-----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, DeOnVFaimdV5dWRbrwqKelG4+Nx0Vr6xIODZtx6EnDIYnhGksHfXcDGYk3FZRU83 7lufyWAS0VvRhsKa+7p99A== 0000930184-99-000006.txt : 19990402 0000930184-99-000006.hdr.sgml : 19990402 ACCESSION NUMBER: 0000930184-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: SEC FILE NUMBER: 001-11397 FILM NUMBER: 99581420 BUSINESS ADDRESS: STREET 1: 3300 HYLAND AVE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7146683102 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 SEC FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1998. 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: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ------------------- --------------- Common Stock, $.01 par value New York Stock Exchange (Including associated preferred stock purchase rights) 9-1/4% Senior Notes Due 2005 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant on March 23, 1999, was approximately $1,752,699,000. The number of outstanding shares of the Registrant's Common Stock as of March 23, 1999 was 77,419,478. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in ICN Pharmaceuticals, Inc.'s definitive Proxy Statement for the 1999 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 hereof. ================================================================================
TABLE OF CONTENTS PAGE ---- PART I 1. Business................................................................................ 2 2. Properties.............................................................................. 12 3. Legal Proceedings....................................................................... 14 4. Submission of Matters to a Vote of Security Holders..................................... 14 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 15 6. Selected Financial Data................................................................. 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 18 7a. Quantitative and Qualitative Disclosures About Market Risk.............................. 29 8. Financial Statements and Supplementary Data............................................. 32 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 61 PART III 10. Directors and Executive Officers of the Registrant...................................... 62 11. Executive Compensation.................................................................. 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 was the acquiring company and, as a result, the Company has reported the historical financial data of SPI in its financial results for periods prior to the Merger. Subsequent to the Merger, the results of the newly merged company include the combined operations of all Predecessor Companies. The Company is a multinational pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. In 1998, the Company had revenues of $838.1 million and a net loss of $352.1 million. Based on the closing price of the Company's common stock on the New York Stock Exchange on March 23, 1999, the Company has an equity market capitalization of approximately $1.8 billion. The Company distributes and sells a broad range of prescription (or "ethical") and OTC pharmaceutical and nutritional products in over 90 countries. These pharmaceutical products treat viral and bacterial infections, diseases of the skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. The Company pursues a strategy of international expansion which includes: (i) the consolidation of the Company's leadership position in Eastern Europe, including Russia; (ii) the acquisition of high margin products that complement existing product lines and can be introduced into additional markets to meet the specific needs of those markets; and (iii) the creation of a pipeline of new products through internal research and development, as well as strategic partnerships and licensing arrangements. The Company continues to review opportunities for acquisitions throughout the regions in which it operates. The Company currently operates nine pharmaceutical companies throughout Eastern Europe (including Russia) and, as measured by sales, the Company believes it is one of the largest pharmaceutical companies in Eastern Europe (including Russia), a region with an estimated population of 425.1 million people with a collective GNP of $838.3 billion. The rate of per capita spending on pharmaceuticals in Eastern Europe currently is only 13% of such rate in Western Europe. The Company also believes it has established itself as one of the largest pharmaceutical companies, as measured by sales, in Russia, a market that is expected to grow significantly over the next decade. The Company believes it is uniquely positioned as being both large enough to have an effective international distribution network not enjoyed by smaller pharmaceutical companies and small enough to permit lower sales thresholds that will achieve profitability that cannot be realized under the production and marketing constraints of larger pharmaceutical companies. The Company has increased sales and profitability in part by acquiring high margin pharmaceutical products that complement its existing product lines. RECENT DEVELOPMENTS ICN YUGOSLAVIA On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision reached by the Ministry for Economic and Property Transformation on November 26, 1998, effectively reduced the Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on the unilaterally imposed recalculation of the Company's original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, 3 contrary to Yugoslav law, without any notification to or representation by the Company. Since the change of control, representatives of the Company and ICN Yugoslavia's management have been denied access to the premises and any representation as to the management of ICN Yugoslavia. As a result of the Yugoslavian government's actions, the Company recorded a charge of $235.3 million in the fourth quarter of 1998, reflecting the write-off of all of the Company's investment in ICN Yugoslavia and related assets. ICN Yugoslavia represented a material part of the Company's business, generating approximately 17%, 30%, and 44% of the Company's revenues for the years ended December 31, 1998, 1997, and 1996. See "Management's Discussion and Analysis of Results of Operations--Recent Events." RUSSIA The Company's operations in Russia were adversely affected by the Russian economic crisis. In the third quarter of 1998, the Russian government and the Russian Central Bank were no longer able to support the ruble at its then-current exchange rate of approximately 6.3 rubles to the dollar. Subsequently, the ruble fell sharply and at December 31, 1998, the exchange rate was approximately 20.7 rubles to the dollar, a decline of more than 68% from the ruble's mid-August 1998 level. As a result of the decline in the ruble exchange rate, the Company recorded foreign exchange losses of $53.8 million related to its Russian operations during 1998. Subsequent to December 31, 1998, the value of the ruble has continued to decline in relation to the dollar, exceeding 23 rubles to the dollar. The Company believes that the economic crisis in Russia has adversely affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company's customers, continue to experience severe liquidity shortages as rubles are in short supply, and Russian companies' hard-currency assets remain frozen in Russian banks. This liquidity crisis has diminished many Russian companies' ability to pay their debts and is likely to lead to a number of business failures in the region. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms. These factors have adversely affected, and may continue to adversely affect, sales and gross margins in the Company's Russian operations. See "Management's Discussion and Analysis of Results of Operations--Recent Events." ACQUISITIONS Effective October 1, 1998, the Company completed the acquisition of the worldwide rights (except India) to four products from F. Hoffmann - La Roche Ltd. ("Roche"). The products include Dalmadorm(R), a sleep disorder drug; Fluoro-Uracil(R), an oncology product; Librax(R), a treatment for gastrointestinal disorders; and Mogadon(R), a sleep disorder drug also used to treat epilepsy. Aggregate consideration for the products was $178.8 million, paid in a combination of $89.4 million cash and 2,883,871 shares of the Company's common stock, valued at $89.4 million. Under the terms of the Company's agreement with Roche, the Company has guaranteed to Roche a per share price initially at $31.00, increasing at a rate of 6% per annum through December 31, 2000. If Roche sells any of the shares prior to December 31, 2000, the Company is entitled to one-half of any proceeds realized by Roche in excess of the guaranteed price. If the market price of the Company's common stock is below the guaranteed price at the end of the guarantee period, the Company will be required to satisfy the aggregate guarantee amount by payment to Roche in cash or, in certain circumstances, in additional shares of the Company's common stock. In October 1998, the Company entered into agreements with Senetek plc under which it obtained rights to market certain products, including the worldwide rights to market Kinetin(R) (marketed by the Company as Kinerase(R)), a skin cream to inhibit signs of aging, through physicians and pharmacies. The Company will market this product primarily through its existing operations. In Latin America, the Company recently acquired the rights to market three products from SmithKline Beecham plc ("SKB"), which the Company believes complement its existing product line and increase its market presence in Latin America. In July 1998, the Company acquired Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a manufacturing and research facility located in a suburb of Prague, Czech Republic for $17.9 million in cash. VUAB's two main product lines are finished forms of human drugs, including injectable antibiotics and infusion solutions, and pharmaceutical raw materials, including ephedrine, a powdered or crystalline alkaloid used in the treatment of allergies and asthma, and nystatin, an antibiotic used in the treatment of fungal infections. The Company believes that VUAB currently accounts for approximately 10 % and 8%, respectively, of the world market for ephedrine and nystatin. Exports of these 4 products accounted for more than 50% of VUAB's total 1998 pro forma product sales volume of $17.5 million. On April 1, 1998, Eli Lilly and Company ("Lilly") and the Company entered into an agreement in which the Company acquired the rights to manufacture, market and sell several Lilly pharmaceutical products in Russia and the Commonwealth of Independent States ("CIS") under the Company's brand names. Lilly will continue to market these products under its own brand names. On March 18, 1998, the Company acquired the global rights to a portfolio of 32 dermatology products from Laboratorio Pablo Cassara, an Argentine-based pharmaceutical manufacturer, for consideration of $22.5 million. These products had pro forma annual sales in Argentina of $9.2 million in 1998. The Company markets these products through its subsidiary, ICN Argentina. In February 1998, the Company acquired from SKB the Asian, African and Australian rights to 39 prescription and over-the-counter pharmaceutical products. These products had pro forma annual sales of $27.1 million in 1998. The Company received the product rights in exchange for $45.5 million, of which $22.5 million was paid in cash and the balance in 821 shares of the Company's Series D Convertible Preferred Stock. Each share of the Series D Convertible Preferred Stock is initially convertible into 750 shares of the Company's common stock (together, the "SKB Shares"), subject to certain antidilution adjustments. The Company has agreed to pay SKB an additional amount in cash (or, under certain circumstances, in shares of common stock) to the extent proceeds received by SKB from the sale of the SKB Shares during the guarantee period ending in December 1999 and the then market value of the unsold SKB Shares do not provide SKB with an average value of $46.00 per common share (including any dividend paid on the SKB Shares). Alternatively, should SKB sell the SKB shares at any time during the guarantee period, the agreement entitles the Company to any of the proceeds realized by SKB in excess of the guarantee price. In 1997, the Company acquired the rights to 11 products from Roche for $183.2 million. The products include Librium(R) (tranquilizer), Efudex(R) (topical anti-skin cancer), Glutril(R) (anti-diabetic), Alloferin(R) (anesthetic), Ancotil(R) (antifungal), Limbitrol(R) (anti-depressant), Protamin(R) (heparin overdose), Levo-Dromoran(R) (pain management) and Mestinon(R)/Prostigmin(R)/Tensilon(R) (myasthenia gravis). Sales of these products contributed $106.1 million to the Company's revenues for 1998. The Company believes that certain of these products in specific markets have growth potential and intends to promote the products accordingly. A state-of-the-art manufacturing facility in Humacao, Puerto Rico was also purchased from Roche in a separate transaction. The Company's research and development activities are based upon the expertise accumulated in over 35 years of nucleic acids research focusing on the internal generation of novel molecules. The research and development function works closely with corporate marketing on a local, regional and worldwide basis. In this connection, the Company has entered into a number of licensing arrangements with other larger pharmaceutical companies, as well as strategic partnerships to develop its proprietary products. Among the Company's products is the broad spectrum antiviral agent ribavirin, which it markets in the United States, Canada and most of Europe under the Virazole(R) trademark. In 1995, the Company entered into a License Agreement with Schering-Plough Corporation ("Schering-Plough") whereby Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C in combination with Schering-Plough's alpha interferon (the "Combination Therapy"). The License Agreement provided the Company an initial non-refundable payment and future royalty payments to the Company from sales of ribavirin by Schering-Plough, including certain minimum royalty rates. As part of the initial License Agreement, the Company retained the right to co-market ribavirin capsules in the European Union under its trademark Virazole(R). Schering-Plough currently has exclusive marketing rights for oral forms of ribavirin for hepatitis C worldwide and is responsible for all clinical development and regulatory activities. In addition, Schering-Plough agreed to purchase up to $42.0 million in common stock of the Company upon achieving certain regulatory milestones. In 1998, the Company sold to Schering-Plough its rights to co-market oral ribavirin for the treatment of hepatitis C in the European Union in exchange for increased royalty rates on sales of ribavirin worldwide. 5 In June 1998, Schering-Plough received approval from the United States Food and Drug Administration ("FDA") to market Combination Therapy under the brand name Rebetron(TM) for the treatment of chronic hepatitis C in patients with compensated liver disease who have relapsed following alpha interferon therapy and began selling Combination Therapy in the United States. On June 9, 1998, Schering-Plough submitted a Marketing Authorization Application ("MAA") for Rebetron(R) to the European Agency for the Evaluation of Medicinal Products ("EMEA") for the treatment of relapsed chronic hepatitis C patients. On June 16, 1998, Schering-Plough filed a supplemental New Drug Application ("NDA") with the FDA for Combination Therapy for the treatment of chronic hepatitis C in patients with compensated liver disease previously untreated with alpha interferon therapy (referred to as treatment-naive patients) and in December 1998, this supplemental NDA was approved by the FDA. The Company believes that the approval of Combination Therapy for the treatment of chronic hepatitis C is important to the Company because of the potential size of the chronic hepatitis C market in the United States, Western Europe, Japan and other markets. According to the Centers for Disease Control and Prevention ("CDCP"), approximately four million Americans are chronically infected with the hepatitis C virus. Of these, 20%-50% are expected to develop liver cirrhosis, of which 20%-30% are expected to go on to develop liver cancer or liver failure requiring liver transplant. An equal or greater degree of disease prevalence is projected in Western Europe and Japan. Besides the use of ribavirin in Combination Therapy, the Company markets ribavirin under its own trademark Virazole(R) for commercial sale in over 40 countries for one or more of a variety of viral infections, including respiratory syncytial virus ("RSV"). In the United States and Europe, Virazole(R) is approved only for use in hospitalized infants and children with severe lower respiratory infections due to RSV. In addition to its pharmaceutical operations, the Company also develops, manufactures and sells, through its wholly-owned subsidiary, Biomedicals, a broad range of research products and related services, immunodiagnostic reagents and radiation monitoring services. The Company markets these products internationally to major scientific, academic, health care and governmental institutions through catalog and direct mail marketing programs. Biomedicals accounted for approximately 7% of the Company's total 1998 revenues. PRODUCTS During 1998, the ten pharmaceutical products generating the greatest sales volume for the Company represented approximately 24% of worldwide pharmaceutical sales. The following table summarizes the Company's top 10 pharmaceutical products based on sales in 1998:
1998 % OF PRODUCT GENERIC NAME THERAPEUTIC PRODUCT PRODUCT CATEGORY/INDICATION SALES SALES - --------------- --------------------- --------------------- -------- ---------- (in millions) Efudex(R)/ Efudix(R) fluorouracil Dermatological $ 43.3 6% Mestinon(R) pyridostigmine bromide Neuromuscular disorders 29.6 4 Bedoyecta(R) vitamin B complex Vitamin supplement 19.7 3 Pentalgin(R) paracetamol, analgine, Pain management 18.9 3 caffeine, phenobarbital, codeine Librium(R) chlordiazepoxide HCl Tranquilizer 12.1 2 Limbitrol(R) chlordiazepoxide HCl, Antidepressant 11.4 2 amitriptyline HCl Virazole(R) ribavirin Antiviral/RSV 11.2 1 Mogadon(R) nitrazepam Tranquilizer/sleep 11.2 1 disorders, epilepsy Ascorbic Acid vitamin C Vitamin supplement 10.1 1 Oxsoralen(R) methoxsalen Antipsoriatic 8.5 1 ------- ------- Sub-total 176.0 24 All others 563.1 76 ------- ------- Total pharmaceutical product sales $ 739.1 100% ======= =======
6 ANTIVIRALS The Company sells its antiviral drug, ribavirin, under the tradename Virazole(R) in North America and most European countries. Ribavirin is sold as Vilona(R) and Virazide(R) in Latin America and Virazide(R) in Spain. Reference to the sale of Virazole(R) includes sales made under the trademarks Vilona(R) and Virazide(R). Ribavirin accounted for approximately 1%, 3% and 5% of the Company's net product sales for the years ended December 31, 1998, 1997 and 1996, respectively. Ribavirin is currently approved for sale in various pharmaceutical formulations in over 40 countries for the treatment of several different human viral diseases, including RSV, hepatitis, herpes, influenza, measles, chicken pox and HIV. In the United States and Canada, Virazole(R) has only been approved for hospital use in aerosolized form to treat infants and young children who have severe lower respiratory infections caused by RSV. In treating RSV, the drug is administered by a small particle aerosolized generator, a system that permits direct delivery of ribavirin to the site of the infection. Similar approvals for ribavirin for use in the treatment of RSV have been granted by governmental authorities in 22 other countries. In 1995, the Company entered into the License Agreement with Schering-Plough whereby Schering-Plough has assumed responsibility for worldwide clinical development and registration of oral ribavirin in Combination Therapy for the treatment of chronic hepatitis C. ANTIBACTERIALS The Company sells approximately 70 antibacterial products which accounted for approximately 10%, 14% and 22% of the Company's net product sales for the years ended December 31, 1998, 1997 and 1996, respectively. Palitrex(R) belongs to the cefalesporin group of medications used to treat afflictions that may not be responsive to penicillin treatment. Pentrexyl(R) belongs to the penicillin group of medications used in a wide variety of bacterial infections including urinary and upper respiratory tract infections. Bactrim(R) is a combination product that is used in the treatment of urinary tract infections. Gentamicin(R) and Amikasin(R) are antibacterials sold by ICN Yugoslavia in various Eastern European markets. As a result of the Yugoslavian government's seizure of the Company's Yugoslavian operations, the Company expects to generate substantially lower revenues from sales of antibacterials in the future. OTHER ETHICALS 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. Other ethicals accounted for approximately 59%, 49% and 41% of net product sales for the years ended December 31, 1998, 1997 and 1996, respectively. Dermatological products represent the Company's largest selling product line among its other ethical pharmaceutical products. The Company manufactures and markets approximately 75 dermatological products primarily in North America. Dermatological products include Efudex(R)/Efudix(R), Oxsoralen-Ultra(R), Solaquin(R), Trisoralen(R) and Eldoquine(R), which are principally used for skin cancer, intractable psoriasis and pigmentation disorders, hypopigmentation (the skin losing its color) and hyperpigmentation (the skin darker than normal). The Company's largest selling ethical product is Efudex(R)/Efudix(R), a topical anti-skin cancer product. The Company markets three anticholinesterase product lines under the names Mestinon(R), Prostigmin(R), and Tensilon(R). These products are used in treating myasthenia gravis, a progressive neuromuscular disorder, and in reversing the effects of certain muscle relaxants. Pentalgin(R) is a pain management product sold in Russia. Librium(R), a tranquilizer, and Limbitrol(R), an antidepressant, are sold in all regions outside of Eastern Europe. Mogadon(R) is a sleep disorder drug also used to treat epilepsy. OTC PRODUCTS OTC products encompass a broad range of ancillary products which are sold through the Company's existing distribution channels, including Bedoyecta(R), a B-complex injectable vitamin marketed by ICN Mexico, and Ascorbic Acid, a Vitamin C product sold in Russia. OTC products accounted for approximately 22%, 25% and 22% of the Company's net product sales for the years ended December 31, 1998, 1997 and 1996, respectively. 7 BIOMEDICAL PRODUCTS Research chemicals, diagnostic and other biomedical products accounted for approximately 8%, 9% and 10% of the Company's net product sales for the years ended December 31, 1998, 1997 and 1996, respectively. RESEARCH CHEMICALS: The Company serves life science researchers throughout the world through a catalog sales operation, direct sales and distributors. The Company's catalog lists approximately 55,000 products which are used by medical and scientific researchers involved in molecular biology, cell biology, immunology and biochemistry, microbiology and other areas. A majority of these products are purchased from third party manufacturers and distributed by the Company. Products include biochemicals, immunobiologicals, radiochemicals, tissue culture products and organic, rare and fine chemicals. DIAGNOSTICS: Among the diagnostics marketed by the Company are 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. The Company manufactures both enzyme and radio-immunoassay kits, which it markets under the ImmuChem(TM) product line. The Company is also a supplier of immunodiagnostic tests for the screening of newborn infants for inherited and other disorders. DOSIMETRY: The Company is a supplier of analytical monitoring services to detect personal occupational exposure to radiation. This service is provided to dentists, veterinarians, chiropractors, podiatrists, hospitals, universities, government institutions, nuclear power plants, 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. RESEARCH AND DEVELOPMENT The Company's research and development activities use the expertise accumulated by the Company and its predecessors in over 35 years of nucleic acids research. In addition, the Company develops innovative products targeted to address the specific needs of the Company's local markets. The Company currently has approximately 464 employees devoted to research and development activities. 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 Central and Eastern 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. These compounds include: VIRAZOLE(R) (RIBAVIRIN): In addition to the use of ribavirin for chronic hepatitis C, clinical studies have been performed with ribavirin 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 ribavirin are herpes zoster, genital herpes, chicken pox, hemorrhagic fever with renal syndrome, measles, influenza and HIV. The Company is initiating focused clinical studies evaluating the use of ribavirin for early intervention against RSV infections in persons whose immune defenses are compromised as a consequence of bone marrow transplantation. SOMATORELIN(TM) (HGRF1-44): Somatorelin(TM) 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 benefits to patients. The Company is currently sponsoring Phase III trials in short stature pediatric patients. 8 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 preparing 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-CI CAMP, OCLADESINE): This nucleotide analog has been shown to control cell growth and proliferation in certain cancers by selective interaction with intracellular regulatory molecules. Independent investigators in Italy and Scotland have conducted preliminary trials in humans that indicate significant utility of this compound. Based on these encouraging results, the Company has undertaken a formal development program designed to lead to registration in the United States for the treatment of colon cancer. Based on an initial meeting with the FDA in October 1998, the Company is preparing to file an Investigational New Drug Application ("IND") with the FDA in the second half of 1999, with clinical evaluations beginning shortly thereafter. The rights to the compounds Tiazole(TM) and Adenazole(TM) were among the assets which the Company contributed to its former 75%-owned subsidiary, ICN Yugoslavia, upon the formation of that joint venture in 1991. See "Management's Discussion and Analysis--Recent Developments". 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 that 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 ribavirin 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. There can be no assurance of the results of any of the Company's research and development efforts or the ultimate commercial success of any of the products in development. MARKETING AND CUSTOMERS The Company markets its pharmaceutical products in some of the most developed pharmaceutical markets, including the United States, Canada and Western Europe, as well as developing markets, including Russia, Eastern Europe and Latin America. The Company adjusts its marketing strategies according to the individual markets in which it operates. The Company believes its marketing strategy is distinguished by flexibility, allowing the Company to successfully market a wide array of pharmaceutical products within diverse regional markets as well as certain drugs on a worldwide basis. The Company has a marketing and sales staff of approximately 1,700 persons, including sales representatives in North America, Latin America, Western Europe and Eastern Europe, who promote its pharmaceutical products. As part of its marketing program for pharmaceuticals, the Company 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 Canada, the Company has its own sales force and promotes and sells directly to physicians, hospitals, wholesalers and large drug store chains. In Latin America, principally Mexico and Argentina, 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 9 wholesalers. In other Western European markets, particularly the United Kingdom and Germany, sales forces have recently been established and distribution methods are in transition as Company affiliates are formed. The Company's sales and marketing organizations are in various stages of development in Russia, Hungary, Poland and the Czech Republic. In Russia, the lower-priced generic domestic product line is sold through a network of distributors and their agents and accounts for approximately 90% of in-market sales. Products imported from other subsidiaries as branded generics or proprietary drugs are promoted to physicians through the Company's own sales force to create demand and are distributed to pharmacies and hospitals through distributors and wholesalers. There are currently over 600 personnel in Russia supporting the sales and marketing function. ICN Hungary, ICN Poland and ICN Czech Republic are building their marketing, sales, and distribution capabilities as they transition their product portfolios in anticipation of the potential future integration of these countries into the European Union common market. 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. The Company's customer group for research products is principally composed of biomedical research institutions, such as universities, the National Institutes of Health, pharmaceutical companies and, to a lesser extent, hospitals. The Company has a sales and marketing organization for its research products of approximately 186 persons, including approximately 118 persons in the United States and Canada, and approximately 42 persons in Europe. COMPETITION The Company operates in a highly competitive environment. The Company's competitors, many of whom have substantially greater capital resources and marketing capabilities and larger research and development staffs and facilities than the Company, are actively engaged in marketing products similar to those of the Company and in developing new products similar to those proposed to be developed and sold by the Company. The Company believes that many of its competitors spend significantly more on research and development related activities than the Company spends. Competitive factors vary by product line and customer and include service, product availability and performance, price and technical capabilities. The Company does business in an industry characterized by extensive and ongoing research efforts. Others may succeed in developing products that are more effective than those presently marketed or proposed for development by the Company. Progress by other researchers in areas similar to those explored by the Company may result in further competitive challenges. The Company may also face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of its currently marketed products expire. MANUFACTURING The Company manufactures or will manufacture its products at 21 facilities. The Humacao, Puerto Rico plant is currently being leased to Roche under a two year lease which expires in August 1999. After expiration of the lease, the Company intends to use the Humacao plant to produce pharmaceutical products. The Company believes it has sufficient manufacturing facilities to meet its needs for the foreseeable future. All of the manufacturing facilities that require current Good Manufacturing Practices approval from the FDA or foreign agencies have obtained such approval. The Company subcontracts the manufacture of many of the products which it currently markets under rights acquired from other pharmaceutical companies. In connection with such acquisitions, the Company generally contracts for the continued supply of the product for specified periods of time. As a result of the acquisition of products from Roche, the Company is in the process of transferring technology that will allow the Company to assume the production of the acquired products. However, there can be no assurance that the Company will be successful in its efforts to manufacture such products or that such products will continue to be available from outside suppliers. Manufacturing of the Company's research chemical products is chiefly carried out in three domestic facilities and one foreign facility: Irvine, California (radiochemicals); Orangeburg, New York (diagnostic and immunobiologicals); Aurora, Ohio (biochemicals and immunobiologicals); and Eschwege, Germany (chromatography products). 10 EMPLOYEES As of December 31, 1998, the Company employed 13,266 persons. Of such employees, the Company employed 8,918 in production, 1,879 persons in sales and marketing, 464 in research and development, and 2,005 in general and administrative matters. The majority of the Company's employees in Mexico, Spain and Poland are covered by collective bargaining or similar agreements. Substantially all of the employees of ICN Russia, ICN Czech Republic and ICN Hungary are covered by national labor laws which establish the rights of employees, including the amount of wages and benefits paid and, in certain cases, severance and similar benefits. The Company currently considers its relations with its employees to be satisfactory and has not experienced any work stoppages, slowdown or other serious labor problems which have materially impeded its business operations. LICENSES, PATENTS AND TRADEMARKS (PROPRIETARY RIGHTS) The Company may be dependent on the protection afforded by its patents relating to ribavirin 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 July 1999 relating to the use of ribavirin to treat specified viral diseases. Revenues in 1998 from the sale of products for the uses covered by such patent rights were approximately $3.1 million. Also, the Drug Price Competition and Patent Term Restoration Act of 1984 (the Waxman-Hatch Act) provides for the award of exclusivity for a period of three years from the date of approval of NDAs containing significant new clinical studies for products whose patent protection would otherwise expire. A request for such an award has been made subsequent to the approval of Combination Therapy for the treatment of relapsed patients. The FDA Modernization Act of 1997 provides for the award of six months of additional exclusivity following the submission to the FDA of data from appropriate studies in pediatric patients. Studies that qualify under this provision are planned. The Company has patents in certain foreign countries, including Japan, covering the antiviral use of ribavirin, for which coverage and expiration varies and which patents expire at various times through June 2005. The Company has no, or limited, patent rights relating to the antiviral use of ribavirin in certain foreign countries where ribavirin is currently, or in the future may be, approved for commercial sale, including countries in the European Union. However, Combination Therapy was granted a favorable review classification through the Concertation Procedure for regulatory approval within the European Union. As a result, if approval is obtained to market Combination Therapy, the data submitted to obtain such approval cannot be referenced in support of another's application to register a competing product for the approved indications for a period of no less than six and not more than ten years. Any such application must be on the basis of independently generated data of substantially equal quality, thus providing a significant barrier to entry for any generic substitutes of Combination Therapy in the European Union. 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 that 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; nor can there be any assurance as to their breadth or the degree of protection which these patents, if issued, will afford the Company. The Company intends to rely substantially on its unpatented proprietary know-how, but there can be no assurance that others will not develop substantially equivalent proprietary information or otherwise obtain access to the Company's know-how. Patents for pharmaceutical compounds are not available in certain countries in which the Company markets its products. 11 Many of the names of the Company's products are registered trademarks in the United States, 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 that may become useful to the Company's business. The extent to which the Company at some future date may need to obtain licenses from others is not known. GOVERNMENT REGULATION The Company is subject to licensing and other regulatory control by the FDA, the Nuclear Regulatory Commission, other Federal and state agencies, and comparable foreign governmental agencies. FDA approval must be obtained in the United States and approval must be obtained from comparable agencies in other countries prior to marketing or manufacturing new pharmaceutical products for use by humans. Obtaining FDA approval for new products and manufacturing processes can take a number of years and involve the expenditure of substantial resources. To obtain FDA approval for the commercial sale of a therapeutic agent, the potential product must undergo testing programs on animals, the data from which is used to file an Investigational New Drug Application with the FDA. In addition, there are three phases of human testing. Phase I: safety tests for human clinical experiments, generally in normal, healthy people; Phase II: expanded safety tests conducted in people who are sick with the 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 a NDA to the FDA. The preparation of a 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 commercial sale by the Company of any new drugs or compounds for any application will be secured in the United States or any other country, or that, if such authorization is secured, those drugs or compounds will be commercially successful. The FDA in the United States and other regulatory agencies in other countries also periodically inspect manufacturing facilities. The Company is subject to price control restrictions on its pharmaceutical products in a majority of countries in which it operates. The Company has been affected in the past by pricing adjustments in Spain and by the lag in allowed price increases in Yugoslavia and Mexico, which has created lower sales in United States 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 12 of Notes to Consolidated Financial Statements for a description of the Company's Litigation. PRODUCT LIABILITY INSURANCE: The Company is currently self-insured with respect to product liability claims. 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. FOREIGN OPERATIONS The Company operates directly and through distributors in North America, Latin America (principally Mexico), Western Europe and Eastern Europe and through distributors elsewhere in the world. For financial information about domestic and foreign operations, see Note 13 of Notes to Consolidated Financial Statements. Approximately 77%, 82%, and 80% of the Company's revenues for the years ended December 31, 1998, 1997, and 1996 were generated from operations outside the U.S. 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 and, in certain countries in which the Company operates, no effective hedging program is available. 12 ITEM 2. PROPERTIES The following are the principal facilities of the Company and its subsidiaries:
OWNED OR SQUARE LOCATION PURPOSE LEASED FOOTAGE -------- ------- ------ ------- NORTH AMERICA Costa Mesa, California Corporate headquarters and Owned 178,000 administrative offices Irvine, California Manufacturing facility Leased 27,000 Orangeburg, New York Manufacturing facility Owned 100,000 Aurora, Ohio Manufacturing and repackaging facility Leased 67,000 Bryan, Ohio Warehouse and manufacturing facility Owned 37,000 Humacao, Puerto Rico Offices and manufacturing facility Owned 410,000 Montreal, Canada Offices and manufacturing facility Owned 93,519 LATIN AMERICA Buenos Aires, Argentina Offices and manufacturing facility Owned 26,890 Mexico City, Mexico Offices and manufacturing facility Owned 220,000 WESTERN EUROPE Brussels, Belgium Sales office Leased 6,323 Orsay, France Sales office Leased 2,658 Eschwege, Germany Offices and manufacturing facility Owned 13,278 Opera, Italy Sales office and warehouse Owned 153,777 Zoetermeer, The Netherlands Offices and manufacturing facility Owned 23,430 Barcelona, Spain Offices and manufacturing facility Owned 93,991 Basingstoke, United Kingdom Administrative office Leased 4,400 EASTERN EUROPE Prague, Czech Republic Offices and manufacturing facility Owned 262,032 Budapest, Hungary Administrative and sales office Leased 15,253 Tiszavasvari, Hungary Offices and manufacturing facility Owned 559,465 Rzeszow, Poland Offices and manufacturing facility Owned 472,133 Chelyabinsk, Russia Offices and manufacturing facility Owned 369,593 Kursk, Russia Offices and manufacturing facility Owned 64,603 Moscow, Russia Eastern European headquarters Owned 102,400 St. Petersburg, Russia Offices and manufacturing facility Owned 319,102 Tomsk, Russia Offices and manufacturing facility Owned 301,680 Yoshkar-Ola, Russia Offices and manufacturing facility Owned 142,397 Reutov, Russia Offices and warehouse Owned 169,900 ASIA, AFRICA, AUSTRALIA Wuxi, China Offices and manufacturing facility Owned 121,363 New South Wales, Australia Sales office Leased 10,650
13 The Humacao, Puerto Rico plant is currently being leased to Roche under a two year lease which expires in August 1999. After the expiration of the lease, the Company intends to use the Humacao plant to produce pharmaceutical products. 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. 14 ITEM 3. LEGAL PROCEEDINGS See Note 12 of Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant did not submit any matters to a vote of security holders during the quarter ended December 31, 1998. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Trading of the Company's common stock on the New York Stock Exchange began on 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. As of February 28, 1999, there were 8,994 holders of record of the Company's common stock. The following table sets forth the high and low sales prices of the Company's common stock on the New York Stock Exchange--Composite Transactions reporting system. The prices set forth below have been retroactively adjusted for the effect of the three-for-two stock split (in the form of a dividend) which became effective on March 16, 1998. 1998 1997 ----------------------- ----------------------- FISCAL QUARTERS High Low High Low ---------- ----------- ---------- ---------- First 51 5/8 25 15/16 18 13 Second 52 1/4 40 1/16 19 3/8 13 5/8 Third 47 7/8 13 13/16 35 1/4 17 5/8 Fourth 27 3/8 13 7/8 37 3/8 26 1/4 In March 1997, the Company increased its quarterly per share cash dividend to 5.3 cents per share. In January 1998, the Company increased its quarterly per share cash dividend to 6 cents per share from 5.3 cents per share. In March 1999, the Board of Directors increased the quarterly per share dividend to 7 cents. 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. During 1998 and 1999, the Company repurchased through open-market purchases an aggregate of 423,967 shares of its common stock under the Company's Stock Repurchase Program. 16 ITEM 6. SELECTED FINANCIAL DATA ICN Pharmaceuticals, Inc. and Subsidiaries (the "Company") was formed in November 1994, as a result of the merger of ICN Pharmaceuticals, Inc. ("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek") and ICN Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies") in a transaction accounted for using the purchase method of accounting (the "Merger"). For accounting purposes, SPI was treated as the acquiring company in the Merger and, as a result, the Company's historical financial data includes only the historical financial data of SPI for periods prior to the Merger; the results of ICN, Viratek and Biomedicals are included in the consolidated financial statements of the Company since the effective date of the Merger. The following table sets forth certain consolidated financial data for the five years ended December 31, 1998. The Company's selected historical financial data for each of the years in the five-year period ended December 31, 1998 were derived from the audited consolidated financial statements of the Company. The trends in the Company's revenues and net income (loss) are affected by several business combinations completed in fiscal years 1995 through 1998. The Company's results of operations for all years include the results of the Company's former subsidiary, ICN Yugoslavia. For 1998, ICN Yugoslavia generated revenues of $141,740,000 and a loss from operations of ($140,419,000). This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 1995 1994 ---------- --------- --------- --------- --------- (in thousands) STATEMENTS OF OPERATIONS Product sales $ 800,639 $ 752,202 $ 614,080 $ 507,905 $ 366,851 Royalties 37,425 -- -- -- -- ---------- --------- --------- --------- --------- Total revenues 838,064 752,202 614,080 507,905 366,851 Cost of product sales 353,600 351,978 291,807 206,049 182,946 Selling, general and administrative expenses 312,377 256,234 192,441 191,459 112,919 Royalties to affiliates, net -- -- -- -- 7,468 Research and development costs 20,835 18,692 15,719 17,231 7,690 Write-off of purchased research and development(1) -- -- -- -- 221,000 Eastern European charges (2) 440,820 -- -- -- -- ---------- --------- --------- --------- --------- Income (loss) from operations(1)(2) (289,568) 125,298 114,113 93,166 (165,172) Translation and exchange (gains) losses, net 80,501 12,790 2,282 (9,484) 191 Interest income (13,057) (15,912) (3,001) (6,488) (4,728) Interest expense 38,069 22,849 15,780 22,889 9,317 ---------- --------- --------- --------- --------- Income (loss) before income taxes and minority interest (395,081) 105,571 99,052 86,249 (169,952) Provision (benefit) for income taxes 1,983 (27,736) (6,815) 2,997 10,360 Minority interest (44,990) 19,383 18,939 15,915 3,269 ---------- --------- --------- --------- --------- Net income (loss)(1)(2) $ (352,074) $ 113,924 $ 86,928 $ 67,337 $(183,581) ========== ========= ========= ========= ========= Per share information: Net income (loss)-- basic $ (4.78) $ 1.93 $ 1.75 $ 1.51 $ (5.29) ========== ========= ========= ========= ========= Net income (loss)-- diluted $ (4.78) $ 1.69 $ 1.51 $ 1.44 $ (5.29) ========== ========= ========= ========= ========= Cash dividends paid (3) $ .24 $ .21 $ .20 $ .19 $ .17 ========== ========= ========= ========= =========
See accompanying Notes to Selected Financial Data. 17
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- --------- BALANCE SHEET DATA: Working capital(2) $ 236,994 $ 585,606 $ 306,764 $ 190,802 $ 137,802 Total assets(2) 1,356,396 1,491,745 778,651 518,298 441,473 Total debt 556,489 348,206 195,681 166,269 215,005 Stockholders' equity(2) 586,164 796,328 315,350 162,172 88,908
NOTES TO SELECTED FINANCIAL DATA: (1) The 1994 merger of ICN and its predecessor companies in 1994 resulted in $221,000,000 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 ribavirin. Net income, excluding this one-time write-off, was $37,419,000 in 1994. (2) As a result of recent political and economic events in Eastern Europe, including the Yugoslavian government's seizure of the Company's Yugoslavian operations effective November 26, 1998, the Company has recorded provisions for losses related to Eastern Europe totaling $451,019,000 in the year ended December 31, 1998. Of this amount, $440,820,000 is included in operating expenses, representing the write-off of the Company's investment in Yugoslavia and related assets ($235,290,000), provisions for losses on accounts and notes receivable (including accounts and notes receivable from the Yugoslavian government) ($203,519,000), and the write-off of certain investments ($2,011,000). The losses related to Eastern Europe also include reductions in the value of certain inventories ($6,072,000) and a charge against interest ($4,127,000). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." (3) Dividends paid for 1998 and 1996 include the fourth quarter distributions declared and paid in the first quarter of the following years. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS The Company's operations in Eastern Europe were adversely affected by recent economic and political developments in the region, including the Yugoslavian government's seizure of the Company's Yugoslavian operations and the increasingly volatile Russian economic situation. YUGOSLAVIA On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision by the Ministry for Economic and Property Transformation that was reached on November 26, 1998, effectively reduced the Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on a unilaterally imposed recalculation of the Company's original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, contrary to Yugoslavian law, without any notification to or representation by the Company. Since the change of control, representatives of the Company and ICN Yugoslavia's management have been denied access to the premises and any representation as to the management of ICN Yugoslavia. As a result of the Yugoslavian government's actions, the Company recorded a charge of $235,290,000 in the fourth quarter of 1998, reflecting the write-off of all of the Company's investment in ICN Yugoslavia and related assets. Prior to the seizure, ICN Yugoslavia's operations were adversely affected by the April 1998 devaluation of the dinar, which resulted in foreign exchange losses of $23,865,000 for the year. ICN Yugoslavia's domestic sales were adversely affected by the Company's previously-announced suspension of sales to the Yugoslavian government. In addition, ICN Yugoslavia's export sales for the second half of 1998 were adversely affected by the Russian economic crisis. In the second and third quarters of 1998, the Yugoslavian government defaulted on its obligations to the Company on $176,204,000 of accounts and notes receivable. As a result, the Company recorded a $173,440,000 charge against earnings at ICN Yugoslavia in the second quarter of 1998, including losses on accounts and notes receivable (including accrued interest) from the Yugoslavian government and government-sponsored entities of $158,961,000 and a $14,479,000 write-down of the value of certain related investments and assets. The Company has commenced litigation in the United States District Court of the District of Columbia against the government of Yugoslavia and related agencies to recover damages and obtain injunctive relief. In addition, the government of Yugoslavia, through a related agency, filed an arbitration proceeding against the Company before the International Chamber of Commerce for damages related to the Company's acquisition of majority control of ICN Yugoslavia. See Note 12 of Notes to Consolidated Financial Statements. The resolution of these matters may affect the ownership of certain compounds which were contributed to ICN Yugoslavia by the Company, pursuant to the agreement which led to the formation of ICN Yugoslavia. Several of these compounds are under development by the Company and its subsidiaries and there are no assurances that the Company will maintain ownership rights to these compounds. RUSSIA The Company's operations in Eastern Europe for 1998 were affected by the Russian economic crisis. In the third quarter of 1998, the Russian government and the Russian Central Bank were no longer able to support the ruble at its then-current exchange rate of approximately 6.3 rubles to $1. Subsequently, the ruble fell sharply and at December 31, 1998, the exchange rate was approximately 20.7 rubles to $1, a decline of more than 68% from the ruble's mid-August 1998 19 level. As a result of the decline in the ruble exchange rate, the Company recorded foreign exchange losses of $53,848,000 related to its Russian operations during 1998. Subsequent to December 31, 1998, the value of the ruble has continued to decline in relation to the dollar, exceeding 23 rubles to $1. The Company believes that the economic crisis in Russia has adversely affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company's customers, continue to experience severe liquidity shortages as rubles are in short supply, and Russian companies' hard-currency assets remain frozen in Russian banks. This liquidity crisis has diminished many Russian companies' ability to pay their debts and is likely to lead to a number of business failures in the region. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms. These factors have adversely affected, and may continue to adversely affect, sales and gross margins in the Company's Russian operations. As a result of the Russian economic crisis, the Company recorded a third quarter 1998 charge against earnings of $42,289,000, representing reserves for accounts receivable of $37,873,000, the write-off of certain investments of $2,011,000, and a reduction in the value of certain inventories of $2,405,000. RECENT ACQUISITIONS The Company continues to review opportunities for acquisitions throughout its regions of operations. In November 1998, the Company completed the acquisition of the worldwide rights (except India) to four products from Roche for $178,800,000 in cash and common stock. The products include Dalmadorm(R), a sleep disorder drug; Fluoro-Uracil(R), an oncology product; Librax(R), a treatment for gastrointestinal disorders; and Mogadon(R), a sleep disorder drug also used to treat epilepsy. In addition, the Company recently entered into an agreement with Senetek plc under which it obtained worldwide rights to market Kinetin(R) (marketed by the Company as Kinerase(R)), a skin cream to inhibit signs of aging, through physicians and pharmacies. The Company will market these products primarily through its existing North American and Western European operations. In Latin America, the Company recently acquired the rights to market three products--Breacol, Cynoplus and Cytomel--from SKB, which the Company believes complement its existing product line and increase its market presence in the region. In February 1998, the Company acquired from SKB the Asian, Australian and African rights to 39 prescription and over-the-counter pharmaceutical products including Actal, Breacol, Coracten, Eskornade, Fefol, Gyno-Pevaryl, Maxolan, Nyal, Pevaryl, Ulcerin and Vylcim. ROYALTY REVENUES Royalty revenues represent amounts earned under the Company's Exclusive License and Supply Agreement (the "License Agreement") with Schering-Plough. Under the License Agreement, Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha interferon. Schering-Plough received approval from the FDA to market Rebetron(TM) Combination Therapy, containing Rebetol(TM) (ribavirin) Capsules and Intron(R)A (interferon alfa-2b, recombinant) Injection, for the treatment of HCV in patients with compensated liver disease who have relapsed following alpha interferon therapy. In June 1998, Schering-Plough began selling Rebetron(TM) in the United States. Also in June 1998, Schering-Plough submitted a Marketing Authorization Application for Combination Therapy to the European Agency for the Evaluation of Medicinal Products for the treatment of relapsed HCV patients. Schering-Plough also filed a supplemental New Drug Application with the FDA for Combination Therapy for the treatment of HCV in patients with compensated liver disease previously untreated with alpha interferon therapy (referred to as treatment-naive patients) and in December 1998, this supplemental NDA was approved by the FDA. Royalty revenues for 1998 were $37,425,000, including amounts earned from United States commercial sales made by Schering-Plough subsequent to receipt of FDA approval, as well as royalties on compassionate use sales outside the United States, primarily in Western Europe. Royalty revenues for 1998 also include a one-time payment of $16,500,000 which the Company received from Schering-Plough in consideration for the sale to Schering-Plough of additional marketing rights in the European Union, in settlement of past royalties, and as reimbursement for expenses incurred by the Company in preparation for the launch of ribavirin capsules in the European Union. 20 RESULTS OF OPERATIONS Certain financial information for the Company's business segments is set forth below. This discussion should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this document. For additional financial information by business segment, see Note 13 of Notes to Consolidated Financial Statements for the year ended December 31, 1998. REVENUES -------------------------------------- 1998 1997 1996 ---- ---- ---- REVENUES: Pharmaceuticals North America $ 176,902 $ 117,355 $ 106,442 Western Europe 66,994 44,960 35,826 Latin America 85,351 63,668 47,359 Russia 163,691 134,688 66,788 Yugoslavia 141,740 225,530 267,166 Other Eastern Europe 93,228 73,050 21,461 Asia, Africa, Australia 48,649 22,036 4,711 ----------- ----------- ----------- Total Pharmaceuticals 776,555 681,287 549,753 Biomedicals 61,509 70,915 64,327 ----------- ----------- ----------- Total revenues $ 838,064 $ 752,202 $ 614,080 =========== =========== =========== Product sales $ 800,639 $ 752,202 $ 614,080 Royalty revenues 37,425 -- -- ----------- ----------- ----------- Total revenues $ 838,064 $ 752,202 $ 614,080 =========== =========== =========== Cost of product sales $ 353,600 $ 351,978 $ 291,807 Gross profit margin on product sales 56% 53% 52% YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997 REVENUES: The increase in revenues for the Company's Pharmaceuticals segments of $95,268,000 (14%) for 1998 reflects growth in product sales driven by the Company's successful acquisition program and increased royalty revenues, partially offset by lower sales in the Yugoslavia Pharmaceuticals segment. Despite the Russian economic crisis, revenues in the Russia Pharmaceuticals and Other Eastern Europe Pharmaceuticals segments increased $29,003,000 (22%) and $20,178,000 (28%), respectively, primarily due to additional revenues from the Company's 1998 and 1997 acquisitions in Russia, Poland and the Czech Republic. Revenues in the Yugoslavia Pharmaceuticals segment, which were adversely affected by the suspension of sales to the Yugoslavian government in April 1998, decreased by $83,790,000 (37%) compared to 1997. The acquisition of products from Roche and increased royalty revenues were the major contributors to revenue increases in North America and Western Europe. Latin America Pharmaceuticals revenues reflect continued growth in the Company's base business as well as sales of the products acquired from Roche and Cassara. The acquisition of products from SKB and Roche contributed to the revenue increase in the Asia, Africa, and Australia Pharmaceuticals segment. In the North America Pharmaceuticals segment, revenues were $176,902,000 for 1998, compared to $117,355,000 for 1997. The $59,547,000 (51%) increase in revenues for the year was primarily the result of the Company's acquisition of the rights to certain products from Roche in 1997 and 1998. In 1997, the Company acquired the worldwide rights (except India) to nine products--Alloferin(R), Ancotil(R), Efudex(R), Glutril(R), Librium(R), Limbitrol(R), Mestinon(R), Prostigmin(R) and Protamin(R)--and the worldwide rights to Levo-Dromoran(R) and Tensilon(R). Effective October 1, 1998, the Company obtained the worldwide rights to Dalmadorm(R), Fluoro-Uracil(R), Librax(R), and Mogadon(R). Sales of the acquired products generated additional revenues of $61,827,000 in the North America Pharmaceuticals segment for 1998. In addition, the 1998 amounts include $31,549,000 of royalty revenues from sales of ribavirin by Schering-Plough under the License Agreement. These amounts were partially offset by lower sales in several of the Company's existing product lines, including an $8,982,000 decline in Virazole(R) sales and lower sales of certain dermatological and hormone replacement products, principally due to increased competition from generic products. 21 In the Western Europe Pharmaceuticals segment, revenues for 1998 were $66,994,000 compared to $44,960,000 in 1997. The increase in revenues of $22,034,000 (49%) is primarily due to the Company's acquisition of the rights to certain products from Roche in the third and fourth quarters of 1997, which generated additional sales of $19,582,000 in 1998. In the Latin America Pharmaceuticals segment, revenues were $85,351,000 for 1998, compared to $63,668,000 for 1997. The increase of $21,683,000 (34%) is primarily due to price increases and higher unit volume, partially offset by unfavorable currency exchange fluctuations. The increase also reflects 1998 sales of $13,636,000 generated by products that the Company acquired from Cassara and Roche during 1997 and 1998. Excluding the effect of the acquired products, revenues for Latin America for 1998 increased 13% from their 1997 level. In the Russia Pharmaceuticals segment, revenues for 1998 were $163,691,000, compared with $134,688,000 for 1997, an increase of $29,003,000 (22%). The inclusion in 1998 of a full year's results for the Company's 1997 acquisitions of AO Tomsk and Marbiopharm (acquired in the fourth quarter of 1997) provided additional revenues of $44,804,000. The effect of these acquisitions was partially offset by lower volumes in the Company's existing Russian operations and the effect of unfavorable currency exchange fluctuations due to the economic crisis in Russia during 1998. The Yugoslavia Pharmaceuticals segment was adversely affected by the economic events in the region during 1998 and effective November 26, 1998 the Company's Yugoslavia operations were seized by the Yugoslavian government. Prior to the seizure, the Yugoslavia Pharmaceuticals segment generated revenues of $141,740,000 for 1998, compared to $225,530,000 in 1997. The decrease of $83,790,000 (37%) reflects lower domestic sales resulting from the effects of the April 1998 devaluation of the dinar and the continued suspension of sales to the Yugoslavian government. The decrease also reflects lower export sales, principally to customers in Russia, due to the economic crisis in Russia during the year. In the Other Eastern Europe Pharmaceuticals segment, revenues for 1998 were $93,228,000, compared with $73,050,000 for 1997, an increase of $20,178,000 (28%). The increase is the result of the inclusion in 1998 of a full year's operations of Polfa Rzeszow, S.A. in Poland and the 1998 acquisition of VUAB in the Czech Republic. The effect of these acquisitions was partially offset by a decline in revenues of $8,384,000 at Alkaloida in Hungary resulting from lower export sales due to the Russian economic crisis. In the Asia, Africa and Australia Pharmaceuticals segment, revenues for 1998 were $48,649,000 compared to $22,036,000 for 1997, an increase of $26,613,000 (121%). The increase is primarily due to the 1998 acquisition of the rights to 39 prescription and over-the-counter pharmaceutical products from SKB, which generated sales of $22,553,000 and sales of the products acquired from Roche, which generated additional sales of $10,241,000 in this segment in 1998. The effect of these acquisitions was partially offset by lower sales of certain hormone replacement products and lower revenues at Wuxi ICN Pharmaceuticals in China. In the Company's Biomedicals segment, revenues for 1998 were $61,509,000 compared to $70,915,000 for 1997, a decrease of $9,406,000 (13%). The decrease is primarily due to lower unit sales volume in certain diagnostics product lines. The decrease is also affected by the 1997 revenue amounts including dosimetry product shipments made to fulfill the higher than normal order backlog that existed at the beginning of 1997. GROSS PROFIT: Gross profit margin on product sales increased to 56% for 1998, compared to 53% for 1997. The improvement in gross profit margin is primarily due to increased sales of the products acquired from Roche and SKB in 1997 and 1998, which generally yield higher gross profit margins than were previously achieved by the Company's base business. Gross profit margins in the North America Pharmaceuticals segment increased to 82% from 81% in the prior year, reflecting the effect of the acquired products. The Company's gross profit margin for 1998 was also affected by gross margin declines in the Yugoslavia Pharmaceuticals segment. Subsequent to the April 1998 devaluation of the Yugoslavian dinar, gross profit margins at ICN Yugoslavia suffered as sales were translated at higher exchange rates, while no significant price increases were received. Gross profit margins at ICN Yugoslavia were further impacted as inventories manufactured prior to the devaluation were charged to cost of product sales at the higher historical exchange rate. The overall gross margins for the Company's Russia Pharmaceuticals segment were 42% for 1998, compared to 39% for 1997. Improvements in operating efficiency at most of the Company's Russian factories offset the adverse impact of the weakening of the ruble. While the Company is generally able to set its prices for Russian markets without government approval, the severe liquidity crisis in Russia and the reduced purchasing power of Russian consumers after the devaluation of the ruble 22 restricted price increases to a level that does not fully offset the impact of the devaluation. Gross profit margins at ICN Russia were further impacted as inventories manufactured prior to the devaluation were charged to cost of product sales at the higher historical exchange rate. In the Other Eastern Europe Pharmaceuticals segment, the gross profit margin improved to 48% from 36% in 1997 primarily due to the fourth quarter 1997 acquisition of Polfa Rzeszow in Poland, and improved operating efficiency at the Company's factory in Hungary. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses were $312,377,000 (37% of revenues) for 1998 compared to $256,234,000 (34% of revenues) for 1997. The Company's 1997 and 1998 acquisition of four pharmaceutical companies in Eastern Europe and the acquisition of product rights from Roche and SKB generated additional expenses of $48,791,000 in 1998, of which approximately $11,726,000 represents increased amortization of goodwill and purchased intangibles. In addition, the ongoing development of the sales, marketing, and administrative functions at the Company's Eastern European headquarters in Moscow, Russia resulted in additional expenses of $16,820,000 in 1998. Other increases in selling, general and administrative expenses reflect increased expenditures, primarily at the Company's United States corporate offices, to support the Company's recent acquisitions and increased sales volume in the base business. These changes were partially offset by lower expenses in the Yugoslavia Pharmaceuticals and Russia Pharmaceuticals segments, reflecting the effect of exchange rate changes during the year. RESEARCH AND DEVELOPMENT COSTS: Research and development costs were $20,835,000 for 1998, compared to $18,692,000 for 1997. The increase reflects the Company's continued investment in the development of products, primarily at its facilities in the United States. TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, were $80,501,000 for the year ended December 31, 1998. The Company incurred losses of $53,848,000 related to its Russian operations, principally due to the third quarter 1998 devaluation of the ruble. ICN Yugoslavia recorded foreign exchange losses of $23,865,000 in 1998, including the effect of the April 1998 devaluation of the dinar. Additionally, the Company recorded foreign currency transaction losses of $2,966,000 in Hungary, principally related to long-term debt denominated in currencies other than the forint, the Hungarian subsidiary's functional currency. INTEREST INCOME AND EXPENSE: For 1998, interest expense increased $15,220,000 compared to the same period in 1997, primarily due to interest expense on the Company's $200,000,000 8-3/4% Senior Notes issued in August 1998 and the inclusion in 1998 of a full year's interest on the Company's 9-1/4% Senior Notes issued in August 1997. The additional interest expense on the Senior Notes was partially offset by interest savings resulting from the conversion of certain long-term debt to common stock and capitalization of interest costs related to plant construction in Russia and Yugoslavia. Interest income for the year ended December 31, 1998 decreased to $13,057,000 in 1998 from $15,912,000 in 1997 due to lower interest income earned on notes receivable from the Yugoslavian government, which was partially offset by increased earnings from the investment of a significant portion of the proceeds of the Senior Notes. INCOME TAXES: The Company's effective income tax rate (benefit) was 1% for 1998 compared to (26%) for 1997. The Company operates in many regions where the tax rate is low or it benefits from a tax holiday. In 1998, the provision for income taxes reflects the effect of income in Russia, Yugoslavia and other jurisdictions taxed at rates lower than the U.S. Federal statutory rate of 35%. Offsetting these benefits was an increase in the valuation allowance associated with the write-off of the Company's Yugoslavian subsidiary. In addition, the Company received no tax benefit for the foreign currency translation losses included in the Company's 1998 net loss. In 1998, the provision for income taxes reflects a deferred tax benefit of $8,223,000 resulting from the recognition of certain deferred tax assets and the reduction of the related valuation allowance. During 1997 and 1998, the Company acquired certain products from Roche and SKB. Also in 1998, Schering-Plough's sales of Rebetron(R) Combination Therapy for HCV commenced following receipt of FDA approval to market the drug and the Company began to receive royalty revenues under the License Agreement. These new products and royalties are 23 expected to generate future taxable income that resulted in a deferred tax benefit in 1998 and 1997. Ultimate realization of the deferred tax assets is dependent upon the Company generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. The Company received the benefit of certain favorable tax laws that resulted in income taxes at a rate lower than the current 25% Yugoslavian statutory rate. Under Yugoslavian law, taxable earnings attributed to foreign investment are exempt from taxation for a five year period. Accordingly, 75% of ICN Yugoslavia's taxable income, the Company's ownership in ICN Yugoslavia, was exempt from taxation for the five years ending December 31, 1996. The Company also received tax credits in Yugoslavia for certain capital investments, including investments in short-term government bonds and plant and equipment, which can only be used in the year in which the investment is made. Effective January 1, 1997, additional changes in the Yugoslavian tax law resulted in benefits to the Company in the form of a reduction in taxes otherwise payable as a result of its foreign investment in ICN Yugoslavia. The effect of these items was to reduce the 1997 effective tax rate at ICN Yugoslavia to 2%. In 1998, the effective tax rate of ICN Yugoslavia was approximately 1%. In Russia, the Company continues to benefit from special tax relief that benefits pharmaceutical companies. Under this relief, approximately 75% of the income generated in Russia related to the manufacture and sale of prescription medicines is exempt from taxation. This reduced the effective rate to approximately 1% in 1998 and 1997. In Hungary, the Company benefited from a tax holiday which expired on December 31, 1998. The trend of low tax rates may not continue in the future. In 1997, the Company recognized substantially all of the benefit of its United States net operating loss carryforwards. In Hungary, the tax holiday expired on December 31, 1998 and the Company expects to incur taxes on the income of its Hungarian operations at a rate of approximately 18% in 1999. The continuing tax benefits in Russia are subject to potential changes in tax law that may be enacted in the future. Should these benefits be repealed, income generated in Russia would require the Company to provide taxes at then-current statutory rates, which could have a material impact on the consolidated financial position, results of operations and cash flows of the Company. YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996 REVENUES: Revenues in the North America Pharmaceuticals segment for 1997 were $117,355,000 compared to $106,442,000 for 1996. The increase of $10,913,000 (10%) is primarily the result of the Company's purchase of the rights to eleven products from Roche in the third and fourth quarters of 1997. The increase in revenues related to the acquired product rights was partially offset by a $10,254,000 decrease in unit sales of ribavirin for respiratory syncytial virus ("RSV"). Revenues in the Western Europe Pharmaceuticals segment for 1997 were $44,960,000 compared to $35,826,000 in 1996. The increase of $9,134,000 (26%) is primarily the result of 1997 sales of $12,939,000 generated by the products acquired from Roche during 1997 and increased ribavirin sales, partially offset by unfavorable currency exchange fluctuations. Revenues in the Latin America Pharmaceuticals segment for 1997 were $63,668,000 compared with $47,359,000 for 1996, an increase of $16,309,000 (34%). Such increases were primarily due to price increases and volume increases, partially offset by unfavorable currency exchange fluctuations. The increase also reflects 1997 sales of $4,296,000 generated by the products acquired from Roche during 1997. Revenues in the Russia Pharmaceuticals segment for 1997 were $134,688,000 compared with $66,788,000 for 1996, an increase of $67,900,000 (102%). The Company acquired AO Tomsk and Marbiopharm in the fourth quarter of 1997, which added revenues of $17,882,000. In addition, the Company's 1996 Russian acquisitions, Polypharm and Leksredstva, generated additional revenues in 1997 of $35,374,000, of which $15,923,222 was due to price and volume increases and the remainder was the result of the inclusion of a full year's sales in 1997. Revenues at ICN Oktyabr in Russia increased $14,644,000 in 1997 compared to 1996 due to price and volume increases. 24 Revenues in the Yugoslavia Pharmaceuticals segment for 1997 were $225,530,000, compared to $267,166,000 in 1996. During 1997, the Company limited its sales to the Yugoslavian government to those amounts which could be paid in cash or in notes receivable fixed in dollar amounts. Revenues at ICN Yugoslavia in 1996 and 1997 were also affected by limitations on governmental health care expenditures. Revenues in the Other Eastern Europe Pharmaceuticals segment for 1997 were $73,050,000, compared to $21,461,000 in 1996. The $51,589,000 increase reflects the inclusion in 1997 of a full year's operations of Alkaloida and the Company's acquisition of Polfa Rzeszow in the fourth quarter of 1997. Revenues in the Asia, Africa and Australia Pharmaceuticals segment for 1997 were $22,036,000 compared to $4,711,000 for 1996. The increase of $17,325,000 (368%) is primarily due to the 1997 acquisition of Wuxi ICN Pharmaceuticals, Inc. in China, which generated revenues of $9,050,000 for the year. The increase also reflects 1997 sales of $7,649,000 generated by the products acquired from Roche during 1997. Revenues in the Biomedicals segment for 1997 were $70,915,000 compared with $64,327,000 in 1996, an increase of $6,588,000 (10%). This increase was primarily due to the acquisition of the former Dosimetry Service Division of Siemens Medical Systems, Inc. in July 1996, partially offset by a $1,261,000 decrease resulting from the sale of the instrument business in March 1996. GROSS PROFIT: Gross profit as a percentage of sales was 53% for 1997 compared to 52% for 1996. ICN Yugoslavia achieved a gross profit margin of 48% in 1997 compared to 41% for 1996, when gross profit margins were adversely affected by the November 1995 devaluation of the Yugoslavian dinar. The devaluation suppressed gross margins in 1996 due to higher exchange rates and a lack of sufficient price increases, while the cost of product sales for inventory manufactured prior to the devaluation is expensed at a higher historical exchange rate. In the Russia Pharmaceuticals segment, the Company achieved a gross profit of 39% in 1997 compared to 45% in 1996, reflecting lower gross profit margins on the Company's 1997 Russian acquisitions and at ICN Oktyabr, where gross profit was affected by competitive pricing pressures. In the Other Eastern Europe Pharmaceuticals segment, gross profit margins improved to 36% in 1997 from 22% in 1996 due to improved operating efficiency in Hungary and the acquisition of Polfa Rzeszow in the fourth quarter of 1997. In the Company's North America Pharmaceuticals segment, gross profit margins were 81% for 1997 compared to 85% in 1996, primarily due to lower sales of ribavirin. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses were $256,234,000 (34% of revenues) in 1997 compared to $192,441,000 (31% of revenues) in 1996. The increase was primarily due to additional expenses of the operations acquired in 1997 and 1996 totaling $25,692,000, including additional amortization of purchased intangibles of $3,762,000 resulting from the acquisition of certain product rights from Roche and additional costs of approximately $5,892,000 resulting from the establishment of the Company's Eastern European headquarters in Moscow. The 1997 amount also includes a one-time $12,000,000 charge related to the settlement of the 1995 class action suit related to the Company's hepatitis C NDA. RESEARCH AND DEVELOPMENT COSTS: Research and development costs increased $2,973,000 in 1997 compared to 1996. The increase is primarily the result of the acquisition of personnel and modern research facilities in Hungary, and increased investment in research and development efforts at ICN Yugoslavia. TRANSLATION AND EXCHANGE LOSSES, NET: Foreign exchange losses, net, in 1997 were $12,790,000 compared to $2,282,000 in 1996. In 1997, ICN Yugoslavia had translation losses of $12,602,000, related to changes in local currency and its impact on their net monetary asset position. In addition, Hungary recorded transaction losses of approximately $2,421,000 on long-term obligations denominated in currencies other than its functional currency. Partially offsetting these losses were gains of $1,121,000 related to the Company's foreign-denominated debt. INTEREST INCOME AND EXPENSE: The increase in interest expense of $7,069,000 in 1997 compared to 1996 is primarily due to interest expense on the 9-1/4% Senior Notes, issued in August 1997 and interest expense on debt acquired in connection with the Company's 1996 and 1997 acquisitions. This additional 25 interest expense was partially offset by reduced interest expense as a result of the conversion of $114,980,000 principal amount of the Company's 8.5% Convertible Subordinated Notes due 1999 and all of the outstanding 5 5/8% Swiss Franc Exchangeable Certificates, as well as increased interest capitalization of interest costs related to plant construction at ICN Yugoslavia. During 1997, the Company capitalized interest of $5,419,000 compared to $3,770,000 in 1996. Interest income increased to $15,912,000 in 1997 from $3,001,000 in 1996 due to the investment of a significant portion of the proceeds of the 9 1/4% Senior Notes. INCOME TAXES: The Company's effective income tax rate (benefit) was (26%) for 1997 compared to (7%) for 1996. In 1997, the provision for income taxes reflects a deferred tax benefit of $35,376,000 resulting from the recognition of certain deferred tax assets and the reduction of the related valuation allowance. During 1997, the Company acquired certain products from Roche and, in early 1998, it acquired certain products from SKB. These new products are expected to generate future taxable income that provided a basis for reducing the Company's valuation allowance for its deferred tax assets in 1997. Ultimate realization of the deferred tax assets is dependent upon the Company generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. In 1997, the benefits from a tax holiday expired in Yugoslavia; however, changes in Yugoslavian tax law in 1997 created benefits that resulted in an overall 2% effective tax rate. In Russia, the Company continued to benefit from special tax relief that benefits pharmaceutical companies resulting in an effective rate of 1%. In Hungary, the Company benefited from a tax holiday expiring December 31, 1998. In 1996, 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 United States which was carried back to prior tax years and resulted in the recovery of taxes previously paid. LIQUIDITY AND CAPITAL RESOURCES During 1998, cash provided by operating activities totaled $9,624,000, compared to $9,315,000 in 1997. Operating cash flows reflect the Company's net loss of $352,074,000 combined with working capital increases (after the effect of business acquisitions and currency translation adjustments) totaling approximately $173,168,000, offset by net noncash charges (including the Eastern European charges of $451,019,000, along with depreciation, minority interest, and foreign exchange gains and losses) of $534,866,000. The write-off of the Company's Yugoslavian operations in the fourth quarter of 1998 reduced its working capital by $120,927,000, including cash of $22,101,000. The working capital increases principally relate to the Company's accounts and notes receivable and its inventories, especially at ICN Yugoslavia and ICN Russia. The Company's accounts and notes receivable decreased by $225,925,000 during 1998. Before the effects of currency devaluation and the Eastern European charges, the Company experienced a $160,345,000 increase in accounts and notes receivable as sales volume grew during the first half of the year. At the same time, cash collections were adversely affected by the continuing liquidity problems among many of the Company's key customers in Russia and Eastern Europe (including the Yugoslavian government). However, the April 1998 devaluation of the Yugoslavian dinar and the Yugoslavian government's default on $176,204,000 of accounts and notes receivable led to the write-off of all of these accounts. In the third quarter, the devaluation of the Russian ruble reduced the dollar value of the Company's Russian accounts receivable by over 70%; the resulting liquidity problems among the Company's customers in the region caused the Company to record additional reserves for anticipated losses on accounts receivable of $37,873,000, further reducing net accounts receivable. In the fourth quarter, the Company's receivables decreased by an additional $83,188,000 as a result of the write-off of ICN Yugoslavia. The Company's inventories decreased by $20,443,000 during 1998. The Company used cash of approximately $29,075,000 to increase inventory levels (principally in the Company's Russian and Eastern European operations) to support the sales growth experienced in the first half of 1998. The Company also built up stocks of the products acquired in 1998 from Roche and SKB. These increases were offset by the loss of inventories valued at $46,652,000 resulting from the write-off of ICN Yugoslavia, and by reserves for losses on certain inventories which the Company incurred as a result of the Russian economic crisis. The Company also 26 used cash to fund increases in prepaid expenses and other assets of approximately $22,290,000, primarily due to vendor prepayments made in Yugoslavia and Russia to reduce the Company's exposure to exchange rate fluctuations; this increase was offset by the write-off of ICN Yugoslavia. The cash used to support the increased levels of receivables, inventories, and prepaid expenses was partially offset by an increase in trade payables and accrued liabilities of $38,912,000 and other working capital changes. Cash used in investing activities was $295,046,000 for 1998 compared to $100,096,000 for 1997. In 1998, the Company used cash of $172,926,000 for acquisitions, including $148,242,000 paid for the acquisition of rights to certain products from Roche, SKB and Cassara. The Company also purchased VUAB and acquired a portion of the minority interests in five of the Company's subsidiaries. In addition, the Company made capital expenditures of $110,281,000, principally representing the continuation of its plant expansion efforts. Cash used in investing activities also reflects the effect of the Yugoslavian government's seizure of the Company's Yugoslavian operations, which resulted in the loss of ICN Yugoslavia's cash balances of $22,101,000. The increase in restricted cash of $15,009,000 was due to additional deposit requirements to collateralize the Company's potential obligation under certain letters of credit. These amounts were partially offset by proceeds from the sale of marketable securities of $22,958,000 and proceeds of $1,202,000 from the sale of assets. In 1997, net cash used in investing activities of $100,096,000 principally consisted of payments for acquisitions totaling $44,829,000 and capital expenditures of $100,397,000, which were partially offset by proceeds from the sale of marketable securities of $40,826,000 and other sources. Cash provided by financing activities totaled $186,019,000 during 1998, including proceeds of long-term borrowings totaling $225,082,000. In August 1998, the Company completed a private placement of $200,000,000 of its 8-3/4% Senior Notes due 2008 for net proceeds of approximately $190,821,000. Other cash flows from financing activities included proceeds of $6,783,000 from the exercise of employee stock options and a net decrease in short-term borrowings of $1,245,000. The Company also received proceeds of $4,299,000 related to shares of its common stock issued in the Company's acquisition of certain product rights from Roche in 1997. Under the purchase agreement, the Company was entitled to a portion of the proceeds realized by Roche from the sale of the shares in excess of a specified price. These amounts were partially offset by principal payments on long-term debt of $27,381,000, and cash dividends paid on common stock of $17,069,000. The dividend payments reflect higher levels of shares outstanding and a 12.5% increase in the per share dividend from the same period in 1997. Net cash provided by financing activities of $262,675,000 for 1997 principally came from long-term borrowings totaling $284,051,000, including the sale of $275,000,000 principal amount of the Company's 9-1/4% Senior Notes in August 1997, and proceeds from the exercise of stock options of $20,498,000. These amounts were partially offset by principal payments of $17,555,000 on long-term debt, a net $14,395,000 reduction in short term borrowings, and cash dividends of $11,631,000. In March 1998, the Company announced the redemption of its Bio Capital Holdings 5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates") and SFr 37,670,000 principal amount of the New Certificates was exchanged for an aggregate of approximately 802,000 shares of the Company's common stock. The remaining SFr 200,000 principal amount of the New Certificates was redeemed for cash. Upon the exchange of the New Certificates, marketable securities held in trust for payment of the New Certificates, having a market value of approximately $22,958,000, became available to the Company, and were sold. The Company's principal sources of liquidity are its existing cash and cash equivalents and cash provided by operations. Cash and cash equivalents at December 31, 1998 totaled $104,921,000, compared to $209,896,000 at December 31, 1997. Working capital at December 31, 1998 was $236,994,000, compared to $585,606,000 at December 31, 1997. The decrease in working capital is primarily due to the losses incurred in Eastern Europe during 1998 (including the write-off of the Company's investment in ICN Yugoslavia and losses on accounts and notes receivable) and the use of cash for the acquisition of product rights and businesses, partially offset by the proceeds of the Company's offering of its 8-3/4% Senior Notes due 2008. Certain of the Company's lines of credit and long term borrowings include covenants restricting payment of dividends, issuance of new indebtedness, and repurchase of the Company's common stock and 27 requiring the maintenance of certain financial ratios. In February 1999, the Company sold 1,141,498 shares of its common stock to Schering-Plough for cash proceeds of $27,000,000. The August 1998 devaluation of the Russian ruble decreased the Company's working capital by approximately $32,000,000. In addition, the current economic crisis in Russia continues to adversely affect the Company's operating cash flows in that region, as its Russian customers continue to experience severe liquidity shortages. The Company may need to invest additional working capital in Eastern Europe (including Russia) to sustain its operations, to provide increasing levels of working capital necessary to support renewed growth, and to fund the purchase or upgrading of facilities. The Company also has several preliminary acquisition prospects that may require significant funds in 1999. However, there can be no assurance that any such acquisitions will be consummated. In March 1999, the Company repurchased an additional 223,967 shares of its common stock for $5,550,000, completing the first part of its stock repurchase program. Under the term of the indentures related to the Company's Senior Notes, the Company is not currently permitted to repurchase additional shares of its common stock. 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 1999 and to fund anticipated acquisitions and capital expenditures, including the continued development of its network of retail pharmacies in Russia. The Company may also seek additional debt financing or issue additional equity securities to finance future acquisitions. The Company is currently self-insured with respect to product liability claims. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a material adverse effect on the Company's liquidity and financial performance. See Note 12 of Notes to Consolidated Financial Statements for the year ended December 31, 1998. FOREIGN OPERATIONS Approximately 77%, 82%, and 80% of the Company's revenues for the years ended December 31, 1998, 1997 and 1996 were generated from operations outside the United States. All of the Company's foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, fluctuations in the relative values of currencies, political instability and restrictive governmental actions. Changes in the relative values of currencies occur from time to time and may, in certain instances, materially affect the Company's results of operations. The effect of these risks remains difficult to predict. ICN Russia operates in a highly inflationary economy and uses the dollar as the functional currency rather than the Russian ruble. During the three year period ended December 31, 1998, the cumulative rate of inflation was approximately 180%. All foreign exchange gains and losses arising from foreign currency transactions and the effects of foreign exchange rate fluctuations are included in income. As of December 31, 1998, ICN Russia had a net monetary asset position of approximately $13,952,000 which would be subject to foreign exchange loss if a further decline in the value of the ruble in relation to the dollar were to occur. Due to the extremely large fluctuation in the ruble exchange rate, the ultimate amount of any future foreign exchange loss the Company may incur cannot presently be determined and such loss may have a material adverse effect on the Company's financial position and results of operations. The Company's management continues to work to reduce its net monetary exposure, including the tightening of credit policies and increased accounts receivable collection efforts including, in some cases, discounts for early payment from customers. However, there can be no assurance that such efforts will be successful. The Company does not currently provide any hedges on its foreign currency exposure and, in certain countries in which the Company operates, no effective hedging programs are available. The Company and its subsidiaries are also subject to foreign currency risk on its foreign-denominated debt of approximately $43,030,000 at December 31, 1998, which is primarily denominated in Swiss francs and German marks and, at Hungary and Poland, in U.S. dollars. See Note 9 of Notes to Consolidated Financial Statements for the year ended December 31, 1998 for further discussion. 28 INFLATION AND CHANGING PRICES The effects of inflation are experienced by the Company through increases in the costs of labor, services and raw materials. The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. While the Company attempts to raise selling prices in anticipation of inflation, the Company has been affected by the lag in 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. THE YEAR 2000 ISSUE Many computer systems and equipment and instruments with embedded microprocessors were designed to recognize only the last two digits of a calendar year. With the arrival of the Year 2000, these systems and microprocessors may encounter operating problems due to their inability to distinguish years after 1999 from years preceding 1999. Systems that are not Year 2000 compliant" could malfunction, potentially resulting in an adverse impact on the Company's business. The Company is pursuing an action plan to be Year 2000 compliant in all locations by the third quarter of 1999. The Company does not have significant reliance on custom, internally generated software; the Company principally uses third party software that is, in most cases, already Year 2000 compliant. The Company has completed an assessment of its worldwide information systems and has determined that it will be required to perform some modification or replacement of software so that all systems will properly utilize dates beyond December 31, 1999. The Company has spent approximately $6,800,000 to upgrade its information systems to be Year 2000 compliant, and currently considers its information systems to be over 90% Year 2000 compliant. The Company recently converted its Russian operations to Year 2000-compliant software. The remaining projects that must be completed for full Year 2000 compliance are software upgrades at the Company's plants in Hungary and Puerto Rico. The purchase of replacement software is necessary to maintain the existing "Good Manufacturing Practices" status of these plants. The Company has acquired appropriate replacement software for these facilities and installation began early in 1999. The estimated additional cost to complete the conversion to full Year 2000 compliance is estimated to be approximately $1,500,000 which will be spent primarily in 1999 and funded with cash from operations. There can be no assurance that the conversion will be completed within internal or external deadlines. The Company's operations may also be impacted in the event that computer disruption is encountered by third parties with whom the Company conducts significant business. These third parties include suppliers and service providers on whom the Company relies, and the wholesalers, distributors, health care providers, and others from whom the Company derives its revenues. The Company has identified the most critical of these third parties and the Company intends to communicate with these third parties concerning their state of readiness. However, the Company can provide no assurance that these third parties will not experience business disruption. If a number of these third parties experience business disruption due to a Year 2000 computer problem, the Company's results of operations and cash flows could be materially adversely affected. The Company is evaluating the need for contingency plans to address potential business disruptions at these third parties. Contingency planning may include increasing inventory levels, establishing secondary sources of supply and manufacturing, modifying production schedules, and maintaining backup lines of communications with our customers. Should the Company determine that important third parties may experience business interruption, appropriate contingency plans will be developed. However, it is unlikely that any contingency plan can fully mitigate the impact of significant business disruptions among these third parties. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union introduced a new currency called the "Euro". The conversion rates between the Euro and the participating nations' existing legacy currencies were fixed irrevocably as of January 1, 1999. Prior to full implementation of the new 29 currency on January 1, 2002, there will be a transition period during which parties may, at their discretion, use either the legacy currencies or the Euro for financial transactions. The Company expects its affected subsidiaries to continue to operate primarily in their respective legacy currencies for at least two years. The majority of the Company's affected subsidiaries currently can accommodate transactions for customers or suppliers operating in either the legacy currency or the Euro. Action plans are currently being implemented which are expected to result in full compliance with all laws and regulations relating to the Euro conversion. Such plans include the adaptation of information technology and other systems to accommodate Euro-denominated transactions as well as the requirements of the transition period. The Company is also addressing the impact of the Euro on its currency exchange-rate risk, taxation, contracts, competition and pricing. While it is not possible to accurately predict the impact the Euro will have on the Company's business or on the economy in general, management currently does not anticipate that the Euro conversion will have a material adverse impact on the Company's market risk with respect to foreign exchange, its results of operations, or its financial condition. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and becomes effective for the Company for the first quarter of 2000. The Company does not currently engage in any program of hedging and consequently the Company does not expect the adoption of SFAS No. 133 to have a material effect on the Company's consolidated financial position, cash flows, or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's business and financial results are affected by fluctuations in world financial markets. The Company evaluates its exposure to such risks on an ongoing basis, and reviews its risk management policy to manage these risks to an acceptable level, based on management's judgment of the appropriate trade-off between risk, opportunity and costs. The Company does not hold any significant amount of market risk sensitive instruments whose value is subject to market price and currency risk. INTEREST RATE RISK: The Company does not hold financial instruments for trading or speculative purposes. The financial assets of the Company are not subject to significant interest rate risk due to their short duration. The financial liabilities of the Company that are subject to interest rate risk are its fixed-rate long-term debt (principally its 8-3/4% Senior Notes and its 9-1/4% Senior Notes). The Company does not use any derivatives or similar instruments to manage its interest rate risk. A 90 basis-point increase in interest rates (approximately 10% of the Company's weighted average interest rate on fixed-rate debt) affecting the Company's financial instruments would have an immaterial effect on the Company's 1998 and 1997 pretax earnings. However, such a change would reduce the fair value of the Company's fixed-rate debt instruments (principally its 8-3/4% and 9-1/4% Senior Notes) by approximately $14,900,000 as of December 31, 1998. 30 THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995. This Annual Report on Form 10-K contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Annual Report on Form 10-K and include statements regarding, among other matters, the Company's growth opportunities, the Company's acquisition strategy, regulatory matters pertaining to governmental approval of the marketing or manufacturing of certain of the Company's products and other factors affecting the Company's financial condition or results of operations. Stockholders are cautioned that any such forward looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from the future results, performance or achievements, expressed or implied in such forward looking statements. Such factors are discussed in this Annual Report on Form 10-K and also include, without limitation, the Company's dependence on foreign operations (which are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange control, limitations on foreign participation in local enterprises, health-care regulations and other restrictive governmental conditions); the risk of operations in Eastern Europe, Russia, Latin America, and China in light of the unstable economic, political and regulatory conditions in such regions; the risk of potential claims against certain of the Company's research compounds; the Company's ability to successfully develop and commercialize future products; the limited protection afforded by the patents relating to Virazole(R), and possibly on future drugs, techniques, processes or products the Company may develop or acquire; the potential impact of the Year 2000 issue; the potential impact of the Euro currency; the Company's ability to continue its expansion plan and to integrate successfully any acquired companies; the results of lawsuits or the outcome of investigations pending against the Company; the Company's potential product liability exposure and lack of any insurance coverage thereof; government regulation of the pharmaceutical industry (including review and approval for new pharmaceutical products by the FDA in the United States and comparable agencies in other countries) and competition. 31 QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly financial data for the years ended December 31, 1998 and 1997 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH 1998(1) QUARTER QUARTER QUARTER QUARTER - ------- ------- ------- ------- -------- Revenues $240,796 $232,943 $162,991 $201,334 Gross profit on product sales 131,827 114,247 85,388 115,577 Eastern European charges -- 165,646 39,884 235,290 Net income (loss) 33,948 (97,498) (65,223) (223,301) Basic earnings (loss) per share $ .47 $ (1.34) $ (.89) $ (2.92) Diluted earnings (loss) per share $ .44 $ (1.34) $ (.89) $ (2.92) FIRST SECOND THIRD FOURTH 1997(1) QUARTER QUARTER QUARTER QUARTER - ------- -------- -------- -------- -------- Revenues $158,968 $160,229 $177,397 $255,608 Gross profit on product sales 84,164 84,272 100,088 131,700 Net income 22,312 21,268 34,557 35,787 Basic earnings per share $ .37 $ .38 $ .61 $ .55 Diluted earnings per share $ .32 $ .34 $ .50 $ .49 (1) The increased revenue trend is substantially due to the Company's expansion program in 1998 and 1997. In addition, revenues for 1998 were affected by the charges described above in "Recent Developments."
32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1998 Report of independent accountants ........................................ 33 Financial statements: Consolidated balance sheets at December 31, 1998 and 1997........ 34 For the years ended December 31, 1998, 1997 and 1996: Consolidated statements of income................................ 35 Consolidated statements of stockholders' equity.................. 36 Consolidated statements of cash flows............................ 37 Notes to consolidated financial statements....................... 38 Financial statement schedule for the years ended December 31, 1998, 1997 and 1996: II. Valuation and qualifying accounts............................ 60 The other schedules have not been submitted because they are not applicable. 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ICN Pharmaceuticals, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of ICN Pharmaceuticals, Inc. (a Delaware corporation) and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 2 and 14, effective November 26, 1998, the Company changed the method of accounting for ICN Yugoslavia, a previously consolidated subsidiary, and reduced the carrying value of the investment to its fair value. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Newport Beach, California March 4, 1999 34 ICN PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (in thousands, except per share data)
1998 1997 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 104,921 $ 209,896 Restricted cash 15,558 549 Accounts receivable, net 180,001 260,495 Notes receivable, net -- 145,431 Inventories, net 126,545 146,988 Prepaid expenses and other current assets 13,723 23,392 ----------- ----------- Total current assets 440,748 786,751 Property, plant and equipment, net 327,756 360,713 Deferred income taxes, net 77,933 69,710 Other assets 45,706 47,978 Goodwill and intangibles, net 464,253 226,593 ----------- ----------- $ 1,356,396 $ 1,491,745 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade payables $ 92,287 $ 96,437 Accrued liabilities 60,644 67,883 Notes payable 17,584 13,759 Current portion of long-term debt 28,097 19,359 Income taxes payable 5,142 3,707 ----------- ----------- Total current liabilities 203,754 201,145 Long-term debt, less current portion 510,808 315,088 Deferred license and royalty income 6,061 12,449 Other liabilities 22,160 24,658 Minority interest 27,449 142,077 Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value; 10,000 shares authorized; -0- and 2 shares Series B and 1 and -0- shares Series D issued and outstanding at December 31, 1998 and 1997, respectively ($22,988 liquidation preference at December 31, 1998) 1 1 Common stock, $.01 par value; 200,000 shares authorized; 76,411 (1998)and 71,432 (1997) shares issued and outstanding (after deducting shares in treasury of 200 and 482, respectively) 764 714 Additional capital 928,956 766,868 Retained earnings (deficit) (295,211) 70,129 Accumulated other comprehensive income (48,346) (41,384) ----------- ----------- Total stockholders' equity 586,164 796,328 ----------- ----------- $ 1,356,396 $ 1,491,745 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 35 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands, except per share data)
1998 1997 1996 ---- ---- ---- Revenues: Product sales $ 800,639 $ 752,202 $ 614,080 Royalties 37,425 -- -- ------------ ----------- ----------- Total revenues 838,064 752,202 614,080 Costs and expenses: Cost of product sales 353,600 351,978 291,807 Selling, general and administrative expenses 312,377 256,234 192,441 Research and development costs 20,835 18,692 15,719 Eastern European charges 440,820 -- -- ------------ ------------ ----------- Total expenses 1,127,632 626,904 499,967 ------------ ------------ ----------- Income (loss) from operations (289,568) 125,298 114,113 Translation and exchange losses, net 80,501 12,790 2,282 Interest income (13,057) (15,912) (3,001) Interest expense 38,069 22,849 15,780 ------------ ------------ ----------- Income (loss) before income taxes and minority interest (395,081) 105,571 99,052 Provision (benefit) for income taxes 1,983 (27,736) (6,815) Minority interest (44,990) 19,383 18,939 ------------ ------------ ----------- Net income (loss) $ (352,074) $ 113,924 $ 86,928 ============ ============ =========== Basic earnings (loss) per share $ (4.78) $ 1.93 $ 1.75 ============ ============ =========== Shares used in per share computation 73,637 55,965 48,341 ============ ============ =========== Diluted earnings (loss) per share $ (4.78) $ 1.69 $ 1.51 ============ ============ =========== Shares used in per share computation 73,637 69,650 60,197 ============ ============ ===========
The accompanying notes are an integral part of these consolidated statements. 36 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands, except per share data)
ACCUMULATED RETAINED OTHER PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL ------ ------ ------ ------ ---------- ---------- --------- ------- BALANCE AT DECEMBER 31, 1995 -- $ -- 45,630 $ 456 $ 289,954 $ (105,844) $ (22,394) $ 162,172 Comprehensive income: Net income -- -- -- -- -- 86,928 -- 86,928 Foreign currency translation adjustments -- -- -- -- -- -- (4,623) (4,623) Net unrealized gain on marketable securities -- -- -- -- -- -- (230) (230) --------- Total comprehensive income 82,075 Exercise of stock options -- -- 1,302 13 10,154 -- -- 10,167 Issuance of preferred stock 50 1 -- -- 47,391 -- -- 47,392 Issuance of common stock in connection with acquisitions -- -- 536 5 6,840 -- -- 6,845 Issuance of common stock -- -- 1,068 11 12,087 -- -- 12,098 Tax benefit of stock options exercised -- -- -- -- 1,600 -- -- 1,600 Cash dividends -- -- -- -- -- (6,999) -- (6,999) ------ ------- -------- ------ -------- ----------- --------- --------- BALANCE AT DECEMBER 31, 1996 50 1 48,536 485 368,026 (25,915) (27,247) 315,350 Comprehensive income: Net income -- -- -- -- -- 113,924 -- 113,924 Foreign currency translation adjustments -- -- -- -- -- -- (14,137) (14,137) --------- Total comprehensive income 99,787 Exercise of stock options -- -- 1,863 19 20,479 -- -- 20,498 Expiration of put option -- -- 1,598 16 24,614 (533) -- 24,097 Issuance of common stock: In connection with acquisitions 2 -- 2,454 24 180,685 -- -- 180,709 Conversion of debt -- -- 10,052 101 161,258 -- -- 161,359 In settlement of litigation -- -- 812 8 9,992 -- -- 10,000 Conversion of preferred shares (50) -- 5,797 58 (58) -- -- -- Cash dividends -- -- -- -- -- (15,472) -- (15,472) Stock dividends on preferred stock -- -- 320 3 1,872 (1,875) -- -- ------ ------- -------- ------ ---------- ---------- --------- --------- BALANCE AT DECEMBER 31, 1997 2 1 71,432 714 766,868 70,129 (41,384) 796,328 Comprehensive income: Net loss -- -- -- -- -- (352,074) -- (352,074) Foreign currency translation adjustments -- -- -- -- -- -- (6,962) (6,962) --------- Total comprehensive income (359,036) Exercise of stock options -- -- 634 6 6,777 -- -- 6,783 Stock compensation -- -- 319 3 5,304 -- -- 5,307 Issuance of preferred stock 1 -- -- -- 23,000 -- -- 23,000 Issuance of common stock: In connection with acquisitions -- -- 2,884 29 93,530 -- -- 93,559 Conversion of debt -- -- 802 8 25,329 -- -- 25,337 Issuance of treasury stock -- -- 482 5 12,528 -- -- 12,533 Purchase of treasury stock -- -- (200) (2) (4,448) -- -- (4,450) Conversion of preferred shares (2) -- 57 1 (1) -- -- -- Cash dividends -- -- -- -- -- (13,197) -- (13,197) Stock dividends on preferred stock -- -- 1 -- 69 (69) -- -- ------ ------- -------- -------- ---------- ---------- --------- --------- BALANCE AT DECEMBER 31, 1998 1 $ 1 76,411 $ 764 $ 928,956 $ (295,211) $ (48,346) $ 586,164 ====== ======= ======== ======== ========== ========== ========= =========
The accompanying notes are an integral part of these consolidated statements. 37 ICN PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands)
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (352,074) $ 113,924 $ 86,928 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 51,096 28,753 17,936 Eastern European charges 451,019 -- -- Provision for losses on accounts receivable 7,559 4,021 4,345 Provision for inventory obsolescence 602 3,342 106 Translation and exchange losses, net 80,501 12,790 2,282 Deferred income (6,112) (5,072) (1,644) Loss (gain) on sale of assets 100 (1,184) 982 Deferred income taxes (8,223) (35,376) 358 Other non-cash gains 3,314 (2,047) (387) Minority interest (44,990) 19,383 18,939 Change in assets and liabilities, net of effects of acquisitions: Accounts and notes receivable (160,345) (154,433) (181,726) Inventories (29,075) (6,227) 43,306 Prepaid expenses and other assets (22,290) 3,936 (11,618) Trade payables and accrued liabilities 38,912 30,665 13,683 Income taxes payable 2,555 1,679 (7,885) Other liabilities (2,925) (4,839) (11,153) ----------- ---------- --------- Net cash provided by (used in) operating activities 9,624 9,315 (25,548) ----------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities 22,958 40,826 27,663 Proceeds from sale of assets 1,202 3,051 6,954 (Increase) decrease in restricted cash (15,009) 3 -- Cash acquired in connection with acquisitions 1,111 1,250 859 Capital expenditures (110,281) (100,397) (26,216) Acquisition of license rights, product lines and businesses (172,926) (44,829) (51,222) Loss of Yugoslavian operations (22,101) -- -- ----------- ---------- --------- Net cash used in investing activities (295,046) (100,096) (41,962) ----------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 225,082 284,051 20,975 Proceeds from exercise of stock options 6,783 20,498 10,167 Proceeds from issuance of preferred stock -- -- 47,392 Proceeds from issuance of common stock 4,299 -- 32,842 Proceeds from issuance of stock put right -- 1,707 3,195 Net decrease in notes payable (1,245) (14,395) (10,908) Payments on long-term debt (27,381) (17,555) (13,984) Dividends paid (17,069) (11,631) (6,999) Purchase of treasury stock (4,450) -- -- ----------- ---------- --------- Net cash provided by financing activities 186,019 262,675 82,680 ----------- ---------- --------- Effect of exchange rate changes on cash and cash equivalents (5,572) (1,364) 102 ----------- ---------- --------- Net increase (decrease) in cash and cash equivalents (104,975) 170,530 15,272 Cash and cash equivalents at beginning of year 209,896 39,366 24,094 ----------- ---------- --------- Cash and cash equivalents at end of year $ 104,921 $ 209,896 $ 39,366 =========== ========== =========
The accompanying notes are an integral part of these consolidated statements. 38 ICN PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND BACKGROUND ICN Pharmaceuticals, Inc. and Subsidiaries ("the Company") was formed in November 1994, as a result of the merger of ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., Viratek, Inc. and ICN Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor Companies"), in a transaction accounted for using the purchase method of accounting (the "Merger"). The Company is a multinational pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research, and diagnostic products and provides radiation monitoring services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Investments in 20% through 50% owned affiliated companies are included under the equity method where the Company exercises significant influence over operating and financial affairs. Investments in less than 20% owned companies are recorded at the lower of cost or realizable value. The accompanying consolidated financial statements reflect the elimination of all significant intercompany account balances and transactions. Effective November 26, 1998, the Company's equity ownership for ICN Yugoslavia was effectively reduced from 75% to 35% based upon a decision by the Yugoslavian Ministry of Economic and Property Transformation. Additionally, representatives of the Company and ICN Yugoslavia's management have been denied access to the premises and any representation as to the management of ICN Yugoslavia. As a result, the Company is no longer able to influence the operating and financial affairs of ICN Yugoslavia. Accordingly, the Company has deconsolidated the financial statements of ICN Yugoslavia as of November 26, 1998, and reduced the carrying value of its investment to the fair value, currently estimated to be zero. The Company will account for its ongoing investment in ICN Yugoslavia under the cost method. See Note 14. CASH AND CASH EQUIVALENTS: Cash equivalents include repurchase agreements, certificates of deposit, money market funds, and municipal debt securities which have maturities of three months or less. For purposes of the consolidated statements of cash flows, the Company considers highly-liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The carrying amount of these assets approximates fair value due to the short-term maturity of these instruments. At December 31, 1998 and 1997, cash equivalents totaled $77,241,000 and $194,026,000, respectively. MARKETABLE SECURITIES: The Company classifies its investments as available for sale. Changes in market values are reflected as unrealized gains and losses, calculated on the specific identification method, in stockholders' equity. In 1998, upon the exchange and redemption of the Company's Bio Capital Holdings 5-1/2% Swiss Franc Exchangeable Certificates (the "New Certificates"), marketable securities previously held in trust for the payment of the New Certificates became available to the Company and were sold, resulting in a gain of $1,993,000. In addition, during 1996, the Company sold certain corporate bond securities, 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: Property, plant and equipment is stated at cost. 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. 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. 39 The Company capitalizes interest on borrowed funds during construction periods as part of the cost of the related asset. 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. Intangible assets also include acquired product rights. Goodwill and intangibles amortization periods range from 5 to 20 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 any impairment of its goodwill and intangibles has occurred. As of December 31, 1998 and 1997, goodwill and intangibles included the following: 1998 1997 ---- ---- (in thousands) Goodwill $ 69,741 $ 57,215 Acquired product rights 423,813 183,209 Other intangible assets 11,811 7,750 ------------ ----------- 505,365 248,174 Accumulated amortization (41,112) (21,581) ------------ ----------- $ 464,253 $ 226,593 ============ =========== 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, 1998 and 1997 was approximately 8% and 18%, respectively. REVENUE RECOGNITION: Revenues and related cost of product sales are recorded at the time of shipment or as services are performed, provided that collection of the revenue is reasonably assured. FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's foreign operations, except those in highly inflationary economies, are translated at 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 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. Recorded losses from foreign exchange translation and transactions were $80,501,000, $12,790,000, and $2,282,000 for 1998, 1997 and 1996, respectively. INCOME TAXES: Income taxes are calculated in accordance with 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 tax laws or rates. 40 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, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which established standards for the reporting and display of comprehensive income. The Company has adopted SFAS No. 130 effective January 1, 1998. Comprehensive income includes such items as foreign currency translation adjustments and unrealized holding gains and losses on available-for-sale securities. These amounts are presented as a component of stockholders' equity, consistent with the Company's previous practice. SFAS No. 130 does not affect current principles of measurement of revenues and expenses and accordingly the adoption of SFAS No. 130 had no effect on the Company's results of operations or financial position. The balance of accumulated other comprehensive income at December 31, 1998 and 1997 consists of accumulated foreign currency translation adjustments. None of the components of other comprehensive income have been recorded net of any tax provision or benefit as the Company does not expect to realize any significant tax benefit or expense from these items. PER SHARE INFORMATION: In 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities including options, warrants, and convertible debt or preferred stock, and income available to common stockholders is adjusted to reflect any changes in income or loss that would result from the issuance of the dilutive common shares. The Company adopted SFAS No. 128 in 1997, and earnings per share amounts for all periods prior to 1997 were restated to comply with its requirements. The Company's Board of Directors declared a quarterly cash dividend or distribution of $0.06 per share for each fiscal quarter of 1998 (including the fourth quarter 1998 distribution declared in January 1999). During 1997, the Company's Board of Directors declared quarterly cash distributions and dividends for each quarter, totaling $0.21 per share. During 1996, the Company's Board of Directors declared quarterly cash distributions for the first, second and third quarters totaling $0.15 per share. For the fourth quarter of 1996, the Company's Board of Directors declared a cash distribution of $0.05 per share in January 1997. STOCK-BASED COMPENSATION: The Company has adopted the disclosure only provisions of SFAS No. 123 for stock options issued to employees. Compensation cost for stock-based compensation has been measured using the intrinsic value method provided by Accounting Principles Board No. 25. RECLASSIFICATIONS: Certain prior year items have been reclassified to conform with the current year presentation, with no effect on previously reported net income or stockholders' equity. 3. ACQUISITIONS ACQUIRED PRODUCT RIGHTS - In February 1998, the Company acquired from SmithKline Beecham plc ("SKB") the Asian, Australian and African rights to 39 prescription and over-the-counter pharmaceutical products. The Company received the product rights in exchange for $45,500,000 payable in a combination of $22,500,000 in cash and 821 shares of the Company's Series D Convertible Preferred Stock (see Note 10). Effective October 1, 1998, the Company acquired from SKB the Latin American rights to three ethical pharmaceutical products for $3,500,000 in cash. In November 1998, the Company completed the acquisition of the worldwide rights (except India) to four products from F. Hoffmann-La Roche Ltd. ("Roche"). Aggregate consideration for the products was $178,800,000, paid in a combination 41 of $89,400,00 cash and 2,883,871 shares of the Company's common stock, valued at $89,400,000 (based on the initial guarantee price of $31.00 per share). See Note 11. In March 1998, the Company acquired the rights to a portfolio of 32 dermatology products from Laboratorio Pablo Cassara ("Cassara") for $22,450,000 in cash. The Company will market the products through its subsidiary, ICN Argentina. The acquisitions of the product rights from SKB, Roche, and Cassara will be accounted for using the purchase method of accounting, with the purchase price being allocated to acquired product rights included in goodwill and intangibles and amortized on a straight-line basis over 18 years. The amortization period was determined based upon analysis and valuations which considered the relative profitability and growth prospects of the acquired products rights, the distribution networks and the recognizable trade names. VYZKUMNY USTAV ANTIBIOTIC A BIOTRANSFORMACII - In July 1998, the Company acquired Vyzkumny Ustav Antibiotic a Biotransformacii ("VUAB"), a pharmaceutical manufacturing and research facility located in a suburb of Prague, Czech Republic, for $17,942,000 in cash. VUAB produces and sells pharmaceutical products in finished forms, principally injectable antibiotics and infusion solutions, and pharmaceutical raw materials. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company. Goodwill of $1,328,000 was recorded in connection with the acquisition and is being amortized over a 20 year estimated useful life. OTHER ACQUISITIONS - During 1998, the Company acquired a 57% interest in Pharmsnabsbyt, a distributor of pharmaceutical products in St. Petersburg, Russia. Pharmsnabsbyt distributes a variety of pharmaceutical products within Russia, including many of those produced by the Company's Russian factories. The Company also acquired a portion of the minority interests in five of its existing Eastern European operations for an aggregate of $6,489,000 in cash. The book value of the minority interests acquired exceeded the consideration paid by an aggregate of $8,983,000, resulting in a reduction of the carrying value of the related goodwill or acquired property and equipment. The following table presents unaudited consolidated pro forma financial information for the twelve months ended December 31, 1998 and 1997, as though the acquisitions made in 1998 had occurred on January 1, 1997 (in thousands, except per share data): Year Ended December 31, ----------------------- 1998 1997 --------- --------- (unaudited) Revenues $ 901,980 $ 892,296 Income (loss) before provision for income taxes and minority interest (375,084) 143,552 Net income (loss) (339,720) 137,685 Basic earnings (loss) per share $ (4.48) $ 2.24 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, 1997. 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. 42 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 intangibles and is being amortized on a straight-line basis over 10 to 20 years based upon the nature of the business or products acquired. The Company has allocated the purchase price first to the identifiable assets acquired (based upon estimated fair values) and the liabilities assumed (at estimated present values). A summary of the purchase price allocation of the 1998 acquisitions is as follows (in thousands): Current assets (excluding cash of $1,111) $ 2,476 Property, plant and equipment 21,163 Other non-current assets 8,972 Acquired product rights 244,106 Goodwill 13,844 Current liabilities (11,374) Long-term liabilities (1,461) ------------ Total purchase price $ 277,726 ============ 4. RELATED PARTY TRANSACTIONS 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 consolidated 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 options to acquire 150,000 shares with an exercise price of $15.17 and the rights to a $4,000,000 life insurance policy provided by the Company. In the event of any default on the debt to the bank, the Company has recourse that is limited to the collateral described above. Both the transaction and the sufficiency of the collateral for the guarantee were approved by the Board of Directors. In 1997, the Company made a short-term advance of $327,000 to the Chairman and CEO, which was repaid, with interest, in 1997. 5. CONCENTRATIONS OF CREDIT RISK The Company is exposed to concentrations of credit risk related to its 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. At December 31, 1998 and 1997, the Company's cash and cash equivalents and restricted cash include $109,000,000 and $178,536,000, respectively, held in time deposits, money market funds, and municipal debt securities through seven major financial institutions. 6. 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): 1998 1997 1996 ---- ---- ---- Domestic $ (252,597) $ (21,886) $ 5,039 Foreign (142,484) 127,457 94,013 ---------- ---------- --------- $ (395,081) $ 105,571 $ 99,052 ========== ========== ========= 43 The income tax (benefit) provision for each of the years ended December 31, consists of the following (in thousands): 1998 1997 1996 ---- ---- ---- Current Federal $ -- $ -- $ (9,469) State 640 200 68 Foreign 9,566 7,440 2,228 ------------ ------------ ------------ 10,206 7,640 (7,173) Deferred Federal (11,409) (31,375) -- Foreign 3,186 (4,001) 358 ------------ ------------ ------------ (8,223) (35,376) 358 ------------ ------------ ------------ $ 1,983 $ (27,736) $ (6,815) ============ ============ ============ The current federal tax provision has not been reduced for the tax benefit associated with the exercise of employee stock options of $-0-, $-0-, and $1,600,000 in 1998, 1997 and 1996, respectively, which were credited directly to additional capital. The primary components of the Company's net deferred tax asset at December 31, 1998 and 1997 are as follows (in thousands): 1998 1997 ---- ---- Deferred tax assets: NOL carryforward $ 100,840 $ 78,356 Inventory and other reserves 14,514 6,605 Tax credit carryover 947 1,226 Capital loss carryforward 18,988 -- Deferred income 1,989 4,415 Long-term debt -- 4,984 Other 3,685 781 Valuation allowance (55,938) (23,077) ----------- ----------- Total deferred tax asset 85,025 73,290 ----------- ----------- Deferred tax liabilities: Property, plant and equipment (168) (196) Inventory (1,770) (1,770) Other (5,154) (1,614) ----------- ----------- Total deferred tax liability (7,092) (3,580) ----------- ----------- Net deferred tax asset $ 77,933 $ 69,710 =========== =========== 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 1998 and 1997, the provision for income taxes reflects a deferred tax benefit of $8,223,000 and $35,376,000, respectively, resulting from the recognition of certain deferred tax assets and the reduction of the related valuation allowance. During 1998 and 1997, the Company acquired certain product rights from Roche and SKB and in 1998, its partner Schering-Plough received FDA approval to market Rebetron(TM), for which the Company will receive royalties. These new products and royalties are expected to generate future taxable income that resulted in a deferred tax benefit in 1998 and 1997. 44 In 1998, the valuation allowance primarily relates to the deduction for the write-off of the Yugoslavian subsidiary, a $12,000,000 benefit of stock options included in the NOL carryforward, the tax credit carryforward, and certain foreign NOLs. Upon realization, the $12,000,000 benefit of stock options included in the NOL carryforward will be added to additional capital. Ultimate realization of the deferred tax assets is dependent upon the Company generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. 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, 1998, the Company has domestic and foreign NOLs of approximately $240,000,000 and $25,000,000, respectively. The Company's NOLs and tax credit carryovers begin to expire in 1999 and the capital loss carryforward of $54,250,000 expires in 2003. The Company's effective tax rate differs from the applicable U.S. statutory federal income tax rate due to the following: 1998 1997 1996 ---- ---- ---- Statutory rate (35%) 35% 35% Foreign source income taxed at lower effective rates: Yugoslavia 15 (17) (24) Russia 3 (5) (5) Hungary -- (2) -- Others (1) (4) (2) Change in valuation allowance 5 (33) -- Basis difference in Yugoslavia 14 -- -- Favorable audit settlement -- -- (5) Domestic NOL loss carryback -- -- (5) Other, net -- -- (1) ------- ------- ------ Effective rate 1% (26)% (7)% ======= ======= ====== In Yugoslavia, the Company received the benefit of certain favorable tax laws that resulted in income taxes at a rate lower than the 25% Yugoslavian statutory rate. Under Yugoslavian law, taxable earnings attributed to foreign investment are exempt from taxation for a five year period. Accordingly, 75% of ICN Yugoslavia's taxable income, the Company's ownership in ICN Yugoslavia, was exempt from taxation for the five years ending December 31, 1996. Also in Yugoslavia, the Company received a tax credit for capital investments, which may include short-term government bonds and property and equipment, which can only be used in the year in which the investment is made. Effective January 1, 1997, additional changes in the Yugoslavian tax law resulted in benefits to the Company in the form of a reduction in taxes otherwise payable as a result of its foreign investment in ICN Yugoslavia. In Russia, the Company continues to benefit from special tax relief that benefits pharmaceutical companies. Under this relief approximately 75% of the income generated in Russia related to the manufacture and sale of prescription medicines is exempt from taxation. This reduces the statutory rate to approximately 8%. The continuing tax benefits in Russia are subject to potential changes in tax law that may be enacted in the future. Should these benefits be repealed, income generated in Russia would require the Company to provide taxes at the current statutory rate of 35%. In Hungary, the Company benefited from a tax holiday which expired on December 31, 1998. 45 In 1998, ICN Yugoslavia and ICN Hungary generated tax loss carryforwards and the Company's Russian subsidiaries generated deferred income tax assets, primarily related to bad debt reserves. Management believes that it is more likely than not that these future tax benefits will not be realized as a result of the seizure of ICN Yugoslavia and the Russian economic crisis affecting Eastern Europe. Accordingly, the Company recorded a valuation allowance against these loss carryforwards and deferred income tax assets, resulting in no tax benefit being recorded in 1998. The aggregate benefit using the local statutory rates in Yugoslavia, Russia, and Hungary in 1997 and 1996 relating to the above items was approximately $23,300,000 ($0.33 per diluted share) and $22,700,000 ($0.38 per diluted share), respectively. During 1998, no U.S. income or foreign withholding taxes were provided on the undistributed earnings of the Company's foreign subsidiaries with the exception of the Company's Panamanian subsidiary, Alpha Pharmaceuticals, since management intends to reinvest those undistributed earnings in the foreign operations. Included in consolidated retained earnings at December 31, 1998, is approximately $145,000,000 of accumulated earnings of foreign operations that would be subject to U.S. income or foreign withholding taxes, if and when repatriated. 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
1998 1997 1996 ---- ---- ---- Income: Net income (loss) $ (352,074) $ 113,924 $ 86,928 Dividends and accretion on preferred stock (34) (5,651) (2,199) ------------- ------------ ----------- Numerator for basic earnings per share -- income available to common stockholders (352,108) 108,273 84,729 Effect of dilutive securities: 8-1/2% Convertible Subordinated Notes -- 9,328 7,520 5-5/8% Swiss Franc Exchangeable Certificates -- 123 (738) 5-1/2% Swiss Franc Exchangeable Certificates -- 37 (345) Other dilutive securities -- -- 21 ------------ ------------ ----------- Numerator for diluted earnings per share -- income available to common stockholders after assumed conversions $ (352,108) $ 117,761 $ 91,187 ============ ============ =========== Shares: Denominator for basic earnings per share -- weighted-average shares outstanding 73,637 55,965 48,341 Effect of dilutive securities: Employee stock options -- 3,033 1,596 Series C Convertible Preferred Stock -- 1,266 -- 8-1/2% Convertible Subordinated Notes -- 6,744 7,800 5-5/8% Swiss Franc Exchangeable Certificates -- 1,811 1,377 5-1/2% Swiss Franc Exchangeable Certificates -- 831 831 Other dilutive securities -- -- 252 ------------ ------------ ----------- Dilutive potential common shares -- 13,685 11,856 ------------ ------------ ----------- Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 73,637 69,650 60,197 ============ ============ =========== Basic earnings (loss) per share $ (4.78) $ 1.93 $ 1.75 ============ ============ =========== Diluted earnings (loss) per share $ (4.78) $ 1.69 $ 1.51 ============ ============ ===========
Income available to common stockholders, for purposes of computing basic earnings per share, reflects adjustments for cumulative preferred dividends and an embedded dividend arising from the discounted conversion terms of the Series B Convertible Preferred Stock. The Company's Series B Convertible Preferred Stock is not reflected in the computation of diluted earnings per share for any 46 periods, as such securities were antidilutive. Because the Company recorded a net loss for 1998, the effects of stock options, the Series D Convertible Preferred Stock, and other potentially dilutive securities are not included in the computation of earnings per share as all such securities are antidilutive. All shares of the Company's Series C Convertible Preferred Stock, issued in July 1997, were converted into common stock during 1997 and the adjustment to the number of shares outstanding represents the additional shares that would have been outstanding had the Series C Convertible Preferred Stock been converted to common stock at the time of issuance. 8. DETAIL OF CERTAIN ACCOUNTS 1998 1997 ---- ---- (in thousands) ACCOUNTS RECEIVABLE, NET: Trade accounts receivable $ 209,444 $ 254,376 Other receivables 19,305 18,118 ------------ ------------ 228,749 272,494 Allowance for doubtful accounts (48,748) (11,999) ------------ ------------ $ 180,001 $ 260,495 ============ ============ INVENTORIES, NET: Raw materials and supplies $ 33,915 $ 65,937 Work-in-process 13,372 16,745 Finished goods 90,846 75,782 ------------ ------------ 138,133 158,464 Allowance for inventory obsolescence (11,588) (11,476) ------------ ------------ $ 126,545 $ 146,988 ============ ============ PROPERTY, PLANT AND EQUIPMENT, NET: Land $ 17,678 $ 20,531 Buildings 124,402 127,577 Machinery and equipment 152,037 145,640 Furniture and fixtures 19,372 20,273 Leasehold improvements 3,341 3,426 ------------ ------------ 316,830 317,447 Accumulated depreciation and amortization (57,455) (53,112) Construction in progress 68,381 96,378 ------------ ------------ $ 327,756 $ 360,713 ============ ============ At December 31, 1998 and 1997, construction in progress includes costs incurred to date for the construction of a new pharmaceutical factory at the Company's Rzeszow, Poland facility and other plant expansion projects. At December 31, 1997, construction in progress also includes costs incurred for the construction and modernization of its former pharmaceutical complex outside Belgrade, Yugoslavia, which was written off in 1998. 1998 1997 ---- ---- (in thousands) ACCRUED LIABILITIES: Payroll and related items $ 11,505 $ 16,423 Interest 13,726 11,683 Other 35,413 39,777 ----------- ----------- $ 60,644 $ 67,883 =========== =========== 47 9. DEBT Long-term debt consists of the following (in thousands):
1998 1997 ---- ---- 9-1/4% Senior Notes due 2005 $ 275,000 $ 275,000 8-3/4% Senior Notes due 2008 (net of unamortized discount of $3,226) 196,774 -- Hungarian mortgages, with interest at rates ranging from LIBOR + 0.9% to LIBOR + 1.0%; interest and principal due in varying amounts through 2001 5,010 5,258 U.S. mortgages with variable interest at rates ranging from 7.1% to 8.9%; interest and principal payable monthly through 2022 10,753 11,925 Polish mortgage note, repaid in 1998 -- 8,604 U.S. capital leases with interest at rates ranging from 4.9% to 6.1% payable monthly through 2000 599 1,651 Swiss Franc Guaranteed Bonds with an effective interest rate of 8.5%, maturing in 2002 (net of unamortized discount of $88 in 1997) 228 6,056 Hungarian loans in U.S. dollars and various foreign currencies, with interest at rates ranging from LIBOR + 0.5% to 21.0%, maturing at various dates through 2002 33,389 24,563 Other long-term debt due in U.S. dollars and various foreign currencies, with interest at rates ranging from 6.0% to 15.0%; interest and principal due in varying amounts through 2004 17,152 1,390 ------------ ----------- 538,905 334,447 Less current portion 28,097 19,359 ------------ ----------- Total long-term debt $ 510,808 $ 315,088 ============ ===========
In August 1998, the Company completed a private placement of $200,000,000 of its 8-3/4% Senior Notes due 2008 (the "8-3/4% Senior Notes") for net proceeds of $190,821,000. The 8-3/4% Senior Notes are subject in limited circumstances to redemption at the Company's option at any time prior to November 15, 2001, at 108.75% of their principal amount, plus accrued and unpaid interest. In connection with the private placement, the Company granted the purchasers of the 8-3/4% Senior Notes certain registration rights. In August 1997, the Company completed an underwritten public offering of $275,000,000 of its 9-1/4% Senior Notes Due 2005 (the "9-1/4% Senior Notes") for net proceeds of $265,646,000. The 9-1/4% Senior Notes are redeemable in cash at the option of the Company, in whole or in part, on or after August 15, 2001, at specified redemption prices. The 8-3/4% Senior Notes and the 9-1/4% Senior Notes (together, the "Senior Notes") each are general unsecured obligations of the Company which rank pari passu in right of payment with all other unsecured senior indebtedness, and are senior to all subordinated indebtedness of the Company. Upon a change of control (as defined in the related indentures), the Company will be required to offer to repurchase the Senior Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued interest thereon to the date of repurchase. Interest on the Senior Notes is payable semi-annually. The indentures governing the Senior Notes include certain covenants which may restrict the incurrence of additional indebtedness, the payment of dividends and other restricted payments, the creation of certain liens, the sale of assets, or the Company's ability to consolidate or merge with another entity, subject to certain qualifications and exceptions. 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 48 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 for SFr. 32,440,000 which are guaranteed by the Company. Each series of the Swiss Franc 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"). Substantially all of the outstanding Old Certificates were exchanged for New Certificates. In March 1998, the Company announced the redemption of the New Certificates and during 1998, SFr 37,670,000 principal amount of the New Certificates was exchanged for an aggregate of approximately 802,000 shares of the Company's common stock and the remainder of the New Certificates were redeemed for cash. Upon the exchange and redemption of the New Certificates, Danish Bonds held in trust for the payment of the New Certificates, having a market value of approximately $22,958,000, became available to the Company and were sold. The exchange increased stockholders' equity by $25,337,000 and reduced long-term debt and accrued interest by $4,680,000. At December 31, 1998, the face value of the outstanding Bio Certificates, SFr. 1,745,000, is convertible into approximately 21,000 shares of the Company's common stock at the exchange price of $54.17 using a fixed exchange rate of SFr. 1.54 to U.S. $1.00. The Company has long-term debt totaling $34,430,000 payable in U.S. dollars, Deutsche marks, and Dutch guilders, collateralized by certain real property and personal property of the Company (principally inventories) having a net book value of $41,005,000 at December 31, 1998. Aggregate annual maturities of long-term debt are as follows (in thousands): 1999 $ 28,097 2000 17,319 2001 12,632 2002 5,632 2003 202 Thereafter 475,023 ----------- Total $ 538,905 =========== The estimated fair value of the Company's debt, based on quoted market prices or on current interest rates for similar obligations with like maturities, was approximately $549,819,000 and $351,722,000 compared to its carrying value of $538,905,000 and $334,447,000 at December 31, 1998 and 1997, respectively. The Company has short and long-term lines of credit, classified in notes payable, aggregating $45,211,000 under which borrowings of $7,346,000 and letters of credit of $28,300,000 were outstanding at December 31, 1998. The lines of credit provide for short-term borrowings and for the issuance of letters of credit, and bear interest at variable rates based upon LIBOR (approximately 5.1% at December 31, 1998) or other indices. Certain of the lines of credit also include covenants restricting the payment of dividends, the issuance of new indebtedness, and the repurchase of the Company's common stock and requiring the maintenance of certain financial ratios and cash collateral balances. 10. PREFERRED STOCK In connection with the acquisition of rights to certain products from SKB, the Company issued to SKB 821 shares of its Series D Convertible Preferred Stock. Each share of the Series D Convertible Preferred Stock is initially convertible into 750 shares of the Company's common stock (together, the "SKB 49 Shares"), subject to certain antidilution adjustments, and has a liquidation preference of $28,000 per share. Except under certain circumstances, SKB has agreed not to sell the SKB Shares until November 4, 1999, unless the market price of the Company's common stock exceeds $50.00 per common share. In connection with the issuance of the SKB shares, the Company guaranteed SKB a price initially at $37.37 per common share, increasing at a monthly rate of $0.43 per share for twenty months. The Company has agreed to pay SKB an additional amount in cash (or, under certain circumstances, in shares of common stock) to the extent proceeds received by SKB from the sale of the SKB Shares during the guarantee period ending in December 1999 and the then market value of the unsold SKB Shares do not provide SKB with an average value of $46.00 per common share (including any dividend paid on the SKB Shares). Alternatively, should SKB sell the SKB shares at any time during the guarantee period, the agreement entitles the Company to any of the proceeds realized by SKB in excess of the guarantee price. The Company has also granted SKB certain registration rights covering the common shares issuable upon conversion of the Series D Preferred Stock. At December 31, 1998, the aggregate guaranteed value of the SKB Shares exceeds their market value by approximately $15,117,000, and the Company may be required to issue approximately 705,000 additional common shares in satisfaction of this agreement. In October 1996, the Company issued 50,000 shares of Series B Convertible Preferred Stock, for net proceeds of $47,392,000, in a private placement. The Series B Convertible Preferred Stock had a liquidation preference of $1,000 per share and was 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 of 13%. The Series B Convertible Preferred Stock had a 6% annual dividend that was cumulative and payable quarterly. The Company had the option to pay the dividend in either cash or common stock of the Company. The Series B Convertible Preferred Stock was mandatorily convertible into common stock on the fifth anniversary of its issuance. However, this provision was subject to extension under certain circumstances. Dividends paid in common stock were based on the fair value of common stock at the time of declaration. During 1997 and 1998, all of the Series B Convertible Preferred Stock was converted into a total of 2,854,000 shares of the Company's common stock. 11. COMMON STOCK During 1998, the Board of Directors and the stockholders each approved the Company's Amended and Restated 1998 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan, as amended, provides for the granting of options to purchase a maximum of 7,854,000 shares (including 3,000,000 shares authorized in 1998) of the Company's common stock to key employees, officers, directors, consultants and advisors of the Company. Options granted under the Stock Option Plan must have an option price not less than 85% of the fair market value of the Company's common stock at the date of the grant, and a term not exceeding 10 years. Options vest ratably over a four year period from the date of the grant. Under the Stock Option Plan each nonemployee director is granted 22,500 options on each April 18. In addition to options granted under the Stock Option Plan, in connection with the Merger all stock options outstanding under the stock option plans of each of the Predecessor Companies were exchanged for options to purchase shares of the Company, based upon the respective exchange ratios. The Company has adopted the disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for options granted under the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated below (in thousands, except per share data): 1998 1997 1996 ---- ---- ---- Net income (loss) $ (359,757) $ 110,426 $ 85,035 Earnings (loss) per share-- basic (4.89) 1.87 1.71 Earnings (loss) per share-- diluted (4.89) 1.64 1.48 50 The pro forma amounts were estimated using the Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 ---- ---- ---- Weighted-average life (years) 5.0 5.0 6.5 Volatility 56% 46% 60% Annual dividend per share $ 0.36 $ 0.24 $ 0.21 Risk-free interest rate 5.15% 6.33% 6.25% Weighted-average fair value of options granted $ 19.54 $ 6.00 $ 9.49
The following table sets forth information relating to stock option plans during the years ended December 31, 1998, 1997 and 1996 (in thousands, except per share data): WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE --------- --------- Shares under option, December 31, 1995 9,369 $ 11.24 Granted 798 15.16 Exercised (1,302) 8.01 Canceled (150) 11.97 --------- Shares under option, December 31, 1996 8,715 12.09 Granted 2,267 13.86 Exercised (1,870) 11.03 Canceled (192) 14.07 --------- Shares under option, December 31, 1997 8,920 12.68 Granted 2,211 42.75 Exercised (634) 10.94 Canceled (144) 14.96 --------- Shares under option, December 31, 1998 10,353 $ 18.97 ========= Exercisable at December 31, 1996 5,660 $ 12.29 ========= Exercisable at December 31, 1997 5,643 $ 12.29 ========= Exercisable at December 31, 1998 6,841 $ 13.43 ========= Options available for grant at December 31, 1997 500 ========= Options available for grant at December 31, 1998 1,433 ========= The schedule below reflects the number of outstanding and exercisable shares as of December 31, 1998 segregated by price range (in thousands, except per share data):
OUTSTANDING EXERCISABLE -------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE AVERAGE OF EXERCISE OF EXERCISE REMAINING RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE LIFE (YEARS) ------------------------ ------ ----- ------ ----- ------------ $ 2.56 to $ 12.36 3,795 $ 9.41 3,642 $ 9.36 4.6 $12.75 to $ 17.99 4,071 15.05 2,586 15.44 6.6 $19.21 to $ 49.00 2,487 39.96 613 29.17 8.1 ------- ------ 10,353 6,841 ======= ======
51 During 1998, the Company extended by one year the term of options to purchase an aggregate of 304,000 shares of common stock which are held by four employees, including the Chairman and CEO and a director. The Company recorded compensation expense of $2,909,000 related to these options. In January 1996, the Company sold approximately 600,000 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 1996, the Company acquired the net assets of the Siemens Dosimetry Service Division of Siemens Medical Systems, Inc. ("Siemens"), for 1,447,250 shares of the Company's common stock (the "Siemens Shares") plus other consideration. On December 23, 1996, Siemens sold the Siemens Shares to certain accounts over which an investment company exercises investment authority (collectively, the "Purchasers"), for $13.00 per share. In conjunction with and conditioned upon the consummation of the sale of the Siemens Shares, the Company entered into an agreement (the "Put Agreement") with the Purchasers pursuant to which the Company sold 150,000 additional shares of common stock for $1,950,000 (together with the Siemens Shares, the "Purchaser Shares") and sold the Purchasers, for $3,200,000, the right to put (the "Put Right") 1,597,250 shares of common stock, valued at $23,120,000 at December 31, 1996, to the Company at $20 per share on January 10, 2000. The Put Agreement also entitled the Company to a portion of any proceeds from the sale of the Purchaser Shares in excess of the $20 per share put price. In 1997, the Purchaser sold substantially all shares subject to the Put Right and the Put Right expired entirely; the $23,120,000 value of the Purchaser Shares was added to the Company's stockholders' equity. In addition, the Company received a cash payment from the Purchasers, which was also added to stockholders' equity. STOCK REPURCHASE PLAN: In September and October 1998, the Company's Board of Directors authorized two stock repurchase programs. The first repurchase program authorized the Company to repurchase up to $10,000,000 of its outstanding common stock. The second authorized the Company to initiate a long-term repurchase program that allows the Company to repurchase up to 3,000,000 shares of its common stock. In executing the repurchase programs, the Company is limited by certain covenants contained in the indentures relating to the Company's Senior Notes. In the indentures, the Company is permitted to repurchase up to $10,000,000 of its common stock under the first program; however, repurchases under the second program will only be permitted as the Company generates cumulative net income, as provided for in the indentures. In 1998, the Company repurchased an aggregate of 200,000 shares of its common stock for $4,450,000. STOCKHOLDER RIGHTS PLAN: 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 "Rights"), par value $0.01 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 occurrence of certain events. The Rights are subject to redemption at the option of the Board of Directors at a price of $0.01 per right until the occurrence of certain events. The Rights expire on November 1, 2004. LONG-TERM INCENTIVE PLAN: The Company has a long-term incentive plan which provides for the issuance of shares of the Company's common stock to senior executives. Shares issued under the long-term incentive plan are restricted and vest over a four-year period. In 1998, approximately 319,000 shares of the Company's common stock having a value of $10,466,000 were issued under this plan. Compensation expense for the value of the common shares issued is being recognized over the vesting period and is credited to additional capital. As of December 31, 1998, the unamortized compensation cost related to the restricted shares is $8,068,000. 52 CONTINGENTLY ISSUABLE SHARES: Effective October 1, 1998, the Company issued 2,883,871 shares of its common stock to Roche as part of the consideration for the rights to four pharmaceutical products. Under the terms of the agreement with Roche, the Company has guaranteed to Roche a per share price initially at $31.00, increasing at a rate of 6% per annum through December 31, 2000. Should Roche sell any of the shares prior to December 31, 2000, the Company is entitled to one-half of any proceeds realized by Roche in excess of the guaranteed price. Should the market price of the Company's common stock be below the guaranteed price at the end of the guarantee period, the Company will be required to satisfy the aggregate guarantee amount by payment to Roche in cash or, in certain circumstances, in additional shares of the Company's common stock. At December 31, 1998, the aggregate guaranteed value of the shares issued to Roche exceeds their market value by approximately $29,927,000, and the Company may be required to issue approximately 1,419,000 additional common shares in satisfaction of this agreement. OTHER: In 1997, long-term debt of the Company having an aggregate carrying value of $124,060,000 was converted into 10,052,000 shares of the Company's common stock. In addition, the Company issued 812,000 shares of its common stock, having a value of $10,000,000, in settlement of litigation. The Company also issued 129,665 shares of its common stock, having a value of $1,875,000, in payment of a portion of the 6% annual dividend on the Series B Convertible Preferred Stock. 12. COMMITMENTS AND CONTINGENCIES 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 United States Securities and Exchange Commission (the "Commission") with respect to certain matters pertaining to the status and disposition of the 1994 Hepatitis C NDA. As set forth in the Order, the investigation concerns whether, during the period from 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 Company securities, engaged in possible violations of Section 17(a) of Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, by having possibly: (i) made false or misleading statements or omitted material facts with respect to the status and disposition of the 1994 Hepatitis C NDA; (ii) purchased or sold Common Stock while in possession of material, non-public information concerning the status and disposition of the 1994 Hepatitis C NDA; or (iii) conveyed material, non-public information concerning the status and disposition of the 1994 Hepatitis C NDA, to other persons who may have purchased or sold Common Stock. The Company has cooperated and continues to cooperate with the Commission in its investigation. On January 13, 1998, the Company received a letter from the Commission's Philadelphia District Office (the "District Office") stating the District Office's intention to recommend to the Commission that it authorize the institution of a civil action against the Company, Milan Panic, Chairman and Chief Executive Officer of the Company, and a former senior executive of the Company. As set forth in the letter, the District Office seeks the authority to commence a civil action to enjoin the Company from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to impose a civil penalty of up to $500,000 on the Company. In regard to Mr. Panic, the District Office seeks the authority to commence a civil action: (i) to enjoin Mr. Panic from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (ii) for disgorgement of approximately $390,000; (iii) for prejudgment interest; (iv) for a civil penalty pursuant to Section 21A of the Exchange Act that cannot exceed three times any amount disgorged; and (v) for an order barring Mr. Panic from serving as an officer or director of a public company pursuant to Section 21 of the Exchange Act. On January 30, 1998 and thereafter, the Company filed submissions with the Commission urging that it reject the District Office's request. On August 27, 1998, the Company's counsel was informed by the District Office that (i) the District Office had withdrawn its request for authorization to commence an enforcement action against Mr. Panic with respect to allegations of illegal insider trading and the remedies of disgorgement, interest, and monetary penalties attendant thereto; and (ii) the Commission had granted the District 53 Office's request for authorization to commence an enforcement action against the Company, Mr. Panic, and a senior executive officer of the Company alleging false or misleading statements or omissions with respect to the status and disposition of the 1994 Hepatitis C NDA, including the remedies of injunctive relief and a civil penalty not to exceed $500,000 against the Company, and injunctive relief and a director and officer bar against Mr. Panic. The Company has received subpoenas from a Grand Jury in 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 understands that the Company, Mr. Panic, two current senior executive officers, a former senior officer, and a current employee of the Company are targets of the investigation. The Company also understands that a senior executive officer, a former officer, a current employee, and a former employee are subjects of the investigation. The United States Attorney's office has advised counsel for the Company that the areas of its investigation include disclosures made and not made concerning the 1994 Hepatitis C NDA to the public and other third parties; stock sales for the benefit of Mr. Panic following receipt on November 28, 1994 of a letter from the FDA informing the Company that the 1994 Hepatitis C NDA had been found not approvable; possible violations of the economic embargo imposed by the United States upon the Federal Republic of Yugoslavia, based upon alleged sales by the Company and Mr. Panic of stock belonging to Company employees; and, with respect to Mr. Panic, personal disposition of assets of entities associated with Yugoslavia, including possible misstatements and/or omissions in federal tax filings. The Company has and continues to cooperate in the Grand Jury investigation. A number of current and former employees of the Company have been interviewed by the government in connection with the investigation. The United States Attorney's office has issued subpoenas requiring various current and former officers and employees of the Company to testify before the Grand Jury. Certain current and former employees testified before the Grand Jury beginning in July 1998. On or about February 9, 1999, the Company commenced an action in the United States District Court of the District of Columbia against the Federal Republic of Yugoslavia ("FRY"), the Republic of Serbia and the State Health Fund of Serbia (the "State Fund") seeking damages in the amount of at least $500,000,000 and declaratory relief arising out of the FRY's recent seizure of the Company's majority interest in ICN Yugoslavia and the failure of the State Fund to pay ICN Yugoslavia for goods sold and delivered. On or about March 9, 1999, the State Fund commenced an arbitration against the Company before the International Chamber of Commerce for unquantified damages due to alleged breaches of the agreement pursuant to which the Company acquired its majority ownership interest in ICN Yugoslavia, and for unspecified injunctive relief. The Company intends to prosecute vigorously its claims against the FRY and any related entities, and to defend against the State Fund's claims against the Company, which the Company believes to be meritless and filed solely as a response to the Company's earlier-filed action in the United States District Court. The Company is party to other pending lawsuits or subject to a number of threatened lawsuits. While the ultimate outcome of pending and threatened lawsuits and the Commission and Grand Jury investigations cannot be predicted with certainty, and an unfavorable outcome could have a material adverse effect on the Company, at this time in the opinion of management, the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. PRODUCT LIABILITY INSURANCE: The Company is currently self-insured with respect to product liability claims and 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 1998, 1997 and 1996. 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, 1998, the present value of the deferred compensation benefits to be paid has been accrued in the amount of $2,868,000. Interest accrues on the outstanding balance at rates ranging from 9.4% 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. 54 OTHER: Milan Panic, the Company's Chairman of the Board and Chief Executive Officer, is employed under a contract expiring December 31, 2002 that provides for, among other things, certain health and retirement benefits. The contract is automatically extended at the end of each term 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 $584,000. 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. 13. BUSINESS SEGMENTS AND GEOGRAPHIC DATA The Company is a multinational pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research, and diagnostic products and provides radiation monitoring services. The Company is organized and operates in the Pharmaceutical group and the Biomedical group. The Pharmaceuticals group produces and markets a variety of pharmaceutical products worldwide and derives royalty revenues from sales of certain of its products by a third party under a license agreement. The Biomedicals group markets research products and related services, immunodiagnostic reagents and instrumentation, and provides radiation monitoring services. In 1998, the principal markets for the Company's products were the United States, Russia, and Yugoslavia, which represented approximately 23%, 20%, and 17%, respectively, of the Company's revenues for the year. However, as discussed in Note 14, effective November 26, 1998, the Company's Yugoslavian operations were seized by the Yugoslavian government. Operations in Russia are subject to business risks described in Note 15. Approximately 77%, 82%, and 80% of the Company's revenues for the years ended December 31, 1998, 1997 and 1996, respectively, were generated from operations outside the United States. The Company's 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 any hedges on its foreign currency exposure and, in certain countries in which the Company operates, no effective hedging programs are available. At December 31, 1998, the Company had a net monetary asset position in Russia of approximately $13,952,000 which is subject to loss in the event that a decline in the value of the ruble relative to the dollar were to occur. 55 In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which requires reporting certain financial information according to the "management approach." This approach requires reporting information regarding operating segments on the basis used internally by management to evaluate segment performance. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The Statement was effective December 31, 1998 and has been adopted for all periods presented. The Company is organized into business units on the basis of geographic region. In applying SFAS 131, these business units have been aggregated into eight reportable segments based on similar long-term economic characteristics. The Company's operations in the Czech Republic, Hungary, and Poland comprise the Other Eastern Europe segment. The accounting policies of the segments are the same as those described in the Note 2. The Company evaluates segment performance based on income from operations, which excludes intersegment sales as well as interest income and expense and foreign exchange gains and losses. The Company allocates amortization on the product rights acquired from Roche and SKB among the segments where the related revenues are reported; the unamortized cost of such acquired product rights is included in assets of the North America Pharmaceuticals segment. The tables below present information about reported segments and geographic data for the years ended December 31, 1998, 1997, and 1996 (in thousands).
REVENUES OPERATING INCOME (LOSS) ------------------------------------ ----------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ------------ ----------- ---------- ---------- Pharmaceuticals North America $ 176,902 $ 117,355 $ 106,442 $ 94,435 $ 48,453 $ 46,937 Western Europe 66,994 44,960 35,826 18,358 10,719 2,113 Latin America 85,351 63,668 47,359 26,791 17,467 10,690 Russia 163,691 134,688 66,788 9,561 28,982 22,021 Yugoslavia 141,740 225,530 267,166 (140,419) 60,235 70,616 Other Eastern Europe 93,228 73,050 21,461 (855) 12,951 1,964 Asia, Africa, Australia 48,649 22,036 4,711 10,062 2,903 1,003 ----------- ----------- ----------- ----------- ---------- ---------- Total Pharmaceuticals 776,555 681,287 549,753 17,933 181,710 155,344 Biomedicals 61,509 70,915 64,327 5,471 5,148 4,985 ----------- ----------- ----------- ----------- ---------- ---------- Consolidated revenues and segment operating income $ 838,064 $ 752,202 $ 614,080 23,404 186,858 160,329 =========== =========== =========== Corporate expenses 312,972 61,560 46,216 Interest income (13,057) (15,912) (3,001) Interest expense 38,069 22,849 15,780 Translation and exchange losses, net 80,501 12,790 2,282 ----------- ---------- ---------- Income (loss) before income Taxes and minority interest $ (395,081) $ 105,571 $ 99,052 =========== ========== ==========
Operating income (loss) for 1998 includes the Eastern European charges totaling $440,820,000. These charges are included in Yugoslavia Pharmaceuticals ($173,508,000), Russia Pharmaceuticals ($11,770,000), Other Eastern Europe Pharmaceuticals ($15,659,000), North America Pharmaceuticals ($3,150,000), and Biomedicals ($647,000). In addition, Eastern European charges of $236,086,000 (principally the write-off of the Company's investment in ICN Yugoslavia) are included in Corporate expenses. 56
DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES (1) ----------------------------------- ----------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ---------- Pharmaceuticals North America $ 13,609 $ 7,284 $ 1,708 $ 2,425 $ 57,921 $ 4,492 Western Europe 4,728 1,197 1,249 2,043 343 364 Latin America 5,563 2,014 823 2,366 1,727 1,314 Russia 104 246 2,252 41,803 17,923 5,820 Yugoslavia 3,720 4,046 4,185 22,472 13,492 1,984 Other Eastern Europe 6,265 3,843 1,075 20,039 4,583 1,777 Asia, Africa, Australia 5,488 142 13 13 646 34 ----------- ----------- ----------- ----------- ----------- ---------- Total Pharmaceuticals 39,477 18,772 11,305 91,161 96,635 15,785 Biomedicals 4,669 4,535 2,718 3,019 3,160 5,230 Corporate 6,950 5,446 3,913 16,101 6,602 8,317 ----------- ----------- ----------- ----------- ----------- ---------- $ 51,096 $ 28,753 $ 17,936 $ 110,281 $ 106,397 $ 29,332 =========== =========== =========== =========== =========== ==========
(1) Includes noncash capital expenditures of $-0-, $6,000 and $3,116 for 1998, 1997, and 1996, respectively. ASSETS ---------------------------------- 1998 1997 1996 ----------- ----------- --------- Pharmaceuticals North America $ 520,017 $ 333,698 $ 56,126 Western Europe 34,816 29,728 36,199 Latin America 66,486 30,191 30,691 Russia 155,368 145,162 54,990 Yugoslavia -- 421,731 342,983 Other Eastern Europe 190,675 147,698 77,245 Asia, Africa, Australia 79,274 25,735 1,785 ----------- ----------- --------- Total Pharmaceuticals 1,046,636 1,133,943 600,019 Biomedicals 76,671 74,334 78,095 Corporate 233,089 283,468 100,537 ----------- ----------- --------- $ 1,356,396 $ 1,491,745 $ 778,651 =========== =========== ========= GEOGRAPHIC DATA
REVENUES LONG-LIVED ASSETS ----------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- United States $ 193,358 $ 137,725 $ 121,782 $ 512,261 $ 343,900 $ 107,219 Canada 18,960 20,824 18,953 3,345 3,602 1,978 Western Europe 85,567 65,352 59,294 26,161 24,010 29,226 Latin America 86,634 66,166 49,444 34,456 8,603 8,493 Russia 163,691 134,688 66,788 86,969 39,330 15,658 Yugoslavia 141,740 225,530 267,166 -- 115,784 93,149 Other Eastern Europe 93,228 73,050 21,461 119,380 90,626 43,985 Asia, Africa, Australia 54,886 28,867 9,192 55,143 9,429 208 --------- --------- --------- --------- --------- --------- $ 838,064 $ 752,202 $ 614,080 $ 837,715 $ 635,284 $ 299,916 ========= ========= ========= ========= ========= =========
Revenues are attributed to the countries based upon the country of domicile of the Company's subsidiary which made the sale, with the exception of certain sales exported from the United States into the Asia, Africa, and Australia region, where the sales are attributed to the region based upon the location of the customer. During 1997, sales to the Yugoslavian government and government-sponsored entities represented approximately 22% of the Company's total revenues. For 1998 no customer accounted for 10% or more of the Company's revenues. Long-lived assets principally consist of property, plant, and equipment, acquired product rights, and goodwill. 57 14. ICN YUGOSLAVIA On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company's 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision by the Ministry for Economic and Property Transformation that was reached on November 26, 1998, effectively reduced the Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on the unilaterally imposed recalculation of the Company's original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, contrary to Yugoslavian law, without any notification to or representation by the Company. Since the change of control, representatives of the Company and ICN Yugoslavia's management have been denied access to the premises and any representation as to the management of ICN Yugoslavia. As a result, the Company is no longer able to influence the operating and financial affairs of ICN Yugoslavia and deconsolidated the financial statements of ICN Yugoslavia as of November 26, 1998. Accordingly, the Company recorded a charge of $235,290,000 in the fourth quarter of 1998, which is included in Eastern European Charges in the accompanying consolidated statements of income. This charge reduces the carrying value of the Company's investment in ICN Yugoslavia to its fair value, currently estimated to be zero. The summary balance sheet of ICN Yugoslavia as of the effective date of the write-off (November 26, 1998) is presented below. ICN YUGOSLAVIA SUMMARY BALANCE SHEET, EXCLUDING INTERCOMPANY BALANCES AS OF NOVEMBER 26, 1998 (unaudited, in thousands) Cash $ 22,101 Accounts receivable, net 58,188 Notes receivable 25,000 Inventories, net 46,652 Other current assets 8,153 Other long-term assets 167,059 ------------- $ 327,153 ============= Current liabilities $ 39,167 Minority interest and long-term liabilities 52,696 Stockholders' equity 235,290 ------------- $ 327,153 ============= Prior to the seizure, ICN Yugoslavia's operations were adversely affected by the April 1998 devaluation of the dinar, and by the Company's previously-announced suspension of sales to the Yugoslavian government. On April 1, 1998, the Yugoslavian government devalued the dinar from a rate of 6.0 dinars per U.S. $1 to 10.92 dinars per U.S. $1. At the time of the devaluation the Company's net monetary asset position in Yugoslavia was approximately $38,000,000, resulting in a foreign exchange loss of approximately $17,000,000 which was recognized in the second quarter of 1998. In addition, sales and gross profit margins at ICN Yugoslavia were adversely affected by the exchange rate changes and the Yugoslavian government's refusal to approve price increases sought by the Company. The Company, along with many of its competitors, suspended all direct sales to the Yugoslavian government in an effort to encourage the Yugoslavian government to approve price increases. The suspension of sales to the Yugoslavian government continued through 1998. 58 Through the first quarter of 1998, the majority of ICN Yugoslavia's domestic sales were made to the Yugoslavian government or government-funded entities. During early 1997, the Company established credit terms with the Yugoslavian government under which future receivables were interest-bearing with one year terms and payable in dinars, but fixed in dollar amounts. At December 31, 1997, the Company had approximately $145,431,000 of notes receivable from the Yugoslavian government under such terms. During the first quarter of 1998, the Company continued to make sales to the Yugoslavian government and government-sponsored entities under similar terms in order to reduce the Company's exposure to losses resulting from exchange rate fluctuations. In the second and third quarters of 1998, the Yugoslavian government defaulted on its obligations to the Company on $176,204,000 of accounts and notes receivable. As a result of the government's default and the suspension of sales to the government, the Company recorded a $173,440,000 charge against earnings at ICN Yugoslavia in the second quarter of 1998. The charge is included in Eastern European Charges ($165,646,000), cost of product sales ($3,667,000), and interest income ($4,127,000) in the accompanying consolidated statements of income. The charge consists of a $151,204,000 reserve for losses on notes receivable (including accrued interest), reserves of $7,757,000 for losses on accounts receivable from government-sponsored entities, and a $14,479,000 write-down of the value of certain related investments and assets. In March 1998, ICN Yugoslavia acquired a 33.7% interest in a healthcare center in the Republic of Montenegro from the Yugoslavian government in exchange for 147,000,000 dinars ($24,400,000) of accounts receivable and approximately $1,200,000 in cash. ICN Yugoslavia also acquired a 15% interest in the financial institution Komercijalna Banka A.D. from the Yugoslavian government in exchange for 28,600,000 dinars ($4,700,000) of accounts receivable. 15. ICN RUSSIA The Company's Russian operations consist of five pharmaceutical factories and related distribution operations. In addition, the Company operates 28 retail pharmacies in Russia. The Company's Russian operations generated 20% (1998), 18% (1997), and 11% (1996) of the Company's total revenues. The Company's Russian operations have been adversely affected by the recent economic events in the region. During 1998, in response to worsening liquidity and declining currency reserves, the Russian government sought international financial assistance and the Russian Central Bank used financial assistance from the International Monetary Fund, along with its existing monetary reserves, in an effort to support the value of the ruble. However, in August 1998, the Central Bank announced that it was no longer able to support the ruble at its then-current exchange rate of approximately 6.3 rubles to $1, and that it would allow the ruble to fall as far as 9.5 rubles to $1. Subsequently, the ruble fell sharply and the Russian Central Bank was unable to support the ruble, even at the previously-announced level. Through the end of 1998, there were large fluctuations in exchange rates for the ruble and the value of the ruble continued to decline in relation to the dollar, at times exceeding 20 rubles to $1. As of December 31, 1998, the exchange rate was approximately 20.7 rubles to $1, a decline of more than 68% from the ruble's mid-August 1998 level. As a result of the decline in the ruble exchange rate, the Company recorded foreign exchange losses of $53,848,000 related to its Russian operations during 1998. FOREIGN EXCHANGE RISK: ICN Russia operates in a highly inflationary economy and uses the dollar as the functional currency rather than the Russian ruble. During the three year period ended December 31, 1998, the cumulative rate of inflation was approximately 180%. All foreign exchange gains and losses arising from foreign currency transactions and the effects of foreign exchange rate fluctuations are included in income. As of December 31, 1998, ICN Russia had a net monetary asset position of approximately $13,952,000 which would be subject to foreign exchange loss if a further decline in the value of the ruble in relation to the United States dollar were to occur. 59 CREDIT RISK: The Company believes that the economic crisis in Russia has adversely affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company's customers, continue to experience severe liquidity shortages as rubles are in short supply, and as Russian companies' hard-currency assets remain frozen in Russian banks. This liquidity crisis has diminished many Russian companies' ability to pay their debts, and is likely to lead to a number of business failures in the region. In 1998, as a result of the Russian economic crisis, the Company recorded a charge of $42,289,000 among several of its operating segments, which is included in Eastern European Charges ($39,884,000) and cost of product sales ($2,405,000) in the accompanying consolidated statements of income. The charge consists of reserves of $37,873,000 for losses on accounts receivable, the write-off of certain investments of $2,011,000, and a reduction in the value of certain inventories of $2,405,000. 16. AGREEMENT WITH SCHERING-PLOUGH CORPORATION On July 28, 1995, the Company entered into an Exclusive License and Supply Agreement (the "License Agreement") and a Stock Purchase 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 License Agreement provided the Company an initial non-refundable payment and future royalty payments to the Company from sales of ribavirin by Schering-Plough, including certain minimum royalty rates. As part of the initial License Agreement, the Company retained the right to co-market ribavirin capsules in the European Union under its trademark Virazole(R). In addition, Schering-Plough will purchase up to $42,000,000 in common stock of the Company upon the achievement of certain regulatory milestones. Under the Agreement, Schering-Plough is responsible for all clinical developments worldwide. In 1998, the Company sold to Schering-Plough its right to co-market oral ribavirin for the treatment of HCV in the European Union, in exchange for increased royalty rates on sales of ribavirin worldwide. Royalty revenues for 1998 include amounts earned from United States commercial sales made by Schering-Plough subsequent to receipt of FDA approval, as well as royalties on compassionate use sales outside the United States, primarily in Western Europe. Royalty revenues for 1998 also include a one-time payment of $16,500,000 which the Company received from Schering-Plough in consideration for the sale to Schering-Plough of the additional marketing rights in the European Union, in settlement of past royalties, and as reimbursement for expenses incurred by the Company in preparation for the launch of ribavirin capsules in the European Union. In February 1999, Schering-Plough purchased 1,141,498 shares of the Company's common stock for $27,000,000. Although the shares are initially unregistered, under the terms of the Agreement, Schering-Plough is entitled to certain registration rights. 17. SUPPLEMENTAL CASH FLOW DISCLOSURES The following table sets forth the amounts of interest and income taxes paid during 1998, 1997 and 1996 (in thousands): 1998 1997 1996 ---- ---- ---- Interest paid (net of amounts capitalized of $3,540, $5,419, and $3,770 in 1998, 1997, and 1996, respectively) $ 34,240 $ 11,750 $ 20,477 ========= ========= ========= Income taxes paid $ 15,207 $ 4,543 $ 6,845 ========= ========= ========= 60 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
ADDITIONS ---------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD --------- -------- -------- ---------- --------- YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts $ 11,999 $ 53,189 $ 9,849(1) $ (26,289) $ 48,748 ======== ========= ======== ========= ======== Allowance for losses on notes receivable $ -- $ 151,204 $ -- $(151,204) $ -- ======== ========= ======== ========= ======== Reserve for inventory obsolescence $ 11,476 $ 6,674 $ 369(1) $ (6,931) $ 11,588 ======== ========= ======== ========= ======== Deferred tax asset valuation allowance $ 23,077 $ 32,861 $ -- $ -- $ 55,938 ======== ========= ======== ========= ======== YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ 8,870 $ 4,021 $ 1,901(1) $ (2,793) $ 11,999 ======== ========= ======== ========= ======== Reserve for inventory obsolescence $ 10,153 $ 3,342 $ 600(1) $ (2,619) $ 11,476 ======== ========= ======== ========= ======== Deferred tax asset valuation allowance $ 55,769 $ (32,692) $ -- $ -- $ 23,077 ======== ========= ======== ========= ======== YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 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 ======== ========= ======== ========= ========
(1) These amounts represent acquisition-date balances of allowances for doubtful receivables and reserves for inventory obsolescence of acquired companies. 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 set forth under the captions "Information Concerning Nominees and Directors" and "Executive Officers" in the Company's definitive Proxy Statement to be filed in connection with the Company's 1999 annual meeting of stockholders (the "Proxy Statement") and is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is set forth under the caption "Executive Compensation and Related Matters" in the Proxy Statement and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this Item is set forth under the caption "Ownership of the Company's Securities" in the Proxy Statement and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item is set forth under the captions "Executive Compensation and Related Matters" and "Certain Transactions" in the Proxy Statement and is incorporated by reference. 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 this 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 Amended and Restated Certificate of Incorporation of Registrant, previously filed as Exhibit 3.1 to Registration Statement 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 Form of Rights Agreement, dated as of November 2, 1994, between the Registrant and American Stock Transfer & 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. 3.5 Certificate of Designation of Rights and Preferences of Series D Convertible Preferred Stock of the Registrant, previously filed as Exhibit 3.5 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated herein by reference. 10.1 Indenture, dated as of August 14, 1997, by and among ICN and United States Trust Company of New York, relating to $275,000,000 9-1/4% Senior Notes due 2005, previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which is incorporated herein by reference.* 10.2 Indenture, dated as of August 20, 1998, by and among ICN and United States Trust Company of New York, relating to $200,000,000 8-3/4% Senior Notes due 2008, previously filed as Exhibit 4.3 to the Company's Registration Statement No. 333-63721 on Form S-4, which is incorporated herein by reference.* 10.3 Registration Rights Agreement, dated as of August 20, 1998, by and among ICN and Schroder & Co. Inc., previously filed as Exhibit 4.3 to the Company's Registration Statement No. 333-63721 on Form S-4, which is incorporated herein by reference. 64 10.4 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. 10.5 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. 10.6 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. 10.7 Amendment to Employment Contract between ICN Pharmaceuticals, Inc., and Milan Panic, dated September 6, 1995 previously filed as Exhibit 10.29 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, which is incorporated herein by reference. 10.8 Amendment to Employment Contract between ICN Pharmaceuticals, Inc., and Milan Panic, to be filed by amendment. 10.9 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. 10.10 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. 10.11 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. 10.12 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and Jack Sholl 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 December 31, 1992, which is incorporated herein by reference. 10.13 Agreement between ICN Pharmaceuticals, Inc. and John Julian, dated May 2, 1995, previously filed as Exhibit 10.11 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated herein by reference. 10.14 Agreement between ICN Pharmaceuticals, Inc. and Devron Averett, dated June 14, 1996, previously filed as Exhibit 10.12 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated herein by reference. 10.15 Agreement among ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc. and David Watt 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 December 31, 1992, which is incorporated herein by reference. 10.16 Agreement between ICN Pharmaceuticals, Inc. and Richard A. Meier dated December 31, 1998, filed herewith. 65 10.17 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. 10.18 ICN Pharmaceuticals, Inc. 1992 Non-Qualified Stock Plan previously filed as Exhibit 10.57 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, which is incorporated herein by reference. 10.19 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. 10.20 ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, filed herewith. 10.21 Exclusive License and Supply Agreement between ICN Pharmaceuticals, Inc. and Schering-Plough Ltd. dated July 28, 1995 previously filed as Exhibit 10 to ICN Pharmaceuticals, Inc.'s Amendment 3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, which is incorporated herein by reference. 10.22 Collateral Agreement between Milan Panic and the Registrant, dated August 14, 1996, previously filed as Exhibit 10.32 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated herein by reference. 10.23 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. 10.24 Form of Asset Purchase Agreement by and between Hoffman-La Roche Inc., a New Jersey corporation, and ICN Pharmaceuticals, Inc., a Delaware corporation, dated as of October 30, 1997, previously filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, which is incorporated herein by reference. 10.25 Form of Asset Purchase Agreement by and between Roche Products Inc., a Panamanian corporation, and ICN Pharmaceuticals, Inc., a Delaware corporation, dated as of October 30, 1997, previously filed as Exhibit 10.2 to ICN Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, which is incorporated herein by reference. 10.26 Form of Asset Purchase Agreement by and between Syntex (F.P.) Inc., a Delaware corporation, Syntex (U.S.A.), a Delaware corporation, and ICN Pharmaceuticals, Inc., a Delaware corporation, dated as of October 30, 1997, previously filed as Exhibit 10.3 to ICN Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, which is incorporated herein by reference. 66 10.27 Agreement for the Sale and Purchase of a Portfolio of Pharmaceutical, OTC and Consumer Healthcare Products between SmithKline Beecham plc and ICN Pharmaceuticals, Inc., previously filed as Exhibit 10.22 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated herein by reference. 10.28 Asset Purchase Agreement dated October 2, 1998 by and between F. Hoffmann - LaRoche Ltd. and ICN Puerto Rico, Inc., previously filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, which is incorporated herein by reference. 10.29 Credit Agreement dated as of March 31, 1997 by and between Banque Nationale de Paris and ICN Pharmaceuticals, Inc., previously filed as Exhibit 10.23 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated herein by reference. 10.30 Second Amendment to Credit Agreement dated as of March 31, 1997 by and between Banque Nationale de Paris and ICN Pharmaceuticals, Inc., previously filed as Exhibit 10.24 to ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated herein by reference. 10.31 ICN Pharmaceuticals, Inc. Executive Long Term Incentive Plan, previously filed as Exhibit 10.1 to ICN Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998, which is incorporated herein by reference. 10.32 Amendment to Exclusive License and Supply Agreement between ICN Pharmaceuticals, Inc. and Schering-Plough Ltd., to be filed by amendment. 21. Subsidiaries of the Registrant. 23. Consent of PricewaterhouseCoopers LLP, independent accountants. 27. Financial Data Schedule. * 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. (B) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the quarter ended December 31, 1998. 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 30, 1999 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 30, 1999 - ---------------------------------------------------- Milan Panic Chairman of the Board and Chief Executive Officer /S/ JOHN E. GIORDANI Date: March 30, 1999 - ---------------------------------------------------- John E. Giordani Executive Vice President, Chief Financial Officer and Corporate Controller /S/ NORMAN BARKER, JR. Date: March 30, 1999 - ---------------------------------------------------- Norman Barker, Jr., Director /S/ BIRCH BAYH Date: March 30, 1999 - ---------------------------------------------------- Senator Birch Bayh, Director /S/ ALAN F. CHARLES Date: March 30, 1999 - ---------------------------------------------------- Alan F. Charles, Director /S/ ROGER GUILLEMIN Date: March 30, 1999 - ---------------------------------------------------- Roger Guillemin, M.D., Ph.D., Director /S/ ADAM JERNEY Date: March 30, 1999 - ---------------------------------------------------- Adam Jerney, President, Chief Operating Officer, Director /S/ WELDON B. JOLLEY Date: March 30, 1999 - ---------------------------------------------------- Weldon B. Jolley, Ph.D., Director 68 SIGNATURES - CONTINUED /S/ ANDREI V. KOZYREV Date: March 30, 1999 - ---------------------------------------------------- Andrei V. Kozyrev, Director /S/ JEAN-FRANCOIS KURZ Date: March 30, 1999 - ---------------------------------------------------- Jean-Francois Kurz, Director /S/ THOMAS LENAGH Date: March 30, 1999 - ---------------------------------------------------- Thomas Lenagh, Director /S/ CHARLES T. MANATT Date: March 30, 1999 - ---------------------------------------------------- Charles T. Manatt, Director /S/ STEPHEN MOSES Date: March 30, 1999 - ---------------------------------------------------- Stephen Moses, Director /S/ MICHAEL SMITH Date: March 30, 1999 - ---------------------------------------------------- Michael Smith, Ph.D., Director /S/ ROBERTS A. SMITH Date: March 30, 1999 - ---------------------------------------------------- Roberts A. Smith, Ph.D., Director /S/ RICHARD W. STARR Date: March 30, 1999 - ---------------------------------------------------- Richard W. Starr, Director 69 EXHIBIT INDEX EXHIBIT PAGE NO. - ------- -------- 10.16 Agreement between ICN Pharmaceuticals, Inc. and Richard A. Meier dated December 31, 1998, filed herewith. 10.20 ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, filed herewith. 21. Subsidiaries of the Registrant. 23. Consent of PricewaterhouseCoopers LLP Independent Accountants. 27. Financial Data Schedule. EX-10.16 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT entered into as of the 31 day of December, 1998, by and between ICN Pharmaceuticals, Inc. (the "Company") and Richard A. Meier, 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 - Treasurer of the Company 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 December 31, 2000; provided, however, that the term of this Agreement shall be automatically extended for one (1) year on December 31, 1999, and on each December 31 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 - Treasurer 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 $240,000 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 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 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 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 or the Subsidiary) 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 any of its subsidiaries 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 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 denominator 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 or any of its subsidiaries. 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/ David C. Watt -------------------------------- David C. Watt Title: Executive Vice President, General Counsel and Corporate Secretary - --------------------------- The "Executive" By: /s/ Richard A. Meier --------------------------------- Richard A. Meier EX-10.20 3 AMENDED AND RESTATED 1998 STOCK OPTION PLAN ICN PHARMACEUTICALS, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN 1. PURPOSE. The purpose of the Plan is to grant to certain key employees, officers, directors, scientific advisors and consultants of ICN Pharmaceuticals, Inc., a Delaware corporation (hereinafter called the "Company"), or any Parent or Subsidiary of the Company, an opportunity to acquire the Shares in order to increase their proprietary interest in the Company and as an added incentive to remain in and advance in its employment. It is also the purpose of the Plan to advance the interests of the Company and its stockholders by strengthening the Company's ability to attract and retain those persons with training, experience and ability by encouraging such persons to become owners of its stock. 2. DEFINITIONS. For purposes of the Plan, unless otherwise specified, capitalized terms shall have the following meanings: 2.1 "Adjusted Fair Market Value" means, in the event of a Change in Control, the greater of (i) the highest price per Share paid to holders of the Shares in any transaction (or series of transactions) constituting or resulting in a Change in Control or (ii) the highest Fair Market Value of a Share during the ninety (90) day period ending on the date of a Change in Control. 2.2 "Agreement" means the written agreement between the Company and an Optionee evidencing the grant of an Option and setting forth the terms and conditions thereof. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Cause" means the commission of an act of fraud or intentional misrepresentation or an act of embezzlement, misappropriation or conversion of assets of the Company, Parent or any Subsidiary. 2.5 "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, in the case of a spinoff, dividend or other distribution in respect of shares, a change in value) in the Shares, or exchange of Shares for a different number or kind of shares or other securities of the Company or another entity, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise. 2.6 A "Change in Control" shall mean the occurrence of: (i) The "acquisition" by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any securities of the Company which generally entitles the holder thereof the vote for the election of directors of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such person, would result in such Person "Beneficially Owning" forty percent (40%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this paragraph (i), a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (a) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (b) acquires the Voting Securities directly from the Company; (c) becomes the Beneficial Owner of more than the permitted percentage of Voting Securities solely as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by such Person; (d) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Controlled Entity") or (e) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined in paragraph (iii) below); or (ii) The individuals who, as of January 29, 1998, are members of the Board of Directors of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (iii) (a) A merger, consolidation or reorganization involving the Company (a "Business Combination"), unless (1) the stockholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination, and (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for the Business Combination constitute at least a majority of the members of the Board of Directors of the Surviving Corporation, and (3) no Person (other than the Company or any Controlled Entity, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Controlled Entity, or any Person who, immediately prior to the Business Combination, had Beneficial ownership of forty percent (40%) or more of the then outstanding Voting Securities) has Beneficial Ownership of forty percent (40%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities (a transaction described in this subparagraph (a) shall be referred to as a "Non-Control Transaction"); (b) A complete liquidation or dissolution of the Company; or (c) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Controller Entity). Notwithstanding the foregoing, (x) a change in Control shall not be deemed to occur solely because forty percent (40%) or more of the then outstanding Voting Securities is Beneficially Owned by (A) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Controlled Entity or (B) any corporation which, immediately prior to its acquisition of such interest, 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; and (y) if an Eligible Employee's employment is terminated and the Eligible Employee reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes hereof, the date of a Change in Control with respect to the Eligible Employee shall mean the date immediately prior to the date of such termination of employment. 2.7 "Code" means the Internal Revenue Code of 1986, as amended. 2.8 "Committee" means a committee consisting of solely at least two (2) directors each of whom are Section 16 Directors and Outside Directors who are appointed by the Board to administer the Plan and to perform the functions set forth herein. 2.9 "Company" means ICN Pharmaceutics, Inc. or any successor thereto. 2.10 "Director Option" means an Option granted pursuant to Section 5. 2.11 "Disability" means a physical or mental infirmity which impairs the Optionee's ability to perform substantially his or her duties for a period of one hundred eighty (180) days during any three hundred and sixty (360) day period. 2.12 "Section 16 Director" means a director of the Company who is a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act. 2.13 "Division" means any of the operating units or divisions of the Company designated as a Division by the Committee. 2.14 "Eligible Employee" means any officer or other key employee or consultant or scientific advisor of the Company or a Parent or Subsidiary designated by the Committee as eligible to receive Options subject to the conditions set forth herein. 2.15 "Employee Option" means an Option granted pursuant to Section 6. 2.16 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.17 "Fair Market Value" on any date means (i) the closing price per share of the Company's stock on the principal exchange on which the stock is listed, on such date (or if no such price is reported on such date, such price as reported on the nearest preceding date on which such price is reported), (ii) if the stock is not listed on an exchange, the bid price per share of stock at the close of trading on such date, or (iii) if the stock is not listed on an exchange or otherwise publicly traded on such date, the fair market value of the Company's stock as of such date as determined in good faith by the Board. 2.18 "Incentive Stock Option" means an Option satisfying the requirements of Section 422 of the Code and designated by the Committee as an Incentive Stock Option. 2.19 "Nonemployee Director" means a director of the Company who is not an employee of the Company or any Subsidiary. 2.20 "Nonqualified Stock Option" means an Option which is not an Incentive Stock Option. 2.21 "Option" means a Employee Option, a Director Option, or either or both of them. 2.22 "Optionee" means a person to whom an Option has been granted under the Plan. 2.23 "Outside Director" means a director of the Company who is an "outside director" within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. 2.24 "Parent" means any corporation which is a parent corporation (within the meaning of Section 424(e) of the Code) with respect to the Company. 2.25 "Plan" means the Amended and Restated ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, at it may be amended from time to time. 2.26 "Pooling Transaction" means an acquisition of or by the Company in a transaction which is intended to be treated as a "pooling of interests" under generally accepted accounting principles. 2.27 "Shares" means the common stock, par value $.01 per share, of the Company. 2.28 "Subsidiary" means any corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) with respect to the Company. 2.29 "Successor Corporation" means a corporation, or a parent or subsidiary thereof within the meaning of Section 424(a) of the Code, which issues or assumes a stock option in a transaction to which Section 424(a) of the Code applies. 2.30 "Ten-Percent Stockholder" means an Eligible Employee, who, at the time an Incentive Stock Option is to be granted to him or her, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or of a Parent or a Subsidiary. 3. ADMINISTRATION. 3.1 The Plan shall be administered by the Committee which shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A quorum shall consist of not less than two members of the Committee and a majority of a quorum may authorize any action. Any decision or determination reduced to writing and signed by a majority of all of the members of the Committee shall be as fully effective as if made by a majority vote at a meeting duly called and held. Each member of the Committee shall be a Disinterested Director and an Outside Director. No member of the Committee shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to this Plan or any transaction hereunder, except for liability arising from his or her own willful misfeasance, gross negligence or reckless disregard of his or her duties. The Company hereby agrees to indemnify each member of the Committee for all costs and expenses and, to the extent permitted by applicable law, any liability incurred in connection with defending against, responding to, negotiation for the settlement of or otherwise dealing with any claim, cause of action or dispute of any kind arising in connection with any actions in administering this Plan or in authorizing or denying authorization to any transaction hereunder. 3.2 Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time to: (a) determine those individuals to whom Employee Options shall be granted under the Plan and the number of Incentive Stock Options and/or Nonqualified Stock Options to be granted to each Eligible Employee and to prescribe the terms and conditions (which need not be identical) of each Employee Option, including the purchase price per Share subject to each Employee Option, and make any amendment or modification to any Agreement consistent with the terms of the Plan; (b) to construe and interpret the Plan and the Options granted thereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable so that the Plan complies with applicable law, including Rule 16b-3 under the Exchange Act and the Code to the extent applicable, and otherwise to make the Plan fully effective, and all decisions and determinations by the Committee in the exercise of this power shall be final, binding and conclusive upon the Company, the Parent, its Subsidiaries, the Optionees and all other persons having any interest therein; (c) to determine the duration and purposes for leaves of absence which may be granted to an Optionee on an individual basis without constituting a termination of employment or service for purposes of the Plan; (d) to exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan; and (e) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 4. STOCK SUBJECT TO THE PLAN 4.1 The maximum number of Shares that may be made the subject of Options granted under the Plan is 6,000,000; provided, however, that the maximum number of Shares that any Eligible Employee may receive pursuant to the Plan in respect of Options may not exceed 1,000,000 Shares. Upon a Change in Capitalization, the maximum number of Shares referred to above shall be adjusted in number and kind pursuant to Section 9. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such number of Shares as shall be determined by the Board. 4.2 Whenever any outstanding Option or portion thereof expires, is canceled or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option, the Shares allocable to the canceled or otherwise terminated portion of the Option may again be the subject of Options granted hereunder. 5. OPTIONS GRANTS FOR NONEMPLOYEE DIRECTORS. 5.1 GRANT. Subject to the availability of an adequate number of Shares designated under the Plan, each Nonemployee Director shall be granted Director Options under the Plan automatically on a non- discretionary basis according to the following provisions of this Section 5 and in accordance with the other provisions of the Plan. Nonemployee Directors shall not be granted options under the Plan except pursuant to this Section 5. Director Options shall be granted automatically to Nonemployee Directors as follows: each person who is a Nonemployee Director on the first business day following the day of an annual meeting of stockholders of the Company shall be granted on such first business day an option to purchase 15,000 Shares. 5.2 PURCHASE PRICE. The purchase price for Shares under each Director Option shall be the Fair Market Value of such Shares on the date of grant. 5.3 VESTING. Subject to Sections 5.4 and 7.4, each Director Option shall become exercisable with respect to 25% of the Shares subject thereto on each of the first four anniversaries of the grant date; provided, that the Optionee is a director as of the relevant anniversary. If an Optionee ceases to serve as a director for any reason, the Optionee shall have no rights with respect to that portion of a Director Option which has not then vested pursuant to the preceding sentence and the Optionee shall automatically forfeit that portion of the Director Option which remains unvested. 5.4 DURATION. Each Director Option shall terminate on the date which is the tenth anniversary of the grant date, unless terminated earlier as follows: (a) If an Optionee's service as a director terminates for any reason other than Disability, death or Cause, the Optionee may for a period of three (3) months after such termination exercise his or her Option to the extent, and only to the extent, that such Option or portion thereof was vested and exercisable as of the date the Optionee's service as a director terminated, after which time the Option shall automatically terminate in full. (b) If an Optionee's service as a director terminates by reason of Disability, the Optionee may, for a period of one (1) year after such termination, exercise his or her Option to the extent, and only to the extent, that such Option or portion thereof was vested and exercisable as of the date the Optionee's service as director terminated, after which one year period the Option shall automatically terminate in full. (c) If an Optionee's service as a director terminates for Cause, the Option granted to the Optionee hereunder shall immediately terminate in full and no rights thereunder may be exercised. (d) If an Optionee dies while a director or within three (3) months after termination of service as a director as described in clause (a) or (b) of this Section 5.4, the Option granted to the Optionee may be exercised at any time within twelve (12) months after the Optionee's death by the person or persons to whom such rights under the Option shall pass by will, or by the laws of descent or distribution, after which time the Option shall terminate in full; provided, however, that an Option may be exercised to the extent, and only to the extent, that the Option or portion thereof was exercisable on the date of termination of the Optionee's services as a director. 6. OPTION GRANTS FOR ELIGIBLE EMPLOYEES. 6.1 AUTHORITY OF COMMITTEE. Subject to the provisions of the Plan and to Section 4.1 above, the Committee shall have full and final authority to select those Eligible Employees who will receive Options (each, an "Employee Option"), which may be Incentive Stock Options or Nonqualified Stock Options, the terms and conditions of which shall be set forth in an Agreement; provided, however, that no person shall receive any Incentive Stock Option unless he or she is any employee of the Company, a Parent or a Subsidiary at the time the Incentive Stock Option is granted. 6.2 PURCHASE PRICE. The purchase price or the manner in which the purchase price is to be determined for Shares under each Employee Option shall be determined by the Committee and set forth in the Agreement, provided that the purchase price per Share under each Employee Option shall not be less than 85% of the Fair Market Value of a Share on the date the Employee Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder). The purchase price for Shares under an Employee Option shall not be decreased after the date of grant of such Option. 6.3 MAXIMUM DURATION. Employee Options granted hereunder shall be for such term as the Committee shall determine, provided that an Incentive Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted. The Committee may, subsequent to the granting of any Employee Option, extend the term thereof but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. 6.4 VESTING. Subject to Section 7.4 hereof, each Employee Option shall become exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Agreement. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable but not later than the date the Employee Option expires. The Committee may accelerate the exercisability of any Employee Option or portion thereof at any time. 6.5 MODIFICATION OR SUBSTITUTION. The Committee may, in its discretion, modify outstanding Employee Options or accept the surrender of outstanding Employee Options (to the extent not exercised) and grant new Options in substitution for them. Notwithstanding the foregoing, no modification of an Employee Option shall adversely alter or impair any rights or obligations under the Employee Option without the Optionee's consent. 7. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS. 7.1 NON-TRANSFERABILITY. No Option granted hereunder shall be transferable by the Optionee to whom granted otherwise than by will or the laws of descent and distribution, or pursuant to a domestic relations order (within the meaning of Rule 16a-12 promulgated under the Exchange Act), and an Option may be exercised during the lifetime of such Optionee only the Optionee or his or her guardian or legal representative. Notwithstanding the foregoing, the Committee may set forth in the Agreement evidencing the Option (other than an Incentive Stock Option) at the time of grant or thereafter, that the Option may be transferred to members of the Optionee's immediate family, to trusts solely for the benefit of such immediate family members and to partnerships in which such family members and/or trusts are the only partners. For this purpose, immediate family means the Optionee's spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, stepchildren and grandchildren. The terms of such Option shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Optionee. 7.2 METHOD OF EXERCISE. The exercise of an Option shall be made only by a written notice delivered in person or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor and Withholding Taxes and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise by any one or a combination of the following: (i) cash or (ii) pursuant to such rules as may be determined by the Committee, transferring Shares to the Company, or (iii) any combination of the foregoing as may be determined by the Committee. Until such person has been issued the Shares subject to such exercise, he or she shall possess no rights as a stockholder with respect to such Shares. Notwithstanding the foregoing, the Committee shall have discretion to determine at the time of grant of each Employee Option or at any later date (up to and including the date of exercise) the form of payment acceptable in respect of the exercise of such Employee Option and may establish cashless exercise procedures which provide for the exercise of the Option and sale of the Underlying Share by a designated broker or dealer. In that connection, the written notice pursuant to this Section 7.2 may also provide instructions from the Optionee to the Company that upon receipt of appropriate instructions from the Optionee's broker or dealer, designated as such on the written notice, the Company shall issue such Shares directly to the designated broker or dealer. Any Shares transferred to the Company (or withheld upon exercise) as payment of the purchase price under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option. If requested by the Committee, the Optionee shall deliver the Agreement evidencing the Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 7.3 RIGHTS OF OPTIONEES. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Optionee and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend, and other ownership rights with respect to such Shares, subject to such terms and conditions as may be set forth in the applicable Agreement. 7.4 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything contained in the Plan or an Agreement to the contrary (other than the last sentence of this Section 7.4), in the event of a Change in Control, (i) all Options outstanding on the date of such Change in Control shall become immediately and fully exercisable, (ii) upon termination of an Optionee's employment following a Change in Control, Options held by the Optionee shall remain exercisable until the later of (x) one year after termination and (y) sixty (60) days following the expiration of the Pooling Period (in the event the Change in Control constitutes a Pooling Transaction), but in no event beyond the stated term of the Option, and (iii) an Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control any Option or portion of an Option to the extent not yet exercised and the Optionee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (x)(A) in the case of a Nonqualified Stock Option, the greater of (1) the Fair Market Value, on the date preceding the date of surrender, of the Shares subject to the Option or portion thereof surrendered or (2) the Adjusted Fair Market Value of the Shares subject to the Option or portion thereof surrendered or (B) in the case of an Incentive Stock Option, the Fair Market Value, on the date preceding the date of surrender, of the Shares subject to the Option or portion thereof surrendered, over (y) the aggregate purchase price for such Shares under the Option or portion thereof surrendered. Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event of a Change in Control which is also intended to constitute a Pooling Transaction, the Committee shall take such actions, if any, as are specifically recommended by an independent accounting firm retained by the Company to the extent reasonably necessary in order to assure that the Pooling Transaction will qualify as such, including but not limited to (a) deferring the vesting, exercise, payment, settlement or lapsing of restrictions with respect to any Option, (b) providing that the payment or settlement in respect of any Option be made in the form of cash, Shares or securities of a successor or acquiror of the Company, or a combination of the foregoing, and (c) providing for the extension of the term of any Option to the extent necessary to accommodate the foregoing, but not beyond the maximum term permitted for any Option. 8. EFFECT OF A TERMINATION OF EMPLOYMENT. The Agreement evidencing the grant of each Employee Option shall set forth the terms and conditions applicable to such Employee Option upon a termination or change in the status of the employment of the Optionee by the Company, Parent, a Subsidiary or a Division (including a termination or change by reason of the sale of a Subsidiary or a Division), which, except for Director Options, shall be as the Committee may, in its discretion, determine at the time the Option is granted or thereafter. 9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to (i) the maximum number and class of Shares or other stock or securities with respect to which Options may be granted under the Plan, (ii) the maximum number of Shares or other stock or securities with respect to which Options may be granted to any Eligible Employee during the term of the Plan, (iii) the number and class of Shares or other stock or securities which are subject to Director Options issuable under Section 5, and (iv) the number and class of Shares or other stock or securities which are subject to outstanding Options granted under the Plan, and the purchase price therefor, if applicable. (b) Any such adjustment in the Shares or other stock or securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code. (c) Any such adjustment in the Shares or other stock or securities subject to outstanding Director Options (including any adjustments in the purchase price) shall be made only to the extent necessary to maintain the proportionate interest of the Optionee and preserve, without exceeding, the value of such Director Options. (d) If, by reason of a Change in Capitalization, an Optionee shall be entitled to exercise an Option with respect to new, additional or different shares of stock or securities, such new, additional or different shares shall thereupon be subject to all of the conditions and restrictions which were applicable to the Shares subject to the Option prior to such Change in Capitalization. 10. EFFECT OF CERTAIN TRANSACTIONS. Subject to Section 7.4 or as otherwise provided in an Agreement, in the event of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company (a "Transaction"), the Plan and the Options issued hereunder shall continue in effect in accordance with their respective terms and each Optionee shall be entitled to receive in respect of each Share subject to any outstanding Options, upon exercise of such Options, the same number and kind of stock, securities, cash, property, or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share; PROVIDED, HOWEVER, that such stock, securities, cash, property, or other consideration shall remain subject to all of the conditions and restrictions which were applicable to the Options prior to such Transaction. 11. TERMINATION AND AMENDMENT OF THE PLAN. The Plan shall terminate on the day preceding the tenth anniversary of the date of its adoption by the Board and no Options may be granted thereafter. The Board may sooner terminate the Plan and the Board may at any time and from time to time amend, modify or suspend the Plan; provided, however, that: (a) No such amendment, modification, suspension or termination shall impair or adversely alter any Options theretofore granted under the Plan, except with the consent of the Optionee, nor shall any amendment, modification, suspension or termination deprive any Optionee of any Shares which he or she may have acquired through or as a result of the Plan; and (b) To the extent necessary under any applicable law, regulation or exchange requirement, no amendment shall be effective unless approved by the stockholders of the Company in accordance with applicable law, and regulation or exchange requirement. 12. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 13. LIMITATION OF LIABILITY. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (i) give any person any right to be granted an Option other than at the sole discretion of the Committee; (ii) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (iii) limit in any way the right of the Company or any Subsidiary to terminate the employment of any person at any time; or (iv) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person at any particular rate of compensation or for any particular period of time. 14. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW. 14.1 Except as to matters of federal law, this Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to conflicts of laws principles thereof. 14.2 The obligation of the Company to sell or deliver Shares with respect to Options granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. 14.3 The Committee may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Employees granted Incentive Stock Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. 14.4 Each Option is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Shares, no Options shall be granted or payment made or Shares issued in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. 14.5 Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Committee may require any individual receiving Shares pursuant to an Option granted under the Plan, as a condition precedent to receipt of such Shares, to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately legended to reflect their status as restricted securities as aforesaid. 15. MISCELLANEOUS. 15.1 MULTIPLE AGREEMENTS. The terms of each Option may differ from other Options granted under the Plan at the same time, or at some other time. The Committee may also grant more than one Option to a given Eligible Employee during the term of the Plan, either in addition to, or in substitution for, one or more Options previously granted to that Eligible Employee. 15.2 WITHHOLDING OF TAXES. (a) The Company shall have the right to deduct from any distribution or payment of cash to any Optionee an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any Option. If an Optionee realizes a taxable event in connection with the receipt of Shares pursuant to an Option exercise (a "Taxable Event"), the Optionee shall pay the Withholding Taxes to the Company prior to the issuance of such Shares. In satisfaction of the obligation to pay Withholding Taxes to the Company, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares then issuable to him or her having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes. (b) If an Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to such Optionee pursuant to the exercise of an Incentive Stock Option within the two-year period commencing on the day after the date of the grant or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Optionees pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office. (c) The Committee shall have the authority, at the time of grant of an Employee Option under the Plan or at any time thereafter, to award tax bonuses to designated Optionees, to be paid upon their exercise of Employee Options granted hereunder. The amount of any such payments shall be determined by the Committee. The Committee shall have full authority in its absolute discretion to determine the amount of any such tax bonus and the terms and conditions affecting the vesting and payment thereof. 15.3 INTERPRETATION. The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. Unless otherwise expressly stated in the relevant Agreement, any grant of Options is intended to be performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code. The Committee shall not be entitled to exercise any discretion otherwise authorized hereunder with respect to such Options if the ability to exercise such discretion or the exercise of such discretion itself would cause the compensation attributable to such Options to fail to qualify as performance-based compensation. 16. EFFECTIVE DATE/SHAREHOLDER APPROVAL. The effective date of the Plan shall be the date of its adoption by the Board, subject only to the approval by the affirmative vote of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at the first meeting of stockholders duly held in accordance with the applicable laws of the State of Delaware after such date of adoption. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 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, 1998, 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(a) 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 Franco SARL France 100 ICN Biomedicals S.R.L Italy 100 ICN Biomedicals N.V./S.A Belgium 100 ICN Oktyabr Russia 95 ICN Polypharm Russia 96 ICN Leksredstva Russia 97 ICN Alkaloida Hungary 72 Polfa Rzeszow, S.A Poland 89 AO Tomsk Chemical Pharmaceutical Plant Russia 90 Marbiopharm Russia 93 Wuxi ICN Pharmaceuticals China 75 ICN Puerto Rico Puerto Rico 100 ICN Czech Republic Czech Republic 100
(a) On February 6, 1999, the government of the Federal Republic of Yugoslavia seized control of ICN Yugoslavia. This action, based on a decision reached by the Ministry for Economic and Property Transformation on November 26, 1998, effectively reduced the Company's equity ownership of ICN Yugoslavia from 75% to 35%. The Company has commenced litigation in the United States District Court of the District of Columbia against the government of Yugoslavia and related agencies to recover damages and obtain injunctive relief. * In accordance with the instructions of Item 601 of Regulation S-K, certain subsidiaries are omitted from the foregoing table. EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 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), Form S-4 (File No. 333-63721) and Form S-3 (File Nos. 333-10661 and 333-49665) of our report dated March 4, 1999, on our audits of the consolidated financial statements and consolidated financial statement schedule of ICN Pharmaceuticals, Inc. as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report includes an emphasis of a matter paragraph related to the Company's change in method of accounting for ICN Yugoslavia, a previously consolidated subsidiary, included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Newport Beach, California March 30, 1999 EX-27 6 FDS 27
5 This schedule contains summary financial information extracted from ICN Pharmaceuticals, Inc.'s December 31, 1998 consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 104,921 0 228,749 (48,748) 126,545 440,748 385,211 (57,455) 1,356,396 203,754 0 0 1 764 585,399 1,356,396 800,639 838,064 353,600 353,600 20,835 440,820 38,069 (395,081) 1,983 (352,074) 0 0 0 (352,074) (4.78) (4.78)
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