(1) and (2) ...................................... 9.10 310(a)(3) and (4) ...................................... Not applicable 310(b) ................................................. 9.08 and 9.10, 16.03 310(c) ................................................. Not applicable 311(a) and (b) ......................................... 9.11 311(c) ................................................. Not applicable 312(a) ................................................. 2.05 312(b) and (c) ......................................... 16.07 313(a) ................................................. 9.06 313(b)(1) .............................................. Not applicable 313(b)(2) .............................................. 9.06 313(c) ................................................. 9.06 and 16.03 313(d) ................................................. 9.06 314(a) ................................................. 6.12 and 16.03 314(b) ................................................. Not applicable 314(c)(1) and (2) ...................................... 16.04 314(c)(3) .............................................. Not applicable 314(d) ................................................. Not applicable 314(e) ................................................. 16.04 314(f) ................................................. Not applicable 315(a), (c) and (d) .................................... 9.01 315(b) ................................................. 9.05; 16.03 315(e) ................................................. 8.11 316(a)(1) .............................................. 8.04 and 8.05 316(a)(2) .............................................. Not applicable 316(a) last sentence ................................... 10.03 316(b) ................................................. 8.07 316(c) ................................................. 10.04 317(a) ................................................. 8.08 and 8.09 317(b) ................................................. 2.05 318(a) ................................................ 16.06 This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture. TABLE OF CONTENTS PAGE PARTIES 1 RECITALS 1 ARTICLE ONE. DEFINITIONS. SECTION 1.01 Definitions ........................................... 1 SECTION 1.02 Other Definitions ..................................... 7 SECTION 1.03 Incorporation by Reference of Trust Indenture Act...... 7 SECTION 1.04 Rules of Construction ................................. 8 ARTICLE TWO. ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF SECURITIES. SECTION 2.01 Dating- Incorporation of Form in Indenture ............ 9 SECTION 2.02. Execution and Authentication .......................... 9 SECTION 2.03. Registrar and Agents .................................. 10 SECTION 2.04. Holders to be Treated as Owners; Payment of ........... 10 SECTION 2.05, Paying Agent to Hold Money in Trust ................... 11 SECTION 2.06. Securityholder Lists .................................. 11 SECTION 2.07. Transfer and Exchange ................................. 11 SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities ....... 12 SECTION 2.09. Temporary Securities .................................. 13 SECTION 2.10. Cancellation of Securities ............................ 13 SECTION 2.11. Benefits of Indenture Provisions ...................... 14 SECTION 2.12. Defaulted Interest .................................... 14 SECTION 2.13. CUSIP Number .......................................... 14 ARTICLE THREE. REDEMPTION OF SECURITIES SECTION 3.01. Redemption Prices ..................................... 14 SECTION 3.02. Notice of Redemption; Selection of Securities ......... 15 SECTION 3.03. Payment of Securities on Redemptions; Deposit of Redemption Price....................................... 16 ARTICLE FOUR. SUBORDINATION OF SECURITIES. SECTION 4.01. Agreement that Securities to Be Subordinate ........... 17 SECTION 4.02. Liquidation; Dissolution; Bankruptcy .................. 17 SECTION 4.03. Company Not to Make Payments with Respect to Securities in Certain Circumstances................. 18 SECTION 4.04. Payment Over of Proceeds in Certain Events ............ 19 SECTION 4.05. No Waiver of Subordination Provisions ................. 20 SECTION 4.06. Notice to Trustee of Specified Events; Reliance on Certificate or Liquidating Agent....................... 20 SECTION 4.07. Subrogation ........................................... 20 SECTION 4.08. Obligation to Pay Not Impaired ........................ 21 SECTION 4.09. Reliance by Senior Indebtedness on Subordination Provisions............................................. 21 SECTION 4.10. Subordination Not to Be Prejudiced by Certain Acts .... 21 SECTION 4.11. Trustee Authorized to Effectuate Subordination ........ 21 SECTION 4.12. Trustee's Relationship to Senior Indebtedness ......... 22 SECTION 4.13. Trustee and Paying Agents Not Chargeable with Knowledge Until Notice................................. 22 SECTION 4.14. Article Applicable to Paying Agents ................... 22 SECTION 4.15. Trustee's Compensation Not Prejudiced ................. 22 ARTICLE FIVE. CONVERSION OF SECURITIES. SECTION 5.01. Conversion Privilege; Conversion Price ................ 23 SECTION 5.02. Manner of Exercising Conversion Privilege ............. 23 SECTION 5.03. Fractional Shares ..................................... 24 SECTION 5.04. Adjustment of Conversion Price ........................ 24 SECTION 5.05. Certificate Concerning Adjusted Conversion Price ...... 28 SECTION 5.06. Notice of Certain Corporate Action .................... 28 SECTION 5.07. Company to Provide Stock .............................. 29 SECTION 5.08. Taxes on Conversions .................................. 29 SECTION 5.09. Covenant as to Stock .................................. 30 SECTION 5.10. Provision in Case of Consolidation or Merger .......... 30 SECTION 5.11. Trustee's Disclaimer of Responsibility for Certain Matters ............................................... 30 ARTICLE SIX. PARTICULAR COVENANTS OF THE COMPANY. SECTION 6.01. Payment of Principal, Premium and Interest ............ 31 SECTION 6.02. Offices for Notices, Payments and Conversions ......... 31 SECTION 6.03. Paying Agents ......................................... 32 SECTION 6.04. Annual Review Certificate ............................. 32 SECTION 6.05. Appointment to Fill a Vacancy in Office of Trustee .... 33 SECTION 6.06. Further Instruments and Acts .......................... 33 SECTION 6.07. Payment of Taxes and Assessments ...................... 33 SECTION 6.08. Maintenance of Corporate Existence .................... 33 SECTION 6.09. Change of Control ..................................... 34 SECTION 6.10. Waiver of Stay or Extension Laws ...................... 36 SECTION 6.11. SEC Reports ........................................... 36 ARTICLE SEVEN. [Intentionally Omitted] ARTICLE EIGHT REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT. SECTION 8.01. Events of Default ..................................... 37 SECTION 8.02. Acceleration .......................................... 38 SECTION 8.03. Other Remedies ........................................ 39 SECTION 8.04. Waiver of Defaults and Events of Default .............. 39 SECTION 8.05. Control by Majority ................................... 39 SECTION 8.06. Limitation on Suits ................................... 39 SECTION 8.07. Rights of Holders to Receive Payment .................. 40 SECTION 8.08. Collection Suit by Trustee ............................ 40 SECTION 8.09. Trustee May File Proofs of Claim ...................... 40 SECTION 8.10. Application of Money Collected by Trustee ............. 41 SECTION 8.11. Undertaking to Pay Costs .............................. 41 SECTION 8.12. Restoration of Rights and Remedies .................... 42 SECTION 8.13. Rights and Remedies Cumulative ........................ 42 SECTION 8.14. Delay or Omission Not Waiver .......................... 42 ARTICLE NINE. CONCERNING THE TRUSTEE. SECTION 9.01. Duties of Trustee ..................................... 42 SECTION 9.02. Rights of Trustee ..................................... 43 SECTION 9.03. Individual Rights of Trustee .......................... 44 0159"2.07 SECTION 9.04. Trustee's Disclaimer .................................. 44 SECTION 9.05. Notice of Defaults .................................... 44 SECTION 9.06. Reports by Trustee to Holders ......................... 44 SECTION 9.07. Compensation and Indemnity ............................ 44 SECTION 9.08. Replacement of Trustee ................................ 45 SECTION 9.09. Successor Trustee by Merger, etc ...................... 46 SECTION 9.10. Eligibility; Disqualification ......................... 46 SECTION 9.11. Preferential Collection of Claims Against Company ..... 46 ARTICLE TEN. CONCERNING THE SECURITYHOLDERS. SECTION 10.01. Action by Securityholders .............................. 46 SECTION 10.02. Proof of Execution by Securityholders, Evidence of Holdings ............................................... 47 SECTION 10.03. Company-owned Securities Disregarded ................... 47 SECTION 10.04. Revocation of Consents, Future Holders Bound ........... 47 ARTICLE ELEVEN. SECURITYHOLDERS' MEETINGS. SECTION 11.01. Purposes of Meetings ................................... 48 SECTION 11.02. Call of Meetings by Trustee ............................ 48 SECTION 11.03. Call of Meetings by Company or Securityholders ......... 48 SECTION 11.04. Qualifications for Voting .............................. 48 SECTION 11.05. Regulations ............................................ 49 SECTION 11.06. Voting ................................................. 49 SECTION 11.07. No Delay of Rights by Meeting .......................... 50 ARTICLE TWELVE. SUPPLEMENTAL INDENTURES. SECTION 12.01. Supplemental Indenture Without . Consent of Securityholders ........................................ 50 SECTION 12.02. Supplemental Indentures with Consent of Securityholders ........................................ 51 SECTION 12.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures ................................ 52 SECTION 12.04. Notation on Securities ................................. 52 SECTION 12.05. Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee ................................... 52 ARTICLE THIRTEEN. CONSOLEDATION, MERGER AND SALE BY THE COMPANY. SECTION 13.01. When Company May Merge, Etc ................... 53 SECTION 13.02. Successor Corporation Substituted ............. 53 ARTICLE FOURTEEN. SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS. SECTION 14.01. Discharge of Indenture ................................ 53 SECTION 14.02. Deposited Moneys to Be Held in Trust by Trustee ....... 54 SECTION 14.03. Paying Agent to Repay Moneys Held ..................... 54 SECTION 14.04. Unclaimed Moneys ...................................... 54 SECTION 14.05. Reinstatement ......................................... 55 ARTICLE FIFTEEN . IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 15.01. Indenture and Securities Solely Corporate Obligations ............................................ 55 ARTICLE SIXTEEN. MISCELLANEOUS PROVISIONS. SECTION 16.01. Provisions Binding on Company's Successors ............ 56 SECTION 16.02. Official Acts by Successor Corporation ................ 56 SECTION 16.03. Notices ............................................... 56 SECTION 16.04. Evidence of Compliance with Conditions Precedent ...... 56 SECTION 16.05. Legal Holidays ........................................ 57 SECTION 16.06. Trust Indenture Act to Control ........................ 57 SECTION 16.07. Communications by Holders with Other Holders .......... 57 SECTION 16.08. Governing Law ......................................... 57 SECTION 16.09 Table of Contents ..................................... 57 SECTION 16.10 Execution in Counterparts ............................. 58 SIGNATURES ............................................................. 58 EXHIBIT A - FORM OF SECURITY THIS INDENTURE, dated as of November 18, 1994 between ICN Pharmaceuticals, Inc., a corporation duly organized and existing under the laws of the State of Delaware (formerly known as ICN Merger Corp. and hereinafter sometimes referred to as the "Company"), and American Stock Transfer & Trust Company, as trustee (the "Trustee"). WITNESSETH: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its 8-1/2% Convertible Subordinated Notes Due 1999 (hereinafter sometimes referred to as the "Securities"), in the aggregate principal amount of up to $115,000,000 and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and AND WHEREAS, all acts and things necessary to make the Securities, when executed by the Company and authenticated and delivered by the Trustee or its authorized signatory as in this Indenture provided, and issued, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Securities have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Securities are, and are to be, authenticated, issued and delivered, and in consideration of the premises, of the purchases and acceptance of the Securities by the holders thereof and for other good and valuable consideration, the receipt whereof is hereby acknowledged, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities, as follows: ARTICLE ONE. DEFINITIONS. SECTION 1.01. Definitions. The terms in this section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the TIA, as amended, or which are by reference therein defined in the Securities Act of 1993, as amended (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in the TIA and in said Securities Act as in force as of the date of this Indenture. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, the term "control" when used with respect to any person means the power, directly or indirectly, alone or together with others, to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any registrar, paying agent, conversion agent, co-registrar or agent for service of notices and demands. "Board of Directors" means the Board of Directors of the Company, the executive committee, if any, of such Board of Directors or any committee of such Board of Directors authorized to act on behalf of such Board of Directors with respect to the Indenture. "Business Day" means any day on which the banks in New York, New York or Los Angeles, California are not authorized or required to be closed and on which the New York Stock Exchange is open for trading and which is not a Saturday or Sunday. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, warrants, options or other equivalents (however designated) of corporate stock or any other equity interest of such person. A "Change of Control" shall occur when (i) the stockholders of the Company adopt a plan of liquidation with respect to the Company or the Company sells, transfers, leases or otherwise disposes of, in one transaction or series of related transactions, leases or otherwise disposes of, in one transaction or series of related transactions, all or substantially all of its assets; (ii) there shall be consummated any consolidation or merger of the Company (1) in which the Company is not the continuing or surviving corporation or (2) pursuant to which the Common Stock would be converted into cash, securities or other property, in each case, other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the total voting power of all classes of Capital stock of the continuing or surviving corporation immediately after such consolidation or merger; (iii) a majority of the Board of Directors are not continuing Directors; or (iv) any person, or any persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any Affiliate thereof shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), at least 50% of the total voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors of the Company. 2 "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, and which is not subject to redemption by the Company. However, subject to the provisions of Section 5.10, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock, par value $.Ol per share, of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company. "Company" means ICN Pharmaceuticals, Inc., a Delaware corporation (formerly known as ICN Merger Corp.), and, subject to the terms of the Indenture, shall include its successors and assigns. "Continuing Director" means as at any date a member of the Board of Directors of the Company who (i) was a member of the Board of Directors of the Company on the Issuance Date or (ii) was nominated for election or elected to the Board of Directors of the Company with the affirmative vote of at least a majority of the directors who were Continuing Directors at the time of such nomination or election (which may be done by approval of the proxy statement in which such member was named as a nominee for director of the Company). "corporation" means any corporation, voluntary association, joint stock association, business trust, or similar organization designated. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 40 Wall Street, 46th Floor, New York, New York 10005, attention: Corporate Trust Administration. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Capital Stock" means, with respect to any person, any Capital Stock Of such Person that, by its terms (or by the terms of any security into which it is convertible or for which it is exercisable, redeemable or exchangeable), matures, or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the maturity of the Securities. "Event of Default" means any event specified in Section 8.01, continued for the period of time, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3 "Indebtedness" means with respect to any person, any of the following (without duplication): (i) the principal of, premium, if any, and interest on and all other amounts owing with respect to any indebtedness (including any such indebtedness representing any deferred payment obligation for the payment of the purchase price of property or assets) of such person for money borrowed or evidenced by bonds, notes, securities or similar obligations, including any guaranty by such person of any indebtedness for money borrowed of any other person, whether any such indebtedness or guaranty is outstanding on the date of the Indenture or is thereafter created, assumed or incurred, (ii) the principal of, premium, if any, and interest on and all other amounts owing with respect to any indebtedness for money borrowed, incurred, assumed or guaranteed by such person in connection with the acquisition by it or any of its subsidiaries of any other businesses, properties or other assets, (iii) lease obligations which such person capitalizes in accordance with generally accepted accounting principles, (iv) any amounts payable by such person under or in respect of letters of credit or bankers' acceptances issued for the account of such person, any interest exchange agreement, interest rate swap agreement or currency exchange or purchase agreements or other similar agreement entered into in respect of all or any portion of the above and (v) guarantees or assumptions by such person of indebtedness of others of any of the kinds referred to in clauses (i) through (iv) above. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Independent Public Accountants" means any firm of certified public accountants of recognized national standing which is selected by the Board of Directors and is in fact independent. "Issuance Date" means the date of original issuance of the Securities. "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer, the Secretary or the Controller of the Company. "Officers' Certificate" when used with respect to the Company, shall mean a certificate signed by any two Officers or by an Officer and by any Assistant Treasurer or any Assistant Secretary of the Company. Each such certificate shall include the statements provided for in Section 16.04 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing, signed by legal counsel who may be an employee of, or of counsel to, the Company or may be other counsel, any such counsel to be satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 16.04 if and to the extent required by the provisions of such Section. 4 "Outstanding," when used with referenda to Securities, shall, subject to the provisions of Section 10.03, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Securities or the payment or redemption of which moneys in the necessary amounts shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company), provided that if such Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article Three provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered or Securities which have been paid pursuant to the terms of Section 2.08; provided that holders of Securities which cease to be outstanding by reason of clause (b) alone shall nevertheless be entitled to convert the same or any portion thereof until and including but not after the close of business on the fifth Business Day prior to the date fixed for redemption. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Permitted Junior Securities" means any securities provided for by a plan of reorganization or readjustment authorized by a court of competent jurisdiction in a reorganization proceeding in which the rights of holders of Senior Indebtedness are not altered without the consent of such holders, which consent is deemed to have been given if such holders, individually or as a class, approve such plan. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture. "Redemption Price", when used with respect to any Securities to be redeemed, means the price fixed for such redemption pursuant to this Indenture as set forth in the form of Security annexed hereto as Exhibit A. "Responsible Officer," when used with respect to the Trustee, means an officer of the Trustee within the corporate trust department, including any vice president or trust officer of the Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. 015942.07 5 "Securities" means the securities that are authenticated and delivered under this Indenture. "Securityholder" or "Holder" or other similar terms, means any person in whose name a particular Security shall be registered on the books of the Company kept for that purpose in accordance with the terms hereof. "SEC" means the Securities and Exchange Commission. "Senior Indebtedness" means Indebtedness of the Company whether outstanding on the Issuance Date or thereafter created, incurred, assumed or guaranteed (including, without limitation, interest that accrues on or after the filing of a petition in bankruptcy or for reorganization, if a claim for post-petition interest is allowed in such proceeding) except (i) any Indebtedness outstanding after the date of the Indenture as to which, by the express terms of the instrument creating or evidencing the same, it is provided that such Indebtedness is not senior or superior in right of payment to the Securities, (ii) the Securities, (iii) any repurchase, redemption or other obligation in respect of Disqualified Capital Stock, (iv) any Indebtedness of the Company to any Subsidiary or to any Affiliate of the Company or any of the Subsidiaries, (v) Indebtedness incurred in connection with the purchase of goods, assets, materials or services in the ordinary course of business or representing amounts recorded as accounts payable, trade payable or other current liabilities of the Company on the books of the Company (other than the current portion of any long-term Indebtedness of the Company that but for this clause (V) would constitute Senior Indebtedness), (vi) any Indebtedness of or amount owned by the Company to employees for services rendered to the Company, and (vii) any liability for federal, state, local or other taxes owing or owed by the Company. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission as in effect on the Issuance Date. "Subsidiary" means a corporation of which 50% or more of the issued and outstanding stock entitled to vote for the election of directors (otherwise than by reason of default in dividends) is at the time owned or controlled, directly or indirectly, by the Company. "Trustee" means American Stock Transfer & Trust Company and, subject to the provisions of Article Nine hereof, shall also include its successors and assigns as Trustee hereunder. "TIA" means the Trust Indenture Act of 1939, as amended, as it was in force as of the date of this Indenture, and with respect to each supplemental indenture hereto, as it was in force as of the date of such supplemental indenture. 0159482.07 6 SECTION 1.02. Other Definitions. TERM DEFINED IN SECTION ---- ------------------ "Bankruptcy Law" 8.01 "Change of Control Repurchase Date" 6.09 "Change of Control Repurchase Price" 6.09 "Conversion Agent" 2.03 "Current Market Price" 5.04 "Custodian" 8.01 "Event of Default" 8.01 "Non-payment Default" 4.03 "Paying Agent" 2.03 "Payment Blockage Period" 4.03 "Payment Default" 4.03 "Registrar" 2.03 "Senior Representative" 4.03 SECTION 1.03. Incorporation by Reference of Trust Indenture Act. The following terms used in the TIA to the extent applicable to this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company or any other obligor on the indenture securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. 7 SECTION 1.04 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in effect on the date hereof; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. 8 ARTICLE TWO. ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF SECURITIES. SECTION 2.01. Dating; Incorporation of Form in Indenture. The Securities and the Trustee's certificate of authentication, with respect thereto, shall be substantially in the form of Exhibit A, which is annexed hereto and which is incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are expressly made, a part of this Indenture. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall nevertheless be valid. A Security shall not be valid until the Trustee manually signs the certificate of authentication on the Security. Such signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue in the aggregate principal amount of $100,000,000, and such additional principal amount, if any, as shall be determined pursuant to the next sentence of this Section 2.02, upon the execution of the Indenture and a written order or orders of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company. Upon receipt by the Trustee of an Officer's Certificate stating that Wertheim Schroder & Co. Incorporated, Jefferies & Company, Inc. and Kemper Securities, Inc. (the "Underwriters") have elected to purchase from the Company a specified aggregate principal amount of additional Securities, not to exceed $15,000,000 pursuant to Section 2 of the Underwriting Agreement, dated November 10, 1994, among the Company and Wertheim Schroder & Co. Incorporated, as representative of the Underwriters, the Trustee shall authenticate and deliver such specified aggregate principal amount of additional Securities to or upon the written order of the Company signed as provided in the immediately preceding sentence. Such Officer's Certificate may be received by the Trustee no later than December 20, 1994, and in any event at least two full Business Days prior to the proposed date for delivery of such additional Securities. The aggregate principal amount of Securities outstanding at any time may not exceed that amount except as provided in Section 2.07. . 9 The Trustee may appoint an authenticating agent to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 principal amount and any integral multiple thereof. SECTION 2.03. Registrar and Agents. The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for payment ("Paying Agent"), an office or agency where Securities may be presented for conversion ("Conversion Agent"), and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional Paying Agents and one or more additional Conversion Agents. The Company or any Subsidiary may act as Registrar, co-Registrar, Paying Agent and/or Conversion Agent. The term "Paying Agent" includes any additional Paying Agent and the term "Conversion Agent" includes any additional Conversion Agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent, Conversion Agent or co-registrar not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 9.07. The Company initially appoints the Trustee as a Registrar, a Paying Agent, a Conversion Agent and agent for service of notices and demands. SECTION 2.04. Holders to be Treated as Owners, Payment of Interest. (a) The Company, the Paying Agent, the Registrar, the Trustee and any agent of the Company, the Paying Agent, the Registrar or the Trustee may deem and treat the person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Company, the Paying Agent, the Registrar nor the Trustee nor any agent of the Company, the Paying Agent, the Registrar or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such Person, 10 or upon his order, shall be valid, satisfy and discharge the liability for moneys payable upon any Security. (b) The Person in whose name any Security is registered at the close of business on any record date with respect to any Interest Payment Date shall be entitled to receive the interest, if any, payable on such Interest Payment Date notwithstanding any transfer or exchange of such Security subsequent to the record date and prior to such Interest Payment Date, except if and to the extent the Company shall default in the payment of the interest due on such Interest Payment Date, in which case such defaulted interest shall be paid in accordance with Section 2.12. The term "record date" as used with respect to any interest payment date for the Securities shall mean the date specified as such in the terms of the Securities. SECTION 2.05. Paying Agent to Hold Money in Trust. On or prior to each interest payment date or date on which payment of principal of the Securities is required, the Company shall provide immediately available funds to the Trustee acting as Paying Agent or with other Paying Agents upon notice to the Trustee a sum sufficient to pay such principal and interest so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that it will hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and to notify the Trustee of any default by the Company (or any other obligor on the Securities) in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall on or before each due date of the principal of or interest on any Securities segregate the money and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to forthwith pay to the Trustee all sums so held in trust by such Paying Agent. Upon doing so, the Paying Agent (other than the Company) shall have no further liability for the money. SECTION 2.06. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the holders of Securities. If the Trustee is not the Registrar, the Company or other obligor, if any, shall furnish to the Trustee at least two Business Days prior to each semiannual record date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the holders of Securities. SECTION 2.07. Transfer and Exchange. When Securities are presented to the Registrar or a co-registrar with a request from the Holder of such Securities to register a transfer, the Registrar shall register the 11 transfer as requested. Every Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorneys duly authorized in writing. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination or denominations, of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency maintained for such purpose pursuant to Section 2.03. To permit registrations of transfers and exchanges, the Company shall issue and execute and the Trustee shall authenticate new Securities evidencing such transfer or exchange at the Registrar's request. No service charge shall be made to the Securityholder for any registration of transfer or exchange. The Company may require from the Securityholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 2.09, 3.03, 5.02, 6.09 or 12.04 (in which events the Company will be responsible for the payment of such taxes). The Registrar shall not be required to exchange or register a transfer of any Security for a period of 15 days immediately preceding the first mailing of notice of redemption of Securities to be redeemed or of any Security selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not to be redeemed. SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities. In case any temporary or definitive Security shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its request the Trustee shall authenticate and deliver, a new Security, bearing a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Security or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case, the applicant for a substituted Security shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee shall authenticate any such substituted Security and deliver the same upon the written request or authorization of any Officer of the Company. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security which has matured or is about to mature shall have become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish the Company, the 12 Trustee and any Paying Agent with such security or indemnity as they may require to save each of them harmless and, in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Security issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. All Securities shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.09. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute and the Trustee shall authenticate and deliver temporary Securities (printed or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be authenticated upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay the Company will execute and deliver to the Trustee definitive Securities and thereupon any or all temporary Securities may be surrendered in exchange therefor, at the office or agency to be maintained by the Company pursuant to Section 2.03, and the Trustee shall authenticate and deliver in exchange for such temporary Securities an equal aggregate principal amount of definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities authenticated and delivered hereunder. SECTION 2.10. Cancellation of Securities. All Securities surrendered for the purpose of payment, redemption, conversion, exchange or transfer shall, if surrendered to the Company or any Paying or Conversion Agent, be delivered to the Trustee for cancellation, or if surrendered to the Trustee, shall be canceled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy canceled Securities and deliver its certificate of destruction to the Company. If the Company shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee for cancellation. 13 SECTION 2.11. Benefits of Indenture Provisions. Nothing in this Indenture or in the Securities expressed or implied, shall give or be construed to give any person, firm or corporation, other than the parties hereto, any Paying Agent, any Conversion Agent and the holders of Securities and, to the extent provided in Article Four, the holders of Senior Indebtedness, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all the covenants, conditions or provisions contained in this Indenture or in the Securities being for the sole benefit of the parties hereto, any Paying Agent, any Conversion Agent and the holders of the Securities and, to the extent provided in Article Four, the holders of Senior Indebtedness. SECTION 2.12. Defaulted Interest. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest (to the extent lawful) to the Persons who are Securityholders on a subsequent special record date. After the deposit by the Company with the Trustee of money sufficient to pay such defaulted interest, the Trustee shall fix the record date and payment date. Each such special record date shall be not less than 10 days prior to such payment date. At least 15 days before the special record date, the Company shall mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. The Company may pay defaulted interest in any other lawful manner if, after prior notice to the Trustee, such payment shall be deemed practicable by the Trustee. SECTION 2.13. CUSIP Number. The Company may use a "CUSIP" number when issuing the Securities and, if so, the Trustee may use the CUSIP number in notices of redemption or exchange as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. ARTICLE THREE. REDEMPTION OF SECURITIES SECTION 3.01. Redemption Prices. The Company may, at its option, redeem all or from time to time any part of the Securities, on any date on or after November 15, 1997 and prior to maturity, upon notice as set forth in Section 3.02 and at the redemption prices (expressed in percentages of the principal amount) set forth in the form of Security herein, together with accrued interest to the date fixed for redemption (but installments of interest whose stated maturity is on or prior to the date fixed for redemption shall continue to be payable to the holders of record on the regular record 6 14 date). Portions of such redemption prices in excess of 100% of the principal amount are sometimes herein referred to as the "premium" payable upon such redemption. SECTION 3.02. Notice of Redemption, Selection of Securities. Whenever the Company redeems Securities pursuant to this Article Three, it shall notify the Trustee of the date fixed for redemption and the principal amount of Securities to be redeemed. The notice shall be accompanied by an Officers' Certificate stating that the redemption complies with the provisions of this Indenture. The Company shall give each such notice at least 45 but not more than 90 days before the date fixed for redemption or such other period as the Company and the Trustee may agree. In case the Company shall desire to exercise its right to redeem all or, as the case may be, any part of the Securities in accordance with the right reserved so to do, notice of such redemption shall be given to the holders of the Securities to be redeemed as hereinafter provided in this Section 3.02, such notice to be given by the Company or, at the Company's direction, by the Trustee in the name and at the expense of the Company. If the notice is to be given by the Trustee, the Company shall provide the Trustee with the information required in this Section 3.02. Notice of redemption shall be given by mailing to holders of Securities to be redeemed in whole or in part a notice of such redemption by first class mail, postage prepaid, not less than 30 nor more than 60 days prior to the date fixed for redemption, to their last addresses as they shall appear upon the registry book. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. In any case, failure to duly give notice by mail, or any defect in the notice, to the holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of such Security or any other Security. The notice shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the then current conversion price; (4) the name and address of the Paying Agent and the Conversion Agent; (5) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in paying the Redemption Price, interest on Securities called for redemption ceases to accrue on and after the Redemption Date; 15 (7) that the right to convert the Securities as provided in Article Five shall terminate at the close of business on a date to be determined by the Company which date (i) shall not be earlier than the fifth Business Day prior to the Redemption Date, or, if the fifth Business Day before the Redemption Date is a Legal Holiday, the close of business on the next preceding day which is not a Legal Holiday and (ii) shall not be later than the Redemption Date (except that a Security which the Company has offered to purchase pursuant to Section 6.09 hereof shall be convertible until the close of business on the Change of Control Repurchase Date); (8) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and the bond number of such Security and that, after the Redemption Date, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued; (9) that Holders who want to convert Securities must satisfy the requirements in paragraph 8 of the Securities; (10) the CUSIP number, if any, of the Securities; and (11) the consequences to a Holder, if any, of converting a Security (or portion of a Security) prior to the next interest payment date if the Redemption Date with respect to such Security occurs on or after such interest payment date. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. If a CUSIP number is listed in such notice or printed on the Security, the notice may state that no representation is made as to the correctness or accuracy of such CUSIP number. If less than all of the Securities are to be redeemed, the Company shall give the Trustee written notice, at least 45 days (or such shorter period as may be acceptable to the Trustee) prior to the date fixed for redemption, as to the aggregate principal amount of the Securities to be redeemed, and thereupon the Trustee shall select, in such manner as it shall deem appropriate and fair (so long as such method is not prohibited the rules of any securities exchange or market in which the Securities are then listed or quoted) from outstanding Securities, a principal amount of Securities equal to such aggregate principal amount of Securities to be redeemed and shall thereafter promptly notify the Company in writing of the Securities so to be redeemed and, if any such Securities are to be redeemed in part, the portions thereof to be redeemed. SECTION 3.03. Payment of Securities on Redemptions, Deposit of Redemption Price. If notice of redemption shall have been given as provided in Section 3.02, such Securities or portions of Securities shall, unless theretofore converted into Common 16 Stock pursuant to the terms hereof, become due and payable on the date fixed for redemption and at the place stated in such notice at the applicable redemption price and premium, if any, together with accrued and unpaid interest to the date fixed for redemption, and on and after such date fixed for redemption, unless the Company shall default in the payment of the redemption price, interest on the Securities so called for redemption shall cease to accrue. Moneys in the amount necessary for each redemption referred to in Section 3.01 shall be deposited with the Paying Agent by the Company on or prior to the date fixed for redemption. On presentation and surrender of such Securities at the place of payment specified in such notice, such Securities or the specified portions thereof shall (subject to the provisions of Article Four) be paid and redeemed at the applicable redemption price, together with accrued and unpaid interest thereon to the date fixed for redemption. Installments of interest whose stated maturity is on or prior to the date fixed for redemption shall continue to be payable to the holders of such Securities on the relevant regular or special record dates according to their terms and the provisions of Section 2.03 of this Indenture. Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unredeemed portion of the Security so presented. The Company's obligation to deposit with the Paying Agent moneys in the amount necessary for the redemption of particular Securities or portions thereof called for redemption shall be reduced automatically by the amount of such moneys attributable to any of such called Securities or portions thereof which shall have been converted prior to the date such moneys are required to be deposited with the Paying Agent. Any moneys which shall have been deposited with the Paying Agent for redemption of Securities and which are not required for that purpose by reason of conversion of such Securities shall be repaid to the Company. The Paying Agent may in each case require evidence reasonably satisfactory to it of such conversion. ARTICLE FOUR. SUBORDINATION OF SECURITIES. SECTION 4.01. Agreement that Securities to Be Subordinate. The Trustee acknowledges, the Company covenants and agrees, and each holder of Securities issued hereunder by his acceptance thereof likewise covenants and agrees, that all payments of principal of, premium, if any, and interest on the Securities and all other monetary claims, including such monetary claims as may result from rights of repurchase or rescission, under or in respect of the Securities shall be subordinated in accordance with the provisions of this Article Four to the prior payment in full in cash of all amounts payable under all Senior Indebtedness of the Company. SECTION 4.02. Liquidation; Dissolution; Bankruptcy. 17 Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (a) holders of all Senior Indebtedness then outstanding shall be entitled to receive payment in full in cash of all amounts owing with respect to all Senior Indebtedness before Securityholders shall be entitled to receive any payment on or with respect to the Securities; and (b) until all Senior Indebtedness is paid in full in cash, any distribution to which Securityholders would be entitled but for this Article Four shall be made to holders of Senior Indebtedness as their interests may appear, except that the Securityholders may receive Permitted Junior Securities. The consolidation of the Company with, or the merger of the Company into, .another person or the liquidation or dissolution of the Company following the conveyance or transfer of the properties and assets of the Company substantially as an entirety to another person upon the terms and conditions set forth in Article Thirteen shall not be deemed a liquidation, dissolution, reorganization, insolvency, receivership or similar proceeding of the Company for the purposes of this Section. SECTION 4.03. Company Not to Make Payments with Respect to Securities in Certain Circumstances. (1) Unless Section 4.02 shall be applicable, upon the occurrence of any default in the payment of any obligation on or with respect to any Senior Indebtedness, whether with respect to scheduled payments or amounts due upon acceleration (a "Payment Default"), then no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of principal of or interest on the Securities or on account of the purchase, redemption or other acquisition of Securities or any of the obligations of the Company under the Securities unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Senior Indebtedness shall have been discharged or paid in full, immediately after which the Company shall resume making any and all required payments, including missed payments, in respect of its obligations under the Securities. (2) Unless Section 4.02 shall be applicable, upon (1) the occurrence of any default (other than a Payment Default) relating to Senior Indebtedness which default, pursuant to the instrument governing such Senior Indebtedness, entitles the holders (or a specified portion of holders) of such Senior Indebtedness to accelerate the maturity of such Senior Indebtedness (a "Non-payment Default") and (2) receipt by the Trustee and the Company from a holder of such Senior Indebtedness or from the trustee, agent or other representative designated in writing to the Trustee of any class or issue of Senior Indebtedness (the "Senior Representative") of written notice of such 18 occurrence, no payment or distribution of any assets of the Company of any kind or character shall be made by the Company on account of principal of or interest on the Securities or on account of the purchase, redemption or other acquisition of Securities or on account of any of the other obligations of the Company under the Securities for a period (a "Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice unless and until the earlier to occur of the following events (subject to any blockage of payments that may then be in effect under subsection (1) of this Section 4.03) (w) 179 days shall have elapsed since receipt of such written notice by the Trustee (provided such Senior Indebtedness shall theretofore not have been accelerated), (x) such Non-payment Default shall have been cured or waived in the manner required by the instrument relating to such Senior Indebtedness or shall have ceased to exist, (y) such Senior Indebtedness shall have been discharged or paid in full or (z) such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from either the Senior Representative initiating such Payment Blockage Period or the holders of at least a majority in principal amount of such issue of such Senior Indebtedness, immediately after which, in the case of clause (w), (x), (y) or (z), the Company shall resume making any and all required payments, including missed payments, in respect of its obligations under the Securities. Only one Payment Blockage Period pursuant to such notice may be commenced with respect to the Securities during any period of 360 consecutive days. Successive Payment Blockage Periods based on successive Non-payment Defaults may be commenced; PROVIDED that no Non-payment Default with respect to Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period shall be, or be made, the basis for the commencement of any other Payment Blockage Period with respect to such Senior Indebtedness unless such event of default shall have been cured or waived for a period of not less than 180 consecutive days. Regardless of anything to the contrary herein, nothing shall prevent (a) any payment by the Trustee to the Securityholders of amounts deposited with it pursuant to Article Fourteen or (b) any payment by the Trustee or Paying Agent as permitted by Section 4.13. SECTION 4.04. Payment Over of Proceeds in Certain Events. In the event that any payment or distribution of assets of the Company of any kind or character not permitted by Sections 4.02 or 4.03, whether in cash, property or securities, shall be received by the Trustee or Paying Agent, if any, or the holders of the Securities before all Senior Indebtedness is paid in full in cash, such payment or distribution shall be received and held in trust for the benefit of the holders of Senior Indebtedness and shall forthwith be paid over or delivered by the Trustee, such Paying Agent or such Holders of the Securities, as the case may be, directly to the holders of Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness held by such holder) or the Senior Representative or the trustee under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, for application to the payment of, all Senior Indebtedness remaining unpaid to the extent necessary to pay all obligations in respect of such Senior Indebtedness in full in cash in accordance with its terms, after giving effect to 19 any other concurrent payment or distribution to the holders of such Senior Indebtedness. SECTION 4.05. No Waiver of Subordination Provisions. Without notice to or the consent of the Securityholders or the Trustee, the holders of Senior Indebtedness may at any time and from time to time, without impairing or releasing the subordination herein made, change the manner, place or terms of payments, or change or extend the time of payment of or renew or alter the Senior Indebtedness, or amend or supplement in any manner any instrument evidencing the Senior Indebtedness, any agreement pursuant to which the Senior Indebtedness was issued or incurred or any instrument securing or relating to the Senior Indebtedness; release any person liable in any manner for the payment or collection of the Senior Indebtedness; exercise or refrain from exercising any rights in respect of the Senior Indebtedness against the Company or any other person; apply any moneys or other property paid by any person or released in any manner to the Senior Indebtedness; or accept or release any security for the Senior Indebtedness. SECTION 4.06. Notice to Trustee of Specified Events, Reliance on Certificate or Liquidating Agent. The Company shall give prompt written notice to the Trustee and any Paying Agent of any fact known to the Company that would prohibit the making of any payment to or by the Trustee or any Paying Agent in respect of the Securities pursuant to the provisions of this Article. Upon any distribution of assets of the Company or payment by or on behalf of the Company referred to in this Article Four, the Trustee and the holders of the Securities shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 4.03 are pending, and the Trustee and the holders of the Securities shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any such distribution to the Trustee or to the holders of the Securities for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Four. SECTION 4.07. Subrogation. After all Senior Indebtedness is paid in full and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Securityholders have been applied to the payment of Senior Indebtedness. A distribution made or payment over made under this Article to holders of Senior Indebtedness which otherwise would have been made to Securityholders is not, as between the Company, its creditors other than the holders of Senior Indebtedness and Securityholders, a payment or distribution by the Company on or on account of Senior Indebtedness, it being understood that the provisions of this Article Four are, and are intended, solely 20 for the purpose of defining the relative rights of the Securityholders, on the one hand, and the holders of Senior Indebtedness, on the other hand. SECTION 4.08. Obligation to Pay Not Impaired. Nothing contained in this Article Four or elsewhere in this Indenture, or in the Securities, is intended to or shall alter or impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest on the Securities at the time and place and at the rate and in the currency therein prescribed, or to affect the relative rights of the holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the right, if any, under this Article Four of the holders of the Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. SECTION 4.09. Reliance by Senior Indebtedness on Subordination Provisions. Each holder of a Security by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness (by its original terms or amendment thereof), whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and hold, or to continue to hold, such Senior Indebtedness, and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in holding, such Senior Indebtedness. The subordination provisions in this Article Four may be enforced directly by the holders of Senior Indebtedness. SECTION 4. 10. Subordination Not to Be Prejudiced by Certain Acts. No present or future holder of Senior Indebtedness shall be prejudiced in his right to enforce subordination of the indebtedness evidenced by the Securities by any act or failure to act in good faith by any such holder or by noncompliance by the Company with the terms and provisions and covenants herein regardless of any knowledge thereof any such holder may have or otherwise be charged with. SECTION 4.11. Trustee Authorized to Effectuate Subordination. Each holder of Securities by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination as provided in this Article Four and appoints the Trustee his attorney-in-fact for any and all such purposes including, in the event of any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership or similar proceedings or upon an assignment for the benefit of creditors or otherwise) tending towards liquidation of the business and assets of the Company, to file a claim for the unpaid balance of its Securities in the form required in said proceedings and to cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days. 21 before the expiration of the time to file such claim or proof, then the holders of the Senior Indebtedness shall have the right to file and are hereby authorized to file an appropriate claim or proof for and on behalf of the holders of said Securities. SECTION 4.12. Trustee's Relationship to Senior Indebtedness. Except for the Trustee's duty to hold cash, properties or securities in trust for the benefit of holders of Senior Indebtedness pursuant to Section 4.04 hereof, the Trustee shall owe no fiduciary duty to the holders of Senior Indebtedness. The Trustee shall be entitled to all rights set forth in this Article Four in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. SECTION 4.13. Trustee and Paying Agents Not Chargeable with Knowledge Until Notice. Notwithstanding any of the provisions of this Article Four or any other provisions of this Indenture, the Trustee and any Paying Agent shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment of moneys to or by the Trustee or any Paying Agent, unless and until a Responsible Officer of the Trustee or such Paying Agent, as the case may be, shall have received written notice thereof from the Company or a holder of a Senior Indebtedness, or any trustee thereof, and, prior to the receipt of any such written notice, the Trustee and any other Paying Agent shall be entitled to assume that no such facts exist. If at least two Business Days prior to the date upon which the terms of any such moneys may become payable for any purpose (including, without limitation, the payment of either the principal of or the interest on any Security) a Responsible Officer of the Trustee or Paying Agent, as the case may be, shall not have received with respect to such moneys the notice provided for in this Section 4.13, then, anything contained herein to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after the commencement to such two Business Day period. Nothing contained in this Section 4.13 shall limit the right of the holders of Senior Indebtedness to recover payments as contemplated by Section 4.04. SECTION 4.14. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee, provided, however, that Sections 4.12 and 4.13 shall not apply to the Company if it acts as a Paying Agent. SECTION 4.15. Trustee's Compensation Not Prejudiced. Nothing contained in this Article Four shall affect or subordinate the rights of the Trustee with respect to any fees, expenses or indemnities owing by the Company to the Trustee under this Indenture. 22 ARTICLE FIVE. CONVERSION OF SECURITIES. SECTION 5.01. Conversion Privilege; Conversion Price. A Holder of a Security may convert it into Common Stock at any time during the period stated in paragraph 8 of the Securities. The number of shares issuable upon conversion of a Security is determined as follows: Divide the principal amount to be converted by the conversion price in effect on the conversion date. Round the result to the nearest 1/100th of a share. The Company will deliver a check in lieu of any fractional share. The initial conversion price is stated in paragraph 8 of the Securities. The conversion price is subject to adjustment in accordance with Section 5.04. SECTION 5.02. Manner of Exercising Conversion Privilege. To convert a Security a Holder must satisfy the requirements in paragraph 8 of the Securities. The .date on which the Holder satisfies all those requirements is the conversion date. As soon as practicable, the Company shall deliver to the Holder through the Conversion Agent a certificate for the number of full shares of Common Stock issuable upon the conversion and a check in lieu of any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record on and after the conversion date. Except as provided below, no adjustment will be made on conversion of a Security for interest accrued thereon or for dividends on shares of Common Stock issued on conversion. If a Security is surrendered for conversion during the period after the close of business on any regular record date for the payment of interest and before the opening of business on the corresponding interest payment date, then (a) notwithstanding such conversion, the interest payable on such interest payment date will be paid by check to the Person in whose name the Security is registered at the close of business on such record date, and (b) (excluding Securities or portions thereof called for redemption on a Redemption Date occurring after such regular record date and on or prior to the fifth Business Day following such interest payment date), when so surrendered for conversion, the Security shall also be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on such interest payment date on the principal amount of such Security then being converted; provided, however, that if the Company shall default in the payment of said interest, said funds, if any shall be returned to the payor thereof. The interest payment with respect to a Security (or portion of a Security) called for redemption on a Redemption Date occurring on a date during the period after the close of business on any regular record date and on or prior to the close of business on the fifth Business Day after such corresponding interest payment date, shall be payable by check on such interest payment date to the holder of such Security at the close of business on such regular record date notwithstanding the conversion of such Security after such regular record date and on or prior to such interest payment 23 date, and the holder converting such Security shall not be required to pay an amount equal to the interest payable by check on such interest payment date upon surrender of such Security for conversion. As promptly as practicable after the receipt of such notice and of such payment, if required, and the surrender of such Security as aforesaid, the Company shall issue and deliver, at the office or agency at which such Security is surrendered, to such holder or on his written order, as specified therein, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Security (or specified portion thereof) in accordance with the provisions of this Article Five, and cash as provided in Section 5.03 in respect of any fractional share of Common Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date on which notice, payment, if required, and proper endorsement or transfer, if required, shall have been received by the Company and such Security shall have been surrendered as aforesaid (unless such holder shall have so surrendered such Security and shall have instructed the Company to effect the conversion on a particular date following such surrender and such holder shall be entitled to convert such Security on such date in which case such conversion shall be deemed to be effected immediately prior to the close of business on such date) and at such time the rights of the holder of such Security as such Securityholder shall cease and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to or on the order of the holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in principal amount equal to the unconverted portion of such Security. SECTION 5.03. Fractional Shares. The Company will not issue a fractional share of Common Stock upon conversion of a Security. Instead the Company will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: Multiply the current market price (as defined in Section 5.04) on the Business Day next preceding the date of conversion of a full share by the fraction. Round the result to the nearest cent. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of Securities (or specified portions thereof to the extent permitted hereby) so surrendered. SECTION 5.04. Adjustment of Conversion Price. The conversion price shall be adjusted from time to time as follows: 24 (a) In case the Company shall hereafter (i) pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the conversion price in effect immediately prior to such action shall be adjusted so that the holder of any Security thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Security been converted immediately prior thereto. An adjustment made pursuant to this subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection (a) the holder of any Security thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a statement filed with the Trustee and with any Conversion Agent) shall determine in good faith the allocation of the adjusted conversion price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) In case the Company shall hereafter issue rights or warrants to holders of its outstanding shares of Common Stock generally entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into or exchangeable for Common Stock) at a price per share (or having a conversion or exchange price per share) less than the current market price per share (as determined pursuant to subsection (e) of this Section 5.04) of the Common Stock on the record date mentioned below, the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any such rights or warrants are distributed, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If at the end of the period during which such rights or warrants are exercisable not all rights or warrants shall have been exercised, the adjusted conversion price shall be immediately readjusted to what it would have been based upon the number of additional shares of Common Stock actually issued (or the number of shares of 25 Common Stock issuable upon conversion of convertible securities actually issued). (c) In case the Company shall hereafter distribute to holders of its outstanding Common Stock generally evidences of its indebtedness or assets (excluding cash dividends or distributions) or rights or warrants to subscribe for securities of the Company (excluding those referred to in subsection (b) of this Section 5.04), then in each such case the conversion price of the shares of Common Stock shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subsection (e) of this Section 5.04) of the Common Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and shall be described in a statement filed with the Trustee and with any Conversion Agent) of the portion of such evidences of indebtedness or assets (but not cash) so distributed to the holder of one share of Common Stock or of such subscription rights or warrants applicable to one share of Common Stock, and of which the denominator shall be such current market price per share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. In any case in which this subsection (c) is applicable, subsection (b) shall not be applicable. (d) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of its Common Stock cash in an aggregate amount that, together with the aggregate amount of any other cash distributions to all holders of its Common Stock within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to this subsection (d) has been made previously exceeds an amount equal to 15% of the amount determined by multiplying the current market price per share (determined as provided in subsection (e) of this Section 5.04) of the Common Stock on the date fixed for stockholders entitled to receive such distribution by the number of shares of Common Stock outstanding on such date (excluding shares held in the Treasury of the Company), the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this subsection (d) by a fraction of which the numerator shall be the current market price per share (determined as provided in subsection (e) of this Section 5.04) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock (determined as aforesaid), such reduction to 26 become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (e) For the purpose of any computation under subsections (b), (c) and (d) of this Section 5.04 or under Section 5.03, the "current market price" per share of Common Stock on any record date shall be deemed to be the average of the daily closing prices for the five consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if the shares of Common Stock are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the shares are listed or admitted to trading, or if they are not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation ("NASDAQ") national market system or any comparable system, or if the Common Stock is not listed on the NASDAQ system or a comparable system, the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. (f) In any case in which this Section 5.04 shall require that an adjustment be made immediately following a record date, the Company may elect to defer (but only until five Business Days following the filing by the Company with the Trustee and any Conversion Agent of the certificate of Independent Public Accountants described in Section 5.05) issuing to the holder of any Security converted after such record date the shares of Common Stock issuable upon such conversion over and above the shares of Common Stock issuable upon such conversion on the basis of the conversion price prior to adjustment. (g) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% of such price; provided, however, that any adjustments which by reason of this subsection (g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5.04 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. Anything in this Section 5.04 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the conversion price, in addition to those required by this Section 5.04, as it in its discretion shall determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable; provided that in no event shall such conversion price be less than the par value of the Common Stock at the time such reduction is made. No adjustment to the conversion price pursuant to this Indenture shall reduce the conversion price below the then existing par value per share of 27 Common Stock. The Company hereby covenants not to take any action to increase the par value per share of the Common Stock. No adjustment in the conversion price need be made for rights to purchase shares of Common Stock or issuances of Common Stock pursuant to a Company plan for reinvestment of dividends or interest. (h) In the event that at any time as a result of an adjustment made pursuant to subsection (a) of this Section 5.04, the holder of any Securities thereafter surrendered for conversion shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the conversion price of such other shares so receivable upon conversion of any Security shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Article Five. SECTION 5.05. Certificate Concerning Adjusted Conversion Price. Whenever the conversion price is adjusted as herein provided, (i) the Company shall promptly file with the Trustee and any Conversion Agent a certificate of a firm of Independent Public Accountants (who may be the regular accountants employed by the Company) setting forth the conversion price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the manner of computing the same, which certificate shall be conclusive evidence of the correctness of such adjustment and (ii) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be given by the Company to the Securityholders in the same manner provided in Section 16.03. The Trustee and any Conversion Agent shall be under no duty or responsibility with respect to any such certificate or the certificate provided for in Section 5. 10 except to exhibit the same from time to time to any holder of a Security desiring an inspection of such certificate. SECTION 5.06. Notice of Certain Corporate Action. In case: (a) the Company shall take any action which would require an adjustment in the conversion price pursuant to Sections 5.04(b), 5.04(c) or 5.04(d); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights; or (c) there shall be any capital reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock), or any consolidation or merger to which the Company is a party or any statutory exchange of securities with another corporation and for which approval of any stockholders of the Company is required, or any sale or transfer of all or substantially all of the assets of the Company; or 28 (d) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then the Company shall cause to be filed with the Trustee and any Conversion Agent, and shall cause to be given to the Securityholders, in the manner provided in Section 16.03, at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such distribution or rights is to be determined, or (ii) the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice or any defect therein shall not affect the legality or validity of the proceedings described in subsection (a), (b), (c) or (d) of this Section 5.06. SECTION 5.07. Company to Provide Stock. The Company will at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting conversions of Securities, the full number of shares of Common Stock deliverable upon the conversion of all outstanding Securities. For purposes of this Section 5.07, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding Securities shall be computed as if at the time of computation all outstanding Securities were held by a single holder. The Company will endeavor to list the shares of Common Stock required to be delivered upon conversion of Securities prior to such delivery upon each national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. Prior to the delivery of any securities or other property, including cash, which the Company shall be obligated to deliver upon conversion of the Securities, the Company will endeavor to comply with all Federal and State laws and regulations thereunder governing the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. SECTION 5.08. Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount 29 of any such tax, or has established, to the satisfaction of the Company, that such tax has been paid. SECTION 5.09. Covenant as to Stock. The Company covenants that all shares of Common Stock which may be delivered upon conversion of Securities will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges imposed by the Company and not subject to any preemptive rights. SECTION 5. 10. Provision in Case of Consolidation or Merger. Notwithstanding any other provision herein to the contrary, in case of any consolidation or merger to which the Company is a party (other than a transaction in which the Company is the continuing corporation and which does not result in any reclassification or change of shares of Common Stock issuable upon conversion of the Securities (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination)), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustments under Section 5.04 but the holder of each Security then outstanding shall have the right thereafter to convert such Security into the kind and amount of securities, cash or other property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale or conveyance had such Security been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Article Five with respect to the rights and interests thereafter of the holders of the Securities, to the end that the provisions set forth in this Article Five shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Securities. Any such adjustments shall be made by and set forth in a supplemental indenture executed by the Company and the Trustee and evidenced by a certificate of a firm of Independent Public Accountants (who may be the regular accountants employed by the Company), to that effect; and any adjustment so approved shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The above provisions of this Section 5.10 shall similarly apply to successive consolidations, mergers, statutory exchanges, sale or conveyances. The Company shall give notice of the execution of such a supplemental indenture to the holders of Securities in the manner provided in Section 16.03 within 30 days after the execution thereof. SECTION 5.11. Trustee's Disclaimer of Responsibility for Certain Matters. Neither the Trustee nor any Conversion Agent shall at any time be under any duty or responsibility to any holder of Securities to determine whether any facts exist which 30 may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture proved to be employed, in making the same. Neither the Trustee nor any Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor any Conversion Agent makes any representation with respect thereto. Neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion or to comply with any of the covenants of the Company contained in this Article Five. ARTICLE SIX. PARTICULAR COVENANTS OF THE COMPANY. SECTION 6.01. Payment of Principal, Premium and Interest. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of (premium, if any) and interest on each of the Securities at the time and place and in the manner provided in the Securities. Principal of (and premium, if any) and interest on each of the Securities shall be considered paid on the date due if the Paying Agent (other than the Company, a Subsidiary thereof or any affiliate of any thereof) holds on that date, not later than 11:00 a.m. New York City time, immediately available funds designated for and sufficient to pay the installment. The Company shall pay interest on overdue principal at the rate borne by the Securities; it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 6.02. Offices for Notices, Payments and Conversions. The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be surrendered for registration of transfer or exchange or conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the 31 Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as an agency of the Company in accordance with Section 2.03. SECTION 6.03. Paying Agents. (a) Any Paying Agent appointed by the Company other than the Trustee shall be a bank or trust company of the character and with the qualifications set forth in Section 9. 10 and the Company covenants and agrees to enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Registrar or Paying Agent. In addition, the Company covenants and agrees to cause such Paying Agent to execute and deliver to the Trustee an instrument in which it shall agree with the Trustee, subject to the provisions of this Section, (1) that such Paying Agent shall hold in trust for the benefit of the Securityholders all sums held by such Paying Agent for the payment of the principal of (or premium, if any) or interest on any of the Securities, (2) that such Paying Agent shall give to the Trustee notice of any failure by the Company (or any other obligor on the Securities) to make any payment of the principal of (or premium, if any) or interest on the Securities when the same shall be due and payable, and (3) at any time during the continuance of such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. (b) If the Company shall at any time act as its own Paying Agent, then on or before eachdue date of the principal of (and premium, if any) or interest on any of the Securities, it will set aside and segregate and hold in trust for the benefit of the holders of the Securities, a sum sufficient to pay such principal (and premium, if any) or interest so becoming due, and will notify the Trustee of any failure to take such action. (c) Anything in this Section 6.03 to the contrary notwithstanding, the Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay or cause to be paid to the Trustee all sums held in trust by it or any Paying Agent as required by this Section, such sums to be held by the Trustee upon the terms herein contained. (d) Anything in this Section 6.03 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 14.03 and 14.04 hereof. SECTION 6.04. Annual Review Certificate. The Company covenants and agrees to deliver to the Trustee, on or before a date not more than 90 days after the end of each fiscal year of the Company ending after the date hereof, a certificate from its principal executive officer, principal financial officer or principal accounting officer stating that a review of the activities of the Company and of its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers with 32 a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such officer signing such certificate, that to the best of his knowledge the Company has kept, observed, performed and fulfilled each and every covenant in this Indenture contained and is not in default in the performance and observance of any of the terms, provisions and conditions hereof (or, if they Company shall be in default, specifying all such defaults and the nature thereof of which he may have knowledge) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of (or premium, if any) or interest on the Securities is prohibited. SECTION 6.05. Appointment to Fill a Vacancy in Office of Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 9.08, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 6.06. Further Instruments and Acts. The Company will, upon request of the Trustee, execute and deliver such further instruments and do such further acts as may reasonably be necessary or proper to carry out more effectually the purposes of this Indenture. SECTION 6.07. Payment of Taxes and Assessments. The Company will, and will cause each Subsidiary to, pay all taxes, assessments and governmental charges lawfully levied or assessed upon it, its property, or upon any part thereof or upon its income or profits, or any part thereof, before the same shall become delinquent, and will duly observe and conform to all lawful requirements of any governmental authority relative to any of its property, and all covenants, terms and conditions upon or under which any of its property is held; and within four months after the accruing of any lawful claims or demands for labor, materials or supplies or other matters which might become a lien or charge upon any of its property or the income therefrom, it will pay or cause to be discharged or make adequate provision to satisfy and discharge the same; provided that nothing in this Section 6.07 or elsewhere in this Indenture contained shall require the Company to observe or conform to any requirements of governmental authority or to cause to be paid or discharged, or to make provision for, any such lien or charge or to pay any such tax assessment or governmental charge so long as the applicability or validity thereof shall be contested in good faith; and provided further, that neither the Company nor any Subsidiary shall be required to pay any such taxes, assessments or charges, if in the judgment of the Board of Directors of the Company or such Subsidiary, such payment shall no longer be advantageous to the Company or such Subsidiary in the conduct of its business. SECTION 6.08. Maintenance of Corporate Existence. Except as otherwise provided or permitted pursuant to the other provisions of this Indenture, the Company will, and will cause each Subsidiary to, maintain its corporate existence and right to carry on business and duly procure all necessary renewals and extensions thereof and to use its best efforts to maintain, preserve and renew all such rights, powers, privileges 33 and franchises; provided, however, that nothing herein contained shall be construed to prevent the Company or a Subsidiary from ceasing or omitting to exercise any rights, powers, privileges or franchises (including, in the case of a Subsidiary, the corporate existence thereof) which in the judgment of the Board of Directors of the Company or of such Subsidiary should not be exercised or the ceasing or omitting to exercise of which in the judgment of the Board of Directors of the Company or of such Subsidiary will not have a material adverse effect on the Company and its Subsidiaries considered as a whole; and provided further, that any Subsidiary of the Company may consolidate with, merge into, or transfer or distribute all or part of its property and assets to the Company or any wholly-owned Subsidiary of the Company. SECTION 6.09. Change of Control. (a) In the event that a Change of Control occurs, each Securityholder shall have the right, at such Securityholder's option, to require that the Company repurchase all or any portion of such Securityholder's Securities at a purchase price (the "Change of Control Repurchase Price") in cash equal to 100% of the principal amount thereof together with accrued interest to the date of repurchase (the "Change of Control Repurchase Date"), in accordance with the provisions of paragraph (b) of this Section 6.09, on a date that shall be not later than the 40th Business Day after the mailing by the Company of the notice that a Change of Control has occurred. (b) Within 15 Business Days after a Change of Control, the Company shall mail a notice to the Trustee and each Securityholder of record as of the date of the Change of Control stating: (1) that a Change of Control has occurred and that such Securityholder has the right to require the Company to repurchase all or any portion of such Securityholder's Securities at the Change of Control Repurchase Price; (2) the current conversion price, the date on which the right to convert such Holder's Securities into Common Stock will expire and the place or places where such Securities may be surrendered for conversion; (3) the Change of Control Repurchase Date; (4) that Holders electing to have Securities or a portion thereof purchased will be required to surrender their Securities to the Paying Agent at the address specified in such notice prior to at any time prior to the close of business on the Change of Control Repurchase Date with the "Option of Holder to Elect Purchase" on the reverse thereof completed and must complete any form of letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; (5) that Holders of Securities will be entitled to withdraw their election to have Securities purchased if the Paying Agent receives, not 34 later than the close of business on the Change of Control Repurchase Date, a tested telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount at maturity of Securities the Holder delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (6) that Securities which have been surrendered to the Paying Agent maybe converted into Common Stock only to the extent that the Holder of such Securities withdraws his election to have such Securities purchased in accordance with the terms of this Section 6.09; (7) that any Security not tendered or not accepted for payment will continue to accrue interest; (8) that, unless the Company defaults in paying the Change of Control Repurchase Price, any Security accepted for payment shall cease to accrue interest after the Change of Control Repurchase Date; and (9) a description of the procedure which a Holder must follow to exercise his right to have Securities repurchases. At the Company's request, the Trustee shall give such notice in the Company's name and at the Company's expense, provided, however, that the Company shall deliver to the Trustee, at least 5 days prior to the date upon which notice must be mailed to Securityholders (unless a shorter time shall be acceptable to the Trustee), an Officer's Certificate setting forth the information to be stated in such notice as provided in this Section 6.09. No failure of the Company to give the foregoing notice shall limit any Securityholder's right to exercise a repurchase right. The Trustee shall be under no obligation to ascertain the occurrence of a Change of Control or to give notice with respect thereto other than as provided above upon receipt of the written notice of a Change of Control from the Company. The Trustee may conclusively presume, in the absence of written notice from the Company to the contrary, that no Change of Control has occurred. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the price payable with respect to the Securities as to which the repurchase right had been exercised in cash to the Securityholder. In the event that a repurchase right is exercised with respect to less than the entire principal amount of a surrendered Security, the Company shall execute and the Trustee shall authenticate for issuance in the name of the Securityholder a Security or Securities in the aggregate principal amount of the unpurchased portion of such surrendered Security. 35 (d) In connection with any repurchase of Securities under this Section 6.09, the Company shall (i) comply with Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act, if applicable, (ii) file the related Schedule 13e-4 (or any successor schedule, form or report) under the Exchange Act, if applicable, and (iii) otherwise comply with all federal and state securities laws so as to permit the rights and obligations under this Section 6.09 to be exercised in the time and in the manner specified in this Section 6.09. SECTION 6.10. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Securities as contemplated herein or in the Securities, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.11. SEC Reports. (a) The Company shall file all reports and other information and documents which it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, and within 15 days after it files all such reports, information and other documents with the SEC, the Company shall file copies of all such reports, information and other documents with the Trustee. The Company will cause any quarterly and annual reports which it mails to its stockholders to be mailed to the Holders of the Securities. In the event the Company is at any time no longer subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will prepare, for the first three quarters of each fiscal year, quarterly financial statements substantially equivalent to the financial statements required to be included in a report on Form 10-Q under the Exchange Act. The Company will also prepare, on an annual basis, complete audited consolidated financial statements, including, but not limited to, a balance sheet, a statement of operations, a statement of cash flows and all appropriate notes. All such financial statements will be prepared in accordance with generally accepted accounting principles consistently applied, except for changes with which the Company's independent accountants concur, and except that quarterly statements may be subject to year-end adjustments. The Company will cause a copy of such financial statements to be filed with the Trustee and mailed to the Holders of the Securities within 50 days after the end of each of the first three quarters of each fiscal year and within 95 days after the close of each fiscal year. The Company will also comply with the other provisions of TIA Subsection 314(a). 36 ARTICLE SEVEN. (Intentionally Omitted] ARTICLE EIGHT. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 8.01. Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable and the default continues for a period of 30 days, whether or not such payment is prohibited by the provisions of Article Four; or (b) the Company defaults in the payment of the principal (or premium, if any) of any of the Securities as and when the same shall become due and payable either at maturity, upon redemption (including redemption and purchase pursuant to Section 6.09), by declaration or otherwise, and in each case whether or not such payment is prohibited by the provisions of Article Four; or (c) the Company fails to perform or observe any other covenant or agreement in the Securities or in this Indenture and the default continues for the period and after the notice specified in the penultimate paragraph of this Section 8.01; or (d) the Company or any of its Significant Subsidiaries shall have failed to pay principal at maturity of, or an event of default shall have occurred and be continuing under and resulted in the acceleration of, any loan agreement, mortgage, indenture or other instrument under which there is issued or by which there is secured or evidenced any Indebtedness of the Company (other than the Securities) or any of its Significant Subsidiaries, whether such Indebtedness exists as of the Issuance Date or shall be created thereafter, and the principal amount of such Indebtedness which, together with any such other Indebtedness so accelerated or not paid at maturity, aggregates an amount equal to or greater than $10,000,000; or (e) there shall have been entered a decree or order under any Bankruptcy Law by a court of competent jurisdiction that (A) is for relief in respect of the Company or any Significant Subsidiary under any Bankruptcy Law, or (B) appoints a Custodian of the Company or such Significant Subsidiary or of any substantial part of the property of the Company or such Significant Subsidiary, as the case may be, or (C) orders the winding-up or liquidation of the affairs of the Company or such Subsidiary, as the case may be, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or 37 (f) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law (A) commences a voluntary case or proceeding with respect to itself, (B) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding, (C) applies for, consents to or acquiesces in the appointment of or taking possession by a Custodian of the Company or such Significant Subsidiary or for a substantial part of its properties or (D) makes a general assignment for the benefit of its creditors; or (g) a final judgment which, together with other outstanding final judgments entered against the Company and/or any of its Significant Subsidiaries, is equal to or exceeds an aggregate of $10,000,000 (not covered by valid and collectible insurance from solvent unaffiliated insurers) shall be entered against the Company and/or any of its Significant Subsidiaries and within 60 days after entry thereof such judgment or judgments shall not have been satisfied or discharged or execution thereof stayed pending appeal or, within 60 days after the expiration of any such stay, such judgment shall not have been satisfied or discharged. The term "Bankruptcy Law" means Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy, insolvency or other similar law. The term "Custodian" means any receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official under any Bankruptcy Law. A Default under clause (c) is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the Securities then outstanding notify the Company and the Trustee, of the Default and the Company does not cure the Default within 60 days after receipt of such notice. The notice must specify the Default, demand that it be remedied and state the notice is a "Notice of Default." When a Default is cured, it ceases. SECTION 8.02. Acceleration. If any Event of Default (other than an Event of Default with respect to the Company specified in Sections 8.01(e) or (f) above) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare to be due and payable immediately the principal amount of the Securities plus accrued interest to the date of acceleration. Upon any such declaration, such amount shall be due and payable immediately. If an Event of Default with respect to the Company specified in Sections 8.01(e) or (f) above occurs, all unpaid principal and accrued interest on the Securities then outstanding shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may rescind an acceleration and its consequences if (x) all existing Events of Default, other than the non-payment of the principal of the Securities which shall have become due solely by such declaration of acceleration, shall have been cured or waived, (y) to the extent the payment of such interest is lawful, interest on overdue installments of interest and 38 overdue principal which has become due otherwise than by such declaration of acceleration has been paid, and (z) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. SECTION 8.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 8.04. Waiver of Defaults and Events of Default. Subject only to the provisions of Sections 8.07 and 12.02 hereof, the Holders of a majority in principal amount of the outstanding Securities by written notice to the Trustee may waive an existing Default or Event of Default and its consequences except (a) a Default in payment of principal or interest on any Security as specified in clauses (a) and (b) of Section 8.01 or (b) in respect of a covenant or provision hereof which under Article Twelve cannot be modified or amended without the consent of the Holder of each outstanding Security affected. When a Default or Event of Default is waived, it is cured and ceases; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 8.05. Control by Majority. The Holders of a majority in principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it, including, without limitation, any remedies provided for in Section 8.03. The Trustee may refuse, however, to follow any direction that conflicts with law, the Securities or this Indenture, or that the Trustee determines may be unduly prejudicial to the rights of another Securityholder, that may involve the Trustee in personal liability or if the Trustee determines that it does not have adequate indemnification against any loss or expense; PROVIDED that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 8.06. Limitation on Suits. Except as provided in Section 8.07, a Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (a) the Holder gives to the Trustee written notice of a continuing Event of Default; 39 (b) the Holders of at least 25% in principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expenses; (d) the Trustee does not comply with the request within 30 days after receipt of the notice, request and offer of indemnity; and (e) no direction inconsistent with such written request has been given to the Trustee during such 30-day period by the Holders of a majority in principal amount of the Securities then outstanding. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 8.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of the principal of, premium, if any, and interest on the Security, on or after the respective due dates expressed in the Security (including the maturity date, the Redemption Date and the Change of Control Purchase Date), or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to convert the Security or to bring suit for the enforcement of such right shall not be impaired or affected without the consent of the Holder. SECTION 8.08. Collection Suit by Trustee. If an Event of Default in payment of interest or principal specified in Section 8.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount of unpaid principal and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate borne by the Securities, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 8.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Securityholders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and 40 shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same. Any Custodian in any such judicial proceeding is hereby authorized by each Securityholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 9.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceedings. SECTION 8.10. Application of Money Collected by Trustee. Subject to the provisions of Article Four, any moneys collected by the Trustee or any Paying Agent pursuant to this Article Eight shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Securities, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of all amounts due the Trustee under Section 9.07 hereof; Second: To holders of Senior Indebtedness of the Company to the extent required by Article Four hereof, Third: To the Securityholders for amounts owing and unpaid upon the Securities for principal (and premium, if any) and interest, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee or Paying Agent) on overdue installments of interest at the rate borne by the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal (and premium, if any) and interest, respectively; and Fourth: To the Company or as a court of competent jurisdiction may direct. SECTION 8.11. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonably attorneys' fees, against any party litigant 41 in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 8.11 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than ten percent in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the due date expressed in such Security. SECTION 8.12. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Security and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 8.13. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 8.14. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Eight or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE NINE. CONCERNING THE TRUSTEE. SECTION 9.01. Duties of Trustee. (1) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. 42 (2) Except during the continuance of an Event of Default: (a) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (b) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. The Trustee, however, shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section 9.01. (2) The Trustee shall not be liable for any error in judgment made in good faith by a Responsible Officer of the Trustee, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 9.02. Rights of Trustee. Subject to Section 9.01: (1) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (2) Before the Trustee acts or refrains from acting, it may require an Officer's' Certificate or an Opinion of Counsel, which shall conform to Section 16.04. The 43 Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Certificate or Opinion. (3) The Trustee may act through Agents and shall not be responsible for the misconduct or negligence of any Agent appointed with due care. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. SECTION 9.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, is subject to Sections 9.10 and 9.11. SECTION 9.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than its certificate of authentication or in any document used in the sale of the Securities other than any statement in writing provided by the Trustee for use in such document. SECTION 9.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as it in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 9.06. Reports by Trustee to Holders. If such report is required by TIA Subsection 313, within 60 days after each May 15 beginning with May 15, 1995, the Trustee shall mail to each Securityholder a brief report dated as of such May 15 that complies with TIA Subsection 313(a). The Trustee also shall comply with TIA Subsection 313(b) and Subsection 313). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock national securities exchange on which the Securities are listed. The Company agrees to notify the Trustee whenever the Securities become listed on any national securities exchange. SECTION 9.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such expenses may include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. 44 Subject to the provisions of the following paragraph, the Company shall indemnify the Trustee for, and hold it harmless against, any loss or liability incurred by it in connection with its duties under this Indenture. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity and the Company may elect by written notice to the Trustee, and with the consent of the Trustee, to assume the defense of any such claim at the Company's expense with counsel reasonably satisfactory to the Trustee. If the Trustee shall not consent to the Company's assumption of the defense, the Company agrees to pay the reasonable costs and expenses of counsel retained to represent the Trustee. The Company need not reimburse the Trustee for any expense or indemnify it against any loss or liability incurred by it through its negligence or bad faith. The Company shall not be liable for any settlement of any claim or action effected without the Company's consent, which consent shall not be unreasonably withheld. To secure the Company's payment obligations in this Section 9.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Sections 8.01(e) or (f) hereof occurs, the expenses and the compensation for the services (including the reasonable fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 9.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 9.08. The Trustee may resign by so notifying the Company. The holders of a majority in principal amount of the Securities then outstanding may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee with the Company's written consent. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 9.10; (b) the Trustee is adjudged a bankrupt or an insolvent; (e) a receiver or other public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the holders of a majority in principal 45 amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company, and if a successor trustee is not appointed within such period, the holders shall no longer be permitted to appoint a successor trustee to replace such successor trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the holders of at least 10% in principal amount of the Securities then outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9. 10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall, upon payment of its charges, transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 9.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Securityholder. SECTION 9.09. Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 9.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Subsection 310(a)(1). The Trustee shall have a combined capital and surplus of at least $10,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Subsection 310(b). SECTION 9.11. Preferential Collection of Claims Against Company. The Trustee is subject to and shall comply with TIA Subsection 311(a), excluding any creditor relationship listed in TIA Subsection 311(b). A Trustee who has resigned or been removed shall be subject to TIA Subsection 311(a) to the extent indicated therein. ARTICLE TEN. CONCERNING THE SECURITYHOLDERS. SECTION 10.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that 46 at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Securities voting in favor thereof at any meeting of Securityholders duly called and held in accordance with the provisions of Article Eleven, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Securityholders. SECTION 10.02. Proof of Execution by Securityholders, Evidence of Holdings. Subject to the provisions of Sections 9.01 and 11.05, proof of the execution of any instrument by a Securityholder or his agent or proxy and proof of the holding by any person of any of the Securities shall be sufficient for any purpose of this Indenture if made in the following manner: (a) The fact and date of the execution by any such person of any instrument may be proved in any reasonable manner acceptable to the Trustee. (b) The ownership of Securities shall be proved by the register of such Securities or by a certificate of the Security Registrar. The record of any Securityholders' meeting shall be proved in the manner provided in Section 11.06. The Trustee may require such additional proof of any matter referred to in this Section 10.02 as it shall deem necessary. SECTION 10.03. Company-owned Securities Disregarded. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction or consent under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any Affiliate of the Company or such obligor shall be disregarded and deemed not to be outstanding for the purpose of any such determination, provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction or consent only Securities which the Trustee knows are so owned shall be so disregarded. SECTION 10.04. Revocation of Consents, Future Holders Bound. At any time prior to but not after the evidencing to the Trustee, as provided in Section 10.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security which is included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at its office and upon proof of holding as provided in Section 10.02, revoke such action as far as concerns such Security. Except as aforesaid any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. Any 47 action taken by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Securities. ARTICLE ELEVEN. SECURITYHOLDERS' MEETINGS. SECTION 11.01. Purposes of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article Eleven for any of the following purposes: (1) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article Eight; (2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Nine; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 12.02; or (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture or under applicable law. SECTION 11.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 11.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, New York, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given to the holders of Securities in the manner provided in Section 16.03. Such notice shall be mailed not less than 20 nor more than 90 days prior to the date filed for the meeting. SECTION 11.03. Call of Meetings by Company or Securityholders. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in The Borough of Manhattan, The City of New York, 48 New York for such meeting and may call such meeting to take any action authorized in Section 11.01, by mailing notice thereof as provided in Section 11.02. SECTION 11.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a person shall (a) be a holder of one or more Securities; or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 11.05. Regulations. Notwithstanding any provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders. In regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 11.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by a majority vote of the meeting. Subject to the provisions of Section 10.03, at any meeting each Securityholder or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him, provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 11.02 or 11.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. At any meeting of Securityholders duly called pursuant to the provisions of Section 11.02 or 11.03, the presence of persons holding or representing Securities in an aggregate principal amount sufficient to take action on any business for the transaction of which such meeting was called shall constitute a quorum. SECTION 11.06. Voting. The vote upon any resolution submitted to any meeting of Securityholders shall be by written ballots on which shall be subscribed the signatures of the holders of Securities or of their representatives by proxy and the principal amount of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes 49 cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 11.02. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 11.07. No Delay of Rights by Meeting. Nothing in this Article Eleven contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Securityholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Securityholders under any of the provisions of this Indenture or of the Securities. ARTICLE TWELVE. SUPPLEMENTAL INDENTURES. SECTION 12.01. Supplemental Indenture Without Consent of Securityholders. The Company, when authorized by the resolutions of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of holders of Securities pursuant to the requirements of Section 5.10; (b) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article Thirteen hereof; (c) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of the Securities as the Board of Directors of the Company and the Trustee shall consider to be for the protection of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the 50 enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (d) to provide for uncertificated Securities in addition to or in place of certificated Securities; (e) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not adversely affect the interests of the holders of the Securities; and (f) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the TIA, or under any similar federal statute hereafter enacted. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 12.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 12.02. SECTION 12.02. Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 10.01) of the holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by the resolutions of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Securities, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium thereon, or modify the provisions of this Indenture with respect to the subordination of the Securities, or 51 impair the right to convert the Securities so affected, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of the affected Securities then outstanding. Upon the request of the Company, accompanied by a copy of the resolutions of its Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 12.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 12.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Twelve shall comply with the TIA as in effect on the date of execution thereof. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Twelve, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 12.04. Notation on Securities. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article Twelve may bear a notation in form approved by the Trustees as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and execution by the Company, authenticated by the Trustee and delivered in exchange for the Securities then outstanding. SECTION 12.05. Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee. The Trustee, subject to the provisions of Section 9.01 may receive an Officers' Certificate and, an Opinion of Counsel both conforming to Section 16.04 as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Indenture. 52 ARTICLE THIRTEEN. CONSOLIDATION, MERGER AND SALE BY THE COMPANY. SECTION 13.01. When Company May Merge, Etc. The Company shall not consolidate with or merge with, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to (each a "transaction"), another person unless: (i)(a) the Company is the surviving entity, or (b) the successor person (if other than the Company) formed by such consolidation or into which the Company is merged or to which such assets are sold, assigned, transferred, leased, conveyed or otherwise disposed is a corporation organized and existing under the laws of the United States or a state thereof or the District of Columbia and such corporation expressly assumes by supplemental indenture all the obligations of the Company under the Securities and the Indenture; (ii) at the time of and immediately after giving effect to such transaction no Default or Event of Default has occurred and is continuing; and (iii) the Company has delivered to the Trustee an Officers' Certificate and opinion of counsel stating that the transaction and supplemental indenture comply with the Indenture, and thereafter all obligations of the Company (if the Company is not the resulting, surviving or transferee person) shall terminate. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties or assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 13.02. Successor Corporation Substituted. Upon any consolidation or merger, or any transfer of all or substantially all of the assets of the Company in accordance with Section 13.01, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein. ARTICLE FOURTEEN. SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS. SECTION 14.01. Discharge of Indenture. If (a) there shall have been delivered to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and in lieu of or in substitution for which other Securities shall have been authenticated and delivered), or (b)(1) all such Securities not theretofore delivered to the Trustee for cancellation shall have become due and payable, or will become due and payable at their stated maturity within one year, or have been called for redemption, and the Company shall have irrevocably deposited with the Paying Agent, in trust, funds (except funds paid to the Company pursuant to Section 14.04) sufficient to pay at maturity or upon 53 redemption all of such Securities (other than any Securities which shall have been destroyed, lost or stolen and in lieu of or in substitution for which other Securities shall have been authenticated and delivered) not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest, and such deposit shall be upon terms making such funds payable forthwith upon due presentation, whether before or after such date of maturity or redemption of such Securities, (2) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such trust funds will not be subject to any rights of holders of Senior Indebtedness, including without limitation, those arising under Article Four hereof, and (3) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been compiled with, and if in any such case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then (except as provided below) this Indenture shall cease to be of further effect, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.04 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; provided, however, that the Company's obligations under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 6.01, 6.02, 6.03, 9.07, 9.08, 14.04, 14.05 and Article Five shall survive until the Securities are no longer outstanding. SECTION 14.02. Deposited Moneys to Be Held in Trust by Trustee. All moneys deposited with the Paying Agent pursuant to Section 14.01 shall be held in trust and, subject to the provisions of Section 14.04, applied by it to the payment, either directly or through any Paying Agent, to the holders of the particular Securities for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due thereon for principal and interest (and premium, if any). SECTION 14.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent of the Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it and thereupon the Paying Agent shall be released from all further liability with respect to such moneys. SECTION 14.04. Unclaimed Moneys. Any moneys deposited with the Trustee or any Paying Agent (including moneys held in trust by the Company if it shall act as its own Paying Agent) not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of (and premium, if any) or interest on such Securities shall have become due and payable shall be repaid to the Company by the Trustee or such Paying Agent on demand, or if held in trust by the Company may at the Company's option be released from such trust; and the holder of any of the Securities entitled to receive such payment shall thereafter look only to the Company, as the holder of a general claim, for the payment thereof, provided, however, that the Trustee or such Paying Agent before being required to make any such repayment, may at the expense of the Company cause to be mailed to each such holder or published once a week for two successive weeks (in each case on any day of the 54 week) in a newspaper printed in the English language and customarily published at least once a day for at least five days in each calendar week and of general circulation in the Borough of Manhattan, The City of New York, New York, or both, a notice that said moneys have not been so applied and that after a date named therein any unclaimed balance of said moneys then remaining will be returned to the Company. SECTION 14.05. Reinstatement. If the Trustee or a Paying Agent is unable to apply any moneys in accordance with Section 14.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 14.01 until such time as the Trustee or such Paying Agent is permitted to apply all such moneys in accordance with Section 14.01; PROVIDED, HOWEVER, that if the Company has made any payment of principal or interest on any of the Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of the Securities to receive such payment from moneys held by the Trustee or such Paying Agent. ARTICLE FIFTEEN. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 15.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal or premium or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or an successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for the execution of this Indenture and the issue of the Securities. 55 ARTICLE SIXTEEN. MISCELLANEOUS PROVISIONS. SECTION 16.01. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not, SECTION 16.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 16.03. Notices. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited, first class postage prepaid, in a United States post office letter box addressed (until another address is filed by the Company with the Trustee) to ICN Pharmaceuticals, Inc., 3300 Hyland Avenue, Costa Mesa, CA 92626, Attn: Chief Executive Officer. Any notice, direction, request, or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the principal office of the Trustee, addressed to the attention of its Corporate Trust Department. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or the Company to or on the holders of Securities shall be given or served by first-class mail, postage prepaid, addressed to the holders of such Securities at their last addressed as the same appear on the registry books referred to in Section 2.03, and any such notice shall be deemed to be given or served by being deposited in a post office letter box in the form and manner provided in this Section 16.03. SECTION 16.04. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and 56 scope of the examination or investigation upon which the statements or opinion contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he had such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 16.05. Legal Holidays. In any case where the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security or the last day on which a Securityholder has the right to convert his Security at a particular conversion price shall not be a Business Day, then payment of interest or principal (and premium, if any) or conversion of the Securities need not be made on such date but may be made on the next succeeding Business Day, with the same force and effect as if made on the date of such maturity or the date fixed for redemption or such last day for conversion, and, in the case of payment, no interest shall accrue for the period from and after such date. SECTION 16.06. Trust Indenture Act to Control. The provisions of subsection 310 to and including subsection 17 of the TIA that imposes duties on any person (including any such provisions automatically deemed included in an indenture by the TIA) are a part of and govern this Indenture. If any provision hereof limits, qualifies or conflicts with any of such duties imposed by operation of such provisions of the TIA, the applicable provisions of the TIA and duties imposed thereby shall control. SECTION 16.07. Communications by Holders with Other Holders. A Securityholder may communicate pursuant to TIA Subsection 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Subsection 312(c). SECTION 16.08. Governing Law. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State, without giving effect to such State's conflicts of law principles. SECTION 16.09. Table of Contents and Headings. The table of contents, titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 16.10. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. The Trustee hereby accepts the trusts in this Indenture declared and provided, upon terms and conditions hereinabove set forth. 57 IN WITNESS WHEREOF, ICN Pharmaceuticals, Inc. has caused this Indenture to be signed and acknowledged by its chairman, its president, or one of its vice presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its secretary or one of its assistant secretaries, and American Stock Transfer & Trust Company has caused this Indenture to be signed and acknowledged by one of its vice presidents, has caused its corporate seal to be affixed hereunto, and the same to be attested by one of its Responsible Officers, as of the day and year first written above. ICN PHARMACEUTICALS, INC. By: /S/ JOHN GIORDANI ---------------------------------------- Name: Title: Attest: /S/ DAVID C. WATT - --------------------------------- Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY, As Trustee By: ----------------------------------------- Name: Title: Attest: - -------------------------------- Trust Officer 58 IN WITNESS WHEREOF, ICN Pharmaceuticals, Inc. has caused this Indenture to be signed and acknowledged by its chairman, its president, or one of its vice presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its secretary or one of its assistant secretaries, and American Stock Transfer & Trust Company has caused this Indenture to be signed and acknowledged by one of its vice presidents, has caused its corporate seal to be affixed hereunto, and the same to be attested by one of its Responsible Officers, as of the day and year first written above. ICN PHARMACEUTICALS, INC. By: /S/ JOHN GIORDANI ---------------------------------------- Name: Title: Attest: /S/ DAVID C. WATT - --------------------------------- Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY, As Trustee By: /S/ HERBERT J. LEMMER ----------------------------------------- Name: HERBERT J. LEMMER Title: VICE PRESIDENT Attest: /S/ - -------------------------------- Trust Officer 58 EXHIBIT A ICN PHARMACEUTICALS, INC. 8-1/2% Convertible Subordinated Note due 1999 ICN PHARMACEUTICALS, INC., a Delaware corporation, promises to pay to - ------------------------------------------------------------------------------- or registered assigns, -------------------------------------------------------- - -------------------------------------------------------------------------------- the principal sum of --------------------------------------------------------- Dollars, on November 15, 1999. Interest Payment Dates: May 15 and November 15 Record Dates: May 1 and November 1 Additional provisions of this Security are set forth on other side of this Security. IN WITNESS WHEREOF, ICN PHARMACEUTICALS, INC. has caused this instrument to be duly signed. ICN PHARMACEUTICALS, INC. By: --------------------------------- Secretary CERTIFICATE OF AUTHENTICATION By: --------------------------------- Chairman of the Board American Stock Transfer & Trust Company, as Trustee, certifies that this is one of the Securities referred to in the within mentioned Indenture. American Stock Transfer & Trust Company, as Trustee By: --------------------------------------- Authorized Signatory Dated: A-1 1. INTEREST. ICN PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at 8-1/2% per annum from and including the date of issuance of this Security to maturity or earlier redemption. The Company will pay interest semi-annually on May 15 and November 15 of each year beginning May 15, 1995. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from November 18, 1994. If an Interest Payment Date falls on a day that is not a Business Day, the interest payment to be made on such Interest Payment Date will be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date, and no additional interest will accrue as a result of such delayed payment. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by this Security, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. METHOD OF PAYMENT. The Company will pay interest on the Securities (except defaulted interest) to the persons who are the registered Holders of the Securities at the close of business on the May 1 or November 1 next preceding the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal and interest by its check payable in such money. It may mail an interest check to a Holder's registered address. 3. REGISTRAR AND AGENTS. Initially, American Stock Transfer & Trust Company will act as a Registrar, a Paying Agent, a Conversion Agent and agent for service of notices and demands. The Company may change any Registrar, co-registrar, Paying Agent, Conversion Agent and agent for service of notices and demands without the prior consent of the Holders but upon notice to the Holders. The Company or any of its Subsidiaries may act as Registrar, co-registrar, Paying Agent or Conversion Agent. 4. INDENTURE; LIMITATIONS. The Company issued the Securities under an Indenture dated as of November 18, 1994 (the "Indenture") between the Company and American Stock Transfer & Trust Company (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code Subsection 77aaa-77bbbb) as in effect on the date of the Indenture. The Securities are subject to all such terms, and the Holders of the Securities are referred to the Indenture and said Act for a statement of such terms. The Securities are general unsecured obligations of the Company limited to $115,000,000 principal amount. A-2 5. OPTIONAL REDEMPTION BY THE COMPANY. The Company may, at its option, redeem the Securities, in whole or from time to time in part, on any date after November 15, 1997, at the following redemption prices, expressed as percentages of the principal amount, if redeemed during the 12 months beginning November 15, of the years indicated below: YEAR PERCENTAGE ---- ---------- 1997 ................................................ 102.125% 1998 and thereafter ................................. 100.000 in each case plus accrued and unpaid interest to the Redemption Date. 6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 principal amount may be redeemed in part, but only in an amount of $1,000 principal amount or integral multiples thereof. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. On and after the Redemption Date interest ceases to accrue on Securities or portions of them called for redemption. 7. CHANGE OF CONTROL. In the event of a Change of Control (as hereinafter defined) with respect to the Company, then each Holder of the Securities shall have the right, at the Holder's option, to require the Company to purchase all or a portion of such Holder's Securities, in accordance with the procedures set forth in the Indenture, at a price equal to 100% of principal amount of the Securities, plus accrued and unpaid interest to the date of purchase. A "Change of Control" of the Company shall be deemed to have occurred at such time when (i) the stockholders of the Company adopt a plan of liquidation with respect to the Company or the Company sells, transfers, leases or otherwise disposes of, in one transaction or series of related transactions, all or substantially all of its assets; (ii) there shall be consummated any consolidation or merger of the Company (1) in which the Company is not the continuing or surviving corporation or (2) pursuant to which the Common Stock would be converted into cash, securities or other property, in each case, other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the total voting power of all classes of Capital Stock of the continuing or surviving corporation immediately after such consolidation or merger; (iii) a majority of the Board of Directors are not Continuing Directors; or (iv) any person, or any persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any Affiliate thereof shall beneficially own (as defined in Rule 13d-3 of the Exchange A-3 Act), at least 50% of the total voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors of the Company. 8. CONVERSION. A Holder of a Security may convert such Security into Common Stock of the Company at any time before the close of business on November 15, 1999. If the Security is called for redemption, the Holder may convert it at any time before the close of business on a date determined by the Company which shall be no earlier than the fifth Business Day prior to the date fixed for such redemption or, if such fifth Business Day is a Business Day, on the next succeeding Business Day (except that a Security which the Company has offered to purchase pursuant to Section 6.09 of the Indenture will remain convertible until the close of business on the Change of Control Repurchase Date). The initial conversion price is $23.86 principal amount per share, subject to adjustment in certain events as set forth in the Indenture. To determine the number of shares issuable upon conversion of a Security, divide the principal amount to be converted by the conversion price in effect on the conversion date and round to the nearest 1/100th share. The Company will deliver a check for any fractional share. To convert a Security, a Holder must (1) complete and sign the conversion notice on the back of the Security, (2) surrender the Security to the Conversion Agent or Registrar, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent and (4) pay any transfer or similar tax if required. Except as provided below, no adjustment is to be made on conversion for interest accrued hereon or for dividends on shares of Common Stock issued on conversion. If a Security is surrendered for conversion after the close of business on any regular record date for payment of interest and before the opening of business on the corresponding interest payment date, then (a) notwithstanding such conversion, the interest payable on such interest payment date will be paid by check to the Person in whose name the Security is registered at the close of business on such record date, and (b) (other than a Security or a portion of a Security called for redemption on a Redemption Date occurring after such record date and on or prior to the fifth Business Day following such interest payment date), when so surrendered for conversion, the Security must be accompanied by payment of an amount equal to the interest payable on such interest payment date on the principal amount of such security then being converted. The interest payment with respect to a Security (or portion of a Security) called for redemption on a Redemption Date occurring on a date during the period after the close of business on a date that would be any regular record date (if a call for redemption had not been made) next preceding a date that would be any interest payment date (if a call for redemption had not been made) to the close of business on the fifth Business Day after the corresponding interest payment date, shall be payable in cash on such interest payment date to the Holder of such Security at the close of business on such regular record date notwithstanding the conversion of such Security after such regular record date and on or prior to such interest payment date, and the Holder shall not be required to pay an amount equal to the interest payable on such interest payment date upon surrender of such Security for conversion. A-4 If the Company is a party to a consolidation or merger or a transfer or lease of all or substantially all of its assets, the right to convert a Security into Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another Person. 9. SUBORDINATION. This Security is subordinated to all existing and future Senior Indebtedness of the Company as defined in the Indenture. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid in cash before any payment may be made to any Holders of Securities. Any Securityholder by accepting this Security agrees to the subordination and authorizes the Trustee to give it effect. In addition to all other rights of Senior Indebtedness described in the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or extension or renewal of the Senior Indebtedness. 10. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities are in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. A Holder may register the transfer of or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption in whole or in part or register the transfer of or exchange any Securities for a period of 15 days before a selection of Securities to be redeemed. 11. PERSONS DEEMED OWNERS. The registered Holder of a Security shall be treated as the owner of it for all purposes. 12. UNCLAIMED MONEY. If money for the payment of principal or interest on any Securities remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its request. After that, Holders may look only to the Company for payment. 13. MERGER OR CONSOLIDATION. The Company may not consolidate with, or merge into, or transfer or lease all or substantially all of its assets to, another person unless: the person is a corporation; such corporation assumes by supplemental indenture all the obligations of the Company under the Securities and the Indenture; at the time thereof and after giving effect to the transaction no Default or Event of Default shall exist; and certain other conditions set forth in the Indenture are satisfied. 14. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. The Indenture will be discharged and canceled except for certain sections thereof upon payment of all the Securities sufficient to pay principal and interest due on such payment or redemption. A-5 15. AMENDMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount of the Securities then outstanding and any existing default in compliance with any provision may be waived with the consent of the Holders of a majority in principal amount of the Securities then outstanding. Without the consent of or notice to any Securityholder, the Company may amend the Indenture or the Securities to, among other things, provide for uncertificated Securities, to cure any ambiguity, defect or inconsistency or make any other change that does not adversely affect the rights of any Securityholder. 16. SUCCESSORS. When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 17. DEFAULTS AND REMEDIES. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of Securities may declare all the Securities to be due and payable in the manner and with the effect provided in the Indenture, and upon any such declaration such principal and accrued interest shall become due and payable immediately. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. The Company is required to file periodic reports with the Trustee as to the absence of Default. An Event of Default is: default for 30 days in payment of interest on the Securities; default in payment of principal on the Securities when due; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Indenture or the Securities; failure to pay at maturity, or default under other Indebtedness of the Company or any Significant Subsidiary of the Company that results in the acceleration prior to maturity, of other Indebtedness equal to or in excess of an aggregate of $10,000,000; the rendering of a final judgment or judgments against the Company or any Significant Subsidiary of the Company equal to or in excess of $10,000,000 which is not discharged or stayed (or not covered by insurance) within a period of 60 days; and certain events of bankruptcy or insolvency involving the Company or its Significant Subsidiaries. 18. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its affiliates, and may otherwise deal with the Company or its affiliates, as if it were not Trustee. 19. NO RECOURSE AGAINST OTHERS. No stockholder, director, officer or incorporator, as such, past, present or future, of the Company or any successor corporation shall have any liability for any obligation of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Security by accepting a Security waives A-6 and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 20. AUTHENTICATION. This Security shall not be valid until the Trustee signs the certificate of authentication on the other side of this Security. 21. ABBREVIATiONS. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. It also will furnish the text of this Security in larger type. Requests may be made to: ICN Pharmaceuticals, Inc., 3300 Hyland Avenue, Costa Mesa, CA 92626. A-7 ASSIGNMENT FORM If you the Holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to (INSERT ASSIGNEE'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) (Print or type assignee's name, address and zip code) and irrevocably appoint ------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: Your signature: ------------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. CONVERSION NOTICE To convert this Security into Common Stock of the Company, check the box: / / To convert only part of this Security, state the principal amount to be converted (which must be a minimum of $1,000 or any multiple thereof): ----------------------------------------- $ ----------------------------------------- If you want the stock certificate made out in another person's name, fill in the form below: (INSERT OTHER PERSON'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) (Print or type other person's name, address and zip code) Date: Your signature: ----------------------------------------------- (Sign exactly as your name appears on the other side of this Security) OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 6.09 of the Indenture, check the box: -------------------------------------- / / If you want to elect to have only part of this Security purchased by the Company pursuant to Section 6.09 of the Indenture, state the amount: (in an integral multiple of $1,000) Date: Signature(s): ------------------------------------------ (Sign exactly as your name(s) appear(s) on the other side of this Security) Signature(s) guaranteed by: THE SIGNATURES SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT entered into as of the 2nd day of May, 1995 by and between ICN Pharmaceuticals, Inc. (the "Company"), and John Julian, an individual (the "Executive") (hereinafter collectively referred to as "the parties"). WHEREAS, the Executive has heretofore been employed by the Company as its Vice President Worldwide Marketing and is experienced in all phases of the business of the Company and the Company desires to retain the services of the Executive on the terms set forth herein; WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the threat of an unsolicited takeover of the Company may occur which can result in significant distractions of its management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board of the Company has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of its key management personnel in the event of a threat of a change in control of the Company and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of a change in control of the Company, the Company desires by this writing to set forth the continued employment relationship of the Executive with the Company. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. TERM. The initial term of employment under this Agreement shall be for the period commencing on the date hereof, and ending March 30, 1996; PROVIDED, HOWEVER, that the term of this Agreement shall be automatically extended for one (1) year on March 30, 1996, and on each March 30th thereafter unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and PROVIDED, FURTHER, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of the third anniversary of a Change in Control (as hereinafter defined). Notwithstanding the foregoing, in no event shall the term of this Agreement extend beyond the first day of the month following the month in which the Executive attains age 65. 2. EMPLOYMENT. (a) The Executive shall be employed as the Vice President - Worldwide Marketing of the Company or such other senior executive capacity as may be mutually agreed to in writing by the parties. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. He shall also promote, by entertainment or otherwise, the business of the Company. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder. The Executive may (i) serve on corporate, civil or charitable boards of committees, (ii) manage personal investments and (iii) deliver lectures and teach at education institutions, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. 3. BASE SALARY. The Company agrees to pay or cause to be paid to the Executive during the term of this Agreement a base salary at the rate of $200,000.00 per annum or such larger amount as the Board may from time to time determine (hereinafter referred to as the "Base Salary"). Such Base Salary shall be payable in accordance with the Company's customary practices applicable to its executives. Such rate of salary, or increased rate of salary, if any, as the case may be, shall be reviewed at least annually by the respective Board and may be further increased (but not decreased) in such amounts as the respective Board in its discretion may decide. 4. EMPLOYEE BENEFITS. The Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company or the Subsidiary and made available to employees generally including, without limitation all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans. The Executive's participation in such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally. 5. EXECUTIVE BENEFITS. The Executive shall be entitled to participate in all executive benefit or incentive compensation plans now maintained or hereafter established by the Company for the purpose of providing compensation and/or benefits to executives of the Company including, but not limited to, the Company's 401(k) and Deferred Compensation Plans and any supplement retirement, salary continuation, stock option, deferred compensation, supplemental medical or life insurance or other bonus or incentive compensation plans. Unless otherwise provided herein, the Executive's participation in such plans shall be on the same basis and terms as other similarly situated executives of the Company, but in no event on a basis less favorable in terms of benefit levels or reward opportunities applicable to the Executive as in effect on the date hereof. No additional compensation provided under any of such plans shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. 6. OTHER BENEFITS. (a) FRINGE BENEFITS AND PERQUISITES. The Executive shall be entitled to all fringe benefits and perquisites (e.g. Company cars, club dues, physical examinations, financial planning and tax preparation services) generally made available by the Company or the Subsidiary to its executives. (b) EXPENSES. The Executive shall be entitled to receive prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company. (c) OFFICE AND FACILITIES. The Executive shall be provided with an appropriate office in Costa Mesa, California, or such other place as may be mutually agreed and with such secretarial and other support facilities as are commensurate with the Executive's status with the Company and adequate for the performance of his duties hereunder. 7. VACATION AND SICK LEAVE. At such reasonable times as the Board shall in its discretion permit, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that: (a) The Executive shall be entitled to annual vacation in accordance with the policies as periodically established by the Board for similarly situated executives of the Company, which shall in no event be less than four weeks per year. (b) In addition to the aforesaid paid vacations, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment for such additional periods of time and for such valid and legitimate reasons as the Board in its discretion may determine. Further, the Board shall be entitled to grant to the Executive a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as the Board in its discretion may determine. (c) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies as in effect from time to time. 8. TERMINATION. The executive's employment hereunder may be terminated under the following circumstances. (a) DISABILITY. The Company may terminate the Executive's employment after having established the Executive's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties under this Agreement which continues for a period of at least one hundred eighty (180) consecutive days. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the term of this Agreement and prior to the establishment of the Executive's Disability during which the Executive is unable to work due to a physical or mental infirmity. Notwithstanding anything contained in this Agreement to the contrary, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive's Disability, the Executive shall be entitled to return to his position with the Company or the Subsidiary as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred. (b) CAUSE. The Company or the Subsidiary may terminate the Executive's employment for "Cause". A termination for Cause is a termination evidenced by a resolution adopted in good faith by two-thirds (2/3) of the Board that the Executive (i) willfully and continually failed to substantially perform his duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed to substantially perform, or (ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; PROVIDED, HOWEVER that no termination of the Executive's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute cause for purposes of this Agreement. (c) (1) GOOD REASON. The Executive may terminate his employment for "Good Reason". For purposes of this Agreement, Good Reason shall mean the occurrence after a Change in Control (as hereinafter defined in this Section 8(e)) of any of the Events or conditions described in Subsections (i) through (viii) hereof: (i) a change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect him to any of such positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) a reduction in the Executive's Base Salary or a failure by the Company or the Subsidiary to increase the Executive's Base Salary within any twelve (12) month period by the average percentage increase during such period of the base salaries of, similarly situated executives. (iii) the Company's or the Subsidiary requiring the Executive to be based at any place outside a 30-mile radius from Costa Mesa, California, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Subsidiary to (A) continue in effect any material compensation or benefit plan in which the Executive was participating at the time of the Change in Control, including, but not limited to, the Company's Deferred Compensation Plan, 401(k) Plan, or (B) provide the Executive with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater). (v) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy, of the Company; (vi) any material breach by the Company of any provision of this Agreement; (vii) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 8 of this Agreement; and (viii) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 11 hereof. (2) Any event or condition described in this Section 8(c)(i) through (viii) which occurs prior to a Change in Control but which (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with a Change in Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to a Change in Control. (3) The Executive's right to terminate his employment pursuant to this Section 8(c) shall not be affected by his incapacity due to physical or mental illness. (d) VOLUNTARY TERMINATION. The Executive may voluntarily terminate his employment hereunder at any time. If the Executive voluntarily terminates his employment for any reason or without reason during the 60-day period which commences on the date which is six (6) months following the date of a Change in Control, it shall be referred to as a "Limited Period Termination." (e) For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (1) The acquisition (other than from the Company) by any person (as such term is defined in Section 13(c) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; or (2) The individuals who, as of the date hereof, are members of the Board of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds (2/3) of the Board, unless the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (3) Approval by stockholders of the Company of (i) a merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than eighty percent (80%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section 8(e)(1), solely because twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (f) NOTICE OF TERMINATION. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (g) TERMINATION DATE, ETC. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that in the case of Disability the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; and (2) If the Executive's employment is terminated for Good Reason or is a Limited Period Termination, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company. 9. COMPENSATION UPON TERMINATION. Upon termination of the Executive's employment during the term of this Agreement (including any extensions thereof), the Executive shall be entitled to the following benefits: (a) If the Executive's employment is terminated by the Company for Cause or Disability or by the Executive (other than for Good Reason or a Limited Period Termination), or by reason of the Executive's death, the Company shall pay the Executive all amounts earned or accrued hereunder through the Termination Date but not paid as of the Termination Date, including (i) Base Salary, (ii) reimbursement for any and all monies advanced or expenses incurred in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company or the Subsidiary for the period ending on the Termination Date, (iii) vacation pay, (iv) any bonuses or incentive compensation and (v) any previous compensation which the Executive has previously deferred (including any interest earned or credited thereon) (collectively, "Accrued Compensation"). In addition to the foregoing, if the Executive's employment is terminated by the Company for Disability or by reason of the Executive's death, the Company shall pay to the Executive or his beneficiaries an amount equal to the bonus or incentive award that the Executive would have been entitled to receive in respect of the fiscal year in which the Executive's Termination Date occurs had he continued in employment until the end of such fiscal year, calculated as if all performance targets and goals (if applicable) had been fully met by the Company and by the Executive, as applicable, for such year, multiplied by a fraction the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365 (a "Pro Rata Bonus"). Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. (b) If the Executive's employment by the Company shall be terminated (1) by the Company other than for Cause, death or Disability, (2) by the Executive for Good Reason, or (3) by the Executive as a Limited Period Termination, then the Executive shall be entitled to the benefits provided below: (i) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus;. (ii) The Company shall pay the Executive as severance pay and in lieu of any further salary for periods subsequent to the Termination Date, in a single payment an amount in cash equal to three (3) times the sum of (A) the Executive's Base Salary at the highest rate in effect at any time within the ninety (90) day period ending on the date the Notice of Termination is given (or if the Executive's employment is terminated after a Change in Control, the Executive's Base Salary immediately prior to the Change in Control, if greater) and (B) the "Bonus Amount" (as defined below). Notwithstanding the foregoing, the amount to be paid under this Subsection (ii) shall be multiplied by a fraction (which in no event shall be greater than one (1)) the numerator of which shall be the number of months (for this purpose any partial month shall be considered as a whole month) remaining until the Executive's 65th birthday and the denominator of which shall be thirty-six (36). The term "Bonus Amount" shall mean (x) the greatest amount of any cash bonus or incentive compensation received by the Executive during the three fiscal years immediately preceding the Termination Date or (y) if no such bonus was received by the Executive during any of such three years, then an amount equal to the Executive's maximum bonus which could be awarded for the fiscal year in which the Termination Date occurs had he continued in employment until the end of such fiscal year, assuming all performance targets and goals (if applicable) had been fully met by the Company and by the Executive, as applicable, for such year; (iii) for a number of months equal to the lesser of (A) thirty-six (36) or (B) the number of months remaining until the Executive's 65th birthday, the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits which were being provided to the Executive at the time Notice of Termination is given (or, if the Executive is terminated following a Change in Control, the benefits provided to the Executive at the time of the Change in Control, if greater). the benefits provided in this Section 9(b)(iii) shall be no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage provided the Executive under the plans providing such benefits at the time Notice of Termination is given (or, if the Executive is terminated following a Change in Control, at the time of the Change in Control if more favorable to the Executive). The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required to be provided hereunder. This Subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; (iv) the Company shall pay in a single payment an amount in cash equal to the excess of (A) the actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and excess retirement plans had (x) the Executive remained employed by the Company for an additional three (3) complete years of credited service (or until his 65th birthday, (if earlier)), (y) his annual compensation during such period been equal to his Base Salary (at the rate used for purposes of Section 9(b)(ii)) and the Bonus Amount, and (z) he been fully (100%) vested in his benefit under each such retirement plan, over (B) the actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this Subsection (iv), "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under any Retirement Plan as applied prior to the Termination Date in accordance with such plan's past practices (but shall in any event take into account; the value of any subsidized early retirement benefit); and (v) all restrictions on any outstanding awards granted by the Company or any other subsidiaries of the Company (including restricted stock awards) granted to the Executive shall lapse and such awards shall become fully (100%) vested immediately, and all stock options and stock appreciation rights granted to the Executive shall become fully (100%) vested and shall become immediately exercisable. (c) The amounts provided for in Sections 9(a) and 9(b)(i), (ii) and (iv) shall be paid within five (5) days after the Executive's Termination Date. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. 10. UNAUTHORIZED DISCLOSURE. The Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of distribution) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; PROVIDED, HOWEVER, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 10) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "the Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 12. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 8(b) of this Agreement, or (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits. 13. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 14. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the executive may have under any other agreements with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 15. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 16. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of law principles thereof. 18. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. ICN Pharmaceuticals, Inc. ATTEST: By: /s/ Milan Panic ------------------------------------- /s/ D.C. Watt Title: President and Chief - --------------------------- Executive Officer Secretary The "Executive" By: /s/ John Julian ------------------------------------- John Julian EX-10 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT entered into as of the 14th day of June, 1996 by and between ICN Pharmaceuticals, Inc. (the "Company"), and Dr. Devron Averett, an individual (the "Executive") (hereinafter collectively referred to as "the parties"). WHEREAS, the Executive has heretofore been employed by the Company as its Senior Vice President - Research and Development and is experienced in all phases of the business of the Company and the Company desires to retain the services of the Executive on the terms set forth herein; WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the threat of an unsolicited takeover of the Company may occur which can result in significant distractions of its management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board of the Company has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of its key management personnel in the event of a threat of a change in control of the Company and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of a change in control of the Company, the Company desires by this writing to set forth the continued employment relationship of the Executive with the Company. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. TERM. The initial term of employment under this Agreement shall be for the period commencing on the date hereof, and ending June 30, 1997; PROVIDED, HOWEVER, that the term of this Agreement shall be automatically extended for one (1) year on June 30, 1997, and on each June 30 thereafter unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and PROVIDED, FURTHER, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of the third anniversary of a Change in Control (as hereinafter defined). Notwithstanding the foregoing, in no event shall the term of this Agreement extend beyond the first day of the month following the month in which the Executive attains age 65. 2. EMPLOYMENT. (a) The Executive shall be employed as the Senior Vice President Research and Development of the Company or such other senior executive capacity as may be mutually agreed to in writing by the parties. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. He shall also promote, by entertainment or otherwise, the business of the Company. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder. The Executive may (i) serve on corporate, civil or charitable boards of committees, (ii) manage personal investments and (iii) deliver lectures and teach at education institutions, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. 3. BASE SALARY. The Company agrees to pay or cause to be paid to the Executive during the term of this Agreement a base salary at the rate of $210,000.00 per annum or such larger amount as the Board may from time to time determine (hereinafter referred to as the "Base Salary"). Such Base Salary shall be payable in accordance with the Company's customary practices applicable to its executives. Such rate of salary, or increased rate of salary, if any, as the case may be, shall be reviewed at least annually by the respective Board and may be further increased (but not decreased) in such amounts as the respective Board in its discretion may decide. 4. EMPLOYEE BENEFITS. The Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company or the Subsidiary and made available to employees generally including, without limitation all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans. The Executive's participation in such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally. 5. EXECUTIVE BENEFITS. The Executive shall be entitled to participate in all executive benefit or incentive compensation plans now maintained or hereafter established by the Company for the purpose of providing compensation and/or benefits to executives of the Company including, but not limited to, the Company's 401(k) and Deferred Compensation Plans and any supplement retirement, salary continuation, stock option, deferred compensation, supplemental medical or life insurance or other bonus or incentive compensation plans. Unless otherwise provided herein, the Executive's participation in such plans shall be on the same basis and terms as other similarly situated executives of the Company, but in no event on a basis less favorable in terms of benefit levels or reward opportunities applicable to the Executive as in effect on the date hereof. No additional compensation provided under any of such plans shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. 6. OTHER BENEFITS. (a) FRINGE BENEFITS AND PERQUISITES. The Executive shall be entitled to all fringe benefits and perquisites (e.g. Company cars, club dues, physical examinations, financial planning and tax preparation services) generally made available by the Company or the Subsidiary to its executives. (b) EXPENSES. The Executive shall be entitled to receive prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company. (c) OFFICE AND FACILITIES. The Executive shall be provided with an appropriate office in Costa Mesa, California, or such other place as may be mutually agreed and with such secretarial and other support facilities as are commensurate with the Executive's status with the Company and adequate for the performance of his duties hereunder. 7. VACATION AND SICK LEAVE. At such reasonable times as the Board shall in its discretion permit, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that: (a) The Executive shall be entitled to annual vacation in accordance with the policies as periodically established by the Board for similarly situated executives of the Company, which shall in no event be less than four weeks per year. (b) In addition to the aforesaid paid vacations, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment for such additional periods of time and for such valid and legitimate reasons as the Board in its discretion may determine. Further, the Board shall be entitled to grant to the Executive a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as the Board in its discretion may determine. (c) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies as in effect from time to time. 8. TERMINATION. The executive's employment hereunder may be terminated under the following circumstances. (a) DISABILITY. The Company may terminate the Executive's employment after having established the Executive's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties under this Agreement which continues for a period of at least one hundred eighty (180) consecutive days. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the term of this Agreement and prior to the establishment of the Executive's Disability during which the Executive is unable to work due to a physical or mental infirmity. Notwithstanding anything contained in this Agreement to the contrary, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive's Disability, the Executive shall be entitled to return to his position with the Company or the Subsidiary as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred. (b) CAUSE. The Company or the Subsidiary may terminate the Executive's employment for "Cause". A termination for Cause is a termination evidenced by a resolution adopted in good faith by two-thirds (2/3) of the Board that the Executive (i) willfully and continually failed to substantially perform his duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed to substantially perform, or (ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; PROVIDED, HOWEVER that no termination of the Executive's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after Notice of Termination is given by the Executive shall constitute cause for purposes of this Agreement. (c) (1) GOOD REASON. The Executive may terminate his employment for "Good Reason". For purposes of this Agreement, Good Reason shall mean the occurrence after a Change in Control (as hereinafter defined in this Section 8(e)) of any of the Events or conditions described in Subsections (i) through (viii) hereof: (i) a change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect him to any of such positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) a reduction in the Executive's Base Salary or a failure by the Company or the Subsidiary to increase the Executive's Base Salary within any twelve (12) month period by the average percentage increase during such period of the base salaries of, similarly situated executives. (iii) the Company's or the Subsidiary requiring the Executive to be based at any place outside a 30-mile radius from Costa Mesa, California, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Subsidiary to (A) continue in effect any material compensation or benefit plan in which the Executive was participating at the time of the Change in Control, including, but not limited to, the Company's Deferred Compensation Plan, 401(k) Plan, or (B) provide the Executive with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater). (v) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy, of the Company; (vi) any material breach by the Company of any provision of this Agreement; (vii) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 8 of this Agreement; and (viii) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 11 hereof. (2) Any event or condition described in this Section 8(c)(i) through (viii) which occurs prior to a Change in Control but which (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with a Change in Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to a Change in Control. (3) The Executive's right to terminate his employment pursuant to this Section 8(c) shall not be affected by his incapacity due to physical or mental illness. (d) VOLUNTARY TERMINATION. The Executive may voluntarily terminate his employment hereunder at any time. If the Executive voluntarily terminates his employment for any reason or without reason during the 60-day period which commences on the date which zis six (6) months following the date of a Change in Control, it shall be referred to as a "Limited Period Termination." (e) For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (1) The acquisition (other than from the Company) by any person (as such term is defined in Section 13(c) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; or (2) The individuals who, as of the date hereof, are members of the Board of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds (2/3) of the Board, unless the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (3) Approval by stockholders of the Company of (i) a merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than eighty percent (80%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section 8(e)(1), solely because twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (f) NOTICE OF TERMINATION. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (g) TERMINATION DATE, ETC. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that in the case of Disability the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; and (2) If the Executive's employment is terminated for Good Reason or is a Limited Period Termination, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company. 9. COMPENSATION UPON TERMINATION. Upon termination of the Executive's employment during the term of this Agreement (including any extensions thereof), the Executive shall be entitled to the following benefits: (a) If the Executive's employment is terminated by the Company for Cause or Disability or by the Executive (other than for Good Reason or a Limited Period Termination), or by reason of the Executive's death, the Company shall pay the Executive all amounts earned or accrued hereunder through the Termination Date but not paid as of the Termination Date, including (i) Base Salary, (ii) reimbursement for any and all monies advanced or expenses incurred in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company or the Subsidiary for the period ending on the Termination Date, (iii) vacation pay, (iv) any bonuses or incentive compensation and (v) any previous compensation which the Executive has previously deferred (including any interest earned or credited thereon) (collectively, "Accrued Compensation"). In addition to the foregoing, if the Executive's employment is terminated by the Company for Disability or by reason of the Executive's death, the Company shall pay to the Executive or his beneficiaries an amount equal to the bonus or incentive award that the Executive would have been entitled to receive in respect of the fiscal year in which the Executive's Termination Date occurs had he continued in employment until the end of such fiscal year, calculated as if all performance targets and goals (if applicable) had been fully met by the Company and by the Executive, as applicable, for such year, multiplied by a fraction the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365 (a "Pro Rata Bonus"). Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. (b) If the Executive's employment by the Company shall be terminated (1) by the Company other than for Cause, death or Disability, (2) by the Executive for Good Reason, or (3) by the Executive as a Limited Period Termination, then the Executive shall be entitled to the benefits provided below: (i) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus; (ii) The Company shall pay he Executive as severance pay and in lieu of any further salary for periods subsequent to the Termination Date, in a single payment an amount in cash equal to three (3) times the sum of (A) the Executive's Base Salary at the highest rate in effect at any time within the ninety (90) day period ending on the date the Notice of Termination is given (or if the Executive's employment is terminated after a Change in Control, the Executive's Base Salary immediately prior to the Change in Control, if greater) and (B) the "Bonus Amount" (as defined below). Notwithstanding the foregoing, the amount to be paid under this Subsection (ii) shall be multiplied by a fraction (which in no event shall be greater than one (1)) the numerator of which shall be the number of months (for this purpose any partial month shall be considered as a whole month) remaining until the Executive's 65th birthday and the denominator of which shall be thirty-six (36). The term "Bonus Amount" shall mean (x) the greatest amount of any cash bonus or incentive compensation received by the Executive during the three fiscal years immediately preceding the Termination Date or (y) if no such bonus was received by the Executive during any of such three years, then an amount equal to the Executive's maximum bonus which could be awarded for the fiscal year in which the Termination Date occurs had he continued in employment until the end of such fiscal year, assuming all performance targets and goals (if applicable) had been fully met by the Company and by the Executive, as applicable, for such year; (iii) for a number of months equal to the lesser of (A) thirty-six (36) or (B) the number of months remaining until the Executive's 65th birthday, the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits which were being provided to the Executive at the time Notice of Termination is given (or, if the Executive is terminated following a Change in Control, the benefits provided to the Executive at the time of the Change in Control, if greater). the benefits provided in this Section 9(b)(iii) shall be no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage provided the Executive under the plans providing such benefits at the time Notice of Termination is given (or, if the Executive is terminated following a Change in Control, at the time of the Change in Control if more favorable to the Executive). The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required to be provided hereunder. This Subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; (iv) the Company shall pay in a single payment an amount in cash equal to the excess of (A) the actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and excess retirement plans had (x) the Executive remained employed by the Company for an additional three (3) complete years of credited service (or until his 65th birthday, (if earlier)), (y) his annual compensation during such period been equal to his Base Salary (at the rate used for purposes of Section 9(b)(ii)) and the Bonus Amount, and (z) he been fully (100%) vested in his benefit under each such retirement plan, over (B) the actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this Subsection (iv), "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under any Retirement Plan as applied prior to the Termination Date in accordance with such plan's past practices (but shall in any event take into account; the value of any subsidized early retirement benefit); and (v) all restrictions on any outstanding awards granted by the Company or any other subsidiaries of the Company (including restricted stock awards) granted to the Executive shall lapse and such awards shall become fully (100%) vested immediately, and all stock options and stock appreciation rights granted to the Executive shall become fully (100%) vested and shall become immediately exercisable. (c) The amounts provided for in Sections 9(a) and 9(b)(i), (ii) and (iv) shall be paid within five (5) days after the Executive's Termination Date. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. 10. UNAUTHORIZED DISCLOSURE. The Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of distribution) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; PROVIDED, HOWEVER, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 10) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "the Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 12. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section 8(b) of this Agreement, or (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits. 13. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 14. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the executive may have under any other agreements with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 15. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 16. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of law principles thereof. 18. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. ICN Pharmaceuticals, Inc. ATTEST: By: /s/ Milan Panic ------------------------------ Title: President and Chief /s/ D.C. Watt Executive Officer - -------------------------- Secretary The "Executive" By: /s/ Devron Averett ---------------------------- Dr. Devron Averett EX-10 5 COLLATERAL AGREEMENT COLLATERAL AGREEMENT This Collateral Agreement (the "Agreement") is hereby entered into by and between Milan Panic ("Panic") and ICN Pharmaceuticals, Inc. ("ICN") this 14th day of August, 1996. (a) WHEREAS, Panic is the Chairman of the Board, Chief Executive Officer and President of ICN; (b) WHEREAS, ICN and Panic were co-defendants in a civil action ("the Suit") in which the plaintiff sought substantial sums of money as damages. The Suit was extensively litigated, and a decision had to be made as to whether to settle the case or carry on with the Suit. ICN preferred to settle it in order to avoid the risks of a trial and additional costs. Panic contended that the plaintiff s claim was baseless and that the Suit should be defended, but he deferred to ICN's decision as to whether, and on what terms, to settle. A settlement was negotiated and concluded. However, Panic, at ICN's request, did not participate in the settlement negotiations; (c) WHEREAS, at all times during the pendency of the Suit, Panic.was a defendant in a separate civil suit with the same plaintiff as referred to in Recital (b). This separate suit contained issues which, if decided favorably to Panic, could have materially and favorably affected the outcome of the Suit in which the settlement was reached because of the doctrines of res judicata and collateral estoppel; (d) WHERAS, there is a dispute between ICN and Panic concerning responsibility for the above-referenced settlement and the Parties have reached an agreement as to how the costs of the settlement should be allocated between them; (e) WHEREAS, ICN has determined that it is in the best interests of ICN that it guarantee a loan granted to Panic by Sanwa Bank in the amount of $3,600,000 so as to facilitate the agreement between Panic and ICN as to the allocation of the costs of the settlement ("the Guarantee"); (f) WHEREAS. Panic has agreed to provide certain collateral to ICN in exchange for the guarantee of said loan; NOW THEREFORE, IT IS RESOLVED, that for good and valuable consideration as described herein, the Parties agree as follows: 1. ICN shall execute all of the necessary documents to effect the Guarantee referred to in Recital (e). 2. Panic shall pledge and assign to ICN as collateral for the Guarantee the following assets which shall serve as the only recourse for the Guarantee: 2 (a) Panic's right to purchase 100,000 shares of ICN common stock at $22.75 per share as granted by the Compensation Committee of the Board on July 24, 1996. (b) Any and all rights which Panic or his estate might otherwise have to the proceeds of a "keyman" life insurance policy on Panic's life which shall be purchased by ICN. (c) Panic shall have the right to substitute collateral for the assets listed in subparagraphs (a) and (b) above, at his option, provided that the value of the substitute collateral shall be equal to the value of the asset or assets which such substitute collateral is replacing. Should Panic default on the loan to Sanwa Bank and ICN be required to fulfill the obligations of the Guarantee, Paiiic's obligation to compensate or repay ICN shall be without recourse except to the extent of the assets specifically identified in subparagraphs (a) and (b) above (or the assets substituted therefor in accordance with subparagraph [c] above) and ICN's right to recover from Panic shall be limited to the rights to foreclose upon the collateral described in subparagraphs (a) and (b) above (or the assets substituted therefor in accordance with subparagraph (c) above). ICN shall have no rights to seek any deficiency if foreclosure on the assets specified in subparagraphs (a) and (b) above (or the assets substituted therefor in accordance with subparagraph (c) above) should fail to yield enough money to satisfy the obligation that Panic might otherwise have to ICN as a result of ICN's fulfillment of its obligations under the Guarantee. 3. Should Panic fail to make any interest payments on his obligations to Sanwa Bank, ICN may tender such payment and charge the payment to Panic as an advance of the compensation to which Panic might otherwise be entitled as an office or director of ICN. 4. ICN shall use all reasonable efforts to assert insurance claims against its insurance carriers for recovery of any and all amounts paid bv ICN to defend or settle the Suit, which efforts shall include the obligation to file suit against any insurance carrier that refuses to reimburse ICN or any officer, director or employee of it, for bad faith, breach of contract, indemnification or recovery of defense costs that may be reasonably due under such insurance policies. 5. Should any dispute arise between the parties regarding any of the terms of this Agreement, the parties agree to submit the dispute to binding arbitration. In the event of said dispute, within thirty (30) days the parties shall determine the procedure for arbitration. Should the parties be unable to reach an agreement on the procedure for arbitration, the parties shall submit the dispute to the American Arbitration Association to be administered pursuant to its ordinary commercial procedures and rules. 6. This Agreement shall be governed by the laws of the State of California. 3 7. This Agreement represents the entire agreement of the parties with respect to its subject matter, and any amendments or modifications hereto must be in writing and executed by both parties. 8. The parties acknowledge and agree that the law firm of Segal & Klar has in the past represented, is now representing, and may in the future represent both ICN and Panic, separately and together, with respect to a variety of matters including the Suit and the related litigation referred to in the Recitals. The parties further acknowledge and agree that they have each specifically authorized Segal & Klar to represent Panic with respect to this Agreement and that ICN has been separately represented by its in-house counsel with respect to this Agreement. The parties hereby consent to such representation by Segal & KJar and ICN's in-house counsel in connection with this Agreement and waive any right in which they might otherwise have to object to such representation based upon any actual or claimed conflict of interest or any other theory. The parties further specifically agree that Segal & Klar may continue to represent their respective interests in connection with any future proceedings which are part of or ancillary to the Suit or the related litigation referred to in the Recitals. ICN PHARMACEUTICALS, INC. MILAN PANIC By: /S/ JOHN E. GIORDANI By: /S/ MILAN PANIC ---------------------------- ------------------------------ [Legal Stamp] Attachment Sep 11, 1996 to Collateral Agreement My signature on this document is to be effective only if ICN does not itself assume the $3.6 million obligation to Sanwa (because ICN rather than I should have incurred the loss in the sum of $3.6 million). If ICN assumes that obligation, I an to have no further liability for the note or any loan agreement or other document related thereto. /s/ Milan Panic -------------------------------- EX-11 6 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Computations of net income per share for the years ended December 31, 1996, 1995, and 1994 are as follows (in thousands):
1996 1995 1994 ---- ---- ---- PRIMARY Net income (loss) $ 86,928 $ 67,337 $ (183,581) Add: Adjustments to net income related to convertible debentures, net of tax (1,083) -- -- Adjustments to net income related to the stated and embedded dividends on the Series B preferred stock (2,199) -- -- ---------- --------- ---------- Adjusted net income $ 83,646 $ 67,337 $ (183,581) ========== ========= ========== Average common shares outstanding 32,227 29,708 23,138 Dilutive common equivalent shares issuable upon the exercise of options currently outstanding to purchase common shares l,064 915 -- Conversion of Debentures 1,472 -- -- Put option common stock equivalents 156 -- -- --------- --------- ---------- 34,919 30,623 23,138 ========= ========= ========== Net income (loss) per share $ 2.40 $ 2.20 $ (7.93) ========= ========= ========== FULLY DILUTED Net income (loss) $ 86,928 $ 67,337 $ (183,581) Add: Adjustments to net income related to convertible debentures, net of tax 6,458 15,736 1,241 Adjustments to net income related to the stated and embedded dividends on the Series B preferred stock (2,199) -- -- --------- --------- ---------- Adjusted net income $ 91,187 $ 83,073 $ (182,340) ========= ========== ========== Average common shares outstanding 32,227 29,708 23,138 Dilutive common equivalent shares issuable upon the exercise of options currently outstanding to purchase common shares 1,071 1,073 680 Conversion of Debentures 6,684 7,200 2,869 Put option common stock equivalents 156 -- -- --------- ---------- ---------- 40,138 37,981 26,687 ========= ========== ========== Net income (loss) per share $ 2.27 $ 2.19 $ (6.83) ========= ========== ==========
EX-21 7 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT ICN Pharmaceuticals, Inc. is incorporated in the State of Delaware. The following table shows the Company's subsidiaries as of December 31, 1996, the percentage of their voting securities (including directors' qualifying shares) then owned, directly or indirectly by the Company, and the jurisdiction under which each subsidiary is incorporated. These subsidiaries are included in the Company's Consolidated Financial Statements. Percentage of voting Jurisdiction Securities Owned of by Company Incorporation or Subsidiary ------------- ------------- ICN Canada, Limited Canada 100 Alpha Pharmaceutical, Inc. Panama 100 ICN Farmaceutica, S.A. Mexico 100 Laboratorios Grossman, S.A. Mexico 100 ICN Pharmaceuticals Holland, B.V. Netherlands 100 ICN Biomedicals, Inc. Delaware 100 ICN Yugoslavia Yugoslavia 75 ICN Biomedicals GmbH--Eschwege Germany 100 ICN Pharmaceuticals Australasia Pty Ltd. Australia 100 ICN Pharmaceuticals Japan K.K. Japan 100 ICN Biomedicals B.V. Netherlands 100 ICN Biomedicals California, Inc. California, U.S.A. 100 ICN Iberica Spain 100 Labsystems Benelux B.V. Netherlands 100 Labsystems Benelux N.V. Belgium 100 ICN Biomedicals, Ltd. Scotland 100 ICN Biomedicals, GmbH Germany 100 ICN France SARL France 100 ICN Biomedicals S.R.L. Italy 95 ICN Biomedicals N.V./S.A. Belgium 100 ICN Oktyabr Russia 90 ICN Polypharm Russia 89 ICN Leksredstva Russia 95 ICN Alkaloida Hungary 60 Wuxi ICN Pharmaceuticals China 75 In accordance with the instructions of Item 601 of Regulation S-K, certain subsidiaries are omitted from the foregoing table. EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS To ICN Pharmaceuticals, Inc.: We consent to the incorporation by reference in the registration statements of ICN Pharmaceuticals, Inc. on Form S-8 (File No. 33-56971) and Form S-3 (File No.'s 333-08179, 333-10661, 333-13243, 333-13423 and 333-16409) of our report dated March 4, 1997, on our audits of the consolidated financial statements and consolidated financial statement schedule of ICN Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report, as it relates to 1996, includes an emphasis of a matter paragraph related to the Company's net monetary assets at ICN Yugoslavia which would be subject to foreign exchange loss if a devaluation of the Yugoslavian dinar were to occur, included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. Los Angeles, California March 27, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000
3-MOS 12-MOS DEC-31-1996 DEC-31-1996 OCT-01-1996 JAN-01-1996 DEC-31-1996 DEC-31-1996 $ 39,918 $ 39,918 00 00 258,531 258,531 00 00 120,973 120,973 444,401 444,401 234,209 234,209 00 00 778,651 778,651 137,637 137,637 00 00 00 00 1 1 324 324 315,350 315,350 778,651 778,651 174,255 614,080 174,255 614,080 80,957 291,807 80,957 291,807 3,780 11,586 (3,956) (4,345) 6,535 15,780 37,936 99,052 (9,160) (6,815) 00 00 00 00 00 00 00 00 29,197 86,928 .74 2.40 .69 2.27
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