-----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, QuuuegwV062ALXBv1Lsj1SZCSunkLS0MI6jf13wwW/EpvzI6KkVdypmhK+pHUzbw IOZ7dPf1clZviiFBnHl83Q== 0000930184-02-000003.txt : 20020515 0000930184-02-000003.hdr.sgml : 20020515 20020515141723 ACCESSION NUMBER: 0000930184-02-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11397 FILM NUMBER: 02650796 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-Q 1 finalmarch10q2002.txt - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-11397 ICN PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0628076 - ------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3300 Hyland Avenue Costa Mesa, California 92626 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 545-0100 --------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- The number of outstanding shares of the registrant's Common Stock, $.01 par value, as of May 10, 2002 was 83,210,154. - ------------------------------------------------------------------------------- 15 ICN PHARMACEUTICALS, INC. INDEX Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Condensed Balance Sheets - March 31, 2002 and December 31, 2001 3 Consolidated Condensed Statements of Income - Three months ended March 31, 2002 and 2001 4 Consolidated Condensed Statements of Comprehensive Income - Three months ended March 31, 2002 and 2001 5 Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 2002 and 2001 6 Management's Statement Regarding Unaudited Financial Statements 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantatative and Qualitative Disclosures About Market Risk 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24
ICN PHARMACEUTICALS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS March 31, 2002 and December 31, 2001 (unaudited, in thousands, except per share data) March 31, December 31, 2002 2001 -------------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 378,495 $ 325,253 Restricted cash 2,018 2,342 Accounts receivable, net 259,412 266,879 Inventories, net 160,570 163,930 Prepaid expenses and other current assets 19,605 14,525 -------------- -------------- Total current assets 820,100 772,929 Property, plant and equipment, net 396,126 405,361 Deferred income taxes, net 65,691 65,175 Goodwill 59,298 45,736 Intangible assets, net 399,533 400,550 Other assets 70,556 64,614 -------------- -------------- $ 1,811,304 $ 1,754,365 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade payables $ 52,819 $ 55,719 Accrued liabilities 101,231 96,624 Notes payable 9,475 4,792 Current portion of long-term debt 1,349 949 Income taxes payable 18,409 3,396 -------------- -------------- Total current liabilities 183,283 161,480 Long-term debt, less current portion 732,626 734,933 Deferred income taxes and other liabilities 35,520 39,377 Minority interest 8,019 7,858 Commitments and contingencies Stockholders' Equity: Common stock, $.01 par value; 200,000 shares authorized;83,427(March 31, 2002) and 81,689 (December 31, 2001) shares outstanding (after deducting shares in treasury of 814 and 814, respectively) 834 817 Additional capital 1,019,977 995,243 Accumulated deficit (68,889) (96,055) Accumulated other comprehensive loss (100,066) (89,288) -------------- -------------- Total stockholders' equity 851,856 810,717 -------------- -------------- $ 1,811,304 $ 1,754,365 ============== ============== The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME For the three months ended March 31, 2002 and 2001 (unaudited, in thousands, except per share data) Three Months Ended March 31, 2002 2001 ---------------- -------------- Revenues: Product sales $ 188,661 $ 171,419 Royalties 57,001 27,550 ---------------- -------------- Total revenues 245,662 198,969 ---------------- -------------- Costs and expenses: Cost of product sales 71,132 69,774 Selling, general and administrative expenses 91,632 73,419 Research and development costs 9,857 6,372 Amortization expense 7,211 8,206 ---------------- -------------- Total costs and expenses 179,832 157,771 ---------------- -------------- Income from operations 65,830 41,198 Translation and exchange losses, net 2,120 400 Interest income (1,335) (2,240) Interest expense 14,493 13,017 ---------------- -------------- Income before provision for income taxes, minority interest and cumulative effect of change in accounting principle 50,552 30,021 Provision for income taxes 20,338 9,263 Minority interest 58 (264) ---------------- -------------- Income before cumulative effect of change in accounting principle 30,156 21,022 Cumulative effect of change in accounting principle 3,541 -- ---------------- -------------- Net income $ 33,697 $ 21,022 ================ ============== Basic earnings per common share Income before cumulative effect of change in accounting principle $ 0.37 $ 0.26 Cumulative effect of change in accounting principle 0.04 -- ---------------- -------------- Net income $ 0.41 $ 0.26 ================ ============== Shares used in per share computation 82,274 80,392 ================ ============== Diluted earnings per common share Income before cumulative effect of change in accounting principle $ 0.36 $ 0.26 Cumulative effect of change in accounting principle 0.04 -- ---------------- -------------- Net income $ 0.40 $ 0.26 ================ ============== Shares used in per share computation 84,331 82,304 ================ ============== The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the three months ended March 31, 2002 and 2001 (unaudited, in thousands) Three Months Ended March 31, 2002 2001 ---------------- -------------- Net income $ 33,697 $ 21,022 Other comprehensive income: Foreign currency translation adjustments (10,778) (9,907) ---------------- -------------- Comprehensive income $ 22,919 $ 11,115 ================ ============== The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2002 and 2001 (unaudited, in thousands) Three Months Ended March 31, 2002 2001 ---------------- --------------- Cash flows from operating activities: Net income $ 33,697 $ 21,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,709 18,064 Provision for losses on accounts receivable 1,597 152 Provision for inventory obsolescence 1,537 474 Translation and exchange losses, net 2,120 400 Loss on sale of assets 98 177 Other non-cash items 3,779 583 Deferred income taxes (522) 644 Minority interest (58) (264) Cumulative effect of change in accounting principle (3,541) __ Change in assets and liabilities, net of effects of acquisitions: Accounts and notes receivable 7,135 32,162 Inventories 1,512 8,204 Prepaid expenses and other assets (11,477) (11,670) Trade payables and accrued liabilities (7,198) (13,915) Income taxes payable 14,921 3,647 Other liabilities (181) (4,793) ---------------- --------------- Net cash provided by operating activities 62,128 54,887 ---------------- --------------- Cash flows from investing activities: Capital expenditures (6,288) (21,810) Proceeds from sale of assets 301 315 Decrease in restricted cash 324 105 Acquisition of license rights, product lines and businesses (3,733) (14,445) ---------------- --------------- Net cash used in investing activities (9,396) (35,835) ---------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 320 160 Proceeds from issuance of notes payable -- 22 Payments on long-term debt (106) (696) Proceeds from exercise of stock options 6,819 1,284 Dividends paid (6,136) (5,801) ---------------- --------------- Net cash provided by (used in) financing activities 897 (5,031) ---------------- --------------- Effect of exchange rate changes on cash and cash equivalents (387) (287) ---------------- --------------- Net increase in cash and cash equivalents 53,242 13,734 Cash and cash equivalents at beginning of period 325,253 155,205 ---------------- --------------- Cash and cash equivalents at end of period $ 378,495 $ 168,939 ================ =============== The accompanying notes are an integral part of these consolidated condensed financial statements.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared on the basis of accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The results of operations presented herein are not necessarily indicative of the results to be expected for a full year. Although the Company believes that all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Reports on Form 10-K and 10-K/A for the year ended December 31, 2001. ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 2002 (unaudited) 1. Summary of Significant Accounting Policies Principles of Consolidation: The accompanying consolidated condensed financial statements include the accounts of ICN Pharmaceuticals, Inc. and Subsidiaries (the "Company") and all of its majority-owned subsidiaries. Investments in 20% through 50% owned affiliated companies are included under the equity method where the Company exercises significant influence over operating and financial affairs. Investments in less than 20% owned companies or 20% through 50% owned companies where the Company does not exercise significant influence over operating and financial affairs are recorded at the lower of cost or fair value. All significant intercompany account balances and transactions have been eliminated. Comprehensive Income: Accumulated other comprehensive loss consists of accumulated foreign currency translation adjustments. Other comprehensive loss has not been recorded net of any tax provision or benefit as the Company does not expect to realize any significant tax benefit or expense from this item. Per Share Information: In March 2002, the Company's Board of Directors declared a first quarter cash dividend of $.0775 per share, payable on April 24, 2002, to stockholders of record on April 10, 2002. Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS No. 142 goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. In the first quarter of 2002, the Company adopted SFAS No. 142 which resulted in a benefit of $3,541,000 for the write-off of unamortized deferred credits relating to excess of fair value over cost of assets acquired. The effect of applying the non-amortization of goodwill provision of SFAS No. 142 was not material to the first quarter of 2002. The Company is currently evaluating its remaining goodwill. Any impairment from the initial adoption of SFAS No. 142 will be recorded as a cumulative effect of change in accounting principle in the year to date consolidated condensed statement of income. At March 31, 2002 and December 31, 2001, amortizable intangible assets were as follows (in thousands): March 31, 2002 December 31, 2001 ------------------------------ ------------------------------ Accumulated Accumulated Gross Amount Amortization Gross Amount Amortization Intangible assets: Product rights $ 503,958 $ (104,425)$ 497,765 $ (97,215) ============== =============== ============== ===============
Estimated amortization expense for the years ending December 31, 2002, 2003, 2004, 2005 and 2006 is $29,000,000 for all periods. Goodwill During the quarter ended March 31, 2002, the Company acquired $14,353,000 of goodwill related to the acquisition of CoolTouch Corporation in the North America pharmaceutical segment. March 31, 2002 December 31, 2001 ---------------------- -------------------- (in thousands) Pharmaceuticals North America $ 27,487 $ 12,998 Latin America 2,257 3,180 Western Europe 8,353 8,355 Russia 7,968 7,968 Asia, Africa, Australia -- -- ---------------------- --------------------- Total pharmaceuticals 46,065 32,501 Biomedicals 13,233 13,235 ---------------------- --------------------- Total goodwill $ 59,298 $ 45,736 ====================== =====================
In April 2002, the FASB issued SFAS No.145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 eliminates the exception to applying APB Opinion 30 to all gains and losses related to extinguishments of debt. The Company accounts for its extinguishment of debt as an extraordinary item under SFAS No. 4 Reporting Gains and Losses from Extinguishment of Debt. Adoption of SFAS No. 145 may impact the way the Company historically reported extraordinary loss on extinguishment of debt. The Company is required to adopt SFAS No. 145 in fiscal year 2003. Reclassifications: Certain prior year amounts have been reclassified to conform with the current period presentation, with no effect on previously reported net income or stockholders' equity. 2. Acquisitions On February 20, 2002, the Company acquired certain assets from CoolTouch Corporation, a provider of non-ablative cosmetic lasers, for 476,530 shares of the Company's common stock valued at $14,534,000. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company. In the first quarter of 2002, the Company acquired the rights to certain products for total consideration of $11,796,000. None of the product acquisitions are material to the financial position or results of operations of the Company. 3. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended March 31, 2002 2001 --------- ---------- Income: Numerator for basic earnings per share-- income available to common stockholders $ 33,697 $ 21,022 Effect of dilutive securities: Other dilutive securities -- (3) --------- ---------- Numerator for diluted earnings per share-- income available to common stockholders after assumed conversions $ 33,697 $ 21,019 ========= ========== Shares: Denominator for basic earnings per share-- weighted-average shares outstanding 82,274 80,392 --------- ---------- Effect of dilutive securities: Employee stock options 2,053 1,891 Other dilutive securities 4 21 --------- ---------- Dilutive potential common shares 2,057 1,912 --------- ---------- Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 84,331 82,304 ========= ========== Basic earnings per common share Income before cumulative effect of change in accounting principle $ 0.37 $ 0.26 Cumulative effect of change in accounting principle 0.04 -- --------- ---------- Net income $ 0.41 $ 0.26 ========= ========== Shares used in per share computation 82,274 80,392 ========= ========== Diluted earnings per common share Income before cumulative effect of change in accounting principle $ 0.36 $ 0.26 Cumulative effect of change in accounting principle 0.04 -- --------- ---------- Net income $ 0.40 $ 0.26 ========= ========== Shares used in per share computation 84,331 82,304 ========= ==========
4. Detail of Certain Accounts March 31, December 31, 2002 2001 ---------------- -------------- (in thousands) Accounts receivable, net: Trade accounts receivable $ 185,652 $ 193,970 Royalties receivable 73,201 70,627 Other receivables 15,402 17,545 ---------------- -------------- 274,255 282,142 Allowance for doubtful accounts (14,843) (15,263) ---------------- -------------- $ 259,412 $ 266,879 ================ ============== Inventories, net: Raw materials and supplies $ 45,036 $ 53,767 Work-in-process 29,695 24,767 Finished goods 104,721 103,150 ---------------- -------------- 179,452 181,684 Allowance for inventory obsolescence (18,882) (17,754) ---------------- -------------- $ 160,570 $ 163,930 ================ ============== Property, plant and equipment, net: Property, plant and equipment, at cost $ 541,303 $ 543,008 Accumulated depreciation and amortization (145,177) (137,647) ---------------- -------------- $ 396,126 $ 405,361 ================ ==============
5. Related Party Transactions In January 2001, the Company made a loan to Mr. Adam Jerney, Chief Operating Officer and President, of $1,197,864 as part of a program adopted by the Board of Directors to encourage directors and officers to exercise stock options (the "Stock Option Program"). As of March 31, 2002, $318,329 was outstanding under the loan, which is collateralized by 41,427 shares of the Company's common stock and is due in January 2003. In April 2001, the Company made a loan to Mr. Milan Panic, Chairman of the Board and Chief Executive Officer, of $2,731,519 as part of the Stock Option Program. The loan is collateralized by 286,879 shares of the Company's common stock and is due in April 2004. These loans bear interest at a rate of 5.61% per annum in the case of Mr. Jerney and 4.63% per annum in the case of Mr. Panic, compounded annually. Interest is payable annually. These loans are non-recourse with respect to principal and full recourse to the obligor with respect to interest. The loans are included in the accompanying consolidated condensed balance sheets as a reduction of stockholders' equity. Mr. Jerney's loan was repaid in April 2002. In January 2002, Mr. Milan Panic exchanged 197,409 stock options with an exercise price of $17.99 and 169,578 stock options with an exercise price of $26.24 for 99,291 shares of the Company's common stock valued at approximately $3,000,000. The Company recorded this amount as compensation expense in the first quarter of 2002. The Company made a short-term loan to Mr. Milan Panic in connection with the exchange of options of $1,335,833. The loan is due January 18, 2003 and bears interest at a rate of 2.8% per annum payable annually. As of March 31, 2002, the loan is included in the accompanying consolidated condensed balance sheet as a reduction of stockholders' equity. This loan was repaid in April 2002. 6. Commitments and Contingencies On August 11, 1999, the United States Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California captioned Securities and Exchange Commission v. ICN Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt, Civil Action No. SACV 99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint alleges that the Company and the individual named defendants made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading and engaged in acts, practices, and courses of business which operated as a fraud and deceit upon other persons in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The SEC Complaint concerns public disclosures made by the Company with respect to the status and disposition of the Company's 1994 New Drug Application for ribavirin as a monotherapy treatment for chronic hepatitis C (the "NDA"). The FDA did not approve this new drug application. The SEC Complaint seeks injunctive relief, unspecified civil penalties, and an order barring Mr. Panic from acting as an officer or director of any publicly-traded company. A pre-trial schedule has been set which requires the end of discovery by August 1, 2002, and the commencement of trial on May 6, 2003. The Company and the SEC appeared before a settlement judge, for the purpose of settlement negotiations. Pending completion of these negotiations, the courts have stayed discovery through June 2002. There can be no assurance that the SEC litigation will be settled by mutual agreement or what the amount of any settlement may ultimately be. In the event a settlement is not reached, the Company will vigorously defend any litigation. On December 17, 2001, the Company pleaded guilty in the United States District Court for the Central District of California to a single felony count for securities fraud for omitting to disclose until February 17, 1995, the existence and content of a letter received from the FDA in late 1994 regarding the unapprovable status of the Company's 1994 NDA for ribavirin as a monotherapy treatment for chronic hepatitis C. This guilty plea was entered pursuant to a plea agreement with the United States Attorney for the Central District of California to settle a six-year investigation. The Company paid a fine of $5,600,000 and became subject to a three-year term of probation. The plea agreement provides that the Office will not further prosecute the Company and will not bring any further criminal charges against the Company or any individuals, except one non-officer employee of the Company, relating to any matters that have been the subject of the investigation and will close its investigation of these matters. The conditions of the probation require the Company to create a compliance program to ensure no future violations of the federal securities laws and to pre-clear with the FDA any public communication by the Company concerning any matter subject to FDA regulation. The terms of the compliance program include the Company retaining an expert to review its procedures for public communications regarding FDA matters and to develop written procedures for these communications. The compliance program also requires preparation of an annual report by the expert on the Company's compliance with the written procedures and annual certification by the Company's management that the Company is complying with the expert's recommendations. In connection with the Grand Jury investigation and SEC litigation, the Company recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover the potential combined settlement liability and all other related costs. The $5,600,000 fine paid by the Company has been charged against the reserve. The Company is a party to a legal matter at one of its distribution companies in Russia. The matter involves a claim relating to non-payment under a contract entered into in January 1995, prior to the Company's acquisition of this Russian distribution company. The claimant is seeking to recover $6,200,000 in damages, plus expenses. Due to the complex and changing legal environment in Russia, the Company can not estimate the range or amount of possible loss, if any, that may be incurred. The Company intends to vigorously defend this matter, however, an adverse decision could have a material effect on the results of operations of the Company. The Company is a party to other pending lawsuits or subject to a number of threatened lawsuits. While the ultimate outcome of pending and threatened lawsuits cannot be predicted with certainty, and an unfavorable outcome could have a negative impact on the Company, at this time in the opinion of management, the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. 7. Business Segments The Company's five reportable pharmaceutical segments have been combined into two geographical groups: ICN Americas (comprised of the Company's pharmaceutical operations in North America and Latin America) and ICN International (comprised of the Company's pharmaceutical operations in Western Europe, Eastern Europe and Asia, Africa and Australia). The following table sets forth the amounts of segment revenues and operating income of the Company for the three months ended March 31, 2002 and 2001 (in thousands): Revenues 2002 2001 ------------ ----------- Product sales Pharmaceuticals ICN Americas North America $ 46,939 $ 42,283 Latin America 29,487 26,092 ------------ ----------- Total ICN Americas 76,426 68,375 ------------ ----------- ICN International Western Europe 54,854 52,533 Russia 29,776 24,399 Asia, Africa and Australia 11,820 10,638 ------------ ----------- Total ICN International 96,450 87,570 ------------ ----------- Total pharmaceuticals 172,876 155,945 Biomedicals 15,785 15,474 ------------ ----------- Total product sales 188,661 171,419 Royalties 57,001 27,550 ------------ ----------- Consolidated revenues $ 245,662 $ 198,969 ============ =========== Operating Income (Loss) Pharmaceuticals ICN Americas North America $ 16,592 $ 18,310 Latin America 9,047 8,155 ------------ ----------- Total ICN Americas 25,639 26,465 ------------ ----------- ICN International Western Europe 5,751 4,322 Russia 1,886 (2,175) Asia, Africa and Australia 1,416 1,261 ------------ ----------- Total ICN International 9,053 3,408 ----------- ---------- Total pharmaceuticals 34,692 29,873 Biomedicals 1,950 2,199 Royalties 57,001 27,550 ------------ ----------- Consolidated segment operating income 93,643 59,622 Corporate expenses 27,813 18,424 Interest income (1,335) (2,240) Interest expense 14,493 13,017 Translation and exchange losses, net 2,120 400 ------------ ----------- Income before income taxes, minority interest and cumulative effect of change in accounting principle $ 50,552 $ 30,021 ============ ===========
The following table sets forth the segment total assets of the Company as of March 31, 2002 and December 31, 2001 (in thousands): Total Assets 2002 2001 ----------------- ------------------ Pharmaceuticals ICN Americas North America $ 543,936 553,166 Latin America 151,449 150,903 ----------------- ------------------ Total ICN Americas 695,385 704,069 ----------------- ------------------ ICN International Western Europe 320,996 296,353 Russia 164,224 162,387 Asia, Africa and Australia 68,676 69,584 ----------------- ------------------ Total ICN International 553,896 528,324 ----------------- ------------------ Total pharmaceuticals 1,249,281 1,232,393 Biomedicals 62,029 65,313 Corporate 499,994 456,659 ----------------- ------------------ Total $ 1,811,304 $ 1,754,365 ================= ==================
8. Supplemental Cash Flow Information Cash paid for income taxes for the three months ended March 31, 2002 and 2001 was $6,486,000 and $5,432,000, respectively. Cash paid for interest for the three months ended March 31, 2002 and 2001 was $16,902,000 and $9,038,000 respectively. Other non-cash items for the three months ended March 31, 2002, included $811,000 for compensation expense related to the vesting of restricted stock under the Company's long-term incentive plan and $2,968,000 for compensation expense related to an exchange of outstanding stock options for common stock. Obligations incurred in connection with product acquisitions for the three months ended March 31, 2002 totaled $9,115,000. 9. Subsequent Events In April 2002, the Company completed an underwritten public offering of 29,900,000 shares of common stock, par value $.01 per share, of Ribapharm Inc. ("Ribapharm"), a previously wholly-owned subsidiary, representing 19.93% of the total outstanding common stock of Ribapharm (the "Ribapharm Offering"). In connection with the Ribapharm Offering, the Company received net cash proceeds of $278,070,000 and will record a gain on the sale of Ribapharm's stock, net of offering costs. The Company will utilize its capital loss carryforwards and a portion of its net operating loss carryforwards to partially offset the gain. As of December 31, 2001, the Company had $72,736,000 of capital loss carryforwards and $106,764,000 of net operating loss carryforwards. On April 17, 2002, the Company used the proceeds of the Ribapharm Offering to complete its tender offer and consent solicitation for all of its outstanding 8 3/4% Senior Notes due 2008. The redemption of these notes will result in an extraordinary loss on extinguishment of debt of approximately $30,00,000, net of an income tax benefit of approximately $17,000,000. In April 2002, the Company repurchased an aggregate 1,000,000 shares of its common stock for $28,035,000 under a stock repurchase plan in open market transactions. In connection with the Ribapharm Offering, the Company paid cash bonuses to its officers, directors and employees totaling approximately $47,800,000 in April 2002. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Certain financial information for the Company's business segments is set forth below. This discussion should be read in conjunction with the consolidated condensed financial statements of the Company included elsewhere in this document. For additional financial information by business segment, see Note 7 of Notes to Consolidated Condensed Financial Statements included elsewhere in this Quarterly Report. Revenues: Three Months Ended March 31, 2002 2001 ---------------- -------------- (in thousands) Product sales Pharmaceuticals ICN Americas North America $ 46,939 $ 42,283 Latin America 29,487 26,092 ---------------- -------------- Total ICN Americas 76,426 68,375 ---------------- -------------- ICN International Western Europe 54,854 52,533 Russia 29,776 24,399 Asia, Africa, Australia 11,820 10,638 ---------------- -------------- Total ICN International 96,450 87,570 ---------------- -------------- Total pharmaceuticals 172,876 155,945 Biomedicals 15,785 15,474 ---------------- -------------- Total product sales 188,661 171,419 Royalties 57,001 27,550 ---------------- -------------- Total revenues $ 245,662 $ 198,969 ================ ============== Cost of product sales $ 71,132 $ 69,774 Gross profit margin on product sales 62% 59%
Royalties: Royalties represent amounts earned under the Company's Exclusive License and Supply Agreement (the "License Agreement") with Schering-Plough Corporation ("Schering-Plough"). Under the License Agreement, Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha interferon (the "Combination Therapy"). In 1998, Schering-Plough received approval from the United States Food and Drug Administration ("FDA") to market Rebetron(TM) Combination Therapy. Rebetron(TM) combines Rebetol(R) (ribavirin) capsules and Intron(R) A (interferon alfa-2b, recombinant) injection, for the treatment of HCV in patients with compensated liver disease. On July 26, 2001, Schering-Plough announced that the FDA granted Schering-Plough marketing approval for Rebetol(R) Capsules as a separately marketed product for use only in combination with Intron(R) A injection for the treatment of HCV in patients with compensated liver disease previously untreated with alpha interferon or who have relapsed following alpha interferon therapy. On August 8, 2001, Schering-Plough announced that the FDA also granted Schering-Plough approval for Peg-Intron(TM) (peginterferon alfa-2b), a longer lasting form of Intron(R) A, for use in combination therapy with Rebetol(R) for the treatment of HCV in patients with compensated liver disease previously untreated with alpha interferon and who are at least 18 years of age. On March 28, 2001, Schering-Plough received notice that the European Union ("EU") Commission of the European Communities (the "Commission") granted centralized marketing authorization to Peg-Intron(TM) (peginterferon alfa-2b) Injection and Rebetol(R) (ribavirin) Capsules as combination therapy for the treatment of both relapsed and naive adult patients with histologically proven HCV. Commission approval of the centralized Type II variations to the Marketing Authorization for Peg-Intron(TM) and Rebetol(R) resulted in unified labeling that was immediately valid in all 15 EU-Member States. In November 2001, Schering-Plough received marketing approval from the Ministry of Health, Labor and Welfare of Japan for ribavirin in combination with interferon alfa-2b for the treatment of HCV. The combination therapy is the first combination therapy approved in Japan for treating patients with HCV. In December 2001, Schering-Plough received pricing approval for this combination therapy in Japan. Schering-Plough also markets the combination therapy in many other countries around the world based on the US and European Union regulatory approvals. Schering-Plough has informed the Company that it believes royalties paid under the License Agreement should not include royalties on products distributed as part of an indigent patient marketing program. Schering-Plough claims that because it receives no revenue from products given to indigent patients, it should not have to pay royalties on these products under the License Agreement. The Company does not agree with Schering-Plough's interpretation of the Agreement. However, in August 2001, Schering-Plough withheld approximately $11,628,000 from its royalty payment relating to the second quarter of 2001. The amount withheld was purportedly intended by Schering-Plough to be a retroactive adjustment of royalties previously paid to the Company through the third quarter of 2000 on products distributed as part of this indigent patient marketing program. Since the fourth quarter of 2000, Schering-Plough is withholding on a current basis all royalty payments purportedly related to this indigent patient marketing program. The Company recognized the $11,628,000 of withheld royalty payments for the retroactive adjustment and $3,050,000 of royalty payments withheld for the fourth quarter of 2000 and the first quarter of 2001 as income. The Company has not established a reserve for these amounts, because in the opinion of management, collectibility is reasonably assured. Since the second quarter of 2001, the Company no longer recognizes any of these withheld royalty payments as income as the Company can no longer determine such amounts due to a lack of information provided by Schering-Plough. The Company has filed an arbitration claim seeking to prevent Schering-Plough from adjusting its royalty payments to the Company. However, if Schering-Plough were to successfully continue to exclude the royalties on products given to indigent patients from future royalty payments, royalties earned could be reduced in the same proportion as the historical adjustment. The Company has given Schering-Plough written notice of its intention to arbitrate this royalty payment dispute to collect these royalties and prevent Schering-Plough from withholding royalty payments on sales under the indigent patient marketing program in the future. The parties expect to select an arbitrator and set an arbitration schedule during May 2002. If the Company does not succeed in this alternative dispute resolution process, it may have to write off all or a portion of this receivable. If the Company does succeed, the Company's subsidiary, Ribapharm, will be entitled to receive the royalty payments on these indigent sales withheld by Schering-Plough. See-Restructuring Royalties for the three months ended March 31, 2002 were $57,001,000 compared to $27,550,000 for the same period of 2001, an increase of $29,451,000 (107%). The increase is due to the launch of pegylated interferon alpha-2b and ribavirin combination therapy by Schering-Plough in October 2001. ICN Americas In the North America Pharmaceuticals segment, revenues for the three months ended March 31, 2002 were $46,939,000, compared to $42,283,000 for the same period of 2001, an increase of $4,656,000 (11%). Sales of Librax(R) in the first quarter of 2002 were higher by approximately $8,900,000 than in the same period in 2001. The increase in revenue was partially off-set by a decrease in sales of dermatological products in the first quarter of 2002 compared to the same period in 2001. In the Latin America Pharmaceuticals segment, revenues for the three months ended March 31, 2002 were $29,487,000, compared to $26,092,000 for the same period of 2001, an increase of $3,395,000 (13%). The increase is primarily due to an increase in sales in Mexico of $5,514,000, partially off-set by a decrease in revenues in Argentina of $2,097,000 due to the Argentine peso devaluation. ICN International In the Western Europe Pharmaceuticals segment, revenue for the three months ended March 31, 2002 were $54,854,000 compared to $52,533,000 for the same period of 2001, an increase of $2,321,000 or (4%). The increase is primarily due to product acquisitions in the last quarter of 2001 and the first quarter of 2002, partially off-set by a 5% decrease in the value of the Euro, which resulted in a decline in revenues of $1,258,000. In the Russia Pharmaceuticals segment, revenues for the three months ended March 31, 2002 were $29,776,000, compared to $24,399,000 for the same period of 2001, an increase of $5,377,000 (22%). The increase is primarily attributable to an increase in sales of major products (Pentalgin(R), Nitrocor(R) and Oligovit(R)) partially off-set by a 8% decline in the value of the ruble. In the Asia, Africa and Australia ("AAA") Pharmaceuticals segment, revenues for the three months ended March 31, 2002 were $11,820,000 compared to $10,638,000 for the same period of 2001, an increase of $1,182,000 (11%). The increase primarily reflects an increase in products sold by ICN Switzerland. Gross Profit: Gross profit margin on product sales increased to 62% for the three months ended March 31, 2002, compared to 59% for 2001. The increase in gross profit margin is primarily due to increased margins in the Western Europe, Russia and AAA Pharmaceuticals segments. Gross profit margin in the Western Europe Pharmaceuticals segment was 51% in 2002 compared to 46% for the first quarter in 2001, which primarily reflects lower cost of goods sold related to the transition of manufacturing products in-house from third party manufacturers. The overall gross margin for the Company's Russia Pharmaceuticals segment was 43% for 2002, compared to 34% for the 2001 first quarter, which benefited from the sale of higher margin products. The overall gross margin for the Company's AAA Pharmaceuticals segment was 53% for 2002, compared to 47% for the 2001 first quarter, which benefited from the sale of higher margin products. Selling, General and Administrative Expenses: Selling, general and administrative expenses were $91,632,000 for the three months ended March 31, 2002, compared to $73,419,000 for the same period in 2001, an increase of $18,213,000. The increase reflects increased selling and advertising expenses of $8,565,000 incurred throughout all regions to promote the Company's products. General and administrative expenses increased by $8,289,000 primarily due to a non-cash compensation charge of $2,968,000 for the exercise of stock options, increased legal and professional fees of approximately $4,800,000 and general and administrative expenses of $915,000 related to the new ICN International headquarters in Basel, Switzerland. Research and Development: Research and development expenses for the 2002 first quarter were $9,857,000, compared to $6,372,000 for the same period in 2001. The increase resulted from the Company's continued expansion of research and development activities. The Company continues to expect to increase its research and development spending in 2002. Translation and Exchange Losses, Net: Translation and exchange losses, net were $2,120,000 for the three months ended March 31, 2002 compared to $400,000 for the same period in 2001. In the first quarter of 2002, translation losses consisted of $1,618,000 of losses related the devaluation of the Argentine peso and $715,000 of losses related to the net monetary asset position of the Company's Russian subsidiaries. In the first quarter of 2001, translation losses principally consisted of losses related to the net monetary asset position of the Company's Russian subsidiaries. Interest Income and Expense: Interest expense during the three months ended March 31, 2002 increased $1,476,000 compared to the same period in 2001 due to interest expense incurred on the 6 1/2% Convertible Subordinated Notes due 2008 issued in July 2001, partially off-set by the repurchases and redemption of the Company's 9 1/2% Senior Notes and 8 3/4% Senior Notes which occurred throughout 2001. Interest income decreased to $1,335,000 in 2002 from $2,240,000 in 2001 due to lower yields on investments. Income Taxes: The Company's effective income tax rate was 40% for 2002 compared to 31% for 2001. The Company operates in many regions where the tax rate is lower than the U.S. Federal statutory rate or where it benefits from tax relief. The increase in the Company's provision for income taxes for the three months ended March 31, 2002 over the same period of 2001, is primarily attributable to a shift in the mix of earnings to higher tax rate jurisdictions. Liquidity and Capital Resources During the three months ended March 31, 2002, cash provided by operating activities totaled $62,128,000, compared to $54,887,000 in 2001. Operating cash flows reflect the Company's net income of $33,697,000, net non-cash charges (including depreciation, minority interest, and translation and exchange gains and losses) of $23,719,000, and working capital decreases totaling approximately $4,712,000. The working capital decrease principally consists of an increase of $14,921,000 in income taxes payable and a decrease of $7,135,000 in accounts receivable offset by an increase of $11,477,000 in prepaid expenses and other assets and a decrease of $7,198,000 in trade payables and accrued liabilities. Cash used in investing activities was $9,396,000 for the three months ended March 31, 2002 compared to $35,835,000 for the same period of 2001. In 2002, net cash used in investing activities consisted of payments for capital expenditures of $6,288,000 and acquisitions of license rights, product lines and businesses of $3,733,000. In 2001, net cash used in investing activities consisted of an acquisition totaling $14,445,000 and payments for capital expenditures of $21,810,000, principally representing an increase in the investment in research and development in North America and distribution facilities in Western Europe. Cash provided by financing activities totaled $897,000 for the three months ended March 31, 2002, including proceeds from the exercise of employee stock options of $6,819,000, offset by cash dividends paid on common stock of $6,136,000. During the first quarter of 2001, cash used in financing activities totaled $5,031,000, including cash dividends paid on common stock of $5,801,000, offset by proceeds from the exercise of employee stock options of $1,284,000. Management believes that the Company's existing cash and cash equivalents and funds generated from operations will be sufficient to meet its operating requirements in the near term and to fund anticipated acquisitions and capital expenditures, including the continued development of its research and development program. The Company may also seek additional debt financing or issue additional equity securities to finance future acquisitions. The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand. The Company also evaluates the collectibility of its receivables at least quarterly. The Company's methodology for establishing the allowance for bad debts varies with the regions in which it operates. With the exception of Russia, the allowance for bad debts is based upon specific identification of customer accounts and the Company's best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. In Russia, the allowance for bad debts is based upon a combination of specific identification of customer account balances and an overall provision based upon anticipated developments and historical experience. In Russia, factors such as the economic crisis in August 1998 and the subsequent stabilization in the middle of 1999 were utilized in the analysis. As of March 31, 2002, the Company believes that adequate provision has been made for inventory obsolescence and for anticipated losses on uncollectible accounts receivable. The Company is currently self-insured with respect to product liability claims. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a negative impact effect on the Company's liquidity and financial performance. Restructuring In 2000, the Company publicly announced a restructuring plan to split its business into three separate publicly traded companies: Ribapharm Inc. (comprised of the Company's royalty stream from ribavirin and the Company's U.S. research & development operations), ICN International AG (comprised of the Company's operations in Western Europe, Eastern Europe and Asia, Africa and Australia) and ICN Americas (comprised of the Company's operations in North America, Latin America and Biomedicals). In April 2002, the Company completed an underwritten public offering of 29,900,000 shares of common stock, par value $.01 per share, of Ribapharm (the "Ribapharm Offering"). In connection with the Ribapharm Offering, the Company received net cash proceeds of $278,070,000 million and will record a gain on the sale of Ribapharm's stock, net of offering costs. The Company will utilize its capital loss carryforwards and a portion of its net operating loss carryforwards to partially offset the gain. The Company is committed to distributing its remaining interest in Ribapharm to the Company's stockholders on a tax-free basis. The distribution will be subject to a ruling from the U.S. Internal Revenue Service ("IRS") compliance with all other legal and regulatory provisions including SEC regulations, Delaware Corporate Law provisions regarding the payment of dividends and compliance with applicable fraudulent conveyance laws. On March 12, 2002, the Company filed a request with the IRS for a ruling that the spin-off will qualify as a tax free spin-off under U.S. tax laws. Typically, it takes four to six months from the date of submission of a ruling request for the Internal Revenue Service to make a determination. The Company cannot assure you that it will not take longer for the IRS to rule on the Company's request or that the Internal Revenue Service will issue a favorable ruling. Nor can the Company assure you that it will be able to obtain a favorable opinion from the Company's counsel or that the IRS or a court will agree with the conclusions reached in that opinion. Furthermore, the Company's commitment to effect the spin-off does not constitute a binding legal obligation to do so. There can be no assurance that the spin-off will be completed. The Company intends to sell up to 40% interest in ICN International in an offering. The Company intends to apply for listing of the shares of ICN International on the Budapest Stock Exchange and global depositary receipts on the London Stock Exchange. Subject to market conditions and regulatory approvals the Company expects to complete the offering of ICN International as soon as practicable. There can be no assurance that an offering of ICN International will be completed. In addition to continuing the Company's operations in North America, Latin America and Biomedicals, ICN Americas will hold the remaining interests in ICN International and Ribapharm until these interests are disposed of by ICN Americas. On April 17, 2002, the Company used the proceeds of the Ribapharm Offering to complete its tender offer and consent solicitation for all of its outstanding 8 3/4% Senior Notes due 2008. The redemption of these notes resulted in an extraordinary loss on extinguishment of debt of approximately $30,000,000, net of an income tax benefit of approximately $17,000,000. The Company contributed to Ribapharm the license agreement with Schering-Plough. The Company will retain the royalty payment for sales of ribavirin in the first quarter of 2002 payable in May 2002. The royalty payment for sales of ribavirin in the second quarter of 2002 is payable in August 2002. This royalty payment will be divided between the Company and Ribaparm on a pro rata basis based on the Ribapharm Offering effective date of April 17, 2002. Additionally, under terms contained in an inter-debtor agreement between the Company and Ribapharm, the Company has agreed to make all interest and principal payments on the $525,000,000 Subordinated Convertible Notes due 2008 issued in July 2001. Foreign Operations Approximately 56% and 63% of the Company's revenues for the three months ended March 31, 2002 and 2001, respectively, were generated from operations outside the United States. All of the Company's foreign operations are subject to risks inherent in conducting business abroad, including possible nationalization or expropriation, price and currency exchange controls, fluctuations in the relative values of currencies, political instability and restrictive governmental actions. Changes in the relative values of currencies occur from time to time and may, in some instances, materially affect the Company's results of operations. The effect of these risks remains difficult to predict. The Company does not currently provide any hedges on its foreign currency exposure and, in some countries in which the Company operates, no effective hedging programs are available. Russia While the Russian economy continues to show improvement since the financial crisis that began in 1998, the economy continues to experience difficulties. In 1998, the ruble fell sharply from a rate of 6.3 to $1 to a rate of 27.5 rubles to $1 by the end of 1999. To date, while the ruble has continued to devalue, it has devalued at a steady, and recently slowing rate, there is continued volatility in the debt and equity markets, high inflation persists, confidence in the banking sector has yet to be restored and there continues to be general lack of liquidity in the economy. In addition, laws and regulations affecting businesses operating with Russia continue to evolve. Russia's return to economic stability is dependent to a large extent on the effectiveness of the measures taken by the government, decisions of international lending organizations, and other actions, including regulatory and political developments, which are beyond the Company's control. At March 31, 2002, the ruble exchange rate was 31.1 rubles to $1 as compared with a rate of 30.1 rubles to $1 at December 31, 2001. As a result of the change in the ruble exchange rate, the Company recorded translation losses of $715,000 related to its Russian operations during the first quarter of 2002. As of March 31, 2002, ICN Russia had a net monetary asset position of approximately $16,193,000, which is subject to foreign exchange loss as further declines in the value of the ruble in relation to the dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate amount of any future translation and exchange loss the Company may incur cannot presently be determined and such loss may have a negative impact on the Company's results of operations. The Company's management continues to work to reduce its net monetary exposure. However, there can be no assurance that such efforts will be successful. Prior to the August 1998 devaluation of the ruble, the Company had favorable experience with the collection of receivables from its customers in the region. Subsequently, the Company has taken additional steps to ensure the creditworthiness of its customers and the collectibility of accounts receivable by tightening its credit policies in the region and concentrating its sales efforts on a smaller number of more reliable customers. The Company believes that the economic and political environment in Russia has affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company's customers, continue to experience liquidity problems as monetary policy has limited the money supply, and Russian companies often lack access to affordable working capital. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms. The current economic condition in Russia continues to impact the Company's operating cash flows in Russia, as some of the Company's Russian customers continue to experience liquidity shortages. The Company may need to invest additional working capital in Russia to sustain its operations, to provide increasing levels of working capital necessary to support renewed growth, and to fund the purchase or upgrading of facilities. The Company also has several preliminary acquisition prospects that may require funds through the year 2002. However, there is no assurance that any such acquisitions will be consummated. Argentina At March 31, 2002, the Company's Argentine subsidiary recorded a foreign currency translation adjustment of $4,722,000 on its net assets reflecting a 49% devaluation of the Argentine peso. This non-cash adjustment reduced stockholder's equity. In addition, the Company's Argentine subsidiary recognized a translation loss of $1,618,000, included in other loss, on net assets denominated in non-peso currencies. Inflation And Changing Prices The effects of inflation are experienced by the Company through increases in the costs of labor, services and raw materials. The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. While the Company attempts to raise selling prices in anticipation of inflation, the Company operates in some markets which have price controls that may limit its ability to raise prices in a timely fashion. Future sales and gross profit will be reduced if the Company is unable to obtain price increases commensurate with the levels of inflation. The Russian government has recently instituted a process for establishing prices for pharmaceutical products, which may lead to price controls in the Russian market in the future. Currently, this process requires the Company to register the prices for some of its products included on the government's list of "products important for health." The next procedure for registration includes the negotiation and approval of such prices between the Company and the relevant state bodies. The Company is currently working with all relevant state bodies to approve its prices and the Company is not presently able to determine the effect, if any, that this process may have on its results of operations. However, such developments could have a negative impact on the Company's results of operations and cash flows in Russia. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company's business and financial results are affected by fluctuations in world financial markets. The Company evaluates its exposure to such risks on an ongoing basis, and reviews its risk management policy to manage these risks to an acceptable level, based on management's judgment of the appropriate trade-off between risk, opportunity and costs. The Company does not hold any significant amount of market risk sensitive instruments whose value is subject to market price risk. In the normal course of business, the Company also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk, and legal risk and are not discussed or quantified in the following analysis. Interest Rate Risk: The Company currently does not hold financial instruments for trading or speculative purposes. The financial assets of the Company are not subject to significant interest rate risk due to their short duration. At March 31, 2002, the Company had $10,552,000 of foreign denominated debt that would subject it to both interest and currency risk. The principal financial liabilities of the Company that are subject to interest rate risk are its fixed-rate long-term debt (principally its 8 3/4% Senior Notes due 2008 and its 6 1/2% Subordinated Convertible Notes due 2008) totaling approximately $719,611,000. The Company does not use any derivatives or similar instruments to manage its interest rate risk. A 100 basis-point increase in interest rates (approximately 14% of the Company's weighted average interest rate on fixed-rate debt) affecting the Company's financial instruments would have an immaterial effect on the Company's first quarter 2002 pretax earnings. However, such a change would reduce the fair value of the Company's fixed-rate debt instruments by approximately $38,200,000 as of March 31, 2002. THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995 This Quarterly Report on Form 10-Q contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Quarterly Report on Form 10-Q and include statements regarding, among other matters, the Company's growth opportunities, the Company's acquisition strategy, the Company's reorganization plans, regulatory matters pertaining to governmental approval of the marketing or manufacturing of certain of the Company's products and other factors affecting the Company's financial condition or results of operations. Stockholders are cautioned that any such forward looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from the future results, performance or achievements, expressed or implied in such forward looking statements. Such factors are discussed in this Quarterly Report on Form 10-Q and also include, without limitation, the Company's dependence on foreign operations (which are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, restrictions on the exchange of currencies, limitations on foreign participation in local enterprises, health-care regulations, price controls, and other restrictive governmental conditions); the risk of operations in Eastern Europe, Latin America, as well as Russia and other countries in light of the unstable economic, political and regulatory conditions in such regions; the risk of potential claims against certain of the Company's research compounds; the Company's ability to successfully develop and commercialize future products; the limited protection afforded by the patents relating to ribavirin, and possibly on future drugs, techniques, processes or products the Company may develop or acquire; the potential impact of the Euro currency; the Company's ability to continue its expansion plan and to integrate successfully any acquired companies; the results of lawsuits or the outcome of investigations pending against the Company; the Company's potential product liability exposure and lack of any insurance coverage thereof; government regulation of the pharmaceutical industry (including review and approval for new pharmaceutical products by the FDA in the United States and comparable agencies in other countries) and competition. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS See Note 6 of Notes to Consolidated Condensed Financial Statements Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 15.1 Review Report of Independent Accountants 15.2 Awareness Letter of Independent Accountants (b) Reports on Form 8-K During the quarter ended March 31, 2002, the following reports on Form 8-K were filed by the Registrant: 1.Current report on Form 8-K dated February 27, 2002 (the date of the earliest event reported), filed on February 27, 2002, for the purpose of reporting , under Item 5, the Registrant's 2001 results of operations. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ICN PHARMACEUTICALS, INC. Registrant Date: May 15, 2002 /s/ Milan Panic -------------------------------------------------------- Milan Panic Chairman of the Board and Chief Executive Officer Date: May 15, 2002 /s/ John E. Giordani -------------------------------------------------------- John E. Giordani Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
EXHIBIT INDEX Exhibit Page No ------- 15.1 Review Report of Independent Accountants 24 15.2 Awareness Letter of Independent Accountants 25 Exhibit 15.1 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ICN Pharmaceuticals, Inc.: We have reviewed the accompanying consolidated condensed balance sheet of ICN Pharmaceuticals, Inc. and its subsidiaries as of March 31, 2002 and the related consolidated condensed statements of income, of comprehensive income and of cash flows for each of the three-month periods ended March 31, 2002 and 2001. These consolidated condensed financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, of stockholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Los Angeles, California May 2, 2002 Exhibit 15.2 AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS May 14, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated May 2, 2002, on our review of interim financial information of ICN Pharmaceuticals, Inc. (the "Company") as of and for the period ended March 31, 2002 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in its Registration Statements on Form S-8 (File Nos. 33-56971, 333-81383, 333-73098 and 333-85572) and Form S-3 (File Nos. 333-10661, 333-67376, 333-88040 and 333-88042). Very truly yours, /S/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Los Angeles, California -----END PRIVACY-ENHANCED MESSAGE-----