1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 2001
REGISTRATION NO. 333-63721
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ICN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2834 33-0628076
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3300 HYLAND AVENUE
COSTA MESA, CALIFORNIA 92626
(714) 545-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY KEEVER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
ICN PHARMACEUTICALS, INC.
3300 HYLAND AVENUE
COSTA MESA, CALIFORNIA 92626
(714) 545-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
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WITH A COPY TO:
RONALD R. PAPA, ESQ.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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8 3/4% Series B Senior Notes Due 2008... $194,611,000 100% $194,611,000 $90,350*
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* Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST , 2001
OFFER TO EXCHANGE
ALL OUTSTANDING
8 3/4% SENIOR NOTES DUE 2008
($194,611,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
8 3/4% SERIES B SENIOR NOTES DUE 2008
OF
ICN PHARMACEUTICALS, INC.
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THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 2001, UNLESS EXTENDED
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ICN Pharmaceuticals, Inc., a Delaware corporation ("ICN" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange $1,000 principal amount of 8 3/4% Series B Senior Notes Due 2008 of ICN
(the "1998 New Notes") for each $1,000 principal amount of the outstanding
$200.0 million principal amount of 8 3/4% Senior Notes Due 2008 of ICN issued on
August 20, 1998 (the "1998 Old Notes") and $1,000 principal amount of 8 3/4%
Series B Senior Notes Due 2008 of ICN (the "1999 New Notes" and, together with
the 1998 New Notes, the "New Notes") for each $1,000 principal amount of the
outstanding $125.0 million principal amount of 8 3/4% Senior Notes Due 2008 of
ICN issued on July 20, 1999 (the "1999 Old Notes" and, together with the 1998
Old Notes, the "Old Notes"). The New Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part. Other than the issue dates and the original issue discount on the 1999
Old Notes, the form and terms of the 1998 Old Notes are identical in all
material respects to the form and terms of the 1999 Old Notes and both the 1998
Old Notes and the 1999 Old Notes are governed by the Indenture. The New Notes
and the Old Notes are collectively referred to herein as the "Notes."
ICN will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be , 2001, unless the Exchange Offer is
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the business day prior to the
Expiration Date, unless previously accepted for payment. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to conditions which may be
waived by ICN and to the terms and provisions of the Registration Rights
Agreement (as defined herein). See "The Exchange Offer." Old Notes may be
tendered only in denominations of $1,000 and integral multiples thereof. ICN has
agreed to pay the expenses of the Exchange Offer.
The New Notes will be obligations of ICN entitled to the benefits of the
Indenture (as defined herein) relating to the Old Notes. The Notes will rank
pari passu in right of payment with all unsecured senior indebtedness and senior
to all subordinated indebtedness of the Company. The Notes will be effectively
subordinated to all secured indebtedness of the Company to the extent of the
assets securing such indebtedness and will also be effectively subordinated to
all indebtedness and other obligations of the Company's subsidiaries. The
indenture permits the Company and its subsidiaries to incur additional
indebtedness, subject to limitations. The form and terms of the New Notes are
identical in all material respects to the form and terms of the Old Notes except
that the New Notes have been registered under the Securities Act. Following the
completion of the Exchange Offer, none of the Notes will be entitled to the
benefits of the provisions of the Registration Rights Agreement relating to
contingent increases in the interest rates provided for pursuant thereto. See
"The Exchange Offer."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 2001.
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Interest on each New Note will accrue from the last Interest Payment Date
(as defined herein) on which interest was paid on the Old Note tendered in
exchange therefor or, if no interest has been paid on such tendered Old Note,
from August 20, 1998 with respect to the 1998 Old Notes and July 20, 1999 with
respect to the 1999 Old Notes (as the case may be). Holders of Old Notes whose
Old Notes are accepted for exchange will be deemed to have waived the right to
receive any payment in respect of interest on the Old Notes accrued from the
last Interest Payment Date or August 20, 1998 with respect to the 1998 Old Notes
and July 20, 1999 with respect to the 1999 Old Notes (as the case may be) to the
date of the issuance of the New Notes. Interest on the New Notes is payable
semi-annually on May 15 and November 15 of each year, accruing from the last
Interest Payment Date or August 20, 1998 with respect to the 1998 Old Notes and
July 20, 1999 with respect to the 1999 Old Notes (as the case may be) at a rate
of 8 3/4% per annum.
Prior to the date hereof, the Company's Exchange Offer Registration
Statement relating to an exchange offer for the Old Notes had not been declared
effective under the Securities Act. Under the provisions of the Registration
Rights Agreement relating to such Old Notes, the Company continued to pay
additional interest on such Old Notes until the date hereof.
The Notes will mature on November 15, 2008, unless previously redeemed. The
Company may redeem up to $70.0 million of the aggregate principal amount of the
Notes in cash at its option at any time prior to November 15, 2001 at 108.75% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of redemption, with the net proceeds of one or more Public Equity Offerings
(as defined). Upon a Change of Control (as defined), the Company will be
required to offer to repurchase the Notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued interest thereon to the date of
repurchase. The occurrence of such a Change in Control may also constitute a
default under the Company's other debt instruments which may contain similar
"change in control" provisions. Such debt instruments may not permit the
repurchase of the Notes absent consent of the lenders thereunder in the event of
a Change in Control. If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient assets to first satisfy its
obligations under any other agreements relating to indebtedness, if accelerated,
and then to repurchase all of the Notes that might be delivered by holders
seeking to accept the Company's offer to repurchase the Notes. The indenture may
not provide protection in the event of a highly leveraged transaction, including
a reorganization, restructuring or merger that does not result in a Change of
Control.
The Notes will be general unsecured obligations of the Company. The Notes
will rank pari passu in right of payment with all unsecured senior indebtedness
of the Company and senior to all subordinated indebtedness of the Company,
including its 6 1/2% Convertible Subordinated Notes due 2008. The Notes will be
effectively subordinated to all secured indebtedness of the Company to the
extent of the assets securing such indebtedness and will also be effectively
subordinated to all indebtedness and other obligations of the Company's
subsidiaries. As of June 30, 2001, the Company had no secured indebtedness
outstanding and its subsidiaries had aggregate indebtedness of $14.1 million
outstanding. The indenture governing the Notes will permit the Company and its
subsidiaries to incur additional indebtedness, subject to limitations.
Old Notes initially purchased by Qualified Institutional Buyers (as defined
in Rule 144A under the Securities Act) were initially represented by global
Notes in registered form, registered in the name of a nominee of The Depository
Trust Company ("DTC"), as depositary. The New Notes exchanged for Old Notes
represented by the global Notes will be represented by global New Notes in
registered form, registered in the name of the nominee of DTC, unless the
beneficial holders thereof request otherwise. The global New Notes will be
exchangeable, upon 10 days' prior written notice, for New Notes in registered
form, in denominations of $1,000 and integral multiples thereof. See
"Description of the New Notes -- Book-Entry Delivery and Form."
Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in several
no-action letters to third parties, and subject to the immediately following
sentence, ICN believes that the New Notes issued pursuant to the Exchange Offer
generally may be offered for resale, resold and otherwise transferred by holders
thereof without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any purchaser of Notes who is an
"affiliate" as defined under Rule 405 of the Securities Act of ICN or who
intends to participate in the
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Exchange Offer for the purpose of distributing the New Notes (i) will not be
able to rely on the interpretation by the staff of the Commission set forth in
the above referenced no-action letters, (ii) will not be able to tender Old
Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the New Notes, unless such sale or transfer is made pursuant
to an exemption from such requirements.
Each holder of the Old Notes who wishes to exchange Old Notes for New Notes
in the Exchange Offer will be required to make representations that (i) any New
Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of such holder's business, (ii) such holder has no arrangements with any
person to participate in the distribution of such New Notes and (iii) such
holder is not an "affiliate," as defined under Rule 405 of the Securities Act,
of ICN or, if such holder is an affiliate, that such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the holder is not a broker-dealer, it will be required to
represent that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the holder is a broker-dealer (a "Participating
Broker-Dealer") that will receive New Notes for its own account in exchange for
Old Notes that were acquired as a result of market-making activities or other
trading activities, it will be required to acknowledge that it has no
arrangements with any person to participate in the distribution of the New Notes
and that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, such holder
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to New Notes (other than a resale of an unsold allotment from the original sale
of the Old Notes) with this Prospectus. Under the Registration Rights Agreement,
ICN is required to allow Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use this Prospectus in
connection with the resale of such New Notes. A broker-dealer that purchased Old
Notes from ICN may not participate in the Exchange Offer.
ICN will not receive any proceeds from this offering, and no underwriter is
being utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL ICN ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
OR BLUE SKY LAWS OF SUCH JURISDICTION.
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TABLE OF CONTENTS
PAGE
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Available Information....................................... i
Incorporation of Documents by Reference..................... ii
Summary..................................................... 1
The Company................................................. 1
Offering of the Old Notes................................... 5
The Exchange Offer.......................................... 5
The New Notes............................................... 8
Risk Factors................................................ 12
Use of Proceeds............................................. 26
Capitalization.............................................. 27
Selected Financial Data..................................... 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
The Exchange Offer.......................................... 47
Business.................................................... 54
Management.................................................. 70
Description of the New Notes................................ 73
Book Entry; Delivery and Form............................... 92
U.S. Federal Income Tax Consequences........................ 94
Plan of Distribution........................................ 98
Legal Matters............................................... 98
Independent Accountants..................................... 98
Index to Financial Statements............................... F-1
AVAILABLE INFORMATION
ICN is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission via EDGAR.
Such reports, proxy statements and other information filed by ICN may be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices: Seven World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and copies of such material can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports,
proxy statements and other information also may be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Materials filed electronically with the Commission may also be accessed through
the Commission's home page on the World Wide Web at http://www.sec.gov.
This Prospectus constitutes a part of a registration statement (the
"Registration Statement") filed via EDGAR by ICN with the Commission under the
Securities Act. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto and reference is
hereby made to the Registration Statement and the exhibits and schedules thereto
for further information with respect to ICN and the securities offered hereby.
Statements contained herein concerning the provisions of any documents filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
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INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act, are incorporated in this Prospectus by reference as of
their respective dates: (i) Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, dated April 2, 2001, which was amended on April 11, 2001,
April 30, 2001 and June 29, 2001, on Form 10-K/A, (ii) Quarterly Reports on Form
10-Q for the quarter ended March 31, 2001, dated May 15, 2001, and for the
quarter ended June 30, 2001, dated August 14, 2001, (iii) Current Reports on
Form 8-K, dated March 20, 2001, March 22, 2001, July 3, 2001, July 13, 2001 and
July 18, 2001, respectively, and (iv) the description of the Common Stock and
associated Preferred Stock Purchase Rights contained in the Registration
Statement on Form 8-A, dated November 10, 1994. All reports and other documents
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such reports and other documents. Any statement contained herein or in a report
or document incorporated or deemed to be incorporated herein by reference shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed report or
document that is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The making of a modifying or superseding statement shall not be deemed an
admission for any purposes that the modified or superseded statement, when made,
constituted a misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made.
No person has been authorized to give any information or make any
representations other than those contained or incorporated by reference in this
Prospectus and the accompanying letter of transmittal and, if given or made,
such information or representations must not be relied upon as having been
authorized by ICN or the exchange agent. Neither the delivery of this Prospectus
or the accompanying letter of transmittal, or both together, nor any sale made
hereunder shall under any circumstances create an implication that there has
been no change in the affairs of ICN since the date hereof. Neither this
Prospectus nor the accompanying letter of transmittal, or both together,
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the request of such person, a copy of any or
all of the documents incorporated herein by reference (other than exhibits
hereto, unless such exhibits are specifically incorporated by reference into
such documents). Written requests for such copies should be directed to
Corporate Secretary, ICN Pharmaceuticals, Inc., 3300 Hyland Avenue, Costa Mesa,
California 92626. Telephone inquiries may be directed to Corporate Secretary, at
(714) 545-0100.
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SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus. Except as the
context otherwise requires, as used in this Prospectus, all references to ICN or
the Company include its subsidiaries.
THE COMPANY
ICN Pharmaceuticals, Inc. (the "Company") is a global, research-based
pharmaceutical company that develops, manufactures, distributes and sells
pharmaceutical, research and diagnostic products. In 2000, the Company had
revenues of $800.3 million and net income of $90.2 million. For the six months
ended June 30, 2001, the Company had revenues of $404.7 million and net income
of $42.3 million.
The Company distributes and sells a broad range of prescription (or
"ethical") and over-the-counter ("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 acquisition of high margin products that complement existing product
lines and can be introduced into new markets to meet the specific needs of those
markets; (ii) the creation of a pipeline of new products through internal
research and development, as well as strategic partnerships and licensing
arrangements; and (iii) the consolidation of the Company's leadership position
in Central and Eastern Europe, including Russia. In executing this strategy, the
Company believes that it is uniquely positioned to continue to exploit its basic
competitive advantages: (i) large enough economies of scale in its global
distribution network not enjoyed by smaller pharmaceutical companies that
provide opportunities to develop and register multi-regional products; and (ii)
small enough economies of scale in much of its manufacturing and production
facilities and its local and regional sales and marketing groups that provide
for higher profitability on the Company's smaller, niche products that cannot be
achieved by the larger pharmaceutical companies.
While most of the Company's businesses operate as part of a global
integrated strategy, each region utilizes knowledge of the local markets to
enhance the overall performance of the Company. For example, the Company
operates six pharmaceutical companies throughout Eastern Europe and, as measured
by sales, the Company believes it is one of the largest pharmaceutical companies
in Eastern Europe. Long term, the Company believes that as the standard of
living (disposable income as a percentage of GNP) rises, the rate of spending on
health care will increase. The Company also believes it will benefit from the
future growth of the Russian market over the next decade.
RESTRUCTURING
On June 15, 2000, the Company publicly announced a restructuring plan to
split its business into three separate publicly traded companies: Ribapharm Inc.
(comprised of the Company's royalty stream from ribavirin and the Company's U.S.
research & development operations) ("Ribapharm"), ICN International AG
(comprised of the Company's operations in Western Europe, Eastern Europe and
Asia, Africa and Australia) ("ICN International") and ICN Americas (comprised of
the Company's operations in North America, Latin America and Biomedicals) ("ICN
Americas"). The Company can give no assurance as to whether or when the
restructuring will take place. The Company believes that sale of interests in
ICN International would not require the consent of noteholders but that the
initial public offering or spin-off of Ribapharm would require the consent of
noteholders.
The Company intends for Ribapharm to become a separate publicly traded
company. To achieve this objective, the Company may sell a minority of
Ribapharm's common stock in an underwritten public offering. The Company has
filed a registration statement with the Securities and Exchange Commission to
effect the Ribapharm public offering. Following the Ribapharm public offering,
the Company may distribute its remaining interest in Ribapharm to the Company's
stockholders on a tax-free basis. Any distribution by the Company of its
remaining interest in Ribapharm to the Company's stockholders is subject to
obtaining a
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8
ruling from the Internal Revenue Service or an opinion of counsel that the
distribution will qualify as a tax-free spin-off, compliance with all other
applicable laws and approval of the holders of the Company's 8 3/4% senior notes
or repayment of those notes. The Company may effect the Ribapharm distribution
without undertaking a Ribapharm public offering if the maximum number of shares
that could be sold in the Ribapharm public offering would not provide a
sufficiently liquid market for those shares or if the Company concludes that,
taking into account the funds that the Company received from the private
placement of the 6 1/2% convertible subordinated notes, cash on hand and other
financings, an additional equity financing would not be necessary to repurchase
all of the Company's outstanding 8 3/4% senior notes and provide for the
Company's working capital requirements.
The Company intends to sell up to a 40% interest in ICN International in an
offering. The Company intends to apply for listing of the shares of ICN
International on the Budapest Stock Exchange and global depositary receipts on
the London Stock Exchange. Subject to market conditions and regulatory approvals
the Company expects to complete the offering of ICN International as soon as
practicable.
In addition to continuing the Company's operations in North America, Latin
America and Biomedicals, ICN Americas will hold the remaining interests in ICN
International and Ribapharm until these interests are disposed of by ICN
Americas, as discussed above.
RESEARCH AND DEVELOPMENT
The Company's research and development effort seeks to discover, develop,
and commercialize innovative products for the treatment of significant unmet
medical needs, principally in the antiviral and anticancer areas. The Company's
current program areas include hepatitis C, hepatitis B, HIV, and cancer, each of
which affects a large number of patients. The Company's research and development
activities are based upon the expertise accumulated in over 30 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 global and regional basis. In connection with this arrangement,
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. In addition, the Company develops innovative products
targeted to address the specific needs of the Company's local markets.
ROYALTY AGREEMENT AND REVENUES
In 1995, the Company entered into an Exclusive License and Supply Agreement
("License Agreement") with Schering-Plough Corporation ("Schering-Plough")
whereby Schering-Plough licensed all oral forms of ribavirin for the treatment
of chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha
interferon (the "Combination Therapy"). 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 worldwide
marketing rights for oral forms of ribavirin for hepatitis C and is responsible
for all clinical development and regulatory activities. 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. As part of the original agreement, Schering-Plough
was required to purchase $42 million of the Company's common stock. In 1999,
after certain regulatory milestones were achieved, Schering-Plough purchased
2,041,498 shares of the Company's common stock fulfilling its obligation.
In addition to 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 for use in hospitalized infants and children with severe
lower respiratory infections due to RSV. See discussion of Schering-Plough's
first/last right of first refusal in "Business -- Licenses, Patents and
Trademarks (Proprietary Rights").
2
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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 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. As a result, the Company had and continues to
have no effective control over 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 $235.3 million
in the fourth quarter of 1998. This charge reduced the carrying value of the
Company's investment in ICN Yugoslavia to its fair value, estimated to be zero.
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. A trial date has been set for July 15, 2002. The resolution of these
matters may affect the status of certain compounds, which were contributed to
ICN Yugoslavia by the Company in accordance with the agreement, which led to the
formation of ICN Yugoslavia.
ICN RUSSIA
While the Russian economy continues to show improvement since the financial
crisis that began in August 1998, the economy continues to experience
difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to
a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999 and 2000, the
ruble continued to fluctuate, there is continued volatility in the debt and
equity market, hyperinflation persists, confidence in the banking sector has yet
to be restored and there continues to be general lack of liquidity in the
economy. As of June 30, 2001, ICN Russia had a net monetary asset position of
approximately $8.6 million, which is subject to foreign exchange loss as further
declines in the value of the ruble in relation to the dollar occur. Due to the
fluctuation in the ruble exchange rate, the ultimate amount of any future
translation and exchange loss the Company may incur cannot presently be
determined and such loss may have a negative impact on the Company's results of
operations. The Company's management continues to work to manage its net
monetary exposure. However, there can be no assurance that such efforts will be
successful.
ACQUISITIONS
In July 2000, the Company acquired the Swiss pharmaceutical company Solco
Basel AG for $30.4 million, of which $25.2 million was paid in cash ($4 million
of cash was received as part of the Solco assets) and the balance in 125,000
shares of the Company's common stock. Under the terms of the Company's agreement
with the sellers, the Company has guaranteed a per share price initially at
CHF64 ($35.62 at June 30, 2001), increasing at a rate of 4% per annum through
June 30, 2002. If the holders of the shares sell any of the shares prior to June
30, 2002, the Company is entitled to one-half of any proceeds realized 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 in cash. The
aggregate guaranteed value of the shares held by the sellers exceeds the market
value by approximately $0.6 million as of June 30, 2001. See
"Business -- Acquisitions."
RECENT DEVELOPMENTS
In July 2001, the Company completed an offering of $525 million of 6 1/2%
Convertible Subordinated Notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm
3
10
common stock or a spin-off of Ribapharm (if either occurs), Ribapharm will
become jointly and severally liable for the obligations under the notes. In the
event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on August 17, 2001, the Company redeemed the
entire aggregate principal amount outstanding of the Company's 9 1/4% Senior
Notes due 2005 at a redemption price of 104.625% of the principal amount
thereof, plus accrued and unpaid interest. In connection with this redemption,
the Company will record an extraordinary loss on extinguishment of debt of $7.9
million, net of tax, in the third quarter of 2001. Any references in the
Prospectus to the aggregate pro forma indebtedness of the Company as of June 30,
2001 is on a pro forma basis to reflect the redemption of the Company's 9 1/4%
Senior Notes due 2005 and the issuance of $525 million of 6 1/2% Convertible
Subordinated Notes due 2008.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
At the Company's annual meeting of stockholders on May 30, 2001, three
persons nominated by a group of dissident stockholders calling themselves the
ICN Committee to Maximize Shareholder Value were elected to the Company's board
of directors. Nine other of the Company's directors remain in office. The terms
of office for six of these directors expire at the 2002 annual meeting and the
terms of office for three of these directors expire at the 2003 annual meeting.
Under the Company's bylaws and an agreement between the Company and SSP-Special
Situations Partners Inc., a member of the ICN Committee to Maximize Shareholder
Value, only three directors will be elected at the 2002 annual meeting, so that
after the 2002 annual meeting, the Company's board will be comprised of nine
directors. If the dissident group or any other stockholder were to elect three
additional nominees at the Company's 2002 annual meeting, then two-thirds of the
Company's Board of Directors would be different from the Company's Board of
Directors as it existed prior to the Company's 2001 annual meeting and the
change of control provisions of the Notes and some compensation arrangements
would be triggered, accelerating the Company's repayment obligations under the
Notes and requiring the Company to make payments under those certain
compensation arrangements. While the potential change in the Company's Board of
Directors described in the preceding sentence would not constitute a change of
control under the terms of the 6 1/2% convertible subordinated notes, the 6 1/2%
convertible subordinated notes also have change of control provisions. See "Risk
Factors -- Change of Control".
In June 2001, the Company's 100% owned subsidiary Ribapharm, Inc. licensed
Levovirin(TM), a compound that is currently in Phase I clinical trials for the
treatment of hepatitis C, to F. Hoffmann-La Roche. Ribapharm received a one time
licensing fee and will be eligible to receive future payments based upon Roche
achieving certain milestones. Roche will be responsible for all future
development costs of Levovirin. If Levovirin is successfully developed and
receives regulatory approval, Ribapharm will be entitled to receive royalty
payments. In addition, Roche licensed to the Company a compound that is at a
similar stage of development. The Company will be responsible for the
development costs of this compound, milestone payments and royalties if the
compound is successfully developed.
On August 13, 2001, Schering-Plough announced that it entered into a
licensing agreement with F. Hoffman-La Roche Ltd. and F. Hoffman-La Roche Inc.
that settles all patent disputes relating to their respective peginterferon
products. In addition, Schering-Plough and Roche will each license to the other
its patents applicable to peginterferon as a combination therapy with ribavirin.
The announcement said that Schering-Plough will cooperate should Roche wish to
acquire a license from the Company under patent rights to oral ribavirin for use
in combination with Roche's peginterferon product. The announcement also said
that the Schering-Plough/Roche agreement is subject to dismissal of the relevant
lawsuits by the courts in the United States and Europe. The Company is currently
evaluating the implications of this agreement.
------------------------
The Company's principal executive offices are located at 3300 Hyland
Avenue, Costa Mesa, California and its telephone number is (714) 545-0100.
4
11
OFFERING OF THE OLD NOTES
On August 20, 1998, ICN completed the private sale to Schroder & Co., Inc.
and Warburg Dillon Read LLC (the "1998 Initial Purchasers") of $200.0 million
principal amount of the 1998 Old Notes with net proceeds to ICN of approximately
$190.8 million. The 1998 Initial Purchasers resold the 1998 Old Notes to a
limited number of qualified institutional buyers at an initial price to
investors of 98.326% of the principal amount thereof (the "1998 Offering"). On
July 20, 1999, ICN completed the private sale to Warburg Dillon Read LLC and
Schroder & Co., Inc. (the "1999 Initial Purchasers" and, together with the 1998
Initial Purchasers, the "Initial Purchasers") of an additional $125 million
principal amount of the 1999 Old Notes with net proceeds to ICN of approximately
$118.5 million. The 1999 Initial Purchasers resold the 1999 Old Notes to a
limited number of qualified institutional buyers at an initial price to
investors of 96.899% of the principal amount thereof (the "1999 Offering," and
together with the 1998 Offering, the "Offering"). The Offering was a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Rule 144A and Section 4 thereof.
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $194.6 million
aggregate principal amount of Old Notes for up to an equal aggregate principal
amount of New Notes. The New Notes will be obligations of ICN entitled to the
benefits of the Indenture (as defined herein) relating to the Old Notes. The
form and terms of the New Notes are identical in all material respects to the
form and terms of the Old Notes except that the New Notes have been registered
under the Securities Act. Following the completion of the Exchange Offer, none
of the Notes will be entitled to the benefits of the provisions of the
Registration Rights Agreement relating to contingent increases in the interest
rates provided for pursuant thereto. See "Description of the New Notes."
The Exchange Offer............ $1,000 principal amount of New Notes will be
issued in exchange for each $1,000 principal
amount of Old Notes validly tendered pursuant
to the Exchange Offer. As of the date hereof,
$194.6 million in aggregate principal amount of
Old Notes are outstanding. ICN will issue the
New Notes to tendering holders of Old Notes on
or promptly after the Expiration Date.
Resale........................ ICN believes that the New Notes issued pursuant
to the Exchange Offer generally will be freely
transferable by the holders thereof without
registration or any prospectus delivery
requirement under the Securities Act, except
that any of its "affiliates" or "dealers," as
such terms are defined under the Securities
Act, that exchange Old Notes held for their own
account (a "Restricted Holder") may be required
to deliver copies of this Prospectus in
connection with any resale of the New Notes
issued in exchange for such Old Notes (the
"Prospectus Delivery Requirement"). A
broker-dealer will be required to acknowledge
that it has no arrangements with any person to
participate in the distribution of the New
Notes and that it will deliver a prospectus in
connection with the sale of such New Notes. A
broker-dealer that purchased Old Notes from ICN
may not participate in the Exchange Offer. See
"The Exchange Offer -- General" and "Plan of
Distribution."
Expiration Date............... 5:00 p.m., New York City time, on ,
2001, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
5
12
Accrued Interest on the New
Notes and the Old Notes....... Interest on each New Note will accrue from the
last Interest Payment Date on which interest
was paid on the Old Note tendered in exchange
therefor or, if no interest has been paid on
such tendered Old Note, from August 20, 1998
with respect to the 1998 Old Notes and July 20,
1999 with respect to the 1999 Old Notes (as the
case may be). Holders of Old Notes whose Old
Notes are accepted for exchange will be deemed
to have waived the right to receive any payment
in respect of interest on such Old Notes
accrued from the last Interest Payment Date or
August 20, 1998 with respect to the 1998 Old
Notes and July 20, 1999 with respect to the
1999 Old Notes (as the case may be) to the date
of the issuance of the New Notes. Consequently,
holders who exchange their Old Notes for New
Notes will receive the same interest payment on
the same Interest Payment Date that they would
have received had they not accepted the
Exchange Offer. See "The Exchange
Offer -- Interest on the New Notes."
Termination of the Exchange
Offer......................... ICN may terminate the Exchange Offer if it
determines that its ability to proceed with the
Exchange Offer could be materially impaired due
to any legal or governmental action, any new
law, statute, rule or regulation or any
interpretation of the staff of the Commission
of any existing law, statute, rule or
regulation. Holders of Old Notes will have
rights against ICN under the Registration
Rights Agreement if ICN fails to consummate the
Exchange Offer. See "The Exchange
Offer -- Termination." No federal or state
regulatory requirements must be complied with
or approvals obtained in connection with the
Exchange Offer, other than applicable
requirements under federal and state securities
laws.
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be
exchanged and any other required documentation,
to United States Trust Company of New York, as
Exchange Agent, at the address set forth herein
and therein or effect a tender of Old Notes
pursuant to the procedures for book-entry
transfer as provided for herein. See "The
Exchange Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Holders............ Any beneficial holder whose Old Notes are
registered in the name of his broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender
on his behalf. If such beneficial holder wishes
to tender on his own behalf, such beneficial
holder must, prior to completing and executing
the Letter of Transmittal and delivering his
Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
holder's name or obtain a properly completed
bond power from the registered holder. The
transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
6
13
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes (or who cannot complete the
procedure for book-entry transfer on a timely
basis) and a properly completed Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date may tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the business day prior to the Expiration Date,
unless previously accepted for exchange. See
"The Exchange Offer -- Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes......... Subject to the conditions as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange
Offer -- Termination", ICN will accept for
exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant
to the Exchange Offer will be delivered
promptly following the Expiration Date. See
"The Exchange Offer -- General."
Income Tax Consequences....... The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
federal income tax purposes. See "U.S. Federal
Income Tax Consequences."
Exchange Agent................ The United States Trust Company of New York,
the Trustee under the Indenture, is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The mailing
address of the Exchange Agent is: United States
Trust Company of New York, P.O. Box 84, Bowling
Green Station, New York, NY 10274-0084; and
deliveries by overnight courier should be
addressed to United States Trust Company of New
York, 30 Broad Street, 14th Floor, New York, NY
10004-2304. For information with respect to the
Exchange Offer, the telephone number for the
Exchange Agent is (800) 548-6565 and the
facsimile number for the Exchange Agent is
(212) 422-0183.
Use of Proceeds............... There will be no cash proceeds payable to ICN
from the issuance of the New Notes pursuant to
the Exchange Offer. The Company has used and
intends to use the net proceeds from the sale
of the 1998 and 1999 Old Notes for the cash
portion of the purchase price of the
acquisition of businesses and products ($116.2
million), to repay subsidiary debt and other
debt ($83.6 million) and to repurchase Series D
Convertible Preferred Stock ($28.3 million).
The remainder of the net proceeds from the
Offering will be used for general corporate
purposes, including other potential
acquisitions of businesses, minority interests
and capital expenditures.
7
14
THE NEW NOTES
Notes Offered................. $194.6 million aggregate principal amount of
8 3/4% Senior Notes due 2008.
Maturity...................... November 15, 2008.
Interest Payment Dates........ May 15 and November 15 of each year, commencing
November 15, 1998.
Ranking....................... The Notes will be general unsecured obligations
of the Company. The Notes will rank pari passu
in right of payment with all unsecured senior
indebtedness of the Company and senior to all
subordinated indebtedness of the Company,
including its 6 1/2% Convertible Subordinated
Notes due 2008. The Notes will be effectively
subordinated to all secured indebtedness of the
Company to the extent of the assets securing
such indebtedness and will also be effectively
subordinated to indebtedness and other
obligations of the Company's subsidiaries. As
of June 30, 2001, the Company had no secured
indebtedness outstanding and its subsidiaries
had aggregate indebtedness of $14.1 million
outstanding. The Indenture governing the Notes
permits the Company and its subsidiaries to
incur additional indebtedness, subject to
limitations. See "Risk Factors -- Ranking of
the Notes; Subsidiary Operations" and
"Description of the New Notes."
Optional Redemption........... The Company may redeem up to $70.0 million of
the aggregate principal amount of the Notes in
cash at its option at any time prior to
November 15, 2001 at 108.75% of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption,
with the net proceeds of one or more Public
Equity Offerings (as defined). See
"-- Description of the New Notes -- Optional
Redemption."
Change of Control............. Upon a Change of Control, the Company will be
required to offer to repurchase the Notes at a
purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase.
See "Description of the New Notes -- Change of
Control."
Certain Covenants............. The Indenture contains covenants with respect
to the Company and its Restricted Subsidiaries
(as defined), which restrict, among other
things, (a) the incurrence of additional
indebtedness, (b) the payment of dividends and
other restricted payments, (c) the creation of
liens, (d) the sale of assets, (e) payment
restrictions affecting Restricted Subsidiaries,
(f) transactions with affiliates and (g) the
issuance of capital stock by Restricted
Subsidiaries. The Indenture also restricts the
Company's ability to consolidate or merge with
or into, or to transfer all or substantially
all of its assets to, another person. See
"Description of the New Notes -- Covenants."
Registration Rights........... Pursuant to a Registration Rights Agreement
(the "Registration Rights Agreement") between
the Company and the Initial Purchasers, the
Company agreed to file by the 30th day
following the date of closing of each of the
1998 Offering and the 1999 Offering (each, an
"Issue Date") a registration statement (the
"Exchange
8
15
Offer Registration Statement") with respect to
an offer to exchange the Notes for a new issue
of debt securities of the Company registered
under the Securities Act with terms (other than
restrictions on transfer as set forth in
"Notice to Investors") substantially identical
to those of the Notes and to use its best
efforts to cause the Exchange Offer
Registration Statement to become effective by
the 150th day following the Issue Date and,
upon becoming effective, to commence the
Exchange Offer and cause the same to remain
open for acceptance for not less than 20
business days after the date of commencement.
Subject to exceptions, if the Exchange Offer is
not consummated within 180 days after the Issue
Date or with respect to notes not eligible to
be exchanged in the circumstances, if the
Initial Purchasers so request, the Company will
file and use its best efforts to cause to be
declared effective a shelf registration
statement (the "Shelf Registration Statement")
with respect to resales of the Notes from time
to time and will use its best efforts to keep
such registration statement effective until two
years after the Issue Date. Subject to
exceptions, if the Exchange Offer Registration
Statement or the Shelf Registration Statement
is not filed or declared effective or ceases to
be effective or the Exchange Offer is not
consummated within the applicable time periods
related thereto (each, a "Registration
Default"), the interest rate borne by the Notes
shall be increased by 0.50% per annum for the
90-day period following such Registration
Default. Such interest rate will increase by an
additional 0.25% per annum at the beginning of
each subsequent 90-day period, up to a maximum
aggregate increase of 1.0% per annum. From and
after the date that all Registration Defaults
have been cured, the Notes will bear interest
at the rate set forth on the cover page of this
Prospectus.
Trading....................... The Old Notes have been designated for trading
in the Private Offerings, Resales and Tradings
through Automated Linkages ("PORTAL") Market.
The New Notes will not be eligible for trading
on PORTAL.
Risk Factors.................. Potential investors in the Notes should
carefully consider the matters set forth under
the caption "Risk Factors" prior to making an
investment decision with respect to the Notes.
9
16
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth summary selected historical and other data
of the Company on a consolidated basis for each of the years in the five year
period ended December 31, 2000 and the unaudited six months periods ended June
30, 2001 and 2000. The summary selected historical financial data for each of
the five years in the five year period ended December 31, 2000 were derived from
the audited consolidated financial statements of the Company. The Company's
selected financial data as of June 30, 2001 and for the six-month period ended
June 30, 2001 and 2000 were derived from the unaudited consolidated condensed
financial statements of the Company included elsewhere in this Prospectus. In
the opinion of management, such unaudited consolidated financial statements
include all adjustments (consisting of only normal recurring items) necessary
for a fair presentation of the financial condition and results of operations of
the Company for such periods. Operating results for the six months ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the full year. The trends in the Company's sales and net income are affected by
several business combinations completed in the fiscal years 1996 through 2000.
See "Business." The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's historical consolidated financial
statements, including the notes thereto, included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ -------------------
1996 1997 1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
STATEMENTS OF OPERATIONS --
CONSOLIDATED:
Product sales...................... $614,080 $ 752,202 $ 800,639 $ 638,475 $ 645,190 $307,671 $345,759
Royalties.......................... -- -- 37,425 108,937 155,114 76,102 58,981
Total revenues..................... 614,080 752,202 838,064 747,412 800,304 383,773 404,740
Gross profit -- product sales...... 322,273 400,224 447,039 382,329 382,372 185,970 206,809
Income (loss) from operations(1)... 114,113 125,298 (289,568) 198,857 183,955 100,944 84,219
Interest expense................... 15,780 22,849 38,069 55,943 60,356 30,635 25,820
Extraordinary loss(2).............. -- -- -- -- 3,225 -- 214
Net income (loss)(1)............... 86,928 113,924 (352,074) 118,626 90,180 58,492 42,285
YEAR ENDED DECEMBER 31,
------------------------------------------------------------ JUNE 30,
1996 1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................... $306,764 $ 585,606 $ 236,994 $ 424,108 $ 406,639 $ 397,889
Total assets...................... 778,651 1,491,745 1,356,396 1,472,261 1,477,072 1,491,225
Total debt(2)..................... 195,681 348,206 556,489 606,035 511,688 506,362
Stockholders' equity.............. 315,350 796,328 586,164 683,572 757,194 785,637
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ -------------------
1996 1997 1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER DATA -- CONSOLIDATED:
Depreciation and amortization...... $ 17,936 $ 28,753 $ 51,096 $ 65,502 $ 64,540 $ 31,377 $ 35,219
Cash flows provided by (used in):
Operating activities............. (25,548) 9,315 9,624 87,123 181,684 82,263 77,208
Investing activities............. (41,962) (100,096) (295,046) (50,360) (90,795) (47,402) (57,724)
Financing activities............. 82,680 262,675 186,019 36,399 (112,765) (22,137) (8,918)
Ratio of earnings to fixed
Charges(3)(4)(5)................. 5.9x 4.5x -- 3.5x 3.1x 3.4x 3.6x
NOTES TO SUMMARY SELECTED FINANCIAL DATA:
(1) As a result of 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 recorded Eastern European charges
totaling $451.0 million in the year ended December 31, 1998. Of this amount,
10
17
$440.8 million is included in operating expenses, representing the write-off
of the Company's investment in Yugoslavia and related assets ($235.3
million), provisions for losses on accounts and notes receivable (including
accounts and notes receivable from the Yugoslavian government) ($203.5
million) and the write-off of investments ($2.0 million). The losses related
to Eastern Europe also include reductions in the value of inventories ($6.1
million) included in cost of product sales and a charge against interest
($4.1 million). As a result of the seizure of the Company's Yugoslavian
operation, the Company deconsolidated the financial statements of ICN
Yugoslavia and is currently accounting for its ongoing investments using the
cost method. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Foreign Operations."
(2) During 2000, the Company repurchased $84.4 million of its outstanding 9 1/4%
Senior Notes and $12.8 million of its outstanding 8 3/4% Senior Notes. The
repurchase generated an extraordinary loss on early extinguishment of debt
of $3.2 million, net of an income tax benefit of $1.7 million.
(3) Fixed charges consist of interest expense and capitalized interest.
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
consist of income before extraordinary loss, minority interests, provision
(benefit) for income taxes and interest expense.
(5) For the year ended December 31, 1998, the Company had a deficiency of
earnings compared to its fixed charges of $398.6 million.
11
18
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The following factors, among others,
could cause actual results to differ materially from those contained in
forward-looking statements made in this Prospectus, including, without
limitation, in "Risk Factors," "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." When used in this
Prospectus and the documents incorporated by reference herein, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plan" and
similar expressions are intended to identify forward-looking statements. In
addition, prospective investors should consider carefully the following factors
in connection with any investment decision made with respect to the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes not exchanged for New Notes pursuant to the Exchange
Offer remain subject to the existing restrictions upon transfer of such Old
Notes. Additionally, holders of any Old Notes not tendered in the Exchange Offer
prior to the Expiration Date will not be entitled to require ICN to file the
Shelf Registration Statement and the stated interest rate on such Old Notes will
remain at its initial level of 8 3/4%.
INDEBTEDNESS OF THE COMPANY
As of June 30, 2001, the Company had aggregate pro forma indebtedness of
$842.4 million outstanding. Subject to the restrictions in the Indenture, the
Company may incur additional indebtedness from time to time to finance working
capital needs, acquisitions, capital expenditures or other purposes. See
"Capitalization." There can be no assurance that financing will continue to be
available on terms acceptable to the Company or at all. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to fund scheduled investments and capital expenditures, to make
future acquisitions or developments and to absorb negative operating results may
be adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Indenture contains, and other debt instruments of the Company may in
the future contain, a number of significant covenants that, among other things,
restrict the ability of the Company to dispose of assets, incur additional
indebtedness, repay other indebtedness or amend other debt instruments, pay
dividends, create liens on assets, enter into investments or acquisitions,
engage in mergers or consolidations, make capital expenditures or engage in
certain transactions with subsidiaries and affiliates, and otherwise restrict
certain corporate activities. The indenture governing the Company's 6 1/2%
Convertible Subordinated Notes due 2008 (the "2001 Indenture") contains certain
limited covenants.
The Company's ability to comply with the covenants contained in the
Indenture and other debt instruments of the Company may be affected by events
beyond its control, including prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could result in
a default under the Indenture and/or such other debt instruments, which would
permit the holders of the Notes or such other lenders, as the case may be, to
declare all amounts borrowed thereunder to be due and payable, together with
accrued and unpaid interest, and any commitments of the other lenders to make
further extensions of credit under such other debt instruments could be
terminated. If the Company were unable to repay its indebtedness to its secured
lenders, such lenders could proceed against the collateral securing such
indebtedness.
RANKING OF THE NOTES; SUBSIDIARY OPERATIONS
The Notes are general unsecured obligations of the Company. The Notes rank
pari passu in right of payment of principal, premium, if any, and interest on,
and any other amounts owing in respect of, the Notes with other unsecured senior
indebtedness of the Company and will be effectively subordinated to all secured
indebtedness of the Company to the extent of the assets securing such
indebtedness. As of June 30, 2001, the Company had no secured indebtedness.
Additionally, the Indenture governing the Notes permits the Company to incur
Senior Bank Debt (as defined)of up to $50.0 million (or, if greater, 85% of
certain
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receivables plus 60% of inventory) which may be collateralized by inventories,
receivables and other assets of the Company. In the event of the bankruptcy,
liquidation, dissolution, reorganization or other winding up of the Company, the
assets of the Company which collateralize secured indebtedness will be available
to pay obligations on the Notes only after the respective secured indebtedness
of the Company has been paid in full. See "Description of the New Notes."
Some of the Company's United States operations and all of its foreign
operations are conducted through subsidiaries. Such subsidiaries have not
guaranteed or otherwise become obligated with respect to the Notes. The Notes
will be therefore effectively subordinated to all indebtedness and other
obligations of such subsidiaries with respect to the assets of such
subsidiaries. As of June 30, 2001, the Company's subsidiaries had aggregate
indebtedness of approximately $14.1 million. Claims of creditors of the
Company's subsidiaries, including trade creditors, will generally have priority
as to the assets of such subsidiaries over the claims of the Company and the
holders of the Company's indebtedness, including the Notes.
DEPENDENCE ON SALES OF THE COMPANY'S PRODUCT
The Company is dependent upon royalties from its license arrangement with
Schering-Plough to fund its research and development program. Schering-Plough
has sole discretion to determine the pricing of ribavirin and the amount and
timing of resources devoted to the marketing of ribavirin. Any significant
decrease in royalties from this license arrangement could require the Company to
reduce its research and development expenditures and other activities. The
Company also may not be able to repay any borrowings it has incurred in
anticipation of receiving these royalties.
Schering-Plough has informed the Company that it believes royalties paid
under the license agreement should not include royalties on products distributed
as part of an indigent patient marketing program. In raising the dispute,
Schering-Plough has not clearly articulated to the Company a contractual basis
for the nonpayment of royalties. Rather it has based its arguments on primarily
moral or humanitarian grounds, essentially equitable arguments, indicating that
they believe they should not have an obligation to pay royalties on product
given to indigent patients. The Company has not been provided with appropriate
information or documentation, and does not agree with such adjustment as the
license agreement articulates those programs for which royalties would not be
due. Should Schering-Plough successfully apply this adjustment retroactively
since the inception of the license agreement, the adjustment would be
approximately $15,000,000. Further, if Schering-Plough were to apply the
proposed adjustment to future royalty payments, royalties could be reduced in
approximately the same proportion as the proposed historical adjustment.
Royalties received from the sale of ribavirin by Schering-Plough could also
decline in the future for a variety of other reasons, including:
+ reductions in the pricing of ribavirin by Schering-Plough or in reimbursement
by health care payors;
+ the expiration or invalidation of the patents related to ribavirin;
+ a decrease in Schering-Plough's marketing efforts;
+ quarterly or yearly fluctuations in the prevalence of hepatitis C;
+ fluctuations in foreign currency exchange rates;
+ the failure or refusal of Schering-Plough to pay royalties, including in
connection with any contract dispute, such as the one discussed above;
+ an increase in the severity or frequency of side effects associated with
ribavirin, the combination therapy, or interferon alfa-2b or the discovery of
other harmful effects attributable to these drugs and therapy.
In addition, future royalties from Schering-Plough may also decrease if
competing therapies are developed for the treatment of hepatitis C. Competing
therapies may include:
+ pegylated interferon developed by Schering-Plough and F. Hoffmann-La Roche;
+ Infergen being developed by Amgen, Inc.;
+ Albuferon being developed by Human Genome Sciences, Inc.; and
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+ protease inhibitors being developed by Eli Lilly and Company, Vertex
Pharmaceuticals Incorporated, Viropharma Incorporated, American Home Products
Corporation and Gilead Sciences, Inc.
Other companies that engage in research activities similar to the Company's
research activities include Abbott Laboratories, Pfizer Inc., GlaxoSmithKlein
plc, Merck & Co. Inc. and Novartis AG. In particular, on May 10, 2001, Novartis
announced that the FDA approved its drug Gleevec which may compete with Tiazole.
RISKS OF RESTRUCTURING
On June 15, 2000, the Company publicly announced a restructuring plan to
split its business into three separate publicly traded companies: Ribapharm Inc.
("Ribapharm") (comprised of the Company's royalty stream from ribavirin and the
Company's U.S. research & development operations), ICN International AG ("ICN
International") (comprised of the Company's operations in Western Europe,
Eastern Europe and Asia, Africa and Australia) and ICN Americas (comprised of
the Company's operations in North America, Latin America and Biomedicals). The
Company has not finalized its plans for this restructuring and its plans may
change or the restructuring may not occur at all. The Company cannot anticipate
the effect that the restructuring plan will have on it. The restructuring may
require the creation of new management systems, the relocation of employees, the
incurrence of additional expenses and other actions that may adversely affect
the Company's business. It may also negatively impact some synergies and
economies of scale that currently benefit the Company's business. The
restructuring may also put additional strain on management's time and attention.
Since the restructuring plan would divide the Company into three separate
companies, the Company may not have sufficient management depth. The Company
cannot anticipate all the consequences of restructuring and some of the
consequences may adversely affect the Company's profitability. If effected, the
restructuring could have a material adverse effect on the Company's cash flow
from operations. Under the Company's Indentures, the Company believes that sale
of interests in ICN International would not require the consent of noteholders
but that the initial public offering or spin-off of Ribapharm Inc. would require
the consent of noteholders. On August 17, 2001 the Company redeemed all of the
outstanding 9 1/4% Senior Notes at a redemption price of 104.625% of the
principal amount thereof, plus accrued and unpaid interest. The Company has
repurchased $130.4 million of Notes and may from time to time repurchase
additional Notes or, in connection with the restructuring, may commence a tender
offer and consent solicitation for the Notes. In such case, Notes not purchased
pursuant to any tender offer would remain outstanding obligations of the
Company. If the requisite consents were received in connection with any tender
offer, the restrictive covenants or other provisions in the Indenture would be
modified or eliminated so that the initial public offering or spin-off of
Ribapharm will not violate any covenants or create any event of default. Such
changes in the Indenture could increase the credit risk to, and otherwise
adversely affect the interests of, non-tendering holders or holders whose notes
are not accepted for payment.
POLITICAL AND ECONOMIC INSTABILITY
Approximately 63% and 62% of the Company's revenues for 2000 and for the
first six months of 2001, respectively, were generated from operations outside
the United States. The Company operates both directly and through distributors
in North America, Latin America (principally Mexico), Western Europe (including
Poland, Hungary and the Czech Republic) and Russia and through distributors
elsewhere in the world.
A large portion of the Company's foreign operations is conducted in
emerging markets. Businesses operating in emerging markets are subject to
greater economic, commercial and political risks, including the risk of civil
unrest or war, than those operating in more developed markets. These risks
include, among others, the nationalization or expropriation of assets or
businesses, price and exchange controls, exchange rate risks (including
devaluation of currency), high rates of inflation, limitations on participation
in local enterprises, political and economic instability, changes in
regulations, restrictive governmental actions, lack of enforcement of legal
rights, corruption and inefficient and restrictive banking systems. For example,
if the government of a territory in which the Company conducts business decides
to nationalize or expropriate some or all of the Company's assets, the Company
may not receive adequate compensation, its cash flow may be significantly
affected and its business, financial condition and results of operations may be
materially adversely affected.
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Even in those countries which have enacted legislation to protect foreign
investment and other property against expropriation and nationalization, there
can be no certainty that such protections will be enforced. This uncertainty is
due to several factors, including: (i) the lack of budgetary resources; (ii) the
apparent lack of political will to enforce legislation to protect property
against expropriation and nationalization; (iii) the lack of an independent
judiciary and sufficient mechanisms to enforce judgments; and (iv) corruption
among government officials. Any such failure to enforce such protections may
have a material adverse affect on the Company's business, financial condition
and results of operations.
The Company has received letters from some authorities of Russian regions
inquiring as to whether it has complied with all of the commitments that it made
when it acquired businesses in Russia. While the Company believes it has
complied with these commitments in all material respects, it cannot predict what
actions these authorities might take if they conclude otherwise. In addition, in
1998 the Company's operations in Yugoslavia were seized by an agency of the
Yugoslavian government.
FOREIGN CURRENCY RISKS
The Company sells products in many countries that are susceptible to
significant foreign currency risk. The Company generally sells products in these
countries for United States dollars. While this eliminates the Company's direct
currency risk, it increases the Company's credit risk because if a local
currency is devalued significantly it becomes more expensive for customers in
that market to purchase the Company's products in United States dollars.
Acquisitions the Company is currently evaluating or pursuing may increase its
foreign currency risk and the other risks identified above. The Company
currently does not have a hedging program to protect against foreign currency
exposure and, in some of the countries in which it operates, no effective
hedging program is available.
RISK OF OPERATIONS IN RUSSIA AND CENTRAL EUROPE
The Company plans to continue to invest in Russia to maintain the quality
of its existing asset base and improve profitability. Any additional potential
investments will be primarily funded by cash flow generated by operations in
Russia and subject to review on a project by project basis. Such review will
consider the current economic conditions in existence at the time as well as
customary financial review.
While the Russian economy continues to show improvement since the financial
crisis that began in August 1998, the economy continues to experience
difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to
a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999 and 2000, the
ruble continued to fluctuate, there is continued volatility in the debt and
equity market, hyperinflation persists, confidence in the banking sector has yet
to be restored and there continues to be general lack of liquidity in the
economy. As of June 30, 2001, ICN Russia had a net monetary asset position of
approximately $8.6 million, which is subject to foreign exchange loss as further
declines in the value of the ruble in relation to the dollar occur. Due to the
fluctuation in the ruble exchange rate, the ultimate amount of any future
translation and exchange loss the Company may incur cannot presently be
determined and such loss may have a negative impact on the Company's results of
operations. The Company's management continues to work to manage its net
monetary exposure. However, there can be no assurance that such efforts will be
successful.
In July 1998, the Company acquired VUAB, a manufacturing and research
facility located in a suburb of Prague in the Czech Republic, for approximately
$17.9 million. Since October 1997, the Company has invested approximately $65.3
million, and 48,000 shares of Common Stock valued at $1.7 million for an 98%
interest in Polfa Rzeszow, S.A. ("Rzeszow"), a pharmaceutical company located in
Poland. Although the Company believes that investment in Russia, Central Europe
and other emerging markets offers access to growing world markets, the economic
and political conditions in such countries are uncertain. Foreign operations are
subject to risks inherent in conducting business abroad, including possible
nationalization or expropriation, price and exchange controls, devaluation of
currencies, limitations on foreign participation in local enterprises, health
care regulations and other restrictive governmental actions. See "-- Dependence
on Foreign Operations."
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Furthermore, the success of the Company's operations in Russia and central
Europe depends on the Company's ability to attract and retain qualified
management in these countries who are familiar not only with the Company's
business and industry but also with the commercial practices and economic and
political environments in these countries.
CHANGE OF CONTROL
At the Company's annual meeting held May 30, 2001, three persons nominated
by a group of dissident shareholders calling themselves the ICN Committee to
Maximize Shareholder Value were elected to the Company's Board of Directors. The
Company reserves the right to challenge the vote by pursuing the Company's
pending lawsuit in federal court. If the dissident group or any other person
were to elect three additional nominees at the Company's 2002 annual meeting,
then two-thirds of the Company's Board of Directors would be different from the
Company's Board of Directors as it existed prior to the Company's 2001 annual
meeting. This would trigger change of control provisions in the Company's
existing debt instruments and some compensation arrangements. If this were to
occur, the Company would be required to make an offer to redeem, at a purchase
price equal to 101% of the principal amount thereof plus accrued interest, all
of the Notes.
If the Company experienced a change of control under its 6 1/2% Convertible
Subordinated Notes due 2008, the Company would be obligated to make an offer to
redeem, at a purchase price equal to 100% of the principal amount thereof, plus
accrued interest, all of the 6 1/2% Convertible Subordinated Notes due 2008.
In addition, if the Company experienced a change of control under
employment agreements with its Chairman and several key senior executive
officers, it would be obligated under these agreements to pay amounts totaling
approximately $27.8 million, based upon present compensation. In addition, the
vesting of options granted to the Company's Chairman and several key senior
executive officers would be accelerated. The value of the accelerated options
would depend upon the market price of shares of the Company's common stock at
that time.
The Company cannot give any assurances that it will have sufficient funds
available for any required repurchases under the Notes or other indebtedness if
the Company experiences a change in control. If the Company fails to repurchase
any existing indebtedness, including the Notes, as required, then the Company
would be in default under the Indenture.
NO ASSURANCE OF SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF FUTURE PRODUCTS
The Company's future growth will depend, in large part, upon its ability to
develop or obtain and commercialize new products and new formulations of or
indications for current products. The Company is engaged in an active research
and development program involving compounds owned by the Company or licensed
from others which the Company may, in the future, desire to develop
commercially. Although the Company has received regulatory approvals with
respect to oral ribavirin for treatment of chronic hepatitis C in combination
with Schering-Plough Corporation's (together with all of its subsidiaries,
"Schering-Plough") alpha interferon (the "Combination Therapy"), there can be no
assurance that the Company will be able to develop or acquire new products,
obtain regulatory approvals to use such products for proposed or new clinical
indications in a timely manner, manufacture its potential products in commercial
volumes or gain market acceptance for such products. It may be desirable that
the Company enter into other licensing arrangements, similar to its arrangement
with Schering-Plough regarding ribavirin, with other pharmaceutical companies in
order to market effectively any new products or new indications for existing
products. There can be no assurance that the Company will be successful in
entering into such licensing arrangements on terms favorable to the Company or
at all. See "-- Limited Patent Protection"; "-- Government Regulation";
"Business"; "Business -- Marketing and Customers"; "Business -- Government
Regulation"; and "Business -- Research and Development."
In June 2001, the Company licensed Levovirin(TM), a compound that is
currently in Phase I clinical trials for the treatment of hepatitis C, to F.
Hoffmann-La Roche. It is expected that Levovirin will be used in
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combination therapy with Pegasys, Roche's pegylated version of interferon alpha
2a. The Company will receive a one time licensing fee and milestone payments. If
Levovirin is successfully developed and receives regulatory approval, the
Company will receive royalty payments. Roche will be responsible for all future
developmental costs of Levovirin. At the same time, Roche has licensed to the
Company a compound that is at a similar stage of development. The Company will
be responsible for the development costs of this compound, milestone payments
and royalties if the compound is successfully developed. See "Risk
factors -- Potential Limitations on Commercialization Opportunities Due to
Contractual Obligations Schering-Plough."
RESEARCH AND DEVELOPMENT EXPANSION
The Company is in the process of significantly increasing the number of its
research and development employees and expanding the scope of its research and
development operations. The Company's plan is to expand its research team from
18 scientists on March 1, 2000 to over 120 scientists by the end of 2002. The
Company also spent approximately $18 million in 2000 to update and modernize its
research laboratories and equipment. This internal expansion and any
acquisitions of products or businesses that the Company makes will result in an
increase in responsibilities for both existing and new management personnel. The
Company's ability to manage expansion and acquisitions effectively will require
it to implement and improve its operational, financial and management
information systems. The Company may also have to recruit additional employees.
If the Company fails to manage its research and development expansion, the
Company's business could be impaired.
LIMITED PATENT PROTECTION
The Company depends, in part, on the protection afforded by its patents
relating to ribavirin for market exclusivity. In particular, if generic forms of
ribavirin are permitted to be sold, both the volume of sales and the price
Schering-Plough charges for the combination therapy may decrease significantly.
The Company has received correspondence from another pharmaceutical company that
has filed an abbreviated New Drug Application for a generic form of ribavirin.
As a result, the Company's royalty revenues may decrease.
Schering-Plough currently has regulatory protection under the Waxman-Hatch
Act in the United States for the treatment of hepatitis C using the combination
therapy. This protection means that the FDA cannot approve a generic form of the
combination therapy until December 2001. Schering-Plough is currently conducting
pediatric studies for the use of the combination therapy that, if completed in
accordance with FDA requirements, may extend this regulatory protection until
June 2002. In addition, Schering-Plough obtained a US patent covering the
combination therapy in January 2001 that may provide additional protection
against competition.
The Company also has three issued US patents that relate to methods of
using ribavirin in dosages that can enhance a patient's immune system in a
manner that is particularly useful for treating hepatitis C in combination with
interferon alpha. The Company believes these protections may provide additional
patent protection for the combination therapy. These patents all expire in
January 2016.
The Company has patents in foreign countries relating to various antiviral
uses of ribavirin. Coverage and expiration of these patents vary, with patents
expiring at various times through June 2005. The Company has no, or limited,
patent rights relating to the antiviral use of ribavirin in selected foreign
countries where ribavirin is currently, or in the future may be, approved for
commercial sale. These include countries in the European Union. However, the use
of oral forms of ribavirin for the combination therapy was granted a favorable
review classification by the European Union. This classification may make it
more difficult for competing drugs not previously approved to gain entry to the
European markets.
In addition, the expiration of US patent rights relating to Adenazole
between May 2008 and December 2015, Tiazole in February 2005, and any
subsequently issued patents relating to Levovirin and Viramidine or other
products, may result in competition from other drug manufacturers. The FDA has
granted Tiazole orphan drug designation for treatment of the late stages of a
form of leukemia. In May 2001, Novartis announced that it received FDA approval
to market its product Gleevec for the treatment of chronic
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myelgoneous leukemia, including the blast crisis stage. This development could
adversely affect the Company's ability to obtain approval for this indication.
Some of the compounds in the Company's nucleoside analog library may have
been patented previously or otherwise disclosed to the public. This would
prevent the Company from obtaining patent protection for the compounds
themselves. In these cases, the Company intends to seek patent protection for
its intended uses of these compounds and/or for derivatives of these compounds.
The existence of a patent will not necessarily protect the Company from
competition. Competitors may successfully challenge the Company's patents,
produce similar drugs that do not infringe its patents or produce drugs in
countries that do not respect the Company's patents.
POTENTIAL MISAPPROPRIATION OF PROPRIETARY RIGHTS BY STRATEGIC PARTNERS
The Company's success will depend, in part, on its ability and the ability
of any strategic partners and licensees, including Schering-Plough, to operate
without infringing on or misappropriating the proprietary rights of others. In
January 2000, F. Hoffmann-La Roche filed lawsuits against Schering-Plough in the
United States District Court in New Jersey and in France. These lawsuits alleged
that Schering-Plough's pegylated interferon infringes F. Hoffmann-La Roche's
patents on pegylated interferon. On August 13, 2001, Schering-Plough announced
that it entered into a licensing agreement with F. Hoffman-La Roche Ltd. and F.
Hoffman-La Roche Inc. that settles all patent disputes relating to their
respective peginterferon products. In addition, Schering-Plough and Roche will
each license to the other its patents applicable to peginterferon as a
combination therapy with ribavirin. The announcement said that Schering-Plough
will cooperate should Roche wish to acquire a license from the Company under
patent rights to oral ribavirin for use in combination with Roche's
peginterferon product. The announcement also said that the Schering-Plough/Roche
agreement is subject to dismissal of the relevant lawsuits by the courts in the
United States and Europe. The Company is currently evaluating the implications
of this agreement.
POTENTIAL LIMITATIONS ON RIGHTS TO COMMERCIALIZE TIAZOLE AND ADENAZOLE
The Company contributed to Ribapharm its rights related to Tiazole and
Adenazole. These are two of the four compounds in Ribapharm's product
development pipeline. However, the Company is involved in litigation with the
Republic of Serbia, the Federal Republic of Yugoslavia and the State Health Fund
of the Republic of Serbia that could impact these rights. The Company has taken
the position in this litigation that rights related to Tiazole and Adenazole
were previously validly transferred to ICN Yugoslavia, a joint venture between
the Company and Yugoslavian entities. Depending on the resolution of this
litigation, Ribapharm may not have valid rights related to Tiazole and
Adenazole. Ribapharm may be required to obtain licenses from, or grant licenses
to, third parties prior to any effort by Ribapharm to commercialize these
products. It may be difficult for Ribapharm to license Tiazole and Adenazole to
third parties for commercialization if rights related to these compounds remain
unclear. As a result of the changing political environment in Yugoslavia, the
Company is attempting to regain control of ICN Yugoslavia. There can be no
assurance that the Company will be successful in its efforts.
UNCERTAIN IMPACT OF ACQUISITION PLANS
The Company intends to continue its strategy of targeted expansion through
the acquisition of compatible businesses and product lines and the formation of
strategic alliances, joint ventures and other business combinations. There can
be no assurance that the Company will successfully complete or finance any
future acquisition or investment. Should the Company complete any material
acquisition, the Company's success or failure in integrating the operations of
the acquired company may have a material impact on the future growth or success
of the Company.
LEGAL PROCEEDINGS
On August 11, 1999, the United States Securities and Exchange Commission
filed a complaint in the United States District Court for the Central District
of California captioned Securities and Exchange
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Commission v. ICN Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and
David C. Watt, Civil Action No. SACV 99-1016 DOC (ANx) (the "SEC Complaint").
The SEC Complaint alleges that the Company and the individual named defendants
made untrue statements of material fact or omitted to state material facts
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading and engaged in acts,
practices, and courses of business which operated as a fraud and deceit upon
other persons in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The SEC Complaint concerns the
status and disposition of the Company's 1994 New Drug Application for Virazole
as a monotherapy treatment for Hepatitis C (the "NDA"). The SEC Complaint seeks
injunctive relief, unspecified civil penalties, and an order barring Mr. Panic
from acting as an officer or director of any publicly-traded company. A
pre-trial schedule has been set which requires the submission of summary
judgment motions in late 2002, the end of discovery by March 17, 2003, and the
commencement of trial on May 6, 2003. The Company and the SEC are engaged in
discussions in an effort to determine whether the litigation can be resolved by
settlement agreement.
Beginning in 1996, the Company received subpoenas from a Grand Jury in the
United States District Court for the Central District of California requesting
the production of documents covering a broad range of matters over various time
periods. The Company understood that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee, and a former
employee of the Company were targets of the investigation. The Company also
understood that a senior executive officer and a director were subjects of the
investigation. The United States Attorney for the Central District of California
(the "Office") advised counsel for the Company that the areas of its
investigation included disclosures made and not made concerning the 1994
Hepatitis C monotherapy 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 monotherapy 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 cooperated, and continues to cooperate, in the
Grand Jury investigation. A number of current and former officers and employees
of the Company were interviewed by the government in connection with the
investigation. The Office had issued subpoenas requiring various current and
former officers and employees of the Company to testify before the Grand Jury.
Certain current and former officers and employees testified before the Grand
Jury beginning in July 1998.
On March 15, 2001, the Company was notified by the Office that a decision
had been made to decline prosecution of all of the individual targets and
subjects of the Grand Jury investigation. At the same time, the Company was also
notified that the United States Attorney had authorized the Office to seek an
indictment of the Company based upon alleged false and misleading
misrepresentations concerning the 1994 hepatitis C monotherapy NDA. The Company
and the Office are engaged in discussions in an effort to determine whether the
matter can be settled by plea bargain, which could include a plea by the Company
to one felony count.
In connection with the Grand Jury investigation and SEC litigation, the
Company has recorded a reserve in the fourth quarter of 2000 of $9,250,000 to
cover the potential combined settlement liability and all other related costs.
The Company's estimate of the fourth quarter reserve was based upon the nature
and amounts noted during settlement discussions with the SEC and the Office. The
Company believes that additional loss in settling these matters, based upon
discussions to date, is not reasonably possible. There can, of course, be no
assurance that the Grand Jury investigation will be settled by plea agreement or
that the SEC litigation will be settled by mutual agreement or what the amount
of any settlement may ultimately be. In the event that a settlement of either
matter is not reached, the Company will vigorously defend any litigation.
On or about February 9, 1999, the Company commenced an action in the United
States District Court for the District of Columbia ("District Court") against
the Federal Republic of Yugoslavia ("FRY"), the Republic of Serbia ("ROS"), and
the State Health Fund of Serbia ("State Fund") seeking damages in the amount of
at least $500,000,000 and declaratory relief arising out of the FRY and ROS's
seizure of the Company's majority ownership interest in ICN Yugoslavia and the
failure of the ROS and State Fund to pay ICN Yugoslavia for goods sold and
delivered. On or about March 9, 1999, the State Fund commenced an
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arbitration against the Company before the International Chamber of Commerce
("ICC") 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, in turn,
counterclaimed against the State Fund, and commenced an arbitration against the
FRY and the ROS in the ICC arising out of the seizure of ICN Yugoslavia and the
failure to pay for goods sold and delivered, seeking damages and other relief.
The District Court stayed the action (while retaining jurisdiction) so that
issues of jurisdiction by and among the parties could be resolved at the ICC. On
February 23, 2001, the Arbitration panel issued decisions holding that: (i) the
State Fund is a proper party to the ICC arbitration; (ii) the issue of
jurisdiction over the ROS in the ICC arbitration will be joined to the merits of
the case and decided in conjunction therewith; and (iii) there is no
jurisdiction over the FRY in the ICC arbitration. The Company intends to
prosecute vigorously its claims against the FRY, the ROS, and the State Fund,
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 action
filed earlier by the Company in the District Court.
The Company is a party to a legal matter at one of its distribution
companies in Russia. The matter involves a claim relating to non-payment under a
contract entered into in January 1995, prior to the Company's acquisition of
this Russian distribution company. The claimant is seeking to recover $6.2
million in damages, plus expenses. Due to the complex and changing legal
environment in Russia, the Company can not estimate the range or amount of
possible loss, if any, that may be incurred. The Company intends to vigorously
defend this matter, however, an adverse decision could have a material effect on
the results of operations of the Company.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation cannot be predicted with certainty,
and an unfavorable outcome could have a negative impact on the Company, at this
time in the opinion of management, the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the efforts and abilities of its key members of
management, including Milan Panic, its Chairman and Chief Executive Officer. The
loss of their services could have a negative impact on the Company. The Company
cannot predict what effect, if any, the Commission and the Grand Jury
investigations of the Company and/or Mr. Panic may have on Mr. Panic's ability
to continue to devote services on a full time basis to the Company. See
"-- Legal Proceedings." In addition, Mr. Panic, who served as Prime Minister of
Yugoslavia from July 1992 to March 1993, remains active in Yugoslavian politics
and may again be asked to serve in public office in Yugoslavia in the future.
There is a risk that in the future Mr. Panic's political activities may result
in a change in government policy that would be detrimental to the Company's
future business activities, if any, in Yugoslavia.
In addition, the Company depends upon the principal members of its
scientific staff, including Dr. Johnson Y.N. Lau. Although the Company has
employment agreements with some of these individuals, including Dr. Lau, the
loss of services of any of these persons could delay or reduce the Company's
product development and commercialization efforts. The Company's success depends
upon its ability to attract, train, motivate and retain qualified scientific
personnel. Qualified personnel are in great demand throughout the biotechnology
and pharmaceutical industries. The Company currently plans to expand its
research team from 18 scientists on March 1, 2000 to over 120 scientists by the
end of 2002. However, the Company may not be able to attract additional
personnel or retain existing employees.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND LACK OF INSURANCE
The Company could be exposed to possible claims for personal injury
resulting from allegedly defective products. Even if a drug were approved for
commercial use by an appropriate governmental agency, there can be no assurance
that users will not claim that effects other than those intended may result from
the Company's
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27
products. The Company generally self-insures against potential product liability
exposure with respect to its marketed products, including ribavirin. While to
date no material adverse claim for personal injury resulting from allegedly
defective products, including ribavirin, has been successfully maintained
against the Company, a substantial claim, if successful, could have a negative
impact on the Company. See "Business -- Litigation, Government Investigations
and Other Matters."
The Company and each of the Company's subsidiaries maintains insurance
covering normal business operations, including fire, property and casualty
protection. Additionally, the Company carries a blanket insurance policy that
provides protection against loss not covered by local insurance policies. The
Company does not carry insurance that covers political risk, nationalization, or
losses resulting from anti-government violence.
GOVERNMENT REGULATION
FDA approval must be obtained in the United States and approval must be
obtained from comparable agencies in other countries prior to marketing or
manufacturing new pharmaceutical products for use by humans. Obtaining FDA
approval for new products and manufacturing processes can take a number of years
and involves the expenditure of substantial resources. Numerous requirements
must be satisfied, including preliminary testing programs on animals and
subsequent clinical testing programs on humans, to establish product safety and
efficacy. No assurance can be given that authorization of the commercial sale of
any new drugs or compounds by the Company for any application, or of existing
drugs or compounds for new applications, 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. Failure to comply
with applicable regulatory requirements can result in, among other things,
sanctions, fines, delays or suspensions of approvals, seizures or recalls of
products, operating restrictions and criminal prosecutions. Furthermore, changes
in existing regulations or adoption of new regulations could prevent or delay
the Company from obtaining future regulatory approvals. See "Business --
Licenses, Patents and Trademarks (Proprietary Rights)."
The Company is subject to price control restrictions on its pharmaceutical
products in the majority of countries in which it operates. To date, the Company
has been affected by pricing adjustments in Spain and by the lag in allowed
price increases in Russia and Mexico, which has impacted sales in U.S. dollars
and reduced 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.
NEW PRODUCT DEVELOPMENT SUBJECT TO HIGH RISK OF FAILURE.
A key component of the Company's strategy is to discover, develop and
commercialize new product candidates using its nucleoside analog library. The
process of successfully commercializing product candidates is very time
consuming, expensive and unpredictable. The Company has only recently begun to
direct significant efforts toward the expansion of its scientific staff and
research capabilities in order to pursue this strategy.
The Company may not identify any additional compounds from the library that
it believes have sufficient commercial promise to warrant further development.
Furthermore, compounds selected from the library for development may not be
patentable. Also, the Company's development work may not identify patentable
uses.
Clinical trials may not demonstrate that the Company's products are safe or
effective. Even if the Company successfully completes clinical trials, it may
not be able to obtain the required regulatory approvals to commercialize any
product candidate or the approval may impose labeling or marketing restrictions
which could materially impact potential profitability. For example, prior to its
approval as part of the combination therapy to treat hepatitis C patients, the
FDA denied the Company's request for regulatory approval to market ribavirin as
a monotherapy to treat hepatitis C. If the Company gains regulatory approval for
a product, the approval will be limited to those diseases for which the
Company's clinical trials demonstrate the product is
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safe and effective. To date, ribavirin is the Company's only internally
discovered product that has received regulatory approval for commercial sale.
POTENTIAL ALLEGATIONS THAT THE COMPANY'S PRODUCTS ARE HARMFUL
The nature of the Company's business exposes it to potential liability
risks inherent in the testing, manufacturing and marketing of pharmaceutical
products. Using the Company's drug candidates in clinical trials may expose the
Company to product liability claims. These risks will expand with respect to
drugs, if any, that receive regulatory approval for commercial sale. Even if a
drug were approved for commercial use by an appropriate governmental agency,
there can be no assurance that users will not claim that effects other than
those intended may result from the Company's products. The Company generally
self-insures against potential product liability exposure with respect to its
marketed products, including ribavirin. While to date no material adverse claim
for personal injury resulting from allegedly defective products, including
ribavirin, has been successfully maintained against the Company, a substantial
claim, if successful, could have a negative impact on the Company.
In the event that anyone alleges that any of the Company's products are
harmful, the Company may experience reduced consumer demand for its products or
its products may be recalled from the market. In addition, the Company may be
forced to defend lawsuits and, if unsuccessful, to pay a substantial amount in
damages. The Company does not currently have insurance against product liability
risks. Insurance is expensive and, if the Company seeks insurance in the future,
it may not be available on acceptable terms. Even if obtained, insurance may not
fully protect the Company against potential product liability claims.
Each of the Company's subsidiaries, including Ribapharm, maintains
insurance covering normal business operations, including fire, property and
casualty protection. Additionally, the Company carries a blanket insurance
policy that provides protection against loss not covered by local insurance
policies. The Company does not carry insurance that covers political risk,
nationalization, or losses resulting from anti-government violence.
In addition, the Company's research and development activities involve the
controlled use of potentially harmful biological materials as well as hazardous
materials, chemicals and various radioactive compounds. The Company cannot
completely eliminate the risk of accidental contamination or injury from the
use, storage, handling or disposal of these materials. In the event of
contamination or injury, the Company could be held liable for damages that
result. Any liability could exceed the Company's resources. The Company is
subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified waste products.
The cost of compliance with, or any potential violation of, these laws and
regulations could be significant. Any insurance the Company maintains may not be
adequate to cover its losses.
POTENTIAL LIMITATIONS ON COMMERCIALIZATION OPPORTUNITIES DUE TO CONTRACTUAL
OBLIGATIONS TO SCHERING-PLOUGH
In November 2000, the Company entered into an agreement that provides
Schering-Plough with an option or right of first/last refusal to license various
compounds the Company may develop. This agreement was entered into as part of a
resolution of claims asserted by Schering-Plough against the Company regarding
its alleged improper hiring of several former Schering-Plough research and
development personnel and claims that the Company's license agreement with
Schering-Plough precluded it from conducting hepatitis C research. The Company
has complied with the terms of this Agreement. The interest of potential
collaborators in obtaining rights to the Company's compounds or the terms of any
agreements the Company ultimately enters into for these rights may be impacted
by this agreement. Furthermore, a commercialization partner other than
Schering-Plough might have otherwise been preferable due to that potential
partner's strength in a given disease area or geographic region or for other
reasons.
In June 2001, the Company licensed Levovirin to F. Hoffman-La Roche. The
Company's agreement with Schering-Plough granted Schering-Plough a right of
first/last refusal to license Levovirin. Although the
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29
Company believes it has complied with its obligations under the right of
first/last refusal, Schering-Plough may allege that the Company has not complied
with these obligations as to Levovirin.
UNCERTAINTY RELATED TO HEALTH CARE REFORM MEASURES AND REIMBURSEMENT POLICIES
The levels at which government authorities, private health insurers, HMOs
and other organizations reimburse the costs of drugs and treatments related to
those drugs will have an effect on the successful commercialization of the
Company's drug candidates. The Company cannot be sure that reimbursement in the
United States or elsewhere will be available for any drugs it may develop or, if
already available, will not be decreased in the future. Also, the Company cannot
be sure that reimbursement amounts will not reduce the demand for, or the price
of, its drugs. If reimbursement is not available or is available only to limited
levels, the Company may not be able to obtain a satisfactory financial return on
the manufacture and commercialization of any future drugs. In addition, as a
result of the trend towards managed health care in the United States, as well as
legislative proposals to reduce government insurance programs, third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement of new drug products. Consequently,
significant uncertainty exists as to the reimbursement status of newly-approved
health care products. Third-party payors may not establish and maintain price
levels sufficient for the Company to realize an appropriate return on its
investment in product development.
POTENTIAL DESTRUCTION OF THE COMPANY'S NUCLEOSIDE ANALOG LIBRARY BY EARTHQUAKE
OR OTHER DISASTER
The laboratory books and the compounds that comprise the Company's
nucleoside analog library are all located at its headquarters in Costa Mesa,
California, near areas where earthquakes have occurred in the past. There are no
duplicate copies off-premises and there are no backup copies of the product
candidates the Company is currently developing. No duplicate copies exist
because making copies would be prohibitively expensive and the library has not
been moved off-site because the Company's scientific staff is currently in the
process of screening it. The Company's ability to develop potential product
candidates from its nucleoside analog library would be significantly impaired if
these records were destroyed in an earthquake or other disaster. Any insurance
the Company maintains may not be adequate to cover its losses.
CALIFORNIA'S ENERGY CRISIS
California has recently experienced an energy crisis that, if it continues,
could disrupt the Company's operations and increase the Company's expenses. When
power reserves for California become low, the state has on some occasions,
implemented, and may in the future continue to implement, rolling blackouts
throughout the state. Although the Company has some emergency back-up power
generators, if blackouts interrupt the Company's power supply, the Company may
temporarily be unable to operate its headquarters facility, including the
Ribapharm research facilities. Any such interruption in the Company's ability to
continue operations could damage the Company's reputation and could result in
lost revenue, either of which could substantially harm the Company's business
and results of operations. In addition, the shortages in wholesale electricity
supplies have caused power prices to increase significantly in California. If
wholesale prices continue to increase, the Company's operating expenses will
likely increase.
POTENTIAL FAILURE OF THIRD PARTY MANUFACTURERS TO COMPLY WITH FDA REGULATIONS
Schering-Plough manufactures the ribavirin sold under license from the
Company. The Company's manufacturers are required to adhere to regulations
enforced by the FDA. The Company's dependence upon others to manufacture its
products may adversely affect its profit margins and its ability to develop and
commercialize products on a timely and competitive basis. Delays or difficulties
with contract manufacturers in producing, packaging or distributing the
Company's products could adversely affect the sales of ribavirin or introduction
of other products. In February 2001, Schering-Plough announced that the FDA has
been conducting inspections of Schering-Plough's manufacturing facility in Las
Piedras, Puerto Rico that manufactures ribavirin, and has issued reports citing
deficiencies concerning compliance with current Good Manufacturing Practices,
primarily relating to production processes, controls and procedures. In June
2001, Schering-Plough announced that FDA inspections in May and June 2001 cited
continuing and additional
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30
deficiencies in manufacturing practices. While Schering-Plough has advised the
Company that the deficiencies were not specifically applicable to the production
of ribavirin, any deviations from Good Manufacturing Practices can affect
overall production at that facility. Schering-Plough's ability to manufacture
and ship ribavirin could be affected by temporary interruption of some
production lines to install system upgrades and further enhance compliance, and
other technical production and equipment qualification issues. If the FDA is not
satisfied with Schering-Plough's responses and proposed corrective action, the
FDA could take regulatory actions against Schering-Plough, including the seizure
of products, an injunction against further manufacture, a product recall or
other actions that could interrupt production of ribavirin. Interruption of
ribavirin production for a sustained period of time could materially reduce the
Company's royalty payments.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Ribavirin and many of
the drugs that the Company is attempting to discover will be competing with new
and existing therapies. Many companies in the United States and abroad are
pursuing the development of pharmaceuticals that target the same diseases and
conditions that the Company is targeting. The Company believes that a
significant number of drugs are currently under development and may become
available in the future for the treatment of hepatitis C, hepatitis B, HIV and
cancer. For example, each of Schering-Plough and F. Hoffmann-La Roche developed
a modified form of interferon, called pegylated interferon, for the treatment of
hepatitis C. In addition, Human Genome Sciences, Inc. submitted an
investigational new drug application with the FDA in October 2000 to initiate
phase I human clinical trials of Albuferon for treatment of hepatitis C. If
pegylated interferon, Albuferon or other therapies prove to be a more effective
treatment for hepatitis C than the combination therapy, then the Company's
royalty revenues from Schering-Plough could significantly decrease.
Many of the Company's competitors, particularly large pharmaceutical
companies, have substantially greater financial, technical and human resources
than the Company does. The Company believes that many of its competitors spend
significantly more on research and development related activities than the
Company does. Others may succeed in developing products that are more effective
than those presently marketed or proposed for development by the Company.
Progress by other researchers in areas similar to those being explored by the
Company may result in further competitive challenges. The Company may also face
increased competition from manufacturers of generic pharmaceutical products when
the patents covering some of its currently marketed products expire. In
addition, academic institutions, government agencies, and other public and
private organizations conducting research may seek patent protection with
respect to potentially competitive products. They may also establish exclusive
collaborative or licensing relationships with the Company's competitors.
ORIGINAL ISSUE DISCOUNT
The 1999 and 1998 Old Notes were issued at a discount from their principal
amount at maturity. Original issue discount will be included as interest income
in a U.S. noteholder's gross income for U.S. federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable. For
a more detailed discussion of the federal income tax consequences to the holders
of the 1999 New Notes of the purchase, ownership and disposition of the 1999 New
Notes, see "U.S. Federal Income Tax Considerations."
If a bankruptcy case is commenced by or against the Company after the
issuance of the 1999 New Notes, the claim of a holder of 1999 New Notes with
respect to the principal amount thereof may be limited to an amount equal to the
sum of (a) the initial offering price and (b) that portion of the original issue
discount constituting "unmatured interest" that accrued to the date of the
commencement of the bankruptcy case. For purposes of the U.S. Bankruptcy Code,
any original issue discount that was not amortized as of the time of any such
bankruptcy filing would constitute "unmatured interest" and may not be allowed
as a valid claim in the bankruptcy case.
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ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Notes will be new securities for which there is currently no public
market. The Company does not intend to list the Notes on any national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation System. Because the Notes are being
sold pursuant to an exemption from registration under the Securities Act and
applicable state securities laws, they may not be publicly offered, sold or
otherwise transferred in any jurisdiction where such registration may be
required unless they are registered or are sold in a transaction exempt from
registration in such jurisdiction. Accordingly, no assurance can be made as to
the development or liquidity of any market for the Notes. If an active public
market does not develop, the market, price and liquidity of the Notes may be
adversely affected. If any of the Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending on
prevailing interest rates, the market for similar securities and other factors,
including general economic conditions and the financial condition and
performance of the Company. Prospective investors in the Notes should be aware
that they may be required to bear the financial risks of such investment for an
indefinite period of time. See "Description of the New Notes" and "Book Entry;
Delivery and Form."
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USE OF PROCEEDS
ICN will not receive any cash proceeds from the issuance of the New Notes
offered hereby. In consideration for issuing the New Notes as contemplated in
this Prospectus, ICN will receive in exchange Old Notes in like principal
amount, the terms of which are identical in all material respects to the New
Notes. The Old Notes surrendered in exchange for the New Notes will be retired
and cancelled and cannot be reissued. Accordingly, issuance of the New Notes
will not result in any increase in the indebtedness of ICN.
The Company has used the net proceeds of $318 million from the sale of the
1998 Old Notes and 1999 Old Notes for the cash portion of the purchase price of
the acquisition of businesses and products in Western Europe and North America
and to repay long-term and other indebtedness, as follows: $89.4 million to
Roche for the acquisition of products in November 1998; $28.3 million by
repurchasing 821 shares of Series D Convertible Preferred Stock issued in
connection with the acquisition of rights to certain products from SKB in
December 1999 and $26.8 million to pay for other acquisitions in Latin America,
Europe and Russia; $10.6 million to repay certain U.S. mortgages with variable
interest rates ranging from 6.1% to 8.9% and maturing in 2022; $15.3 million to
repay certain short-term notes payable with variable interest rates ranging from
3.9% to 5.8% and maturing at various dates in 1999; $16.0 million to repay other
long term debt due in U.S. dollars and various foreign currencies, with interest
rates ranging from 6.0% to 13.5% and maturing through 2004; and $41.7 million of
indebtedness of its Hungarian subsidiary with interest rates ranging from 4.2%
to 21%, maturing through 2002. The remainder of the net proceeds from the
Offering will be used for general corporate purposes, including other potential
acquisitions of businesses, minority interests and capital expenditures. The
Company continually reviews acquisitions of complementary businesses and expects
to pursue other acquisitions even if those currently under review are not
completed.
Pending the uses outlined above, funds will be placed into short-term
investments such as governmental obligations, bank certificates of deposit,
banker's acceptances, repurchase agreements, short-term debt obligations, money
market funds and interest-bearing accounts.
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CAPITALIZATION
The following table sets forth the capitalization of the Company on a pro
forma basis at June 30, 2001 after giving effect to the Convertible Subordinated
Notes offering and the redemption of the 9 1/4% Senior Notes. The exchange of
the Old Notes into the New Notes offered hereby will have no impact on the
Company's capitalization. The table should be read in conjunction with the
Company's historical consolidated financial statements and notes hereto,
included elsewhere in this Prospectus.
JUNE 30, 2001
--------------------------
ACTUAL PRO FORMA(3)
---------- ------------
(IN THOUSANDS)
Total debt:
8 3/4% Senior Notes Due 2008(1)(2)............... $ 303,250 303,250
9 1/4% Senior Notes Due 2005..................... 188,978 --
6 1/2% Convertible Subordinated Notes due 2008... -- 525,000
Other debt....................................... 14,134 14,134
---------- ----------
Total debt.................................... $ 506,362 $ 842,384
========== ==========
Minority interest.................................. $ 9,640 $ 9,640
Stockholders' equity:
Common stock, $.01 par value; 200,000 shares
authorized; 81,391 shares outstanding......... 814 814
Additional capital............................... 982,279 982,279
Accumulated deficit.............................. (105,696) (113,633)
Accumulated other comprehensive income........... (91,760) (91,760)
---------- ----------
Total stockholders' equity.................... 785,637 777,700
Total capitalization.......................... $1,301,639 $1,629,724
========== ==========
---------------
(1) Represents the $200.0 million aggregate principal amount of 8 3/4% Senior
Notes issued in August 1998, less unamortized debt discount of $2.5 million,
and the $125.0 million aggregate principal amount of 8 3/4% Senior Notes due
2008 issued on July 20, 1999, less unamortized discount of $3.3 million. The
Company repurchased $12.8 million aggregate principal amount of 8 3/4%
Senior Notes during 2000.
(2) In April 2001, the Company repurchased $3.3 million and $1.7 million
aggregate principal amount of 8 3/4% and 9 1/4% Senior Notes, respectively.
In July and August 2001 the Company repurchased $114.2 million aggregate
principal amount of 8 3/4% Senior Notes. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment
of debt of $13,160,000, net of tax.
(3)Pro forma amounts reflect the issuance of $525 million of 6 1/2% Convertible
Subordinated Notes, redemption of the 9 1/4% Senior Notes, and the
extraordinary loss, net of tax, of $7.9 million as a result of the redemption
of the 9 1/4% Senior Notes outstanding as of June 30, 2001, which are not
part of this offering.
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SELECTED FINANCIAL DATA
The following table sets forth selected historical and other data of the
Company on a consolidated basis and selected historical operating data of ICN
Yugoslavia for each of the years in the five-year period ended December 31, 2000
and the unaudited six month periods ended June 30, 2001 and 2000. The Company's
selected historical financial data for each of the years in the five-year period
ended December 31, 2000 were derived from the audited consolidated financial
statements of the Company. The Company's selected financial data as of June 30,
2001 and for the six-month periods ended June 30, 2001 and 2000 were derived
from the unaudited consolidated condensed financial statements of the Company
included elsewhere in this Prospectus. In the opinion of management, such
unaudited consolidated financial statements include all adjustments (consisting
of only normal recurring items) necessary for a fair presentation of the
financial condition and results of operations of the Company for such periods.
Operating results for the six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the full year. The trends in
the Company's sales and net income are affected by several business combinations
completed in fiscal years 1996 through 2000. See "Business." The information
contained in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's historical consolidated financial statements, including the notes
thereto, included elsewhere in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENTS OF OPERATIONS:
Product sales....................................... $614,080 $752,202 $ 800,639 $638,475 $645,190 $307,671 $345,759
Royalties........................................... -- -- 37,425 108,937 155,114 76,102 58,981
-------- -------- --------- -------- -------- -------- --------
Total revenues...................................... 614,080 752,202 838,064 747,412 800,304 383,773 404,740
Cost of product sales............................... 291,807 351,978 353,600 256,146 262,818 121,701 138,950
Selling, general and administrative................. 190,929 249,206 291,776 252,207 304,314 138,865 152,640
Research and development............................ 15,719 18,692 20,835 10,963 18,769 6,853 12,823
Amortization of goodwill and intangibles............ 1,512 7,028 20,601 29,239 30,448 15,410 16,108
Eastern European charges(1)......................... -- -- 440,820 -- -- -- --
-------- -------- --------- -------- -------- -------- --------
Income (loss) from operations(1).................... 114,113 125,298 (289,568) 198,857 183,955 100,944 84,219
Other (income) loss, net including translation and
exchange.......................................... 2,282 12,790 80,501 11,823 6,587 4,056 (4,340)
Interest income..................................... (3,001) (15,912) (13,057) (8,894) (12,542) (5,812) (4,134)
Interest expense.................................... 15,780 22,849 38,069 55,943 60,356 30,635 25,820
-------- -------- --------- -------- -------- -------- --------
Income (loss) before income taxes, minority interest
and extraordinary loss............................ 99,052 105,571 (395,081) 139,985 129,554 72,065 66,873
Provision (benefit) for income taxes................ (6,815) (27,736) 1,983 28,996 37,683 14,542 23,793
Minority interest................................... 18,939 19,383 (44,990) (7,637) (1,534) (969) 581
-------- -------- --------- -------- -------- -------- --------
Income (loss) before extraordinary loss(1).......... 86,928 113,924 (352,074) 118,626 93,405 58,492 42,499
Extraordinary loss, net of income taxes(2).......... -- -- -- -- 3,225 -- 214
-------- -------- --------- -------- -------- -------- --------
Net income(1)....................................... $ 86,928 $113,924 $(352,074) $118,626 $ 90,180 $ 58,492 $ 42,285
======== ======== ========= ======== ======== ======== ========
Per share information:
Income (loss) before extraordinary loss --
basic........................................... $ 1.75 $ 1.93 $ (4.78) $ 1.52 $ 1.18 $ 0.74 $ 0.53
Extraordinary loss................................ -- -- -- -- .04 -- .01
-------- -------- --------- -------- -------- -------- --------
Net income (loss) -- basic........................ $ 1.75 $ 1.93 $ (4.78) $ 1.52 $ 1.14 $ 0.74 $ 0.52
======== ======== ========= ======== ======== ======== ========
Income (loss) before extraordinary loss --
diluted......................................... $ 1.51 $ 1.69 $ (4.78) $ 1.45 $ 1.14 $ 0.72 $ .51
Extraordinary loss................................ -- -- -- .04 -- --
-------- -------- --------- -------- -------- -------- --------
Net income (loss) -- diluted...................... $ 1.51 $ 1.69 $ (4.78) $ 1.45 $ 1.10 $ 0.72 $ 0.51
======== ======== ========= ======== ======== ======== ========
Cash dividends paid(3).............................. $ .20 $ .21 $ .24 $ .28 $ .29 $ 0.0725 $ 0.075
======== ======== ========= ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
------------------------------------------------------------ JUNE 30,
1996 1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital(1)....................... $306,764 $ 585,606 $ 236,994 $ 424,108 $ 406,639 $ 397,889
Total assets(1).......................... 778,651 1,491,745 1,356,396 1,472,261 1,477,072 1,491,225
Total debt(2)............................ 195,681 348,206 556,489 606,035 511,688 506,362
Stockholders' equity(1).................. 315,350 796,328 586,164 683,572 757,194 785,637
See accompanying Notes to Selected Financial Data.
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- --------- --------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
OTHER DATA -- CONSOLIDATED:
Gross profit -- product sales.............. $322,273 $ 400,224 $ 447,039 $382,329 $ 382,372 $185,970 $206,809
Depreciation and amortization.............. 17,936 28,753 51,096 65,502 64,540 31,377 35,219
Capital expenditures....................... 26,216 100,397 110,281 44,083 49,330 13,923 36,974
Cash flows provided by (used in):
Operating activities..................... (25,548) 9,315 9,624 87,123 181,684 82,263 77,208
Investing activities..................... (41,962) (100,096) (295,046) (50,360) (90,795) (47,402) (57,724)
Financing activities..................... 82,680 262,675 186,019 36,399 (112,765) (22,137) (8,918)
Actual Ratios
Earnings to fixed charges(4)(5)(6)....... 5.9x 4.5x -- 3.5x 3.1x 3.4x 3.6x
OPERATING DATA -- ICN YUGOSLAVIA:(7)
Net sales.................................. $267,166 $ 225,530 $ 141,740 $ -- $ -- $ -- $ --
Gross profit............................... 109,185 108,320 61,310 -- -- -- --
Income from (loss) operations(1)........... 70,616 60,235 (140,419) -- -- -- --
Interest expense........................... 1,478 107 770 -- -- -- --
Depreciation and amortization.............. 4,185 4,046 3,720 -- -- -- --
NOTES TO SELECTED FINANCIAL DATA:
(1) As a result of 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 recorded Eastern European charges
totaling $451.0 million in the year ended December 31, 1998. Of this amount,
$440.8 million is included in operating expenses, representing the write-off
of the Company's investment in Yugoslavia and related assets ($235.3
million), provisions for losses on accounts and notes receivable (including
accounts and notes receivable from the Yugoslavian government) ($203.5
million), and the write-off of investments ($2.0 million). The losses
related to Eastern Europe also include reductions in the value of
inventories ($6.1 million) included in cost of product sales and a charge
against interest ($4.1 million). As a result of the seizure of the Company's
Yugoslavian operation, the Company deconsolidated the financial statements
of ICN Yugoslavia and is currently accounting for its ongoing investments
using the cost method. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Foreign Operations."
(2) During 2000, the Company repurchased $84.4 million of its outstanding 9 1/4%
Senior Notes and $12.8 million of its outstanding 8 3/4% Senior Notes. The
repurchase generated an extraordinary loss on early extinguishment of debt
of $3.2 million, net of an income tax benefit of $1.7 million.
(3) Dividends paid for 2000, 1999, 1998 and 1996 include the fourth quarter
distributions declared and paid in the first quarter of the following year.
(4) Fixed charges consist of interest expense and capitalized interest.
(5) For purposes of determining the ratio of earnings to fixed charges, earnings
consists of income before extraordinary loss, minority interests, provision
(benefit) for income taxes, and interest expense.
(6) For the year ended December 31, 1998, the Company had a deficiency of
earnings compared to its fixed charges of $398.6 million.
(7) The Company has provided disclosures of operating data for ICN Yugoslavia to
show the significance of the portion of the Company's revenues and expenses
which, prior to November 26, 1998, were subject to the risks associated with
doing business in Yugoslavia.
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36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain financial information for the Company's business segments is set
forth below. This discussion should be read in conjunction with the consolidated
condensed financial statements of the Company included elsewhere in this
document. For additional financial information by business segment, see Note 7
of Notes to Consolidated Condensed Financial Statements for the six months ended
June 30, 2001.
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
REVENUES
Product sales
Pharmaceuticals
ICN Americas
North America(1)..................................... $ 86,420 $ 56,759
Latin America (principally Mexico)................... 55,730 57,984
-------- --------
Total ICN Americas................................ 142,150 114,743
-------- --------
ICN International
Western Europe....................................... 102,377 90,074
Russia............................................... 47,356 50,034
Asia, Africa, Australia.............................. 23,641 22,024
-------- --------
Total ICN International........................... 173,374 162,132
-------- --------
Total pharmaceuticals............................. 315,524 276,875
Biomedicals............................................... 30,235 30,796
-------- --------
Total product sales............................... 345,759 307,671
Royalty revenues(1)......................................... 58,981 76,102
-------- --------
Total revenues.................................... $404,740 $383,773
======== ========
Cost of product sales....................................... $138,950 $121,701
Gross profit margin on product sales........................ 60% 60%
---------------
(1)Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. All amounts for 2000 have been restated to
conform with the current year presentation.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO 2000
Royalty Revenues: Royalty revenues represent amounts earned under the
Company's Exclusive License and Supply Agreement (the "License Agreement") with
Schering-Plough Corporation ("Schering-Plough"). Under the License Agreement,
Schering-Plough licensed all oral forms of ribavirin for the treatment of
chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha
interferon (the "Combination Therapy"). In 1998, Schering-Plough received
approval from the United States Food and Drug Administration ("FDA") to market
Rebetron(TM) Combination Therapy. Rebetron(TM) combines Rebetol(R) (ribavirin)
capsules and Intron(R) A (interferon alfa-2b, recombinant) injection, for the
treatment of HCV in patients with compensated liver disease. On July 26, 2001,
Schering-Plough announced that the FDA granted Schering-Plough marketing
approval for Rebetol(R) Capsules as a separately marketed product for use only
in combination with Intron(R) A injection for the treatment of chronic hepatitis
C in patients with compensated liver disease previously untreated with alpha
interferon or who have relapsed following alpha interferon therapy. On August 8,
2001, Schering-Plough announced that the FDA also granted Schering-Plough
approval for Peg-Intron(TM) (peginterferon alfa-2b), a longer lasting form of
Intron(R) A, for use in combination therapy with Rebetol(R) for the treatment of
chronic hepatitis C in patients with compensated liver disease previously
untreated with alpha interferon and who are at least 18 years of age.
30
37
On March 28, 2001, Schering-Plough received notice that the European's
Union Commission of the European Communities (the "Commission") granted
centralized marketing authorization to Peg-Intron(TM) (peginterferon alfa-2b)
Injection and Rebetol(R) (ribavirin) Capsules as combination therapy for the
treatment of both relapsed and naive adult patients with histologically proven
chronic hepatitis C. Commission approval of the centralized Type II variations
to the Marketing Authorization for Peg-Intron(TM) and Rebetol(R) resulted in
unified labeling that was immediately valid in all 15 EU-Member States.
Royalty revenues for the six months ended June 30, 2001 were $58,981,000
compared to $76,102,000 for the same period of 2000, a decrease of $17,121,000
(22%). The decrease is reflective of a slowdown in sales of Rebetron(TM) by
Schering-Plough as physicians await marketing authorization pending FDA review
and clearance for the use of pegylated interferon with ribavirin. The Company
anticipates royalty revenues to increase over the remainder of 2001, due to the
approval of Rebetol(R) for use in combination therapy with Peg-Intron(TM)
(peginterferon alpha-2b).
Schering-Plough has informed the Company that it believes royalties paid
under the license agreement should not include royalties on product distributed
as part of an indigent patient marketing program. In raising the dispute,
Schering-Plough has not clearly articulated a contractual basis for the
nonpayment of royalties. Rather it has based its arguments on primarily moral or
humanitarian grounds, essentially equitable arguments, indicating that they
believe they should not have an obligation to pay royalties on product given to
indigent patients. The Company has not been provided with appropriate
information or documentation, and does not agree with such adjustment as the
license agreement articulates those programs for which royalties would not be
due. Should Schering-Plough successfully apply the proposed adjustment
retroactively since the inception of the license agreement, the adjustment would
be approximately $15,000,000. Further, if Schering-Plough were to apply the
proposed adjustment to future royalty payments, royalties could be reduced in
approximately the same proportion as the proposed historical adjustment.
ICN AMERICAS
In the North America Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $86,420,000, compared to $56,759,000 for the same
period of 2000, an increase of $29,661,000 (52%). In 2001, revenues include
sales of $17,390,000 attributable to the assets purchased from Medical Alliance
in January 2001. Additionally, sales of Efudex(R) and Mestinon in 2001 were
higher by $7,927,000 and $3,448,000, respectively, than in the same period in
2000.
In the Latin America Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $55,730,000, compared to $57,984,000 for the same
period of 2000. The decrease of $2,254,000, or 4%, is primarily due to a
decrease in sales volume in Mexico related to reduced inventory levels at
distributors.
ICN INTERNATIONAL
In the Western Europe Pharmaceuticals segment, revenues for the six months
ended June 30, 2001 were $102,377,000 compared to $90,074,000 for the same
period of 2000. The increase of $12,303,000, or 14%, includes revenues of
$5,721,000 attributable to the Swiss pharmaceutical company Solco which was
acquired in July 2000 and an increase in sales in Poland of $4,459,000.
In the Russia Pharmaceuticals segment, revenues for the six months ended
June 30, 2001 were $47,356,000, compared to $50,034,000 for the same period of
2000. The decrease of $2,678,000, or 5%, is attributable to lower sales volume
in 2001, partially offset by revenues attributable to the Solco acquisition of
$2,774,000 included in the six months ended June, 2001 and higher retail
pharmacy sales of $2,059,000.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended June 30, 2001 were 23,641,000 compared to $22,024,000 for the
same period of 2000. The increase of $1,617,000, or 7%, is due to the
acquisition of the Solco product line ($5,872,000), partially offset by a
decrease in sales due to the discontinuance of certain low margin product sales
and the pharmaceutical industry mandated withdrawal from the market of
Eskornade, a cough and cold product, which contains the active ingredient PPA
(phenyl-propanolamine).
31
38
Gross Profit: Gross profit margin on product sales remained consistent at
60% for the six months ended June 30, 2001, compared to 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $152,640,000 for the six months ended June 30,
2001, compared to $138,865,000 for the same period in 2000, an increase of
$13,775,000 (10%). The increase reflects additional selling general and
administrative expenses of $19,398,000 related to acquisitions and higher
professional fees related to shareholder matters partially offset by lower bad
debt expense of $3,580,000 in 2001.
Research and Development: Research and development expenses for the six
months ended June 30, 2001 were $12,823,000, compared to $6,853,000 for the same
period in 2000. The 87% increase resulted from the expansion of research and
development primarily in the areas of antiviral and anticancer drugs. The
Company continues to expect to increase its research and development investment,
which includes laboratory upgrades and installation of state-of-the-art
equipment, in the second half of the year.
Other (income) loss, net including translation and exchange: Other (income)
loss, net including translation and exchange losses reflects income of
($4,340,000) for the six months ended June 30, 2001, compared to a loss of
$4,056,000 for the same period in 2000. In 2001, the Company recorded other
income in connection with the Levovirin(TM) license agreement offset by
translation and exchange losses of $660,000. In 2000, translation losses
principally consisted of translation losses of $2,834,000 related to the net
monetary asset position of the Company's Russian subsidiaries and transaction
losses of $559,000 in the Company's Italian subsidiary and $502,000 related to
operations in Puerto Rico.
Interest Income and Expense: Interest expense during the six months ended
June 30, 2000 decreased $4,815,000 compared to the same period in 2000, which
was the result of the repurchase of approximately $97,000,000 of Senior Notes
during the fourth quarter of 2000. Interest income decreased from $5,812,000 in
2000 to $4,134,000 in 2001 due to the decrease in cash and lower yields on
investments.
Income Taxes: The Company's effective income tax rate for the six months
ended June 30, 2001 was 36% compared to 20% for 2000. The increase in the
effective tax rate results from the recognition of deferred tax assets amounting
to $12,250,000 through the reduction of the related valuation allowance for
capital loss carryforwards during the second quarter of 2000, which was
partially offset by losses incurred in tax jurisdictions that do not create a
corresponding reduction in current taxes.
32
39
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 AND YEAR
ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
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, 2000.
REVENUE
--------------------------------
2000 1999 1998
-------- -------- --------
REVENUES:
Pharmaceuticals
North America............................................ $275,687 $254,694 $182,778
Western Europe........................................... 187,206 185,417 154,346
Latin America............................................ 127,485 100,325 85,351
Russia................................................... 106,271 91,648 163,691
Yugoslavia............................................... -- -- 141,740
Asia, Africa, Australia.................................. 45,133 54,131 48,649
-------- -------- --------
Total Pharmaceuticals............................ 741,782 686,215 776,555
Biomedicals................................................ 58,522 61,197 61,509
-------- -------- --------
Total revenues................................... $800,304 $747,412 $838,064
======== ======== ========
Product sales.............................................. $645,190 $638,475 $800,639
Royalty revenues........................................... 155,114 108,937 37,425
-------- -------- --------
Total revenues................................... $800,304 $747,412 $838,064
======== ======== ========
Cost of product sales...................................... $262,818 $256,146 $353,600
Gross profit margin on product sales....................... 59% 60% 56%
Year Ended December 31, 2000 Compared to 1999
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 (the "Combination Therapy").
In 1998, Schering-Plough received approval from the United States Food and Drug
Administration ("FDA") to market Rebetron(TM) Combination Therapy. Rebetron(TM)
combines Rebetol(R) (ribavirin) Capsules and Intron(R)A (interferon alfa-2b,
recombinant) Injection, for the treatment of HCV in patients with compensated
liver disease. In May 1999, the European Union's ("EU") Commission of the
European Communities granted marketing authorization to Schering-Plough to
market Rebetol(R) (ribavirin) Capsules for use in combination with interferon
alfa-2b injection (marketed as Intron(R)A in certain countries) for the
treatment of both relapsed and previously untreated (naive) HCV patients. The
Commission's approval resulted in a single Marketing Authorization with unified
labeling was immediately valid in all 15 European Union-Member States.
Schering-Plough commenced marketing Rebetol(R) in Germany (May 1999), the United
Kingdom (July 1999), Italy (October 1999), France (May 2000) and Spain (May
2000). The Company anticipates that Schering-Plough will introduce Rebetol(R) in
the other EU markets upon receiving pricing approvals, where necessary, from
individual EU countries.
Royalty revenues for the year ended December 31, 2000 were $155,114,000
compared to $108,937,000 for 1999, an increase of 42%, reflective of additional
sales of Rebetron(TM) by Schering-Plough resulting from the 1999 and 2000
launches into certain European markets.
Schering-Plough has informed the Company that it believes royalties for the
fourth quarter should not include royalties of approximately $1,800,000 on
products distributed as part of an indigent patient marketing
33
40
program. It also informed the Company that amounts that had previously been paid
under this program, which they estimate to be approximately $11,900,000, should
be returned to Schering-Plough. In raising the dispute, Schering-Plough has not
clearly articulated a contractual basis for the nonpayment of royalties. Rather
it has based its arguments on primarily moral or humanitarian grounds,
essentially equitable arguments, indicating that they believe they should not
have an obligation to pay royalties on product given to indigent patients. The
Company has not been provided with appropriate information or documentation, and
does not agree with such adjustment as the Agreement articulates those programs
for which royalties would not be due. Should Schering-Plough successfully apply
this adjustment retroactively, it could have an impact on the Company's results
of operations. Further, if Schering-Plough were to apply the proposed adjustment
to future royalty payments, royalties could be reduced in approximately the same
proportion as the proposed historical adjustment.
Segment Revenues: In the North America Pharmaceuticals segment, revenues
for the year ended December 31, 2000 were $275,687,000, compared to $254,694,000
for 1999. The increase in revenue of $20,993,000 (8%) was primarily the result
of an increase of $46,177,000 (42%) in royalty revenues from sales of Rebetol(R)
(ribavirin) by Schering-Plough and sales price increases of $12,066,000 (5%)
partially offset by lower unit sales of $37,288,000 (15%) primarily resulting
from production and supply problems that affected Efudex(R) and Librax(R) and
decreased sales of other ethical products.
In the Western Europe Pharmaceuticals segment, revenues for the year ended
December 31, 2000 were $187,206,000 compared to $185,417,000 for 1999, an
increase of $1,789,000 (1%). In 2000, revenues include sales attributable to the
Solco acquisition in the third quarter 2000 of $7,036,000, product acquisitions
(1999) of $6,834,000 (4%) and the effect of an increase in sales prices of
$13,591,000 (7%), offset by the negative impact of the stronger US Dollar of
$27,324,000 (15%).
In the Latin America Pharmaceuticals segment, revenues for the year ended
December 31, 2000 were $127,485,000, compared to $100,325,000 for 1999. The
increase of $27,160,000 (27%) primarily reflects increases in sales volume of
$17,128,000 (17%) including sales of Bedoyecta(R), an injectable vitamin B-12
supplement, Virazole(R) (ribavirin), from the launching of OTO ENI, ear drops
for external infectious and inflammatory otitis for pediatric use, and from the
launching of a new line of dermatological products including Microskin,
MicroVITA and MicroKA.
In the Russia Pharmaceuticals segment, revenues for the year ended December
31, 2000 were $106,271,000, compared with $91,648,000 for 1999, an increase of
$14,623,000 (16%). The increase was primarily the result of the expansion of the
Company's retail pharmacy business in 1999 of $13,324,000 (15%).
In the Asia, Africa and Australia Pharmaceuticals segment ("AAA"), revenues
for the year ended December 31, 2000 were $45,133,000 compared to $54,131,000
for 1999, a decrease of $8,998,000 (17%). In 2000, revenues include sales
attributable to the Solco acquisition in the third quarter of $7,037,000. The
decrease, after excluding the sales from Solco ($16,035,000), is due to sales
volume decrease of $10,820,000 (21%) resulting from the shift by the Company to
new distribution channels a year ago resulting in higher than normal sales in
the second quarter of 1999, and the termination of a joint venture agreement in
China of $4,720,000 (8%).
In the Company's Biomedicals segment, revenues for the year ended December
31, 2000 were $58,522,000 compared to $61,197,000 for 1999, a decrease of
$2,675,000 (4%). The decrease is primarily due to lower sales volume in the
Company's diagnostics and research product lines, partially offset by increased
revenues from dosimetry services.
Gross Profit: Gross profit margin on product sales decreased to 59% for
the year ended December 31, 2000, compared to 60% for 1999. The decrease in
gross profit margin is primarily due to lower gross profit margin in AAA. The
gross profit margin for AAA was 42% in 2000 compared to 54% in 1999, reflecting
a higher cost of goods purchased from toll manufacturers, which were purchased
from SKB and Roche in 1999 and a decrease in gross profit margin of 6% in 2000
related to the termination of a joint venture in China. The gross profit margin
for all other regions was relatively the same for 2000 and 1999.
34
41
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $304,314,000 for the year ended December 31, 2000,
compared to $252,207,000 for 1999, an increase of $52,107,000 (21%). In 1999,
selling, general and administrative expenses included approximately $11,981,000
of costs associated with an asset revaluation in the Hungarian business.
Excluding the asset revaluation charge in 1999, selling, general and
administrative expenses increased $64,088,000. This increase is primarily due to
a rise in selling and advertising expenses of $28,184,000, an increase in
corporate expenses, including compensation and legal expenses of $13,825,000
primarily due to a $9,250,000 reserve for potential legal settlements and all
other related costs (see note 12 of Notes to the Consolidated Financial
Statements), lease termination costs of approximately $3,000,000 and 1999
non-recurring reductions of expense of $6,131,000.
Research and Development: Research and development expenses for the year
ended December 31, 2000 were $18,769,000, compared to $10,963,000 in 1999. The
increase reflects the Company's expanded and intensified research and
development efforts in 2000. Total research and development spending for 2000
was $37 million, which included capital for new equipment and facilities, as
well as accelerated research programs to focus on the pipeline and new product
development.
Translation and Exchange Losses, Net: Translation and exchange losses, net
were $6,587,000 for the year ended December 31, 2000 compared to $11,823,000 for
1999. In the year of 2000, translation losses principally consisted of
translation losses of $3,525,000 related to the net monetary asset position of
the Company's Russian subsidiaries and transaction losses of $3,062,000. In
1999, translation losses principally consisted of translation losses of
$6,738,000 related to the net monetary asset position of the Company's Russian
subsidiaries and losses of $2,650,000 in Hungary and Poland resulting from
foreign-denominated debt.
Interest Income and Expense: Interest expense during the year ended
December 31, 2000 increased $4,413,000 compared to 1999, primarily due to
interest on the $125,000,000 principal amount 8 3/4% Senior Notes due 2008
issued in July 1999 partially offset by a reduction of debt during the second
half of 1999 in the Company's subsidiaries in Hungary, Poland and Czech
Republic. Interest income increased from $8,894,000 in 1999 to $12,542,000 in
2000 as a result of the increase in cash generated during the second half of
1999.
Income Taxes: The Company's effective income tax rate for the year ended
December 31, 2000 was 27% compared to 21% for 1999. The increase in the
effective tax rate results from higher taxable income in 2000 and the effect of
the losses in Hungary and China for which no tax benefit was recorded partially
offset by the recognition, during the second quarter of 2000, of deferred tax
assets through the reduction of the related valuation allowance for capital loss
carryforwards amounting to $12,250,000. During 1999, the Company reduced its
valuation allowance for capital loss carryforwards by $25,286,000. The Company
has announced its intention to restructure the Company and divide the Company
into three separate publicly traded companies. This restructuring will include
the sale of stock of the two newly formed companies, which is expected to result
in a net capital gain. The Company will be able to utilize its capital loss
carryforwards to offset the gain generated on the sale of stock. Ultimate
realization of the deferred tax asset is dependent upon the Company generating
sufficient capital gains prior to the expiration of the capital loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that the deferred tax assets will be realized.
In Russia, the Company continues to benefit from special tax relief that
benefits pharmaceutical companies. Under this relief approximately 75% of the
income generated in Russia related to the manufacture and sale of prescription
medicines is exempt from taxation. This reduces the statutory rate to
approximately 8%. The continuing tax benefits in Russia are subject to potential
changes in tax law that may be enacted in the future. Should these benefits be
repealed, income generated in Russia would require the Company to provide taxes
at the current statutory rate of 35%, which could have a material impact on the
consolidated results of operation and cashflows of the Company.
Year Ended December 31, 1999 Compared to 1998
Royalty Revenues: Royalty revenues for 1999 were $108,937,000 compared to
$37,425,000 for 1998. The 1999 royalty amount reflects increasing United States
commercial sales of Rebetron(TM) by Schering-
35
42
Plough subsequent to receipt of initial FDA approval in June 1998, inception of
commercial sales in the European Union and an increase in compassionate use
sales, primarily in Western Europe.
Royalty revenues for 1998 also include a one-time payment of $16,500,000
which the Company received from Schering-Plough for the settlement of past
royalties due on physician initiated clinical trials and free product
distributed by Shering-Plough ($8,467,000), as reimbursement for expenses
incurred by the Company in preparation for the launch of ribavirin capsules in
the European Union ($3,033,000) and a forgiveness of a $5,000,000 obligation to
Shering-Plough. In addition, the Company forfeited the right to co-market oral
forms of ribavirin for the treatment of HCV in the European Union in exchange
for an increase in worldwide royalty rates.
The Company recorded the entire amount of the one-time payment as revenue
as well as the previously unamortized portion of the 1995 license revenue paid
to the Company by Schering-Plough of $3,689,000. At the time of the initial sale
of the rights and technology to Schering-Plough in 1995, the Company maintained
the rights to co-market in the European Union, was obligated under a supply and
manufacturing agreement and participated on scientific advisory committees
during the clinical trial process being conducted by Schering-Plough. In 1998,
when the Company gave up the rights to co-market in the European Union in
exchange for increased royalty rates, the Company no longer had any continuing
obligations with respect to the transfer of the rights and technology to
Schering-Plough.
Segment Revenues: The decrease in revenues for the Company's
Pharmaceutical segments of $90,340,000 (or 12%) for 1999 reflects the impact of
the loss of the Yugoslavian operations ($141,740,000 in 1998) and the decrease
in revenues of $72,043,000 in Russia, which was adversely impacted by the
Russian economic situation. The decrease was partially offset by the increase in
royalty revenues of $71,512,000 and the increase in product sales from
acquisitions in 1999 and 1998 of $80,528,000.
In the North America Pharmaceuticals segment, revenues were $254,694,000
for 1999, compared to $182,778,000 for 1998, an increase of $71,916,000 (or
39%). Revenues for 1999 reflect a $71,460,000 increase in royalty revenues from
sales of Rebetol(R) (ribavirin) by Schering-Plough Corporation
("Schering-Plough") and the increase in sales of $12,993,000, resulting from the
product acquisition from F. Hoffman-La Roche Ltd. ("Roche") in October 1998. In
addition, product sales of Kinerase(R), which the Company introduced in March
1999, generated sales of $10,062,000. The increase was partially offset by a
decrease of $11,327,000 in sales of the products obtained from Roche in 1997.
During 1999, the Company began using published data, which reflects
pharmaceutical sales data on sales made to distributors, including the buying
trends of the distributors. The Company used this information in determining to
decrease its selling and marketing efforts for these products, thus resulting in
decreased sales. In addition, the decrease reflects a decline in units and
revenues primarily from Virazole(R) and the Company's Bleach product line.
In the Western Europe Pharmaceuticals segment, revenues for 1999 were
$185,417,000 compared to $154,346,000 for 1998. The increase of $31,071,000 (or
20%) is primarily due to the Company's acquisition of the rights to certain
products from Roche in October 1998, which generated additional sales of
$18,625,000. In addition, $8,368,000 of the sales increase resulted from the
inclusion of the full year results of ICN Czech Republic, which was acquired in
June 1998.
In the Latin America Pharmaceuticals segment, revenues were $100,325,000
for 1999 as compared to $85,351,000 for 1998, an increase of $14,974,000 (or
18%). The increase is primarily due to the product acquisitions in 1998 as well
as continued growth in the base business. The acquisitions included products
acquired from Roche in October 1998 and a portfolio of 32 dermatology products
acquired from Laboratorio Pablo Cassara ("Cassara") effective March 1, 1998. The
acquired products generated additional sales of $8,167,000 over the 1998 period.
In the Russia Pharmaceuticals segment, revenues for 1999 were $91,648,000
compared with $163,691,000 for 1998, a decrease of $72,043,000 (or 44%). The
Company's Russian operations continue to be impacted by the Russian economic
situation, which the Company believes has affected the liquidity and purchasing
power of many of its Russian customers. In addition, the 77% decline in the
value of the Russian ruble in relation to the United States dollar since June
1998 has reduced the dollar amount of the Company's
36
43
Russian revenues. The Company has partially offset the effect of the exchange
rate changes through price increases and improvement in its product mix.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for
1999 were $54,131,000 compared to $48,649,000 in 1998, an increase of $5,482,000
(or 11%). The increase is primarily related to sales of products acquired from
Roche and SmithKline Beecham plc. ("SKB") in 1998, which generated additional
sales of $10,125,000 in 1999. This increase was partially offset by order
backlog resulting from temporary delays in shipments of certain products from
contracted manufacturers and by lower revenues at Wuxi ICN Pharmaceuticals in
China.
In the Company's Biomedicals segment, revenues for 1999 were $61,197,000
compared to $61,509,000 in 1998, a decrease of $312,000. This decrease is
primarily related to lower sales volume in the Company's diagnostic and
radiochemical product lines, partially offset by increased revenues from
radiation monitoring services.
Gross Profit: Gross profit margin on product sales increased to 60% for
1999 compared to 56% for 1998. The improvement in gross profit margin is
primarily due to increased sales of the products acquired from Roche in 1998,
which generally yield higher gross profit margins than were previously achieved
by the Company's base business. The Company's gross profit margin for 1999 was
also improved by the loss of the Company's Yugoslavian operations, which
achieved a 43% gross profit margin for 1998. Gross profit margins in the North
America Pharmaceuticals segment were 85% for 1999 compared to 82% in 1998,
reflecting the effect of the acquired products. In the Western Europe
Pharmaceuticals segment, the gross profit margins were 49% for 1999 compared to
53% for 1998. The decrease in margin over 1998 was the result of the decrease in
gross profit margins in Hungary and Poland. The Company's operations in Hungary
and Poland have reduced export sales to the Russian market, temporarily lowering
operating efficiencies as the Company shifts its efforts toward European Union
markets. The decrease in Western Europe was partially offset by the effect of
the acquired Roche products, which generally yield higher gross profit margins.
The overall gross margins for the Company's Russia Pharmaceuticals segment were
36% for 1999 compared to 42% for 1998. In 1999, gross profit margins in the
Company's Russian operations continue to be affected by the decline in sales
volume resulting from the devaluation of the ruble. While the Company has
historically been able to set its prices for Russian markets without government
approval, the ruble devaluation has reduced the purchasing power of Russian
consumers, effectively restricting price increases to a level that does not
fully offset the impact of the devaluation. In an effort to diminish the impact
of the decline in gross profit margin, the Company has also improved its product
mix for the Russian market to focus on higher-margin products.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $252,207,000 for 1999, compared to $291,776,000 for
1998, a decrease of $39,569,000. The decrease primarily reflects the impact of
the loss of the Company's Yugoslavian operations, which incurred expenses of
$24,844,000 during 1998. In the Company's Russian operations, selling, general
and administrative expenses decreased by $27,519,000 (excluding the effect of
acquisitions), principally due to the 77% decline in the value of the ruble and
the Company's cost-control efforts. The decrease in selling, general and
administrative expenses also reflects an $18,270,000 decline in corporate
expenses related to a reduction of legal expenses and some non-recurring
expenses recorded in 1998. These amounts were partially offset by additional
costs resulting from acquisitions of business and product rights, which totaled
$19,182,000. The Company's selling, general and administrative expenses in 1999
also include approximately $11,981,000 of additional costs associated with the
Hungarian business.
Amortization of Goodwill and Intangibles: Amortization of goodwill and
intangibles expenses were $29,239,000 for 1999, compared to $20,601,000 for
1998, an increase of $8,638,000. The increase principally reflects the increase
in the amortization of intangibles related to the products acquired from Roche
in 1998.
Research and Development: Research and development expenditures for 1999
were $10,963,000, compared to $20,835,000 for the same period in 1998. The
decrease reflects lower spending at the Company's facilities in the United
States and Hungary, and the impact of the loss of the Company's Yugoslavian
operations. In 1998, research and development at ICN Yugoslavia totaled
$3,141,000. Additionally, the Company slowed its spending as it evaluated its
overall research strategy during 1999.
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Translation and Exchange Losses, Net: Translation and exchange losses,
net, were $11,823,000 for the year ended December 31, 1999 compared to
$80,501,000 for the same period in 1998. In 1999, translation losses principally
consisted of losses of $6,738,000 related to the net monetary asset position of
the Company's Russian subsidiaries and losses of $2,650,000 in Hungary and
Poland resulting from foreign-denominated debt, which was repaid in the second
half of 1999. For the year ended December 31, 1998, the Company's translation
and exchange losses principally reflect the August 1998 devaluation of the
Russian ruble and ICN Yugoslavia's net monetary asset position.
Interest Income and Expense: For 1999, interest expense increased
$17,874,000 compared to the same period in 1998, primarily due to the additional
interest expense resulting from the Company's 8 3/4% Senior Notes due 2008,
issued in August 1998 and July 1999. Interest expense on the Senior Notes was
partially offset by lower interest expense on obligations of the Company's
subsidiaries which were repaid using a portion of the proceeds from the Senior
Notes. The net increase in interest expense also reflects a decrease in the
amount of interest cost capitalized related to certain construction projects.
During 1998, the Company capitalized interest of $3,540,000; no interest cost
was capitalized in 1999. Interest income decreased to $8,894,000 in 1999 from
$13,057,000 in 1998. In 1998, interest income included $4,022,000 of interest
earned at ICN Yugoslavia on its cash balances and accounts receivable.
Income Taxes: The Company's effective income tax rate for 1999 was 21%
compared to 1% for 1998. The provision for income taxes increased as a result of
the effect of higher 1999 taxable income in the United States, and the effect of
the losses in Hungary and China for which no tax benefit was recorded. These
increases in the effective tax rate were partially offset by higher 1999 taxable
income in Puerto Rico and other jurisdictions taxed at rates lower than the U.S.
Federal statutory rate of 35%. The provision for income taxes for 1999 includes
a deferred tax benefit of $25,286,000 resulting from the recognition of deferred
tax assets through the reduction of the related valuation allowance.
ICN Hungary generated tax loss carryforwards in 1999 and in 1998. In 1998,
the Company's Russian subsidiaries also generated deferred income tax assets,
primarily related to bad debt reserves. Management believes that it is more
likely than not that these future tax benefits will not be realized prior to
expiration as a result of the seizure of ICN Yugoslavia and the economic crisis
affecting Eastern Europe. Accordingly, the Company recorded a valuation
allowance against these loss carryforwards and deferred income tax assets,
resulting in no tax benefit being recorded in 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001 cash provided by operating
activities totaled $77,208,000 compared to $82,263,000 in 2000. Operating cash
flows reflect the Company's net income of $42,285,000 and net noncash charges
(including depreciation, minority interest, and foreign exchange gains and
losses) of $40,856,000, partially offset by working capital increases (after the
effect of business acquisitions and currency translation adjustments) totaling
approximately $5,933,000. The working capital increases principally consist of a
decrease of $18,435,000 in accounts receivable, a decrease of $7,424,000 in
inventories and an increase of $10,024,000 in income taxes payable offset by an
increase of $15,833,000 in prepaids and other assets, a decrease of $20,853,000
in trade payables and accrued liabilities and a decrease of $5,130,000 in other
liabilities.
Cash used in investing activities was $57,724,000 for the six months ended
June 30, 2001 compared to $47,402,000 for the same period of 2000. In 2001, net
cash used in investing activities principally consisted of acquisitions totaling
$19,897,000 and payments for capital expenditures of $36,974,000 principally
representing an increase in the investment in research and development in North
America and distribution facilities in Western Europe. In 2000, the Company made
capital expenditures of $13,923,000, principally representing production
equipment in Western Europe and an increase in research and development in North
America. In addition, the Company used $34,153,000 for the acquisition of a
business and product rights ($9,697,000) and for the deposit of cash required
for the acquisition of Solco Basel AG in early July ($24,456,000).
Cash used in financing activities totaled $8,918,000 for the six months
ended June 30, 2001, including cash dividends paid on common stock of
$11,818,000 and payments on long-term debt of $5,738,000
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(including the repurchase of $3,338,000 of the Company's outstanding 8 3/4%
Senior Notes and $1,667,000 of its outstanding 9 1/4% Senior Notes), offset by
the proceeds from the exercise of stock options of $8,301,000. In 2000, cash
used in financing activities totaled $22,137,000, including payments on
long-term debt of $12,734,000, payments of cash dividends on common stock of
$11,173,000 and payments on notes payable $6,080,000. These payments were offset
by proceeds on notes payable of $4,856,000 and proceeds from the exercise of
stock options of $2,994,000. At June 30, 2001, certain of the Company's lines of
credit and long-term borrowings include covenants restricting the amount of
dividends paid, issuance of new indebtedness and repurchase of the Company's
common stock.
During 2000, cash provided by operating activities totaled $181,684,000
compared to $87,123,000 in 1999. Operating cash flows reflect the Company's net
income of $90,180,000 and net non-cash charges (including depreciation, minority
interest, and foreign exchange gains and losses) of $102,289,000, partially
offset by working capital increases (after the effect of business acquisitions
and currency translation adjustments) totaling approximately $10,785,000. The
working capital increases principally consist of a $34,129,000 increase in
inventories primarily due to bridging stocks required during the transfer of
manufacturing to the Company's manufacturing facilities for products acquired in
prior years.
The Company evaluates the carrying value of its inventories at least
quarterly, taking into account such factors as historical and anticipated future
sales compared with quantities on hand, the price the Company expects to obtain
for its products in their respective markets compared with historical cost, and
the remaining shelf life of goods on hand. The Company also evaluates the
collectibility of its receivables at least quarterly. The Company's methodology
for establishing the allowance for bad debts varies with the regions in which it
operates. With the exception of Russia, the allowance for bad debts is based
upon specific identification of customer accounts and the Company's best
estimate of the likelihood of potential loss, taking into account such factors
as the financial condition and payment history of major customers. In Russia,
the allowance for bad debts is based upon a combination of specific
identification of customer account balances and an overall provision based upon
anticipated developments and historical experience. In Russia, factors such as
the economic crisis in August 1998 and the subsequent stabilization in the
middle of 1999 were utilized in the analysis. Based upon this analysis, the
Company recorded bad debt expense related to its Russian operations of
$1,824,000, $8,129,000 and $26,242,000 for the years ended December 31, 2000,
1999 and 1998, respectively. As of December 31, 2000 and 1999 the allowance for
doubtful accounts for the Company's Russian subsidiaries was $10,276,000 and
$9,142,000, respectively. As of December 31, 2000, the Company believes that
adequate provision has been made for inventory obsolescence and for anticipated
losses on uncollectible accounts receivable.
Cash used in investing activities was $90,795,000 for 2000 compared to
$50,360,000 for 1999. In 2000, the Company made acquisitions of license rights,
product lines and businesses amounting to $40,968,000 (net of acquired cash
$4,613,000) and made capital expenditures of $49,330,000, principally
representing an increase in the investment in research and development in North
America and production equipment in Western Europe (including Poland, Hungary
and the Czech Republic. In 1999, the Company incurred capital expenditures of
$44,083,000, principally representing the continuation of its plant expansion
efforts and investment in information systems. The Company also used cash of
$23,588,000 (net of cash acquired of $288,000) for acquisitions, including
acquiring a chain of 88 pharmacies in Russia, the purchase of a pharmaceutical
distributor in Hungary and acquired product rights in certain Western European
markets. These amounts were partially offset by the decrease in restricted cash
in the amount of $15,144,000 which was required to collateralize the Company's
obligation under certain letters of credit. After the Company settled its
obligation in the fourth quarter of 1999, the restriction was removed.
Cash used in financing activities totaled $112,765,000 during 2000,
including payments on long-term debt of $105,901,000 (including the repurchase
of $84,355,000 of the Company's outstanding 9 1/4% Senior Notes and $12,830,000
of its outstanding 8 3/4% Senior Notes), payments of cash dividends on common
stock of $22,665,000, and payments on notes payable of $7,911,000. These
payments were offset by proceeds from the exercise of stock options of
$14,568,000, proceeds from the issuance of notes payable of $5,724,000 and
proceeds from long-term borrowings of $3,420,000. During 1999, cash provided by
financing activities totaled $36,399,000 principally consisted of proceeds from
long-term borrowings of $145,490,000, including net
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proceeds of $118,485,000 from a private placement of $125,000,000 principal
amount of its 8 3/4% Senior Notes due 2008. The Company used cash (including a
portion of the proceeds of the 8 3/4% Senior Notes) for principal payments of
$87,632,000 on long-term debt and for payments of $31,695,000 on notes payable.
Other sources of cash also included $42,000,000 from the sale to Schering-Plough
of 2,041,498 shares of its common stock (as provided for under the terms of a
Stock Purchase Agreement entered into with Schering-Plough in 1995) and proceeds
from the exercise of employee stock options of $12,894,000. These amounts were
partially offset by the payment of dividends on common stock of $21,017,000, the
repurchase of 614,167 shares of common stock for $15,304,000 under the Stock
Repurchase Program authorized by the Company's Board of Directors in 1998 and
the repurchase of the Company's Series D Preferred Stock in settlement of the
remaining obligation to SKB.
The current economic environment in Russia continues to affect the
Company's operating cash flows in Russia, some of the Company's Russian
customers continue to experience liquidity shortages. The Company may need to
invest additional working capital in Russia to sustain its operations, to
provide increasing levels of working capital necessary to support renewed
growth, and to fund the purchase or upgrading of facilities.
During 1999, the Company entered into certain option transactions which
allowed the Company to establish a price range in which the Company had the
option to repurchase its stock at a later date, without any immediate outlay of
its cash resources. The Company entered into these option positions when the
Company believed its stock to be undervalued, and anticipated that its stock
price would appreciate. Under this program, the Company sold put options, which
entitled the holder to sell the Company's stock to the Company at a specified
price. At the same time, in a cashless transaction, the Company purchased call
options, which entitled the Company to purchase its stock at a specified price
from the same party. The put and call positions essentially established a price
range within which the Company can repurchase its stock. If the stock price
rises above the call option strike price, the repurchase of stock will be at a
favorable price compared to the market price. Conversely, if the stock price
falls below the put option strike price, the repurchase of stock is more costly
than the market price. The put options and the corresponding call options
expired in 2000. The Company, at its option, could make either a physical
settlement, a cash settlement, or a net share settlement of its positions under
the put and call options. The Company received 46,014 shares of its common stock
and paid $20,000 in cash to settle its positions under the put and call options.
Management believes that the Company's existing cash and cash equivalents
and funds generated from operations will be sufficient to meet its operating
requirements in the near term and to fund anticipated acquisitions, capital
expenditures, including the continued development of its research and
development program. The Company also has several preliminary acquisition
prospects that may require significant funds through the year 2001. However,
there can be no assurance that any such acquisitions will be consummated. The
Company may also seek additional debt financing or issue additional equity
securities to finance future acquisitions.
The Company intends for Ribapharm to become a separate publicly traded
company. To achieve this objective, the Company may sell a minority of
Ribapharm's common stock in an underwritten public offering. The Company has
filed a registration statement with the Securities and Exchange Commission to
effect the Ribapharm public offering. Following the Ribapharm public offering,
the Company may distribute its remaining interest in Ribapharm to the Company's
stockholders on a tax-free basis. The distribution will be subject to a ruling
from the U.S. Internal Revenue Service (the "IRS"), compliance with all other
legal and regulatory provisions, and the required approval by holders of the
Company's outstanding debt.
In order for the spin-off to be tax-free to the Company's stockholders, the
Company must distribute to its stockholders at least 80% of the issued and
outstanding common stock of Ribapharm. This requirement may limit the number of
shares of Ribapharm common stock that can be sold in the Ribapharm public
offering. The number of shares of Ribapharm common stock available to be sold in
the Ribapharm public offering may be further limited for a number of reasons.
For example, if the shares of Ribapharm common stock, which are to be
received upon conversion of the Company's Convertible Subordinated Notes due
2008, are provided by the Company rather than issued by Ribapharm, the number of
shares of Ribapharm common stock available to be sold in the offering will be
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reduced by the number of shares of Ribapharm common stock into which the
Convertible Subordinated Notes due 2008 are convertible. Although the Company
may elect to provide the shares of Ribapharm common stock receivable upon
conversion of the Convertible Subordinated Notes due 2008, the Company will not
do so if the Company's continuing ownership of Ribapharm common stock would
jeopardize the tax-free nature of the spin-off.
Additionally, the Company has had discussions with Roche Capital
Corporation, an affiliate of F. Hoffmann-La Roche, regarding the possible
exchange of a portion of its shares of the Company's common stock for shares of
Ribapharm common stock at the time of Ribapharm's contemplated initial public
offering and/or the time of the spin-off. If the exchange with Roche occurs at
the time of the public offering, the number of shares that can be sold in a
Ribapharm public offering may be reduced. There is no assurance that the Company
will reach any definitive agreement with Roche regarding this exchange.
The Company may not undertake a Ribapharm public offering at all if the
maximum number of shares that could be sold in the offering, taking into account
the foregoing limitations, would not provide a sufficiently liquid market for
those shares or if the Company concludes that, taking into account the funds
that the Company receives from the offering of the Convertible Subordinated
Notes due 2008, cash on hand and other financings, an additional equity
financing would not be necessary to repurchase all of the Company's outstanding
8 3/4% Senior Notes due 2008. Furthermore, if the Company consummates a
Ribapharm public offering or consummates an exchange of Ribapharm common stock
for the Company's common stock with Roche, the holders of our common stock and
holders who convert Convertible Subordinated Notes due 2008 would own a smaller
percentage of Ribapharm common stock and, in the case of the Roche exchange, a
larger percentage of the Company's common stock than would be the case if that
exchange does not occur.
If the Company completes the initial public offering of Ribapharm, the
Company will within sixty days of the public offering seek a ruling from the
IRS. The approximate proceeds to the Company from a Ribapharm public offering
have not yet been determined. The Company expects to use any proceeds from a
Ribapharm public offering to repurchase the Notes. Subject to market conditions,
the Company is planning to complete the Ribapharm offering in 2001.
The Company intends to sell up to a 40% interest in ICN International AG
("ICN International") in an offering. The approximate proceeds to the Company
from an ICN International offering have not yet been determined. The bulk of the
shares are intended to be offered by ICN International, which will receive the
net proceeds from such shares, however the Company may also offer a portion of
the ICN International shares and in that event would receive a proportionate
amount of the net proceeds. The net proceeds received by ICN International are
intended to be used for acquisitions, sales and marketing, research and
development, manufacturing facility improvements, and general corporate
purposes. The net proceeds, if any, received by the Company are intended to be
used to repay, in part, the Company's existing indebtedness. The Company intends
to apply for listing of the shares of ICN International on the Budapest Stock
Exchange and global depositary receipts on the London Stock Exchange. The
Company filed draft offering circulars with regulatory authorities in both
London and Budapest in March 2001. Subject to market conditions and regulatory
approvals the Company expects to complete the offering of ICN International as
soon as practicable.
The Company had revenue of $800,304,000, net income of $90,180,000 and
operating cash flows of $181,684,000 for the year ended December 31, 2000. Of
these amounts, Ribapharm contributed revenue of $154,818,000, net income
$81,983,000 and operating cash flows of $83,549,000 and ICN International
contributed revenue of $338,757,000, net loss of $952,000 and operating cash
flows of $26,172,000, for the year ended December 31, 2000.
In July 2001, the Company completed an offering of $525 million of 6 1/2%
Convertible Subordinated Notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm
will become jointly and severally liable for the obligations under the notes. In
the event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on
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August 17, 2001, the Company redeemed the entire aggregate principal amount
outstanding of the Company's 9 1/4% Senior Notes due 2005 at a redemption price
of 104.625% of the principal amount thereof, plus accrued and unpaid interest.
In connection with the redemption, the Company will record an extraordinary loss
on extinguishment of debt of $7,900,000, net of tax, in the third quarter of
2001.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
The Company is currently self-insured with respect to product liability
claims. While to date no material adverse claim for personal injury resulting
from allegedly defective products has been successfully maintained against the
Company, a substantial claim, if successful, could have a negative impact on the
Company's liquidity and financial performance.
FOREIGN OPERATIONS
Approximately 62% and 63% of the Company's revenues for the six months
ended June 30, 2001 and 2000, respectively, were generated from operations
outside the United States. Approximately 63%, 64%, and 76% of the Company's
revenues for the years ended December 31, 2000, 1999 and 1998 were generated
from operations outside the United States. All of the Company's foreign
operations are subject to certain risks inherent in conducting business abroad,
including possible nationalization or expropriation, price and currency exchange
controls, fluctuations in the relative values of currencies, political
instability and restrictive governmental actions. Changes in the relative values
of currencies occur from time to time have and may, in certain instances,
materially affect the Company's results of operations. The effect of these risks
remains difficult to predict. The Company does not currently provide any hedges
on its foreign currency exposure and, in certain countries in which the Company
operates, no effective hedging programs are available.
Russia
While the Russian economy continues to show improvement since the financial
crisis that began in 1998, the economy continues to experience difficulties. In
1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to a rate of 20.7
rubles to $1 at December 31, 1998. Throughout 1999 and 2000, the ruble continues
to fluctuate, there is continued volatility in the debt and equity market,
hyperinflation persists, confidence in the banking sector has yet to be restored
and there continues to be general lack of liquidity in the economy. In addition,
laws and regulations affecting businesses operating within Russia continue to
evolve. Russia's return to economic stability is dependent to a large extent on
the effectiveness of the measures taken by the government, decisions of
international lending organizations, and other actions, including regulatory and
political developments, which are beyond the Company's control.
At June 30, 2001, the ruble exchange rate was 29.1 rubles to $1 as compared
with a rate of 28.2 rubles to $1 at December 31, 2000. As a result of the change
in the ruble exchange rate, the Company recorded translation losses of $469,000
related to its Russian operations during the first six months of 2001. As of
June 30, 2001, ICN Russia had a net monetary assets position of approximately
$8,588,000, which is subject to foreign exchange loss as further declines in the
value of the ruble in relation to the dollar occur.
At December 31, 2000, the ruble exchange rate was 28.2 rubles to $1 as
compared with the rate of 27.5 rubles to $1 and 20.7 rubles to $1 as of December
31, 1999 and 1998, respectively. As a result of the change in the ruble exchange
rate, the Company recorded translation losses of $3,525,000, $6,738,000 and
$53,848,000, related to its Russian operations during 2000, 1999 and 1998,
respectively. As of December 31, 2000, ICN Russia had a net monetary asset
position of approximately $12,423,000, which is subject to foreign exchange loss
as further declines in the value of the ruble in relation to the dollar occur.
Due to the fluctuation in the ruble exchange rate, the ultimate amount of
any future translation and exchange loss the Company may incur cannot presently
be determined and such loss may have a negative impact on the Company's results
of operations. The Company's management continues to work to manage its net
monetary exposure. However, there can be no assurance that such efforts will be
successful.
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The Company's Russian subsidiaries periodically engage in barter
transactions related to the sale of its products in exchange for raw materials,
other finished goods and costs or services incurred in the conduct of its
operations. For each of the periods ended December 31, 2000, 1999 and 1998, the
Company's Russian subsidiaries recorded approximately $3,000,000, $8,000,000 and
$8,000,000, respectively, in revenue related to barter transactions.
The Company's collections on accounts receivable in Russia have been
adversely affected by the Russian economic situation. Prior to the August 1998
devaluation of the ruble, the Company had favorable experience with the
collection of receivables from its customers in the region. Subsequently, the
Company has taken additional steps to ensure the creditworthiness of its
customers and the collectibility of accounts receivable by tightening its credit
policies in the region. These steps include a shortening of credit periods,
suspension of sales to customers with past-due balances and discounts for cash
sales. The adoption of these more restrictive credit policies contributed to the
decline in sales in Russia for 1999 compared to 1998.
The Company believes that the economic and political environment in Russia
has affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience liquidity
problems as monetary policy has limited the money supply, and Russian companies
often lack access to an effective banking system. As a result, many Russian
companies have limited ability to pay their debts, which has led to a number of
business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, thus increasing pressure on
the Company and other producers to limit price increases in hard currency terms.
As a result of the Russian economic situation, the Company recorded a charge in
1998 of $42,289,000 among several of its operating segments, which is included
in Eastern European charges ($39,884,000) and cost of product sales ($2,405,000)
in the consolidated statements of income. The charge consisted of reserves of
$37,873,000 for losses on accounts receivable, the write-off of certain
investments of $2,011,000, and a reduction in the value of certain inventories
of $2,405,000.
See Note 6 to the Consolidated Condensed Financial Statements for the
quarter ended June 30, 2001 for legal proceedings that affect the Company's
Russian subsidiaries.
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 any significant
access to the premises and representation as to the management of ICN
Yugoslavia.
Prior to the seizure, ICN Yugoslavia's operations were adversely affected
by the April 1998 devaluation of the dinar, which resulted in foreign exchange
losses of $23,865,000 for the year. ICN Yugoslavia's domestic sales were
adversely affected by the Company's previously announced suspension of sales to
the Yugoslavian government. In addition, ICN Yugoslavia's export sales for the
second half of 1998 were adversely affected by the Russian economic crisis. In
the second and third quarters of 1998, the Yugoslavian government defaulted on
its obligations to the Company on $176,204,000 of accounts and notes receivable.
As a result of the government's default and the suspension of sales to the
government, the Company recorded a $173,440,000 charge against earnings at ICN
Yugoslavia in the second quarter of 1998. The charge is included in Eastern
European charges ($165,646,000), cost of product sales ($3,667,000) and interest
income ($4,127,000) in the consolidated statements of income. The charge
consists of $151,204,000 reserve for losses on notes receivable
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(including accrued interest), reserves of $7,757,000 for losses on accounts
receivable from government-sponsored entities, and a $14,479,000 write-down of
the value of certain related investments and assets.
The Company has commenced litigation in the United States District Court of
the District of Columbia against the government of Yugoslavia and related
agencies to recover damages and obtain injunctive relief. In addition, the
government of Yugoslavia, through a related agency, filed an arbitration
proceeding against the Company before the International Chamber of Commerce for
damages related to the Company's acquisition of majority control of ICN
Yugoslavia. A trial date has been set for July 15, 2002. The resolution of these
matters may affect the status of certain compounds, which were contributed to
ICN Yugoslavia by the Company, pursuant to the agreement that led to the
formation of ICN Yugoslavia.
ACQUIRED PRODUCTS
The majority of products acquired by the Company are mature products with
no effective patents, either because of expirations or the absence of legal
protections provided by the local governments in the respective markets. Under
the Company's ownership, price increases and additional advertising and
promotions were planned for selected products, as the Company believes that they
were not marketed to their greatest potential. The Company believes that some of
these products in specific markets have an adequate growth potential, and
intends to develop a product strategy for each product.
The Company believes that these products will continue to generate
significant sales even without patent protection because the trademarks under
which they are marketed are well-established and enjoy substantial customer
brand-loyalty. Moreover, the relatively small sales volumes and market sizes for
some of these products pose significant barriers to entry of generic
competition.
The Company estimated the remaining life of these products based on
anticipated future profits assuming a constant profit margin for the remaining
product cycle. It should be noted, however, any sales growth or increase in
profitability attained by additional marketing efforts is expected to be
relatively short-lived. After a temporary boost, these products will revert to
their gradually declining trend in accordance with the product cycle model. The
acquired products' historical operating results demonstrated their ability to
earn substantial excess profits. Excess profits are directly related to their
competitive advantage primarily attributable to the product quality and
reputation. The useful life was defined as the number of years for the
forecasted annual product sales to reach 50% of the cumulative historical amount
through the date of acquisition. During the forecasted period, only gradual
declines are expected due to the absence of immediate threats from competition
of generic or/and alternative products. Based upon the Company's analysis, the
useful lives of products acquired were estimated to be 18 years.
INFLATION AND CHANGING PRICES
The effects of inflation are experienced by the Company through increases
in the costs of labor, services and raw materials. The Company is subject to
price control restrictions on its pharmaceutical products in the majority of
countries in which it operates. While the Company attempts to raise selling
prices in anticipation of inflation, the Company operates in some markets which
have price controls that may limit its ability to raise prices in a timely
fashion. Future sales and gross profit will be reduced if the Company is unable
to obtain price increases commensurate with the levels of inflation.
The Russian government has instituted a process for establishing prices for
pharmaceutical products, which may lead to price controls in the Russian market
in the future. Currently, this process requires the Company to register the
prices for certain of its products included on the government's list of
"products important for health." The next procedure for registration includes
the negotiation and approval of such prices between the Company and the relevant
state bodies. The Company is currently working with all relevant state bodies to
approve its prices and the Company is not presently able to determine the
effect, if any, that this process may have on its results of operations.
However, such developments could have a negative impact on the Company's results
of operations and cash flows in Russia.
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EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced the Euro. The conversion rates between the Euro and the participating
nations' existing legacy currencies were fixed irrevocably as of January 1,
1999. Prior to full implementation of the new currency on January 1, 2002, there
will be a transition period during which parties may, at their discretion, use
either the legacy currencies or the Euro for financial transactions.
The Company expects its affected subsidiaries to continue to operate
primarily in their respective legacy currencies for the remainder of 2001. 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 negative
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 2001. The Company does not
currently engage in any program of hedging and consequently the Company does not
expect the adoption of SFAS No. 133 to have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an
amortization approach to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that Statement, which for the Company, will be January 1, 2002.
In December 1999, the Securities and Exchange Commission (the "SEC")
released Staff Accounting Bulletin ("SAB") No. 101, which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company adopted the provisions of SAB 101 in the fourth
quarter of 2000. Adoption of SAB 101 did not cause a material change in the
Company's financial condition or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business and financial results are affected by fluctuations
in world financial markets. The Company evaluates its exposure to such risks on
an ongoing basis, and reviews its risk management policy to manage these risks
to an acceptable level, based on management's judgment of the appropriate
trade-off between risk, opportunity and costs. The Company does not hold any
significant amount of market risk sensitive instruments whose value is subject
to market price and currency risk.
In the normal course of business, the Company also faces risks that are
either non-financial or non-quantifiable. Such risks principally include country
risk, credit risk, and legal risk and are not discussed or quantified in the
following analysis.
Interest Rate Risk: The Company does not hold financial instruments for
trading or speculative purposes. The financial assets of the Company are not
subject to significant interest rate risk due to their short duration. At June
30, 2001, the Company had $9,920,000 of foreign denominated debt that would
subject it to
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both interest and currency risk. At June 30, 2001, the principal financial
liabilities of the Company subject to interest rate risk were its fixed-rate
long-term debt (principally its 8 3/4% Senior Notes due 2008 and its 9 1/4%
Senior Notes due 2005) totaling approximately $498,000,000. The Company does not
use any derivatives or similar instruments to manage its interest rate risk. As
of June 30, 2001, the fair market value of the Company's fixed rate debt
(principally its 8 3/4% and 9 1/4% Senior Notes) exceeded the face value by
approximately $55 million.
In July 2001, the Company completed an offering of $525 million of 6 1/2%
Convertible Subordinated Notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. On August 17, 2001, the Company redeemed the entire
aggregate principal amount outstanding of the Company's 9 1/4% Senior Notes due
2005 at a redemption price of 104.625% of the principal amount thereof, plus
accrued and unpaid interest. In July and August 2001, the Company repurchased
$114,221,000 principal amount of its 8 3/4% Senior Notes due 2008.
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THE EXCHANGE OFFER
GENERAL
Registration Rights
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on or pursuant to which the Company agreed, for the benefit of holders
of the Old Notes, that it will, at its expense (i) on or prior to the 30th day
following the date of closing of each of the 1998 Offering and the 1999 Offering
(each, an "Issue Date"), file the Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer pursuant to which the Notes will
be exchanged for the Exchange Notes, which will have terms identical to the
Notes (except that the Exchange Notes will not contain terms with respect to
transfer restrictions or any provision relating to this paragraph) and (ii) use
its best efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act by the 150th day after the Issue
Date. Upon effectiveness of the Exchange Offer Registration Statement, the
Company will offer to all holders of the Notes an opportunity to exchange their
securities for a like principal amount of the Exchange Notes. The Company will
keep the Exchange Offer open for acceptance for not less than 20 business days
after the date the Exchange Offer Registration Statement is declared effective.
For each Note surrendered to the Company for exchange pursuant to the Exchange
Offer, the holder of such Note will receive an Exchange Note having a principal
amount at maturity equal to that of the surrendered Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the Note surrendered in exchange therefor or, if no interest has
been paid on such Note, from the Issue Date.
Under existing interpretations of the staff of the Commission's Division of
Corporation Finance (the "Staff"), the Exchange Notes will generally be freely
transferable after the Exchange Offer without further registration under the
Securities Act; provided, however, that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Exchange Offer will be subject
to a prospectus delivery requirement with respect to resales of such Exchange
Notes. To date, the Staff has taken the position that Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to
transactions involving an exchange of securities such as the exchange pursuant
to the Exchange Offer (other than a resale of an unsold allotment from the sale
of the Notes to the Initial Purchasers) with the prospectus contained in the
Exchange Offer Registration Statement. Pursuant to the Registration Rights
Agreement, the Company will permit Participating Broker-Dealers and other
persons, if any, subject to similar prospectus delivery requirements to use the
prospectus contained in the Exchange Offer Registration Statement in connection
with the resale of such Exchange Notes.
Each holder of the Notes who wishes to exchange its Notes for Exchange
Notes in the Exchange Offer will be required to make representations to the
Company, that (i) any Exchange Notes to be received by it will be acquired in
the ordinary course of its business, (ii) it has no arrangement with any person
to participate in a public distribution (within the meaning of the Securities
Act) of the Exchange Notes and (iii) it is not an "affiliate," as defined in
Rule 405 of the Securities Act, of the Company, or if it is such an affiliate,
that it will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable to it.
In addition, each holder who is not a broker-dealer will be required to
represent that it is not engaged in, and does not intend to engage in, a public
distribution of the Exchange Notes. Each holder who is a broker-dealer and who
receives Exchange Notes for its own account in exchange for Notes that were
acquired by it as a result of market-making activities or other trading
activities will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such Exchange Notes.
In the event that applicable interpretations of the Staff do not permit the
Company to effect the Exchange Offer or if for any other reason the Exchange
Offer is not consummated by the 180th day following the Issue Date, or if the
Initial Purchaser so requests with respect to the Notes not eligible to be
exchanged for Exchange Notes in the Exchange Offer or if any holder of Notes is
not eligible to participate in the Exchange Offer or does not receive freely
tradeable Exchange Notes in the Exchange Offer, the Company will, at its
expense, (a) promptly file a Shelf Registration Statement (the "Shelf
Registration Statement") permitting
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resales from time to time of the Notes, (b) use its best efforts to cause the
Shelf Registration Statement to become effective and (c) use its best efforts to
keep the Shelf Registration Statement current and effective until two years from
the Issue Date or such shorter period that will terminate when all the Notes
covered by the Shelf Registration Statement have been sold pursuant thereto. The
Company, at its expense, will provide to each holder of the Notes copies of the
prospectus, that is a part of the Shelf Registration Statement, notify each such
holder when the Shelf Registration Statement has become effective and take other
actions as are required to permit unrestricted resales of the Notes from time to
time. A holder of Notes who sells such Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling security holder in
the related prospectus and to deliver a prospectus to purchasers, will be
subject to civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such holder (including indemnification
obligations).
In the event that (i) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 30th day after the Issue Date or
declared effective on or prior to the 150th day after the Issue Date, (ii) the
Exchange Offer is not consummated on or prior to the 180th day following the
Issue Date, (iii) the Shelf Registration Statement is not filed or declared
effective within the required time periods or (iv) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective (except as specifically permitted therein)
for a period of 15 consecutive days without being succeeded immediately by an
additional Exchange Offer Registration Statement or Shelf Registration
Statement, as the case may be, filed and declared effective (each such event a
"Registration Default"), the interest rate borne by the Notes shall be increased
by 0.50% per annum for the 90-day period following such Registration Default.
Such interest rate will increase by an additional 0.25% per annum at the
beginning of each subsequent 90-day period following such Registration Default,
up to a maximum aggregate increase of 1.0% per annum. From and after the date
that all Registration Defaults have been cured, the Notes bear interest at the
rate set forth on the cover page of this Prospectus.
Prior to the date hereof, the Company's Exchange Offer Registration
Statement relating to an exchange offer for the Old Notes had not been declared
effective under the Securities Act. Under the provisions of the Registration
Rights Agreement relating to such Old Notes, the Company continued to pay
additional interest on such Old Notes until the date hereof.
Notwithstanding the foregoing, to the extent necessary, there shall be
added to all time limitation periods that number of days representing delays in
the Company's filings with the Commission caused by events beyond the Company's
control despite its best efforts in either of the following categories: (i)
events affecting issuers generally, such as the temporary closure of federal
agencies; or (ii) events directly affecting the Company such as its inability to
obtain all information of an acquisition entity constituting a significant
subsidiary within a time period that would permit independent auditors to
prepare required audited information on a timely basis. In addition, if at any
time counsel to the Company has determined in good faith that it is reasonable
to conclude that the filing of the Exchange Offer Registration Statement or the
Shelf Registration Statement or the compliance by the Company with its
disclosure obligations in connection with the Exchange Offer Registration
Statement or the Shelf Registration Statement may require the disclosure of
information which the Board of Directors of the Company has identified as
material and which the Board of Directors has determined that the Company has a
bona fide business purpose for preserving as confidential, then the Company may
delay the filing or the effectiveness of the Exchange Offer Registration
Statement or Shelf Registration Statement (if not then filed or effective, as
applicable) and shall not be required to maintain the effectiveness thereof or
amend or supplement the Exchange Offer Registration Statement or Shelf
Registration Statement for a period expiring upon the earlier to occur of (A)
the date on which such material information is disclosed to the public or ceases
to be material or the Company is able to so comply with its disclosure
obligations and Commission requirements or (B) 30 days after the Company
notifies the holders of such good faith determination.
The summary herein of the Registration Rights Agreement does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement, a copy of which is
available upon request to the Company.
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As of the date of this Prospectus, $194.6 million aggregate principal
amount of the Old Notes is outstanding. In connection with the issuance of the
Old Notes, ICN arranged for the Old Notes initially purchased by qualified
institutional buyers, as defined pursuant in Rule 144A under the Securities Act
("Qualified Institutional Buyers"), to be issued and transferable in book-entry
form through the facilities of DTC, acting as depositary. The New Notes will
also be issuable and transferable in book-entry form through DTC.
This Prospectus, together with the accompanying Letter of Transmittal is
being sent to all registered holders of Old Notes as of , 2001 (the
"Record Date").
ICN shall be deemed to have accepted validly tendered Old Notes when, as
and if ICN has given oral or written notice thereof to the Exchange Agent. See
"Exchange Agent." The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purpose of receiving New Notes from ICN and delivering New
Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. ICN will pay all charges and expenses, other
than applicable taxes, in connection with the Exchange Offer. See "Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 2001, unless ICN, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended. In
order to extend the Expiration Date, ICN will notify the Exchange Agent of any
extension by oral or written notice and will mail to the record holders of Old
Notes an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. Such
announcement may state that ICN is extending the Exchange Offer for a specified
period of time.
ICN reserves the right (i) to delay acceptance of any Old Notes, to extend
the Exchange Offer or to terminate the Exchange Offer and to refuse to accept
Old Notes not previously accepted, if any of the conditions set forth herein
under "Termination" shall have occurred and shall not have been waived by ICN
(if permitted to be waived by ICN), by giving oral or written notice of such
delay, extension or termination to the Exchange Agent and (ii) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by ICN
to constitute a material change, ICN will promptly disclose such amendment in a
manner reasonably calculated to inform the holders of the Old Notes of such
amendment.
Without limiting the manner in which ICN may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, ICN shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
Interest on each New Note will accrue from the last Interest Payment Date
on which interest was paid on the Old Note tendered in exchange therefor or, if
no interest has been paid on such tendered Old Note, from August 20, 1998 or
July 20, 1999 (as the case may be). Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued from the last Interest
Payment Date or August 20, 1998 or July 20, 1999 (as the case may be) to the
date of the issuance of the New Notes. Consequently, holders who exchange their
Old Notes for New
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Notes will receive the same interest payment on the same Interest Payment Date
that they would have received had they not accepted the Exchange Offer. Interest
on the New Notes is payable semi-annually on May 15 and November 15 of each year
accruing from the last Interest Payment Date or, in the case of the first
payment, August 20, 1998 or July 20, 1999 (as the case may be) at a rate of
8 3/4% per annum.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedure for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, the Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the Exchange Agent at its
addresses set forth herein under "Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE
WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement between
such holder and ICN in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to ICN.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of ICN or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Old Notes are held of record by DTC who desires to deliver such Old
Notes by book-entry transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder (including any
participant in DTC whose name appears on a security position listed as the owner
of Old Notes) who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution.
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If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by ICN, evidence
satisfactory to ICN of their authority to so act must be submitted with the
Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by ICN in its sole discretion, which determination will be final and binding.
ICN reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes ICN's acceptance of which would, in the opinion of
counsel for ICN, be unlawful. ICN also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Old Notes. ICN's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as ICN shall determine. Neither ICN,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes
nor shall any of them incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, ICN reserves the right in its sole discretion to (a) purchase
or make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date, or, as set forth under "Termination," to terminate the Exchange
Offer and (b) to the extent permitted by applicable law, purchase Old Notes in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers may differ from the terms of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within five business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes to be tendered in prior form for
transfer and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by ICN. Any such notice of withdrawal must (i) specify the name
of the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Deposit or withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by ICN, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for exchange will
be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "Procedures for Tendering" at any time prior to
the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, ICN will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if: (i) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer, which, in ICN's
judgment, might materially impair ICN's ability to proceed with the Exchange
Offer or (ii) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission in a manner, which, in ICN's judgment, might materially
impair ICN's ability to proceed with the Exchange Offer.
If ICN determines that it may terminate the Exchange Offer, as set forth
above, ICN may (i) refuse to accept any Old Notes and return any Old Notes that
have been tendered to the holders thereof, (ii) extend the Exchange Offer and
retain all Old Notes tendered prior to the Expiration Date of the Exchange
Offer, subject to the rights of such holders of tendered Old Notes to withdraw
their tendered Old Notes, (iii) waive such termination event with respect to the
Exchange Offer and accept all properly tendered Old Notes that have not been
withdrawn. If such waiver constitutes a material change in the Exchange Offer,
ICN will disclose such change by means of a supplement to this Prospectus that
will be distributed to each registered holder of Old Notes, and ICN will extend
the Exchange Offer for a period of five to 10 business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the Old Notes, if the Exchange Offer would otherwise expire during
such period.
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EXCHANGE AGENT
The United States Trust Company of New York, the Trustee under the
Indenture, has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
By Mail: United States Trust Company of New York
P.O. Box 84
Bowling Green Station
New York, NY 10274-0084
By Hand Prior to 4:30 p.m.: United States Trust Company of New York
30 Broad Street, B Level
14th Floor
New York, New York 10004-2304
By Hand After 4:30 p.m. United States Trust Company of New York
on Expiration Date 30 Broad Street, 14th Floor
and by Overnight Courier: New York, NY 10004-2304
By Facsimile: (212) 422-0183
Confirm by Telephone: (800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by ICN. The principal solicitation for tenders pursuant to the Exchange
Offer is being made by mail. Additional solicitations may be made by officers
and regular employees of ICN and its affiliates in person, by telegraph or
telephone.
ICN will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. ICN, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. ICN may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by ICN.
ICN will pay all transfer taxes, if any, applicable to the exchange of Old
Notes pursuant to the Exchange Offer. If, however, certificates representing New
Notes or Old Notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by ICN upon the
consummation of the Exchange Offer. The expenses of the Exchange Offer will be
amortized by ICN over the term of the New Notes under generally accepted
accounting principles. Unamortized expenses relating to the Old Notes will be
deferred and amortized over the life of the New Notes.
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BUSINESS
INTRODUCTION
ICN Pharmaceuticals, Inc. (the "Company") is a global, research-based
pharmaceutical company that develops, manufactures, distributes and sells
pharmaceutical, research and diagnostic products. In 2000, the Company had
revenues of $800.3 million and net income of $90.2 million. For the six months
ended June 30, 2001, the Company had revenues of $404.7 million and net income
of $42.3 million.
The Company distributes and sells a broad range of prescription (or
"ethical") and over-the-counter ("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 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; (ii) the creation of a pipeline of new products through
internal research and development, as well as strategic partnerships and
licensing arrangements; and (iii) the consolidation of the Company's leadership
position in Central and Eastern Europe, including Russia. In executing this
strategy, the Company believes that it is uniquely positioned to continue to
exploit its basic competitive advantages: (i) large enough economies of scale in
its global distribution network not enjoyed by smaller pharmaceutical companies
that provide opportunities to develop and register multi-regional products; and
(ii) small enough economies of scale in much of its manufacturing and production
facilities and its local and regional sales and marketing groups that provide
for higher profitability on the Company's smaller, niche products that cannot be
achieved by the larger pharmaceutical companies.
The Company's research and development efforts are primarily focused on the
development of drugs in the antiviral and anticancer areas. The Company's
current research and development program areas include hepatitis C, hepatitis B,
HIV, and cancer, each of which affects a large number of patients. The Company
seeks to capitalize on an extensive nucleoside analog library that has already
lead to the discovery and development of ribavirin.
The Company operates in two principal business areas: the pharmaceutical
business which comprises approximately 93% of the Company's total revenue, and
the biomedical business which makes up the remainder. The Company's
pharmaceutical business operates as five regional businesses: North America,
Latin America, Western Europe (including Poland, Hungary and the Czech
Republic), Eastern Europe (predominantly Russia), and Asia, Africa and Australia
("AAA"). The Company's biomedical business operates in three primary areas:
research chemicals, dosimetry and diagnostic equipment. The regional businesses
are each comprised of a number of local operating subsidiaries most of which are
owned directly or indirectly through the Company's principal operating company
in the United States.
While most of the Company's businesses operate as part of a global
integrated strategy, each region utilizes knowledge of the local markets to
enhance the overall performance of the Company. For example, the Company
operates six pharmaceutical companies throughout Eastern Europe and, as measured
by sales, the Company believes it is one of the largest pharmaceutical companies
in Eastern Europe. Long term, the Company believes that as the standard of
living (disposable income as a percentage of GNP) rises, the rate of spending on
health care will increase. The Company also believes it will benefit from the
future growth of the Russian market over the next decade.
RESTRUCTURING
On June 15, 2000, the Company publicly announced a restructuring plan to
split its business into three separate publicly traded companies: Ribapharm Inc.
(comprised of the Company's royalty stream from ribavirin and the Company's U.S.
research & development operations) ("Ribapharm"), ICN International AG
(comprised of the Company's operations in Western Europe, Eastern Europe and
Asia, Africa and Australia) ("ICN International") and ICN Americas (comprised of
the Company's operations in North America, Latin America and Biomedicals). The
Company can give no assurance as to whether or when the
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restructuring will take place. The Company believes that under the terms of
ICN's indentures sale of interests in ICN International would not require the
consent of noteholders but that the initial public offering or spin-off of
Ribapharm would require the consent of noteholders.
Ribapharm
The Company intends for Ribapharm to become a separate publicly traded
company. To achieve this objective, the Company may sell a minority of
Ribapharm's common stock in an underwritten public offering. The Company has
filed a registration statement with the Securities and Exchange Commission to
effect the Ribapharm public offering. Following the Ribapharm public offering,
the Company may distribute its remaining interest in Ribapharm to the Company's
stockholders on a tax-free basis. The distribution will be subject to a ruling
from the U.S. Internal Revenue Service, compliance with all other legal and
regulatory provisions, and the required approval by holders of the Company's
outstanding debt.
In order for the spin-off to be tax-free to the Company's stockholders, the
Company must distribute to its stockholders at least 80% of the issued and
outstanding common stock of Ribapharm. This requirement may limit the number of
shares of Ribapharm common stock that can be sold in the Ribapharm public
offering. The number of shares of Ribapharm common stock available to be sold in
the Ribapharm public offering may be further limited for a number of reasons.
For example, if the shares of Ribapharm common stock, which are to be
received upon conversion of the Company's Convertible Subordinated Notes due
2008, are provided by the Company rather than issued by Ribapharm, the number of
shares of Ribapharm common stock available to be sold in the offering will be
reduced by the number of shares of Ribapharm common stock into which the
Convertible Subordinated Notes due 2008 are convertible. Although the Company
may elect to provide the shares of Ribapharm common stock receivable upon
conversion of the Convertible Subordinated Notes due 2008, the Company will not
do so if the Company's continuing ownership of Ribapharm common stock would
jeopardize the tax-free nature of the spin-off.
Additionally, the Company has had discussions with Roche Capital
Corporation, an affiliate of F. Hoffmann-La Roche, regarding the possible
exchange of a portion of its shares of the Company's common stock for shares of
Ribapharm common stock at the time of Ribapharm's contemplated initial public
offering and/or the time of the spin-off. If the exchange with Roche occurs at
the time of the public offering, the number of shares that can be sold in a
Ribapharm public offering may be reduced. There is no assurance that the Company
will reach any definitive agreement with Roche regarding this exchange.
The Company may not undertake a Ribapharm public offering at all if the
maximum number of shares that could be sold in the offering, taking into account
the foregoing limitations, would not provide a sufficiently liquid market for
those shares or if the Company concludes that, taking into account the funds
that the Company receives from the offering of the Convertible Subordinated
Notes due 2008, cash on hand and other financings, an additional equity
financing would not be necessary to repurchase all of the Company's outstanding
8 3/4% Senior Notes due 2008. Furthermore, if the Company consummates a
Ribapharm public offering or consummates an exchange of Ribapharm common stock
for the Company's common stock with Roche, the holders of our common stock and
holders who convert Convertible Subordinated Notes due 2008 would own a smaller
percentage of Ribapharm common stock and, in the case of the Roche exchange, a
larger percentage of the Company's common stock than would be the case if that
exchange does not occur.
If the Company completes the initial public offering of Ribapharm, the
Company will within sixty days of the public offering seek a ruling from the
IRS. Typically, it takes four to six months from the date of submission of a
ruling request for the IRS to make a determination, but it may take longer.
Consent of the holders of the Notes would be required for the Company to
distribute its interest in Ribapharm. The Company has not yet obtained this
consent. Although the Company anticipates obtaining this consent, in the event
that such consent is not obtained, the Company would not be able to complete the
restructuring unless it is able to identify and implement an alternative
structure. The Company has not yet identified any alternative structures. The
Company expects to use any proceeds from a Ribapharm public offering to
repurchase the Notes. If the Company repurchases Notes, the Company's cash
balances and the Company's interest expense
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would be reduced. The Company believes that a repurchase of the Notes would not
have a material effect on the Company's operations. The Company believes that
consent of the Noteholders would not be required in connection with the sale of
interests in ICN International because the Indenture does not prohibit the sale
of a subsidiary of the Company but, rather, restricts the amount and type of
consideration for such sales and the Company's use of funds generated from such
sales. The Company believes that consent of the Noteholders would be required in
connection with the public offering and spin-off of Ribapharm under the terms of
the Company's Indentures, because, among other things, such public offering and
spin-off could be deemed a sale of substantially all of the assets of the
Company.
ICN International
The Company intends to sell up to a 40% interest in ICN International in an
offering. The Company intends to apply for listing of the shares of ICN
International on the Budapest Stock Exchange and global depositary receipts on
the London Stock Exchange. Subject to market conditions and regulatory approvals
the Company expects to complete the offering of ICN International as soon as
practicable.
ICN Americas
In addition to continuing the Company's operations in North America, Latin
America and Biomedicals, ICN Americas will hold the remaining interests in ICN
International and Ribapharm until these interests are disposed of by ICN
Americas, as discussed above.
When available, copies of the preliminary prospectus relating to the
offering of shares of Ribapharm may be obtained from the offices of UBS Warburg
LLC, 299 Park Avenue, New York, New York 10171, telephone 212-821-3000.
A registration statement relating to the shares of Class A common stock of
Ribapharm has been filed with the U.S. Securities and Exchange Commission but
has not yet become effective. These securities may not be sold nor may offers to
buy be accepted prior to the time that the registration statement becomes
effective. This Form S-4 shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Any securities of ICN International offered will not be and have not been
registered under the U.S. Securities Act of 1933, as amended, and may not be
offered or sold in the United States, absent registration or an applicable
exemption from registration requirements.
In July 2001, the Company completed an offering of $525 million of 6 1/2%
Convertible Subordinated Notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm
will become jointly and severally liable for the obligations under the notes. In
the event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on August 17, 2001, the Company redeemed the
entire aggregate principal amount outstanding of the Company's 9 1/4% Senior
Notes due 2005 at a redemption price of 104.625% of the principal amount
thereof, plus accrued and unpaid interest. In connection with this redemption,
the Company will record an extraordinary loss on extinguishment of debt of $7.9
million, net of tax, in the third quarter of 2001.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
ACQUISITIONS
The Company, as a fundamental aspect of its growth strategy, actively
pursues acquisitions throughout its regions of operations. Currently, the
Company has operations in twelve of the top fifteen pharmaceutical markets, as
measured by sales. Over the past three years, the Company has acquired a variety
of products,
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some of which are counted as the Company's largest products, and a number of
companies around the world. The following is a summary of the Company's
acquisitions.
In July 2000, the Company acquired the Swiss pharmaceutical company Solco
Basel AG for $30.4 million, of which $25.2 million was paid in cash ($4 million
of cash was received as part of the Solco assets) and the balance in 125,000
shares of the Company's common stock. Under the terms of the Company's agreement
with the sellers, the Company has guaranteed a per share price initially at CHF
64 ($35.62 at June 30, 2001), increasing at a rate of 4% per annum through June
30, 2002. If the holders of the shares sell any of the shares prior to June 30,
2002, the Company is entitled to one-half of any proceeds realized 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 in cash. The
aggregate guaranteed value of the shares held by the sellers exceeds the market
value by approximately $0.6 million as of June 30, 2001.
Effective September 1, 1999, the Company acquired a chain of 88 retail
outlets in Moscow and St. Petersburg, Russia, for $7.6 million. The purchase
complements the Company's plan to vertically integrate the Russian market and
provides the Company with the ability to effectively implement one element of
its distribution strategy.
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 Dalmane(R)/ Dalmadorm(R), a sleep disorder drug;
Fluorouracil, an oncology product; Librax(R), a treatment for gastrointestinal
disorders; and Mogadon(R), a sleep disorder drug also used to treat epilepsy.
The aggregate purchase price 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 guaranteed to Roche a per share price initially at $31.00,
increasing at a rate of 6% per annum through December 31, 2000. On February 28,
2001, the Company issued 92,975 shares of its common stock valued at
approximately $2.7 million in settlement of the guarantee. See Note 11 of Notes
to Consolidated Financial Statements.
In October 1998, the Company entered into agreements with Senetek plc under
which it obtained rights to market certain products, including rights to market
Kinetin (marketed by the Company as Kinerase(R)), a skin cream to inhibit signs
of aging, through physicians and pharmacies. In 1998, the Company launched the
product and is marketing it through its existing operations.
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 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.
In March 1998, the Company acquired the global rights to a portfolio of 32
dermatology products from Laboratorio Pablo Cassara, an Argentine-based
pharmaceutical manufacturer, for $22.5 million cash. The Company markets these
products through its subsidiary, ICN Argentina.
In February 1998, the Company acquired from SmithKline Beecham plc ("SKB")
the Asian, African and Australian rights to 39 prescription and OTC
pharmaceutical products. 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 was initially convertible into 750 shares
of the Company's common stock (together, the "SKB Shares"), subject to certain
antidilution adjustments. The Company 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 did not provide SKB with an average value of $46.00 per common share
(including any dividend paid on the SKB Shares). In December 1999, the Company
satisfied its obligation to SKB by repurchasing the 821 shares of Series D
Convertible Preferred Stock for $28.3 million in cash.
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ROYALTY AGREEMENT AND REVENUES
In 1995, the Company entered into an Exclusive License and Supply Agreement
("License Agreement") with Schering-Plough Corporation ("Schering-Plough")
whereby Schering-Plough licensed all oral forms of ribavirin for the treatment
of chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha
interferon (the "Combination Therapy"). 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 worldwide
marketing rights for oral forms of ribavirin for hepatitis C and is responsible
for all clinical development and regulatory activities. 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. As part of the original agreement, Schering-Plough
was required to purchase $42 million of the Company's common stock. In 1999,
after certain regulatory milestones were achieved, Schering-Plough purchased
2,041,498 shares of the Company's common stock fulfilling its obligation.
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 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.
In May 1999, the European Union's ("EU") Commission for the European
Communities granted marketing authorization to Schering-Plough to market
Rebetol(R) (ribavirin) capsules for use in combination with interferon alfa-2b
injection (marketed as Intron(R)A in certain countries) for the treatment of
both relapsed and naive HCV patients. The Commission's approval resulted in a
single Marketing Authorization with unified labeling that was immediately valid
in all 15 European Union-Member States. Schering-Plough commenced marketing
Rebetol(R) in Germany (May 1999), the United Kingdom (July 1999), Italy (October
1999), France (May 2000) and Spain (May 2000). The Company anticipates that
Schering-Plough will introduce Rebetol(R) in the other EU markets upon receiving
pricing approvals, where necessary, from individual EU countries.
On March 28, 2001, Schering-Plough Corporation received notice that the
European Commission of the European Union granted centralized marketing
authorization to Peg-Intron(TM) (peginterferon alfa-2b) Injection and Rebetol(R)
(ribavirin) Capsules as combination therapy for the treatment of both relapsed
and naive adult patients with histologically proven chronic hepatitis C.
Commission approval of the centralized Type II variations to the Marketing
Authorizations for Peg-Intron(TM) and Rebetol(R) would result in unified
labeling that would be immediately valid in all 15 EU-Member States.
On July 26, 2001, Schering-Plough announced that the U.S. Food and Drug
Administration (FDA) granted Schering-Plough marketing approval for Rebetol(R)
(ribavirin, USP) Capsules as a separately marketed product for use only in
combination with Intron(R)A (interferon alfa-2b, recombinant) injection for the
treatment of chronic hepatitis C in patients with compensated liver disease
previously untreated with alpha interferon or who have relapsed following alpha
interferon therapy.
On August 8, 2001, Schering-Plough announced that the FDA also granted
Schering-Plough approval for Peg-Intron(TM) (peginterferon alfa-2b), a longer
lasting form of Intron(R)A, for use in combination therapy with Rebetol(R) for
the treatment of chronic hepatitis C in patients with compensated liver disease
previously untreated with alpha interferon and who are at least 18 years of age.
Royalty revenues under the License Agreement were $155.1 million, $108.9
million and $37.4 million for 2000, 1999 and 1998, respectively. The increase in
royalty revenues is from increasing United States commercial sales of
Rebetron(TM) by Schering-Plough subsequent to receipt of initial FDA approval in
June
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1998, the 1999 and 2000 launches into certain European markets and heightened
worldwide demand for the combination therapy. The 1998 amount includes a
one-time payment of $16.5 million received from Schering-Plough for past
royalties and as reimbursement of expenses incurred by the Company in
preparation for the launch of ribavirin capsules in the EU.
Schering-Plough has informed the Company that it believes royalties paid
under the license agreement should not include royalties on products distributed
as part of an indigent patient marketing program. In raising the dispute,
Schering-Plough has not clearly articulated a contractual basis for the
nonpayment of royalties. Rather it has based its arguments on primarily moral or
humanitarian grounds, essentially equitable arguments, indicating that they
believe they should not have an obligation to pay royalties on product given to
indigent patients. The Company has not been provided with appropriate
information or documentation, and does not agree with such adjustment as the
Agreement articulates those programs for which royalties would not be due.
Should Schering-Plough successfully apply the proposed adjustment retroactively,
since the inception of the license agreement, the adjustment would be
approximately $15,000,000. Further, if Schering-Plough were to apply the
proposed adjustment to future royalty payments, royalties could be reduced in
approximately the same proportion as the proposed historical adjustment.
According to the Centers for Disease Control and Prevention, 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.
In addition to 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 for use in hospitalized infants and children with severe
lower respiratory infections due to RSV.
EASTERN EUROPEAN DEVELOPMENTS
During 1999 and 1998, the Company's operations in Eastern Europe were
adversely affected by economic and political developments in the region,
including the Yugoslavian government's seizure of the Company's Yugoslavian
operations.
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. As a result, the Company had and continues to
have no effective control over 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 $235.3 million
in the fourth quarter of 1998. This charge reduced the carrying value of the
Company's investment in ICN Yugoslavia to its fair value, estimated to be zero.
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 $23.9 million for the year. ICN Yugoslavia's domestic sales were
adversely affected by the Company's 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 $176.2 million of accounts and notes receivable. As a result
of the government's default, the Company recorded a $173.4 million charge
against earnings at ICN Yugoslavia in the second quarter of 1998. The charge is
included in Eastern European charges ($165.6 million), cost of
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product sales ($3.7 million) and interest income ($4.1 million) in the
consolidated statements of income. The charge consisted of a $151.2 million
reserve for losses on notes receivable (including accrued interest), reserves of
$7.8 million for losses on accounts receivable from government-sponsored
entities, and a $14.4 million 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. A trial date has been set for July 15, 2002. The resolution of these
matters may affect the status of certain compounds, which were contributed to
ICN Yugoslavia by the Company in accordance with the agreement, which led to the
formation of ICN Yugoslavia. See Item 1 "Business -- Research and Development."
PRODUCTS
During 2000, the ten pharmaceutical products generating the greatest sales
volume for the Company represented approximately 32% of worldwide pharmaceutical
sales. The following table summarizes the Company's top ten pharmaceutical
products based on sales in 2000:
2000 % OF
THERAPEUTIC PRODUCT PRODUCT
PRODUCT GENERIC NAME CATEGORY/INDICATION SALES SALES
------- ------------ ------------------- ------- -------
(IN MILLIONS)
Efudix(R)/Efudex(R) fluorouracil Antineoplastic/Actinic $ 35.3 6%
Keratosis
Mestinon(R) pyridostigmine bromide Anticholinesterase/ 33.9 6
myasthenia gravis
Bedoyecta(R) Vitamin B complex Vitamin supplement 25.6 4
Librax(R) chlordiazepoxide HCl and Antispasmotic 17.0 3
clidinium bromide
Virazole(R) ribavirin Antiviral 14.9 3
Dalmane(R)/Dalmadorm(R) flurazepam/dihydrochloride Sedative/sleep disorders 14.5 2
Kinerase(TM) N(6) -- furfuryladenine Dermatological 12.4 2
0.1%
Nuclosina(R) omeprazole Gastrointestinal 10.9 2
Ancotil(R)/Ancobon(R) flucytosine Antifungal 10.2 2
Fluorouracil injectable fluorouracil Oncology 10.1 2
------ ---
Sub-total
184.8 32
All others
401.9 68
------ ---
Total pharmaceutical product sales, excluding royalty revenue $586.7 100%
====== ===
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 3%, 1% and 1% of the
Company's net product sales for the years ended December 31, 2000, 1999 and
1998, 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
been approved for hospital use in aerosolized form to treat infants and young
children who have severe lower respiratory tract infections caused by RSV. In
treating RSV, the drug is administered by a small particle aerosol 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.
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Antibacterials
The Company sells antibacterial products which accounted for approximately
8%, 10% and 10% of the Company's net product sales for the years ended December
31, 2000, 1999 and 1998, respectively.
The major products in this group include Ancobon(R)/Ancotil(R), Anapenil(R)
and Yectamicina(R). Ancobon(R)/ Ancotil(R) is a systemic anti-fungal product
that is used in the treatment of serious infections. Anapenil(R) is an
antibiotic product that is used in the treatment of susceptible infections.
Yectamicina(R) is a bactericidal aminoglycoside antibiotic that is used in the
treatment of respiratory, urinary, gastrointestinal tract infections, sepsis,
meningitis and bone infections due to Gram-negative and Gram-positive bacteria.
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 73%, 68% and 59%
of net product sales for the years ended December 31, 2000, 1999 and 1998,
respectively.
Dermatological products represent the Company's largest selling product
line among its other ethical pharmaceutical products. Dermatological products
include Efudex(R)/Efudix(R), Oxsoralen-Ultra(R), Kinerase(TM), Solaquin(R), and
Eldoquine(R), which are principally used for actinic keratosis, psoriasis,
reducing wrinkles and other signs of aging 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 has also introduced a laser-based product, known as N-Lite(TM),
for the reduction of periocular wrinkles. N-Lite(TM) is currently cleared by FDA
for the specific claim of wrinkle reduction in the periocular region of the
face. The product is currently being tested for other indications, including
acne and wrinkle removal in other anatomical regions. The Company believes
N-Lite(TM) is complementary to its dermatological business.
Other ethical products include Mestinon(R), Librax(R), Bedoyecta(R),
Dalmane(R)/Dalmadorm(R), Fluorouracil injectible, Librium(R) and Limbitrol(R).
OTC Products
OTC products encompass a broad range of ancillary products, which are sold
through the Company's existing distribution channels. OTC products accounted for
approximately 7%, 11% and 22% of the Company's net product sales for the years
ended December 31, 2000, 1999 and 1998, respectively.
Biomedical Products
Research chemicals, diagnostic and other biomedical products accounted for
approximately 9%, 10% and 8% of the Company's net product sales for the years
ended December 31, 2000, 1999 and 1998, respectively.
Research Chemicals: The Company serves life science researchers throughout
the world primarily through a catalog sales operation. 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.
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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 effort seeks to discover, develop,
and commercialize innovative products for the treatment of significant unmet
medical needs, principally in the antiviral and anticancer areas. The Company's
current program areas include hepatitis C, hepatitis B, HIV, and cancer, each of
which affects a large number of patients. The Company's research and development
activities are based upon the expertise accumulated in over 30 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 global and regional basis. In connection with this arrangement,
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. In addition, the Company develops innovative products
targeted to address the specific needs of the Company's local markets.
In March 2000, the Company hired Johnson Y.N. Lau, Ph.D., M.D., to lead the
research and development effort. Dr. Lau, an expert in viruses and liver
diseases, was formerly senior director in antiviral research at the
Shering-Plough Research Institute. The Company spent approximately $18 million
in 2000 to update and modernize its research laboratories and equipment. The
Company expects to spend a similar amount to complete the modernization of its
research facilities in 2001. This modernization will enable the Company to
accelerate its drug discovery and development process by utilizing advanced
screening techniques and equipment, biological assays, and sophisticated
computer assisted drug design. The Company plans to expand its research team to
over 120 scientists by the end of 2001, and currently employs approximately 85
employees devoted to research and development activities.
Near and Medium-Term Research and Development
The Company's near-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
pre-clinical and clinical evaluation of certain nucleoside 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.
Levovirin(TM): Levovirin(TM) is a nucleoside analog that is being
developed in oral form for the treatment of hepatitis C. Pre-clinical
studies suggest that Levovirin(TM) may have an ability to stimulate an
immune response to viral infections without a direct antiviral effect and
without the anemia associated with ribavirin. In preliminary toxicology
studies, Levovirin(TM) appeared to have fewer side effects than ribavirin
at the same dosage levels. An Investigational New Drug Application ("IND")
was submitted to
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the FDA in December 2000 to begin clinical testing of Levovirin(TM) for the
treatment of chronic hepatitis C. The Company has proceeded with initial
clinical studies that consist of a safety and tolerability study in normal
volunteers followed by a second study in hepatitis-C infected patients. In
June 2001, the Company's 100% owned subsidiary Ribapharm, Inc. licensed
Levovirin(TM to F. Hoffman-La Roche. Ribapharm received a one-time
licensing fee and will be eligible to receive future payments based upon
Roche achieving certain milestones. Roche will be responsible for all
future development costs of Levovirin(TM. If Levovirin(TM is successfully
developed and receives regulatory approval, Ribapharm will be entitled to
receive royalty payments.
Tiazole(TM) (tiazofurin): In January 2001, Tiazole(TM) was granted
orphan drug status by U.S. federal regulators for the indication of chronic
myelogenous leukemia. The orphan-drug designation is granted for rare
diseases or conditions that affect fewer than 200,000 people in the United
States. Such status will provide seven years of marketing exclusivity if
Tiazole(TM) is the first drug approved for this indication. Chronic
mylogenous leukemia is not currently curable with conventional chemotherapy
or immunotherapy. Tiazole is currently in phase III clinical trials (study
commenced September 2000). If required studies and tests are successful,
the Company intends to file a NDA with the U.S. FDA for the treatment of
chronic myelogenous leukemia with blast crisis.
Tiazole(TM) is also being developed for the treatment of ovarian
cancer and multiple myeloma. It is believed that Tiazole(TM) may cause
inhibition of the biosynthesis of guanosine tiphosphate, which is a
building block essential for tumor cell growth in various cancer cell
lines. The Company believes that the resulting reduction in the
concentration of these building blocks may reduce the capacity of the
cancer cells to proliferate.
Adenazole(TM) (8-CI cAMP, Tocladesine): Adenazole(TM) is a nucleoside
analog being developed for the treatment of colon cancer. Adenazole(TM) may
potentially control cell growth and cause cancer cells to behave more like
normal cells in various cancer cell lines. The Company expects that
Adenazole(TM) will be administered to patients intravenously. Adenazole(TM)
has completed two Phase I trials.
Adenazole(TM) has been evaluated for potential use in the treatment of
colon cancer in two Phase I studies. Of the 19 patients with colon cancer
in the two studies, one patient showed a 70% reduction of retroperitoneal
mass, believed to be related to cancer, while another patient showed stable
disease for four months. In December 1999, the Company submitted various
data to US and Russian regulatory authorities to obtain permission to
proceed with Phase I trials in the treatment of colon cancer in both
countries. In the United States, the FDA accepted the Company's
investigational new drug application. A Phase Ib study was initiated in
September 2000 with the University of California in San Diego and Los
Angeles as the two clinical trial sites.
The rights to the compounds Tiazole(TM) and Adenazole(TM) were among
the assets which the Company contributed to ICN Yugoslavia, upon the
formation of that joint venture in 1991. The resolution of the ongoing
matter with the Yugoslavian government may affect the status of these
compounds.
Viramidine(TM): Viramidine(TM) is a nucleoside analog that the
Company intends to develop in oral form for the treatment of hepatitis C.
The Company expects to test Virmidine's(TM) effect on the hepatitis C virus
both on its own and in combination with interferon alpha. Viramidine(TM) is
currently in pre-clinical development. The pre-clinical studies have
indicated that this nucleoside analog has the same pattern of
immunomodulatory and antiviral activity as ribavirin but was found to have
fewer side-effects compared to ribavirin in preliminary studies. The
Company is conducting a number of pre-clinical studies, including virologic
studies, mechanism of action studies, drug metabolism studies and ancillary
pharmacology studies, to evaluate the potential of this nucleoside analog.
If the efficacy and toxicity profile are confirmed, the Company intends to
file an IND in the fourth quarter of 2001.
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Long-Term Research and Development
The Company's long-term research and development activities are focused on
the identification and development of novel therapeutic compounds for the
treatment of viral diseases, cancer and immunologic dysfunction. The Company's
research focus is based on extending the library of nucleoside analogs through
new synthesis and screening efforts. This is a proven approach that led to the
identification of ribavirin by the Company and to other nucleoside therapeutics,
in particular, antiviral and anticancer drugs, by other companies. Given the
success of the use of nucleoside analogs in the areas of antiviral and
anticancer research, the Company is focusing its R&D efforts in these two
therapeutic areas.
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, as well as many developing markets. 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 2,500 persons
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.
In Western Europe the Company promotes and sells pharmaceutical products through
its own sales forces to physicians, hospitals, retail outlets, pharmacies and
wholesalers.
In Russia, the Company's sales and marketing organization is in various
stages of development. Most of the 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 such as branded
generics or proprietary drugs are promoted directly to physicians through the
Company's own sales force. In addition, the Company utilizes its own network of
distributors and wholesalers, as well as third party distributors and
wholesalers, to market to pharmacies and hospitals. Additionally, in September
1999, the Company acquired a chain of 88 retail pharmacies in Moscow and St.
Petersburg, Russia from an affiliate of Groupe Multipharma SC. The acquisition
of these retail pharmacies provides the Company with the ability to effectively
implement one element of its distribution strategy.
The research chemical and diagnostic product lines are sold worldwide
primarily through the Company's mail order catalogs. 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.
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
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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 its pharmaceutical products at 20 facilities. At
the Humacao, Puerto Rico plant, the Company has a toll manufacturing agreement
with Roche to manufacture some of its products for its U.S. and European market.
The Company also uses the Humacao plant to produce and distribute some of the
Company's 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 certification from the FDA or foreign
agencies have obtained such approval.
In order to meet the demand for some of its markets, the Company
subcontracts the manufacturing of some of its products, including products under
the rights acquired from other pharmaceutical companies. Generally, acquired
products continue to be produced for a specific period of time by the selling
company. During that time, the Company integrates the products into its own
manufacturing facilities or initiates toll manufacturing agreements with third
parties. 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).
EMPLOYEES
As of December 31, 2000, the Company employed 12,700 persons. These
employees included 7,910 in production, 2,690 persons in sales and marketing,
110 in research and development, and 1,990 in general and administrative
matters. The majority of the Company's employees in Mexico, Spain, Poland and
Hungary are covered by collective bargaining or similar agreements.
Substantially all of the employees in Russia, the Czech Republic and 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,
slowdowns 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. 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 underway. 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
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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, 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. In addition, Schering-Plough obtained
a US patent covering the Combination Therapy in January 2001 that may provide
additional protection against competition.
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.
Many of the names of the Company's products are registered trademarks
worldwide. 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.
In November 2000, the Company entered into an agreement to provide
Schering-Plough with certain rights to license various products the Company may
develop. Under the terms of the strategic agreement, Schering-Plough has the
option to exclusively license on a worldwide basis up to three compounds that
the Company may develop for the treatment of hepatitis C on terms specified in
the agreement. The option does not apply to Levovirin or Viramidine. The option
is exercisable as to a particular compound at any time prior to the start of
Phase II clinical studies for that compound. Once it exercises the option with
respect to a compound, Schering-Plough is required to take over all
developmental costs and responsibility for regulatory approval for that
compound.
Under the terms of the agreement, the Company also granted Schering-Plough
the right of first/last refusal to license compounds relating to the treatment
of infectious diseases (other than hepatitis C) or cancer or other oncology
indications as well as the right of first/last refusal with respect to Levovirin
and Viramidine (collectively, the "Refusal Rights"). Under the terms of the
Refusal Rights, if the Company intends to offer a license or other rights with
respect to any of these compounds to a third party, the Company is required to
notify Schering-Plough. At Schering-Plough's request, the Company is required to
negotiate in good faith with Schering-Plough on an exclusive basis the terms of
a mutually acceptable exclusive worldwide license or other form of agreement on
commercial terms to be mutually agreed upon. If the Company cannot reach an
agreement with Schering-Plough, the Company is permitted to negotiate a license
agreement or other arrangement with a third party. Prior to entering into any
final arrangement with the third party, the Company is required to offer
substantially similar terms to Schering-Plough, which terms Schering-Plough has
the right to match.
If Schering-Plough does not exercise its option or Refusal Rights as to a
particular compound, the Company may continue to develop that compound or
license that compound to other third parties. The agreement with Schering-Plough
will terminate the later of 12 years from the date of the agreement or the
termination of the 1995 license agreement with Schering-Plough. The agreement
was entered into as part of the resolution of claims asserted by Schering-Plough
against the Company, including claims regarding the
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Company's alleged improper hiring of former Schering-Plough research and
development personnel and claims that the Company was not permitted to conduct
hepatitis C research.
In June 2001, the Company licensed Levovirin to F. Hoffman-La Roche. The
Company's agreement with Schering-Plough granted Schering-Plough Refusal Rights
for Levovirin. Although the Company believes it has complied with the Refusal
Rights, Schering-Plough may allege that the Company has not complied with the
Refusal Rights as to Levovirin.
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 an NDA requires the expenditure of
substantial funds and the commitment of substantial resources. The review by the
FDA could take up to several years. If the FDA determines that the drug is safe
and effective, the NDA is approved. No assurance can be given that authorization
for 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 Russia 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.
FOREIGN OPERATIONS
The Company operates directly and through distributors in North America,
Latin America (principally Mexico), Western Europe (including Poland, Hungary
and the Czech Republic) 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 62% and 63% of the Company's revenues for the six months
ended June 2001 and 2000, respectively, were generated from operations outside
the United States. Approximately 63%, 64%, and 76% of the Company's revenues for
the years ended December 31, 2000, 1999, and 1998 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 action.
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.
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While the Russian economy continues to show improvement since the financial
crisis that began in August 1998, the economy continues to experience
difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to
a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999 and 2000, the
ruble continued to fluctuate, there is continued volatility in the debt and
equity market, hyperinflation persists, confidence in the banking sector has yet
to be restored and there continues to be general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
Russia continue to evolve. Russia's return to economic stability is dependent to
a large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the Company's control.
At December 31, 2000, the ruble exchange rate was 28.2 rubles to $1 as
compared with the rate of 27.5 rubles to $1 and 20.7 rubles to $1 as of December
31, 1999 and 1998, respectively. As a result of the change in the ruble exchange
rate, the Company recorded translation and exchange losses related to its
Russian operations of $3.5 million, $6.7 million and $53.8 million, during 2000,
1999 and 1998, respectively, as well as translation losses of $469,000 during
the first six months of 2001. As of June 30, 2001, ICN Russia had a net monetary
asset position of approximately $8.6 million, which is subject to foreign
exchange loss as further declines in the value of the ruble in relation to the
dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate
amount of any future translation and exchange loss the Company may incur cannot
presently be determined and such loss may have a negative impact on the
Company's results of operations. The Company's management continues to work to
manage its net monetary exposure. However, there can be no assurance that such
efforts will be successful.
The Company believes that the economic and political environment in Russia
has affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience liquidity
problems as monetary policies have limited the money supply, and Russian
companies often lack access to an effective banking system. As a result, many
Russian companies have limited ability to pay their debts, which has 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 affected, and may continue to adversely
affect, sales and gross margins in the Company's Russian operations. As a result
of the Russian economic situation, the Company recorded a charge in 1998 of
$42.3 million among several of its operating segments, which is included in
Eastern European charges ($39.9 million) and cost of product sales ($2.4
million) in the consolidated statements of income. The charge consists of
reserves of $37.9 million for losses on accounts receivable, the write-off of
certain investments of $2.0 million, and a reduction in the value of certain
inventories of $2.4 million.
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
Orangeburg, New York Manufacturing facility Owned 100,000
Aurora, Ohio Offices and manufacturing facility Leased 75,850
Humacao, Puerto Rico Offices and manufacturing facility Owned 397,000
Montreal, Canada Offices and manufacturing facility Owned 93,519
Latin America
Mexico City, Mexico Offices and manufacturing facility Owned 189,581
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OWNED OR SQUARE
LOCATION PURPOSE LEASED FOOTAGE
-------- ------- -------- -------
Western Europe
Barcelona, Spain Offices and manufacturing facility Owned 93,991
Birsfelden, Switzerland Offices and manufacturing facility Owned 216,226
Prague, Czech Republic Offices and manufacturing facility Owned 262,032
Tiszavasvari, Hungary Offices and manufacturing facility Owned 559,465
Rzeszow, Poland Offices and manufacturing facility Owned 472,133
Warsaw, Poland Offices and manufacturing facility Owned 90,244
Eastern Europe
Chelyabinsk, Russia Offices and manufacturing facility Owned 329,405
Moscow, Russia Eastern European headquarters Owned 102,400
St. Petersburg, Russia Offices and manufacturing facility Owned 350,033
Tomsk, Russia Offices and manufacturing facility Owned 301,680
Yoshkar-Ola, Russia Offices and manufacturing facility Owned 737,802
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.
LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements as of
and for the three months and six months ended June 30, 2001, for a description
of the Company's litigation.
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 negative impact on the results of operations and cash flows.
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MANAGEMENT
The following individuals are the members of the Board of Directors and
executive officers of the Company:
NAME AGE PRESENT POSITION WITH THE COMPANY
---- --- ---------------------------------
Milan Panic............................... 71 Chairman of the Board and Chief Executive Officer
Norman Barker, Jr......................... 78 Director
Birch E. Bayh............................. 72 Director
Edward A. Burkhardt....................... 62 Director
Alan F. Charles........................... 62 Director
Ronald R. Fogleman........................ 59 Director
Roger Guillemin, M.D., Ph.D. ............. 77 Director
Adam Jerney............................... 59 Director, President and Chief Operating Officer
Jean-Francois Kurz........................ 67 Director
Steven J. Lee............................. 53 Director
Stephen D. Moses.......................... 66 Director
Rosemary Tomich........................... 63 Director
John E. Giordani.......................... 58 Executive Vice President
Gregory Keever............................ 52 Executive Vice President -- General Counsel and
Corporate Secretary
Bill A. MacDonald......................... 52 Executive Vice President -- Strategic Planning
Richard A. Meier.......................... 41 Executive Vice President and Chief Financial Officer
Jack L. Sholl............................. 58 Executive Vice President -- Public Relations
Johnson Y.N. Lau.......................... 40 Senior Vice President, Research and Development
James G. McCoy............................ 59 Executive Vice President, Human Resources
David C. Watt............................. 47 Executive Vice President
Milan Panic, the founder of the Company, has been Chairman of the Board and
Chief Executive Officer of the Company since its inception in 1960 and President
until 1997, except for a leave of absence from July 14, 1992 to March 4, 1993
while he was serving as Prime Minister of Yugoslavia and a leave of absence from
October 1979 to June 1980.
Norman Barker, Jr., has served as a director of the Company since 1988. Mr.
Barker is the retired Chairman of the Board of First Interstate Bank of
California and Former Vice Chairman of the Board of First Interstate Bancorp.
Mr. Barker joined First Interstate Bank of California in 1957 and was elected
President and Director in 1968, Chief Executive Officer in 1971 and Chairman of
the Board in 1973. He retired as Chairman of the Board at the end of 1985. Mr.
Barker is a director of Bank Plus, Inc. and TWC Convertible Securities, Inc.
Birch E. Bayh, has served as a director of the Company since 1992. Senator
Bayh is a senior partner in the Washington, D.C. law firm of Oppenheimer, Wolff,
Donnelly and Bayh, L.L.P. He was previously head of the Washington, D.C. office
of Bayh, Connaughton & Stewart, L.L.P. (1991-1997) and Rivkin, Radler, Bayh,
Hart & Kremer (1985-1991), and a partner of the Indianapolis, Indiana and
Washington, D.C. law firm of Bayh, Tabbert & Capehart (1981-1985). From 1963 to
1981, Mr. Bayh served as United States Senator from the State of Indiana. Mr.
Bayh is a director of Simon Property Group.
Edward A. Burkhardt has been the President of Rail World, Inc., a railway
management consulting and investment corporation specializing in privatizations,
since August 1999. From 1987 through August 1999, Mr. Burkhardt held a number of
positions with Wisconsin Central Transportation Corporation, including Chairman,
President and Chief Executive Officer. Wisconsin Central Transportation
Corporation is a holding company which operates a regional North American rail
system in Wisconsin, Michigan, Illinois, Minnesota and Ontario. Wisconsin
Central Transportation Corporation also owns minority interests in, and
participates in the management of, rail operations in the United Kingdom and
Australia, as well as ferry and rail operations in New Zealand.
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Alan F. Charles has served as a director of the Company since 1986. Mr.
Charles was Vice Chancellor of University Relations at the University of
California, Los Angeles from 1980 to 1993 and served in various administrative
capacities at that University since 1972. Mr. Charles is now an independent
consultant in higher education management. Mr. Charles is a director of the Rand
Institute of Civil Justice.
General Ronald R. Fogleman, United States Air Force (Retired), has been the
President and Chief Executive Officer of Durango Aerospace, Inc., an
international aviation consulting services company, since 1998. Prior to joining
Durango Aerospace, General Fogleman, who retired from the United States Air
Force in September 1997, served as Chief of Staff of the United States Air Force
from 1994 until 1997 and as Commander-in-Chief of the United States
Transportation Command from 1992 until 1994. General Fogleman currently serves
on the Board of Directors of North American Airlines, a feeder airline for El
Al; Rolls Royce of North America; the International Airline Support Group, Inc.;
Mesa Air Group, Inc.; and World Airways, Inc.
Roger Guillemin, M.D., Ph.D., has served as a director of the Company since
1989. Dr. Guillemin has been a Distinguished Scientist at the Whittier Institute
in La Jolla, California from March 1989 to 1995 and was Resident Fellow and
Chairman of the Laboratories for Neuroendocrinology at the Salk Institute in La
Jolla, California, and Adjunct Professor of Medicine at the Medical School of
the University of California at San Diego. Dr. Guillemin was awarded the Nobel
Prize in Medicine in 1977 and, in the same year, was presented the National
Medal of Science by the President of the United States. He was affiliated with
the Department of Physiology at Baylor College of Medicine in Houston, Texas
from 1952 to 1970. Dr. Guillemin is a member of the National Academy of
Sciences, and a Fellow of the American Association for the Advancement of
Science. Dr. Guillemin has also served as President of the American Endocrine
Society. Mr. Guillemin is a director of Theratechnologies, Inc. and CEREP S.A.
Adam Jerney has served as a director of the Company since 1992. Mr. Jerney
is currently President and Chief Operating Officer of the Company. He served as
Chairman of the Board and Chief Executive Officer of ICN from July 14, 1992 to
March 4, 1993 during Milan Panic's leave of absence (as discussed above). Mr.
Jerney joined the Company in 1973 as Director of Marketing Research in Europe
and assumed the position of General Manager of ICN Netherlands in 1975. In 1981,
he was elected Vice President -- Operations. He became President of the Company
in 1997. Prior to joining the Company, he spent four years with F. Hoffmann-La
Roche & Company.
Jean-Francois Kurz has served as a director of the Company since 1989. Mr.
Kurz was a Member of the Board of Directors and the Executive Committee of the
Board of DG Bank Switzerland Ltd. from 1990 to 1992. In 1988 and 1989, Mr. Kurz
served as a General Manager of TDB American Express Bank of Geneva and, from
1969 to 1988, he was Chief Executive Officer of Banque Gutzweiler, Kurz,
Bungener in Geneva. Mr. Kurz is also Chairman of the Board and a director of
Banque Pasche S.A., Geneva.
Steven J. Lee has been Chairman and Chief Executive Officer of PolyMedica
Corporation since June 1996. From 1990 to 1996, he was President and Chief
Executive Officer of PolyMedica. PolyMedica is a national medical products and
services company. Through its Liberty Medical Supply subsidiary, it is the
largest value-added provider of diabetic supplies to Medicare-eligible seniors.
Mr. Lee is also a director of Kensey Nash Corporation.
Stephen D. Moses has served as a director of the Company since 1988. Mr.
Moses is Chairman of the Board of Stephen Moses Interests. He was formerly
Chairman of the Board of National Investment Development Corporation and
Brentwood Bank in Los Angeles, California. Mr. Moses serves on the Board of
Directors of The Central Asian-American Enterprise Fund and is Chair of its
investment committee. He is a member of the Board of Directors of Steadfast
Ventures, Inc. He also serves on the Board of Trustees of Franklin and Marshall
College and the Board of Counselors of The UCLA Foundation.
Rosemary Tomich has been owner of the Hope Cattle Company since 1958 and
the A. S. Tomich Construction Company since 1970. She is also Chairman of the
Board of Directors and Chief Executive Officer of Livestock Clearing, Inc. and
was a founding director of the Palm Springs Savings Bank. Ms. Tomich is also a
member of the Advisory Board of the University of Southern California School of
Business Administration and on the Board of Councilors of the UCLA Foundation.
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John E. Giordani joined the Company in June of 1986 as Senior Vice
President and Chief Financial Officer. He served as the Company's Executive Vice
President and Chief Financial Officer from 1992 to January 2000. Since January
2000, he has served as an Executive Vice President of the Company. Prior to
joining the Company, he served as Vice President and Corporate Controller of
Revlon, Inc., in New York, New York from 1982 through 1986 and as Deputy and
Assistant Corporate Controller with Revlon, Inc. from 1978 through 1982. He was
with the public accounting firm of Peat, Marwick, Mitchell & Co. (now known as
"KPMG Peat Marwick LLP") from 1969 to 1978.
Bill A. MacDonald joined the Company in March 1982 as Director of Taxes. In
1983, he became Vice President -- Taxes and Corporate Development. In 1987, Mr.
MacDonald became Senior Vice President -- Tax and Corporate Development and in
1992 was promoted to Executive Vice President -- Strategic Planning. From 1980
to 1982, he served as the Tax Manager of Pertec Computer Corporation. From 1973
to 1980, he was Tax Manager and Assistant Treasurer of Republic Corporation.
Gregory Keever joined the Company in July 2001, and holds the position
Executive Vice President, General Counsel and Secretary. Prior to joining the
Company, Mr. Keever was a partner at the law firm of Coudert Brothers since 1997
and, prior thereto, Buchalter, Nemer, Fields and Younger, in Los Angeles,
California, since 1995.
David C. Watt joined the Company in March 1988 as Assistant General Counsel
and Secretary. He was elected Vice President -- Law and Secretary in December
1988. In January 1992, Mr. Watt was promoted to Senior Vice President of the
Company. In February 1994, Mr. Watt was elected Executive Vice President,
General Counsel and Secretary of the Company. In 2001, Mr. Watt was elected
Executive Vice President. From 1986 to 1987, he was President and Chief
Executive Officer of Unitel Corporation. He also served as Executive Vice
President and General Counsel and Secretary of Unitel Corporation during 1986.
From 1983 to 1986, he served with ICA Mortgage Corporation as Vice President,
General Counsel and Corporate Secretary. Prior to that time, he served with
Central Savings Association as Assistant Vice President and Associate Counsel
from 1981 to 1983 and as Assistant Vice President from 1980 to 1981.
Richard A. Meier joined the Company in May 1998 as Senior Vice
President -- Finance and Corporate Treasurer. He was promoted to Executive Vice
President and Chief Financial Officer in January 2000. From October 1996 to May
1998, Mr. Meier was a Senior Vice President with the investment banking firm of
Schroder & Co. Inc. From 1994 to 1996, he was employed by Smith Barney, Inc.
Prior to that, he served in various banking capacities at other firms.
Jack L. Sholl joined the Company in August 1987 as Vice President, Public
Relations. He was elected Senior Vice President -- Corporate Human Resources in
September 1994 and later became Executive Vice President, Corporate Human
Resources. In August 2000, Mr. Sholl became Executive Vice President, Public
Relations. From 1979 to August 1987, he served as Director of Financial and
Media Communications with Warner-Lambert Company of Morris Plains, New Jersey,
and from 1973 to 1979 as Manager, Department of Communications with Equibank,
N.A. of Pittsburgh, Pennsylvania. Prior to that time, he served on the Public
Relations staff of the New York Stock Exchange (1971-1973) and in editorial
positions with The Associated Press (1968-1971), the last as supervising
Business and Financial Editor in New York.
Johnson Y.N. Lau, M.D., Ph.D., joined ICN in March 2000 as Senior Vice
President, Research and Development. Before joining the Company, he was a Senior
Director in Antiviral Research at the Schering-Plough Research Institute. He
served as a faculty member at the University of Florida from 1992 to 1996. From
1989 to 1991, he served as a faculty member at the Institute of Liver Studies,
King's College Hospital School of Medicine and Dentistry, University of London.
James G. McCoy joined the Company in August 2000 as Executive Vice
President, Human Resources. From 1979 to June 2000, he was a management
consulting partner with Coopers & Lybrand/ PricewaterhouseCoopers LLP. He was
the managing partner for the financial cost management and middle-market
partners on the West Coast. Previously, he was Director of Human Resources,
Strategic Planning and Accounting for Warner Elecktra Atlantic Distribution
Company, a subsidiary of Warner Communications. Prior to that time, he was with
the public accounting firm Ernst & Ernst (now Ernst & Young) and Litton
Industries, Inc.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The New Notes will be issued under an Indenture (the "Indenture"), dated as
of August 20, 1998, by and between the Company and U.S. Trust Company of New
York, as trustee (the "Trustee"). Upon the issuance of the New Notes or the
effectiveness of a Shelf Registration Statement (as defined below), the
Indenture will be subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). As used in this "Description of the New
Notes" section, references to the Notes means the New Notes and the "Company"
means ICN Pharmaceuticals, Inc., but not any of its subsidiaries (unless the
context otherwise requires).
The following is a summary of the material provisions of the Indenture.
This summary does not purport to be complete and is subject to the detailed
provisions of, and is qualified in its entirety by reference to, the Trust
Indenture Act, the Notes and the Indenture, including the definitions of terms
contained therein and including those terms made part of the Indenture by
reference to the Trust Indenture Act. A copy of the proposed form of Indenture
may be obtained from the Company. The definitions of terms used in the following
summary are set forth below under "-- Certain Definitions." Reference is made to
the Indenture for the full definition of all such terms, as well as any other
capitalized terms used herein for which no definition is provided.
MATURITY AND INTEREST
The Notes will be unsecured senior obligations of the Company limited in
aggregate principal amount to $350 million ($200.0 million of which were issued
in the 1998 Offering and $125.0 million of which were issued in the 1999
Offering). The Notes will mature on November 15, 2008. Interest on the Notes
will accrue at the rate of 8 3/4% per annum and will be payable semi-annually in
arrears on May 15 and November 15 in each year, commencing on November 15, 1998,
to holders of record on the immediately preceding May 1 and November 1,
respectively. The Notes issued in the 1999 Offering were offered at a discount
from their principal amount at maturity. As a result, for federal income tax
purposes, holders of the 1999 New Notes may be required to include amounts as
income prior to the receipt of cash attributable thereto. See "Federal Income
Tax Consequences -- Original Issue Discount." Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of the original issuance of the Notes (the "Issue
Date"). Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose in The City of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the holders of the Notes at their respective addresses as set
forth in the register of holders of Notes. Until otherwise designated by the
Company, the Company's office or agency in The City of New York will be the
office of the Trustee maintained for such purpose. The Notes will be issued in
fully registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof. No service charge will be made for any transfer,
exchange or redemption of Notes, except in some circumstances for any tax or
other governmental charge that may be imposed in connection therewith.
REDEMPTION
Mandatory Redemption. The Notes are not subject to any mandatory sinking
fund redemption prior to maturity.
Optional Redemption. At any time or from time to time on or prior to
November 15, 2001, the Company may, at its option, redeem up to $70 million of
the aggregate principal amount of the Notes with the net proceeds of one or more
Public Equity Offerings, at a redemption price equal to 108.75% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
redemption; provided, however, that such redemption is effected within 90 days
after the consummation of any such Public Equity Offering.
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"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Capital Stock) of the Company pursuant to an
effective registration statement filed under the Securities Act.
Selection and Notice. If less than all of the Notes are to be redeemed at
any time, selection of the Notes to be redeemed will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
securities exchange, on a pro rata basis or by lot or any other method as the
Trustee shall deem fair and appropriate; provided, however, that Notes redeemed
in part shall only be redeemed in integral multiples of $1,000. Notices of any
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of Notes to be redeemed at such
holder's registered address. If any Note is to be redeemed in part only, the
notice of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed, and the Trustee shall authenticate and
mail to the holder of the original Note a new Note in principal amount equal to
the unredeemed portion of the original Note promptly after the original Note has
been cancelled. On and after the redemption date, interest will cease to accrue
on Notes or portions thereof called for redemption.
RANKING
The Notes will be general unsecured obligations of the Company. The Notes
will rank pari passu in right of payment with all unsecured senior indebtedness
and senior to all subordinated indebtedness of the Company, including its 6 1/2%
Convertible Subordinated Notes. The Notes will be effectively subordinated to
all secured indebtedness of the Company to the extent of the assets securing
such indebtedness and will also be effectively subordinated to all indebtedness
of the Company's subsidiaries. As of June 30, 2001, the Company had no secured
indebtedness outstanding and its subsidiaries had aggregate indebtedness of
approximately $14.1 million outstanding. See "Risk Factors -- Ranking of the
Notes; Subsidiary Operations."
CHANGE OF CONTROL
In the event of a Change of Control, each holder of Notes will have the
right, unless the Company has given a notice of redemption, subject to the terms
and conditions of the Indenture, to require the Company to offer to purchase all
or any portion (equal to $1,000 or an integral multiple thereof) of such
holder's Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase, in accordance with the terms set forth below (a "Change of Control
Offer").
Other debt instruments of the Company may in the future restrict the
Company's ability to purchase Notes pursuant to a Change of Control Offer.
Moreover, such debt instruments may contain a "change of control" provision that
is similar to the provision in the Indenture relating to a Change of Control,
and the occurrence of such a "change of control" would constitute a default
under such debt instruments. Such debt instruments may not permit the purchase
of the Notes absent consent of the lenders thereunder in the event of a Change
of Control. Notwithstanding the foregoing, the failure of the Company to effect
a Change of Control Offer would constitute an Event of Default under the
Indenture.
If the Company is unable to obtain the requisite consents and/or repay all
indebtedness which restricts the Company's ability to repurchase the Notes upon
the occurrence of a Change of Control, the Company may not be able to commence a
Change of Control Offer to purchase the Notes within 30 days of the occurrence
of the Change of Control. Such failure would constitute an Event of Default
under the Indenture. If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient assets to first satisfy its
obligations under any other agreements relating to indebtedness, if accelerated,
and then to purchase all of the Notes that might be delivered by holders seeking
to accept a Change of Control Offer.
On or before the 30th day following the occurrence of any Change of
Control, the Company shall mail to each holder of Notes at such holder's
registered address a notice stating: (i) that a Change of Control has occurred
and that such holder has the right to require the Company to purchase all or a
portion (equal to $1,000 or an integral multiple thereof) of such holder's Notes
at a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase (the
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"Change of Control Purchase Date"), which shall be a business day, specified in
such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest, if
any, as of the Change of Control Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Change of
Control Offer, any Notes accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest on the Change of Control Purchase Date, (v)
the procedures, consistent with the Indenture, to be followed by a holder of
Notes in order to accept a Change of Control Offer or to withdraw such
acceptance, and (vi) such other information as may be required by the Indenture
and applicable laws and regulations.
On the Change of Control Purchase Date, the Company will (x) accept for
payment all Notes or portions thereof tendered pursuant to the Change of Control
Offer, (y) deposit with the Paying Agent the aggregate purchase price of all
Notes or portions thereof accepted for payment, and (z) deliver or cause to be
delivered to the Trustee all Notes tendered pursuant to the Change of Control
Offer. The Paying Agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Notes plus accrued and unpaid interest, if any, thereon, and the Trustee shall
promptly authenticate and mail to each holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part shall be
promptly returned to the holder of such Note. On and after a Change of Control
Purchase Date, interest will cease to accrue on the Notes or portions thereof
accepted for payment, unless the Company defaults in the payment of the purchase
price therefor. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Purchase
Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ("incur") any Indebtedness (including Acquired
Debt), except that the Company may incur Indebtedness (including Acquired Debt)
if, at the time of, and immediately after giving pro forma effect to, such
incurrence of Indebtedness, the Consolidated Cash Flow Coverage Ratio of the
Company for the most recently ended four fiscal quarters would be at least 3.0
to 1.0.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(i) Senior Bank Debt of the Company or any of its Restricted
Subsidiaries, in an aggregate principal amount not to exceed at any time
outstanding the greater of (x) $50.0 million, and (y) the sum, at such
time, of (I) 85% of the consolidated book value of net accounts receivable
and current notes receivable of the Company and the Restricted Subsidiaries
and (II) 60% of the consolidated book value of inventory of the Company and
the Restricted Subsidiaries;
(ii) Indebtedness of the Company represented by the Notes issued in
the Offering and the Exchange Notes;
(iii) Indebtedness of the Company or any Restricted Subsidiary not
covered by any other clause of this paragraph which is outstanding on the
Issue Date ("Existing Indebtedness");
(iv) Indebtedness owed by any Restricted Subsidiary to the Company or
to another Restricted Subsidiary, or owed by the Company to any Restricted
Subsidiary; provided, however, that any such Indebtedness shall at all
times be held by a Person which is either the Company or a Restricted
Subsidiary; provided, further, however, that upon either (a) the transfer
or other disposition of any such Indebtedness to a Person other than the
Company or another Restricted Subsidiary or (b) the sale, lease,
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transfer or other disposition of shares of Capital Stock (including by
consolidation or merger) of any such Restricted Subsidiary to a Person
other than the Company or another Restricted Subsidiary resulting in such
Restricted Subsidiary ceasing to be a Restricted Subsidiary, the incurrence
of such Indebtedness shall be deemed to be an incurrence that must be
permitted by this covenant other than by virtue of this clause (iv);
(v) Indebtedness of the Company or any Restricted Subsidiary arising
with respect to Interest Rate Agreement Obligations and Currency Agreement
Obligations incurred for the purpose of fixing or hedging interest rate
risk or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or with respect to any receivable or liability the payment of
which is determined by reference to a foreign currency;
(vi) Indebtedness represented by performance, completion, guarantee,
surety and similar bonds provided by the Company or any Restricted
Subsidiary in the ordinary course of business consistent with past
practice;
(vii) Any Indebtedness incurred in connection with or given in
exchange for the renewal, extension, substitution, refunding, defeasance,
refinancing or replacement, in whole or in part (a "refinancing"), of any
Indebtedness incurred as permitted under the first paragraph of this
covenant or any Indebtedness described in clauses (ii) or (iii) above and
this clause (vii) ("Refinancing Indebtedness"); provided, however, that (a)
the principal amount of such Refinancing Indebtedness shall not exceed the
principal amount (or accreted amount, if less) of the Indebtedness so
refinanced (plus the premiums and reasonable expenses to be paid in
connection therewith); (b) if the Weighted Average Life to Maturity of the
Indebtedness being refinanced is equal to or greater than the Weighted
Average Life to Maturity of the Notes, the Refinancing Indebtedness shall
have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being refinanced; (c)
with respect to Refinancing Indebtedness that is subordinated to the Notes,
such Refinancing Indebtedness shall be at least as subordinated in right of
payment to the Notes as, the Indebtedness being refinanced; and (d) the
Company or the obligor on such Refinancing Indebtedness shall be the
obligor on the Indebtedness being refinanced;
(viii) Indebtedness incurred by the Company or any Restricted
Subsidiary constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims or self-insurance;
(ix) Indebtedness of the Company or any Restricted Subsidiary arising
from agreements providing for indemnification, adjustment of purchase price
or similar obligations, in each case incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
Guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; provided that the maximum liability in respect
of such Indebtedness shall not exceed the gross proceeds actually received
by the Company and its Restricted Subsidiaries in connection with such
disposition; and
(x) Indebtedness of the Company or any Restricted Subsidiary in
addition to that described in clauses (i) through (ix) above, and any
renewals, extensions, substitutions, refinancings or replacements of such
Indebtedness, so long as the aggregate principal amount of all such
Indebtedness incurred pursuant to this clause (x) does not exceed $35.0
million at any one time outstanding.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary shall be deemed to have been incurred at
the time such Person becomes a Restricted Subsidiary or is merged with or into
or consolidated with the Company or a Restricted Subsidiary, and Indebtedness
which is assumed at the time of the acquisition of any asset shall be deemed to
have been incurred at the time of such acquisition.
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Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined reasonably and in
good faith by the Board of Directors of the Company):
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(ii) the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under "-- Limitation on Incurrence of Indebtedness"; and
(iii) the aggregate amount of all Restricted Payments made after the
Issue Date shall not exceed the sum of:
(a) an amount equal to 50% of the Company's aggregate cumulative
Consolidated Net Income accrued on a cumulative basis during the period
(treated as one accounting period) beginning on the Issue Date and
ending on the date of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit); plus
(b) the aggregate amount of all net cash proceeds received since
the Issue Date by the Company from the issuance and sale (other than to
a Restricted Subsidiary) of, or equity contribution with respect to,
Capital Stock (other than Disqualified Stock) and the principal amount
of Indebtedness of the Company or any Restricted Subsidiary issued or
incurred on or after the Issue Date that has been converted into or
exchanged for Capital Stock (other than Disqualified Stock), in any such
case to the extent that such proceeds are not used to redeem,
repurchase, retire or otherwise acquire Capital Stock or any
Indebtedness of the Company or any Restricted Subsidiary pursuant to
clause (ii) of the next paragraph; plus
(c) the amount of the net reduction in Restricted Investments
resulting from (x) the payment of dividends or the repayment in cash of
the principal of loans or the cash return on any Restricted Investment,
in each case to the extent received by the Company or any Restricted
Subsidiary, (y) the release or extinguishment of any guarantee of
Indebtedness which guarantee constituted a Restricted Investment, and
(z) in the case of Investments in Unrestricted Subsidiaries the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued as provided in the definition of "Investment"), such aggregate
amount of the net reduction in Restricted Investments not to exceed the
amount of Restricted Investments previously made by the Company or any
Restricted Subsidiary, which amount was included in the calculation of
the amount of Restricted Payments.
The foregoing provisions will not prohibit, so long as no Default or Event
of Default is continuing, the following actions (collectively, "Permitted
Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture (which payment shall be deemed to have
been paid on such date of declaration for purposes of clause (iii) of the
preceding paragraph);
(ii) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or any Indebtedness of the Company or any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Restricted Subsidiary) of, or equity
contribution with respect to, Capital Stock of the Company (other than any
Disqualified Stock);
(iii) cash dividends on the Common Stock of the Company paid in the
ordinary course consistent with past practice; provided that the Company
could incur at least $1.00 of additional Indebtedness
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(other than Permitted Indebtedness) pursuant to the covenant described
under "-- Limitation on Incurrence of Indebtedness";
(iv) the redemption, repurchase or other acquisition of Capital Stock
of the Company issued to SmithKline Beecham plc or any other Person as
consideration for or in exchange for products used in the Company's
business in an amount not to exceed $40.0 million in the aggregate; and
(v) other payments not otherwise permitted by the foregoing clauses
(i) through (iv) in an aggregate amount not to exceed $20.0 million.
For purposes of clause (iii) of the first paragraph of this covenant, the
Permitted Payments referred to in clauses (i), (iii and (v) above shall be
included in the aggregate amount of Restricted Payments made since the Issue
Date.
Limitation on Asset Sales. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Trustee) of the assets or other
property sold or disposed of in the Asset Sale and (ii) at least 75% of such
consideration consists of either cash or Cash Equivalents; provided, however,
that (A) for purposes of this covenant, "cash" shall include (x) the amount of
any Indebtedness (other than any Indebtedness that is by its terms subordinated
to the Notes) of the Company or such Restricted Subsidiary as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto that is assumed by the transferee of any such assets or other
property in such Asset Sale (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis such that there is no further
recourse to the Company or any of the Restricted Subsidiaries with respect to
such liabilities and (y) any notes, obligations or securities received by the
Company or such Restricted Subsidiary from such transferee that are converted
within 60 days by the Company or such Restricted Subsidiary into cash (to the
extent of the cash received) and (B) the 75% cash or Cash Equivalents
requirement will not apply to any sale of all or substantially all of the assets
or Capital Stock of ICN Biomedicals, Inc.
Within one year after any Asset Sale, the Company may elect to apply the
Net Proceeds from such Asset Sale to (a) permanently reduce any Senior Bank Debt
of the Company and/or (b) make an investment in, or acquire assets and
properties that will be used in, a Related Business. Any Net Proceeds from an
Asset Sale not applied or invested as provided in the first sentence of this
paragraph within one year of such Asset Sale will be deemed to constitute
"Excess Proceeds."
Each date that the aggregate amount of Excess Proceeds in respect of which
an Asset Sale Offer (as defined below) has not been made exceeds $10.0 million
shall be deemed an "Asset Sale Offer Trigger Date." As soon as practicable, but
in no event later than 20 business days after each Asset Sale Offer Trigger
Date, the Company shall commence an offer (an "Asset Sale Offer") to purchase
the maximum principal amount of Notes that may be purchased out of the Excess
Proceeds. Any Notes to be purchased pursuant to an Asset Sale Offer shall be
purchased pro rata based on the aggregate principal amount of Notes outstanding,
and all Notes shall be purchased at an offer price in cash in an amount equal to
100% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. To the extent that any Excess Proceeds remain after
completion of an Asset Sale Offer, the Company may use the remaining amount for
general corporate purposes otherwise permitted by the Indenture. Upon the
consummation of any Asset Sale Offer, the amount of Excess Proceeds shall be
deemed to be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not later than
the 20th business day after the related Asset Sale Offer Trigger Date to each
holder of Notes at such holder's registered address, stating: (i) that an Asset
Sale Offer Trigger Date has occurred and that the Company is offering to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds (to the extent provided in the immediately preceding paragraph),
at an offer price in cash in an amount equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of the purchase
(the "Asset Sale
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Offer Purchase Date"), which shall be a business day, specified in such notice,
that is not earlier than 30 days or later than 60 days from the date such notice
is mailed, (ii) the amount of accrued and unpaid interest, if any, as of the
Asset Sale Offer Purchase Date, (iii) that any Note not tendered will continue
to accrue interest, (iv) that, unless the Company defaults in the payment of the
purchase price for the Notes payable pursuant to the Asset Sale Offer, any Notes
accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest after the Asset Sale Offer Purchase Date, (v) the procedures,
consistent with the Indenture, to be followed by a holder of Notes in order to
accept an Asset Sale Offer or to withdraw such acceptance, and (vi) such other
information as may be required by the Indenture and applicable laws and
regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale that are to be applied to an Asset Sale Offer, (ii) deposit
with the Paying Agent the aggregate purchase price of all Notes or portions
thereof accepted for payment, and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Asset Sale Offer. If less than all
Notes tendered pursuant to the Asset Sale Offer are accepted for payment by the
Company for any reason consistent with the Indenture, selection of the Notes to
be purchased by the Company shall be in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not so listed, on a pro rata basis or by lot; provided,
however, that Notes accepted for payment in part shall only be purchased in
integral multiples of $1,000. The Paying Agent shall promptly mail to each
holder of Notes or portions thereof accepted for payment an amount equal to the
purchase price for such Notes plus accrued and unpaid interest, if any, thereon,
and the Trustee shall promptly authenticate and mail to such holder of Notes
accepted for payment in part a new Note equal in principal amount to any
unpurchased portion of the Notes, and any Note not accepted for payment in whole
or in part shall be promptly returned to the holder of such Note. On and after
an Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will publicly announce the
results of the Asset Sale Offer on or as soon as practicable after the Asset
Sale Offer Purchase Date.
The foregoing provisions will not apply to a transaction consummated in
compliance with the provisions of the Indenture described under "-- Merger,
Consolidation and Sale of Assets" below.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Asset
Sale Offer and will be deemed not to be in violation of any of the covenants
under the Indenture to the extent such compliance is in conflict with such
covenants.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness (other than
Permitted Liens) on any asset now owned or hereafter acquired, or any income or
profits therefrom, or assign or convey any right to receive income therefrom to
secure any such Indebtedness, unless (i) if such Lien secures Indebtedness which
is pari passu with the Notes, then the Notes are secured on an equal and ratable
basis with the obligations so secured until such time as such obligation is no
longer secured by a Lien or (ii) if such Lien secures Indebtedness which is
subordinated to the Notes, any such Lien shall be subordinated to a Lien granted
to the holders of the Notes in the same collateral as that securing such Lien to
the same extent as such subordinated Indebtedness is subordinated to the Notes.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause to become effective any consensual encumbrance or consensual restriction
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions to the Company or any other Restricted Subsidiary on its
Capital Stock or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (ii) make loans or advances to, or issue Guarantees
for the benefit of, the Company or any other Restricted Subsidiary or (iii)
transfer any of its properties or assets to the Company or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of
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(a) applicable law, (b) any instrument governing Indebtedness or Capital Stock
of an Acquired Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition); provided, however, that no such encumbrance or restriction is
applicable to any Person, or the properties or assets of any Person, other than
the Acquired Person, (c) by reason of customary non-assignment, subletting or
net worth provisions in leases or other agreements entered into the ordinary
course of business and consistent with past practices, (d) Purchase Money
Obligations for property acquired in the ordinary course of business that impose
restrictions only on the property so acquired, (e) an agreement for the sale or
disposition of assets or the Capital stock of a Restricted Subsidiary; provided,
however, that such restriction or encumbrance is only applicable to such
Restricted Subsidiary or assets, as applicable, and such sale or disposition
otherwise is permitted by the provisions described under "-- Limitation on Asset
Sales"; provided, further, however, that such restriction or encumbrance shall
be effective only for a period from the execution and delivery of such agreement
through a termination date not later than 180 days after such execution and
delivery, (f) the Indenture and the Notes and (g) Refinancing Indebtedness
permitted under the Indenture; provided that such encumbrances and restrictions
are, in the good faith judgment of the Company's Board of Directors, no more
restrictive, in any material respect, than those contained in the Indebtedness
being so refinanced.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company unless (1) such transaction or
series of transactions is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could reasonably
be obtainable at such time in a comparable transaction in arm's-length dealings
with an unrelated third party, and (2) the Company delivers to the Trustee (a)
with respect to any transaction or series of transactions involving aggregate
payments in excess of $1.0 million, an Officers' Certificate certifying that
such transaction or series of related transactions complies with clause (1)
above and (b) with respect to any transaction or series of transactions
involving aggregate payments in excess of $2.0 million, an Officer's Certificate
certifying that such transaction or series of related transactions has been
approved by a majority of the members of the Board of Directors of the Company
(and approved by a majority of the Independent Directors or, in the event there
is only one Independent Director, by such Independent Director), and (c) with
respect to any transaction or series of transactions involving aggregate
payments in excess of $10.0 million, an opinion as to the fairness to the
Company from a financial point of view issued by an investment banking firm of
national standing. Notwithstanding the foregoing, this covenant will not apply
to (i) employment agreements or compensation or employee benefit arrangements
with any officer, director or employee of the Company or any of its Restricted
Subsidiaries entered into in the ordinary course of business (including
customary benefits thereunder and including reimbursement or advancement of
out-of-pocket expenses, and director's and officer's liability insurance), (ii)
any transaction entered into by or among the Company or one of its Restricted
Subsidiaries with one or more Restricted Subsidiaries of the Company, (iii) any
transaction permitted by the second paragraph under "-- Limitation on Restricted
Payments", and (iv) transactions permitted by, and complying with, the
provisions described under "-- Merger, Consolidation and Sale of Assets."
Limitation on Designation of Unrestricted Subsidiaries. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under the Indenture (a "Designation")
unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Company
would be able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant described under "-- Limitation
on Incurrence of Indebtedness"; and
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(c) the Company would not be prohibited under the Indenture from
making an Investment at the time of such Designation in an amount (the
"Designation Amount") equal to the greater of (x) the book value of such
Restricted Subsidiary on such date and (y) the Fair Market Value of such
Restricted Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Limitation on Restricted Payments" for all purposes of the
Indenture in an amount equal to the Designation Amount.
The Indenture further provides that the Company will not designate an
Unrestricted Subsidiary as a Restricted Subsidiary (a "Redesignation"), unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Redesignation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Redesignation shall be deemed to
have been incurred at such time and shall have been permitted to be
incurred for all purposes of the Indenture.
An Unrestricted Subsidiary shall be deemed to be redesignated as a
Restricted Subsidiary at any time if (a) the Company or any other Restricted
Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness
of such Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Unrestricted Subsidiary or (b) a default
with respect to any Indebtedness of such Unrestricted Subsidiary (including any
right which the holders thereof may have to take enforcement action against it)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity, except in the case of clause (a)
to the extent permitted under the covenant described above under the caption
"-- Limitation on Restricted Payments."
All Designations and Redesignations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Subsidiaries that are not designated by the Board of Directors as Restricted or
Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The
Designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be
deemed a Designation of all of the Subsidiaries of such Unrestricted Subsidiary
as Unrestricted Subsidiaries.
Provision of Financial Statements and Information. Whether or not the
Company is then subject to Section 13(a) or 15(d) of the Exchange Act, the
Indenture provides that the Company will file with the Securities and Exchange
Commission (the "Commission"), so long as any Notes are outstanding, the annual
reports, quarterly reports and other periodic reports which the Company would
have been required to file with the Commission pursuant to such Section 13(a) or
15(d) if the Company were so subject, and such documents shall be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (i) within 15 days
of each Required Filing Date, file with the Trustee, and supply the Trustee with
copies for delivery to the holders of the Notes, the annual reports, quarterly
reports and other periodic reports which the Company would have been required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act
if the Company were subject to such Sections and (ii) if the Commission will not
accept the filing of such documents promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective holder of the Notes.
Additional Covenants. The Indenture also contains covenants with respect
to the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) maintenance of
corporate existence; (iv) payment of taxes and other claims; (v) maintenance of
properties; and (vi) maintenance of insurance.
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MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides that the Company shall not, in any single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the Surviving Person), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets (determined on a consolidated basis for the Company and its Restricted
Subsidiaries) in one or more related transactions to, another Person, and the
Company will not permit any Restricted Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries, taken
as a whole, to another Person, unless (i) the Surviving Person is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Notes, the Indenture and,
if then in effect, the Registration Rights Agreement pursuant to a supplemental
indenture or other written agreement, as the case may be, in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction, no
Default or Event of Default shall have occurred and be continuing; and (iv)
after giving pro forma effect to such transaction, the Surviving Person (x)
would have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately preceding such transaction and (y) would be
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness." Notwithstanding clauses
(iii) and (iv) above, any Restricted Subsidiary may consolidate with, merge into
or transfer all or part of its properties and assets to the Company or another
Restricted Subsidiary.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, such Surviving Person shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from its obligations under, the
Indenture, the Notes and the Registration Rights Agreement.
EVENTS OF DEFAULT
The Indenture provides that each of the following constitutes an Event of
Default:
(i) a default for 30 days in the payment when due of interest on, or
Liquidated Damages (if any) with respect to, any Note;
(ii) a default in the payment when due of principal on any Note,
whether upon maturity, acceleration, optional redemption, required
repurchase or otherwise;
(iii) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses (i)
and (ii) above) which failure continues for 30 days after written notice
thereof has been given to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the then outstanding Notes;
(iv) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $10.0 million in
the aggregate and, if not already matured at its final maturity in
accordance with its terms, such Indebtedness shall have been accelerated;
(v) one or more judgments, orders or decrees for the payment of money
in excess of $10.0 million, either individually or in the aggregate, shall
be entered against the Company or any Restricted Subsidiary or any of their
respective properties and which judgments, orders or decrees are not paid,
discharged, bonded or stayed or stayed pending appeal for a period of 60
days after their entry; or
(vi) events of bankruptcy, insolvency or reorganization of the Company
or any Restricted Subsidiary.
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If any Event of Default (other than as specified in clause (vi) of the
preceding paragraph with respect to the Company) occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Notes may, and the Trustee at the request of such holders shall,
declare all the Notes to be due and payable immediately by notice in writing to
the Company, and to the Company and the Trustee if by the holders, specifying
the respective Event of Default and that such notice is a "notice of
acceleration," and the Notes shall become immediately due and payable.
Notwithstanding the foregoing, in the case of an Event of Default arising from
the events specified in clause (vi) of the preceding paragraph with respect to
the Company, the principal of, premium, if any, and any accrued interest on all
outstanding Notes shall ipso facto become immediately due and payable without
further action or notice. Holders of the Notes may not enforce the Indenture or
the Notes except as provided in the Indenture.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except (i) a continuing Default or Event of Default in the payment
of the principal of, or premium, if any, or interest on, the Notes (which may
only be waived with the consent of each holder of Notes affected), or (ii) in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each Note outstanding. Subject
to limitations, holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium or interest on the Notes, a Default in payment
on the Change of Control Purchase Date pursuant to a Change of Control Offer or
on the Asset Sale Offer Purchase Date pursuant to an Asset Sale Offer or a
Default in compliance with the provisions described under "-- Merger,
Consolidation and Sale of Assets") if it determines that withholding notice is
in their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, interest on or Liquidated Damages, if any, with respect to
any of the Notes or for any claim based thereon or otherwise in respect thereof,
and no recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture, or in any of the Notes or because of the creation of
any Indebtedness represented thereby, shall be had against any incorporator,
shareholder, officer, director, employee or controlling person of the Company or
of any successor Person thereof. Each Holder, by accepting the Notes, waives and
releases all such liability.
DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding Notes
and to have satisfied all other obligations under the Notes and the Indenture
except for (i) the rights of holders of the outstanding Notes to receive, solely
from the trust fund described below, payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment, (iii) the rights, powers,
trusts, duties and immunities of the Trustee under the Indenture, and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to covenants that are described in the Indenture ("covenant
defeasance") and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes. In the
event that a covenant defeasance occurs, some events (not including non-payment,
bankruptcy and insolvency events) described under "-- Events of Default" will no
longer constitute Events of Default with respect to the Notes.
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In order to exercise either defeasance or covenant defeasance, (i) the
Company shall irrevocably deposit with the Trustee, as trust funds in trust, for
the benefit of the holders of the Notes, cash in United States dollars, United
States Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the report of a nationally
recognized firm of independent public accountants or a nationally recognized
investment banking firm, to pay and discharge the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity; (ii) the
Company shall have delivered to the Trustee an opinion of counsel in the United
States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such defeasance or covenant defeasance, as the case may be, and will be subject
to Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance or covenant defeasance, as
the case may be, had not occurred (in the case of defeasance, such opinion must
refer to and be based upon a ruling of the Internal Revenue Service or a change
in applicable Federal income tax laws); (iii) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
clause (vi) under the first paragraph under "-- Events of Default" is concerned,
at any time during the period ending on the 91st day after the date of deposit;
(iv) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any other
agreement or instrument to which the Company is a party or by which it is bound;
(v) the Company shall have delivered to the Trustee an opinion of counsel to the
effect that (A) the trust funds will not be subject to any rights of holders of
Indebtedness (other than holders of the Notes) and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result
therefrom.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust and
thereafter repaid to the Company) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for the principal of,
premium, if any, and interest to the date of deposit; (ii) the Company has paid
or caused to be paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an Officers' Certificate and
an opinion of counsel each stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture or the Notes
may be amended or supplemented with the written consent of the holders of at
least a majority in aggregate principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for the Notes), and any existing Default or Event of Default or compliance with
any provision of the Indenture or the Notes may be waived with the consent of
the holders of a majority in aggregate principal amount of the then outstanding
Notes (including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, an amendment or waiver shall
not: (i) reduce the principal amount of the Notes whose holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note, or alter or waive the provisions with respect to the
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redemption of the Notes in a manner adverse to the holders of the Notes other
than with respect to a Change of Control Offer or an Asset Sale Offer, (iii)
reduce the rate of or change the time for payment of interest on any Notes, (iv)
waive a Default or Event of Default in the payment of principal of, premium, if
any, or interest on the Notes (except that holders of at least a majority in
aggregate principal amount of the then outstanding Notes may (a) rescind an
acceleration of the Notes that resulted from a non-payment default, and (b)
waive the payment default that resulted from such acceleration), (v) make any
Note payable in money other than that stated in the Notes, (vi) make any change
in the provisions of the Indenture relating to waivers of past Defaults or the
rights of holders of Notes to receive payments of principal of, or premium, if
any, or interest on, the Notes, or (vii) following the occurrence of a Change of
Control, amend, change or modify the Company's obligation to make and consummate
a Change of Control Offer in the event of a Change of Control or modify any of
the provisions or definitions with respect thereto in a manner adverse to the
holders of the Notes, or following the occurrence of an Asset Sale, amend,
change or modify the Company's obligation to make and consummate an Asset Sale
Offer or modify any of the provisions or definitions with respect thereto in a
manner adverse to the holders of the Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
(i) to cure any ambiguity, defect or inconsistency, (ii) to provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii) to
provide for the assumption of the Company's obligations to holders of the Notes
in the event of any Disposition involving the Company in which the Company is
not the Surviving Person, (iv) to make any change that would provide any
additional rights or benefits to the holders of the Notes or that does not
adversely affect the rights of any such holder, or (v) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
TRANSFER AND EXCHANGE
The registered holder of a Note will be treated as the owner of it for all
purposes. A holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. Neither the Company nor the Registrar shall be
required to issue, register the transfer of or exchange any Note (i) during a
period beginning at the opening of business on the day that the Trustee receives
notice of any redemption from the Company and ending at the close of business on
the day the notice of redemption is sent to holders, (ii) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, and (iii) during a Change of
Control Offer or an Asset Sale Offer if such Note is tendered pursuant to such
Change of Control Offer or Asset Sale Offer and not withdrawn.
THE TRUSTEE
U.S. Trust Company of New York is the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) contains limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in some cases or to realize on certain property received by it
in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, if it acquires any
conflicting interest (as defined in the Trust Indenture Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York, without regard to the principles of conflicts of law.
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CERTAIN DEFINITIONS
Set forth below are defined terms used in the Indenture. Reference is made
to the Indenture for the definition of all other terms used in the Indenture.
"Acquired Debt" means, with respect to any specified Person, Indebtedness
of any other Person (the "Acquired Person") existing at the time the Acquired
Person merges with or into, or becomes a Restricted Subsidiary of, such
specified Person, including Indebtedness incurred in connection with, or in
contemplation of, the Acquired Person merging with or into, or becoming a
Restricted Subsidiary of, such specified Person; provided, however, that
Indebtedness of such Acquired Person which is redeemed, defeased, retired or
otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Acquired Person merges with or into or becomes a
Restricted Subsidiary of such specified Person shall not be Acquired Debt.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with") of any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary of any assets (including by way of a
sale-and-leaseback) other than in the ordinary course of business, or (ii) the
issuance or sale of Capital Stock of any Restricted Subsidiary, in the case of
each of (i) and (ii), whether in a single transaction or a series of related
transactions, to any Person (other than to the Company or a Restricted
Subsidiary and other than directors' qualifying shares) for Net Proceeds in
excess of $1.0 million. Notwithstanding the foregoing, (a) the transfer of any
assets constituting an Investment by the Company or any Restricted Subsidiary
shall not be considered an Asset Sale if such Investment is permitted pursuant
to the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" and (b) exchanges of assets of the Company for assets of
any other Person in the ordinary course of business shall not constitute an
Asset Sale.
"Capital Lease Obligation" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, of
such Person, including any Preferred Stock.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Rating Services or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptances
(or, with respect to foreign banks, similar instruments) maturing within one
year from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any member of the European Union or any United States branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $200 million; (v) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications specified
in
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clause (iv) above; and (vi) investments in money market funds which invest
substantially all their assets in securities of the types described in clauses
(i) through (v) above.
"Cash Flow" means, with respect to any period, Consolidated Net Income for
such period, plus, to the extent deducted in computing such Consolidated Net
Income: (i) extraordinary net losses, plus (ii) provision for taxes based on
income or profits and any provision for taxes utilized in computing the
extraordinary net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense, plus (iv) depreciation, amortization and all other non-cash
charges (including amortization of goodwill and other intangibles but excluding
any items that will require cash payments in the future for which an accrual or
reserve is made).
"Change of Control" means the occurrence of any of the following events
after the Issue Date: (i) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes (including by
merger, consolidation or otherwise) the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 50% or more of the voting power of the
total outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
nomination for election by the stockholders of the Company was approved by a
vote of 66 2/3% of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of such
Board of Directors of the Company then in office; (iii) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the terms of the Indenture); or (iv) the sale or other
disposition (including by merger, consolidation or otherwise) of all or
substantially all of the Capital Stock or assets of the Company to any Person or
group (as defined in Rule 13d-5 of the Exchange Act) as an entirety or
substantially as an entirety in one transaction or a series of related
transactions.
"Consolidated Cash Flow Coverage Ratio" means, for any period, the ratio of
(i) the aggregate amount of Cash Flow for such period, to (ii) Consolidated
Interest Expense for such period, each determined on a pro forma basis after
giving pro forma effect to (a) the incurrence of the Indebtedness giving rise to
the calculation of the Consolidated Cash Flow Coverage Ratio and (if applicable)
the application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, at the beginning of such period; (b) the incurrence,
repayment or retirement of any other Indebtedness by the Company and its
Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such period); (c) in the case
of Acquired Debt, the related acquisition as if such acquisition had occurred at
the beginning of such period; and (d) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, or any related repayment of
Indebtedness, in each case since the first day of such period, assuming such
acquisition or disposition had been consummated on the first day of such period.
"Consolidated Interest Expense" means, with respect to any period, the sum
of (i) the interest expense of the Company and its Restricted Subsidiaries for
such period, including, without limitation, (a) amortization of debt discount,
(b) the net payments, if any, under interest rate contracts (including
amortization of discounts), (c) the interest portion of any deferred payment
obligation and (d) accrued interest, plus (ii) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued
by the Company and its Restricted Subsidiaries during such period, and all
capitalized interest of the Company and its Restricted Subsidiaries, plus (iii)
all dividends paid during such period by the Company and its Restricted
Subsidiaries with respect to any Disqualified Stock (other than by any
Restricted Subsidiary to the Company or any other Restricted Subsidiary and
other than any dividend paid in Capital Stock (other than Disqualified Stock)),
in each case, as determined on a consolidated basis in accordance with GAAP
consistently applied.
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"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted to the extent included in calculating such net income (or loss), by
excluding, without duplication, (i) all extraordinary gains and losses (less all
fees and expenses relating thereto), (ii) the portion of net income (or loss) of
the Company and its Restricted Subsidiaries allocable to interests in
unconsolidated Persons or Unrestricted Subsidiaries, except to the extent of the
amount of dividends or distributions actually paid to the Company or its
Restricted Subsidiaries by such other Person during such period, (iii) for
purposes of the covenant entitled "-- Certain Covenants -- Limitation on
Restricted Payments", net income (or loss) of any Person combined with the
Company or any of its Restricted Subsidiaries on a "pooling-of-interests" basis
attributable to any period prior to the date of combination, (iv) net gains and
losses (less all fees and expenses relating thereto) in respect of disposition
of assets (including, without limitation, pursuant to sale and leaseback
transactions) other than in the ordinary course of business, or (v) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
to the Company is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person at any date, the
sum of (i) the consolidated stockholders' equity of such Person less the amount
of such stockholders' equity attributable to Disqualified Stock of such Person
and its Subsidiaries (Restricted Subsidiaries, in the case of the Company), as
determined on a consolidated basis in accordance with GAAP consistently applied
and (ii) the amount of any Preferred Stock of such Person not included in the
stockholders' equity of such Person in accordance with GAAP, which Preferred
Stock does not constitute Disqualified Stock.
"Currency Agreement Obligations" means the obligations of any person under
a foreign exchange contract, currency swap agreement or other similar agreement
or arrangement to protect such person against fluctuations in currency values.
"Default" means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Stock" means (i) any Preferred Stock of any Restricted
Subsidiary and (ii) that portion of any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof (other than upon a Change of Control of the
Company in circumstances where the holders of the Notes would have similar
rights), in whole or in part on or prior to the stated maturity of the Notes.
"Dollars" and "$" means lawful money of the United States of America.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession in the United States of America, which are applicable
as of the Issue Date and consistently applied.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection or deposit in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, and
whether or not contingent, (i) all indebtedness of such Person for borrowed
money or which is evidenced by a note, bond, debenture or similar instrument,
(ii) all obligations of such Person to pay the deferred or unpaid purchase price
of property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such service, (iii) all Capital Lease Obligations
of such Person, (iv) all obligations of such Person in respect of letters of
credit or bankers' acceptances issued or created for the account of such Person,
(v) to the extent not otherwise included in this definition, all net obligations
of such Person under Interest Rate Agreement Obligations or Currency Agreement
Obligations of such Person, (vi) all liabilities of others of the kind described
in the preceding clause (i), (ii) or (iii) secured by any Lien on any property
owned by such Person; provided, however, if the obligations secured by a Lien
(other than a Permitted Lien not securing any liability that would itself
constitute Indebtedness) on any assets or property have not been assumed by such
Person in full or are not such Person's legal liability in full, the amount of
such Indebtedness for purposes of this definition shall be limited to the lesser
of the amount of Indebtedness secured by such Lien and the Fair Market Value of
the property subject to such Lien, (vii) all Disqualified Stock issued by such
Person and all Preferred Stock issued by a Subsidiary of such Person, and (viii)
to the extent not otherwise included, any guarantee by such Person of any other
Person's indebtedness or other obligations described in clauses (i) through
(vii) above. "Indebtedness" of the Company and the Restricted Subsidiaries shall
not include current trade payables incurred in the ordinary course of business
and payable in accordance with customary practices, and non-interest bearing
installment obligations and accrued liabilities incurred in the ordinary course
of business which are not more than 90 days past due. The principal amount
outstanding of any Indebtedness issued with original issue discount is the
accreted value of such Indebtedness. Notwithstanding the foregoing, Indebtedness
shall not include Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business; provided
that such Indebtedness is extinguished within 3 business days of the incurrence
thereof.
"Independent Director" means a director of the Company other than a
director (i) who (apart from being a director of the Company or any Subsidiary
of the Company) is an employee, associate or Affiliate of the Company or a
Subsidiary of the Company, or (ii) who is a director, employee, associate or
Affiliate of another party (other than the Company or any of its Subsidiaries)
to the transaction in question.
"Interest Rate Agreement Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude travel and similar advances to
officers and employees of the Company in the ordinary course of business and
extensions of trade credit by the Company and its Restricted Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of the
Company or such Restricted Subsidiary, as the case may be. For the purposes of
the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include
and be valued at the Fair Market Value of the net assets of any Restricted
Subsidiary (to the extent of the Company's equity interest in such Restricted
Subsidiary) at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the Fair Market Value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any
Investment shall be the original cost of such Investment plus the cost of all
additional Investments by the Company or any of its Restricted Subsidiaries,
without any adjustments for increases or decreases in value, or
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write-ups, writedowns or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; provided, however,
that no such payment of dividends or distributions or receipt of any such other
amounts shall reduce the amount of any Investment if such payment of dividends
or distributions or receipt of any such amounts would be included in
Consolidated Net Income. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, the Company no longer owns, directly or
indirectly, greater than 50% of the outstanding Common Stock of such Restricted
Subsidiary, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the Fair Market Value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Notes are first issued under the
Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages owing under the
Registration Rights Agreement.
"Net Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate cash or Cash Equivalent proceeds received by such Person and/or its
Affiliates in respect of such Asset Sale, which amount is equal to the excess,
if any, of (i) the cash or Cash Equivalents received by such Person and/or its
Affiliates (including any cash payments received by way of deferred payment
pursuant to, or monetization of, a note or installment receivable or otherwise,
but only as and when received) in connection with such Asset Sale, over (ii) the
sum of (a) the amount of any Indebtedness that is secured by such asset and
which is required to be repaid by such person in connection with such Asset
Sale, plus (b) all fees, commissions and other expenses incurred by such Person
in connection with such Asset Sale, plus (c) provision for taxes, including
income taxes, directly attributable to the Asset Sale or to required prepayments
or repayments of Indebtedness with the proceeds of such Asset Sale, plus (d) if
such Person is a Restricted Subsidiary, any dividends or distributions payable
to holders of minority interests in such Restricted Subsidiary from the proceeds
of such Asset Sale, plus (e) appropriate amounts to be provided by the Company
or any Restricted Subsidiary as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale; provided that upon the release of any such reserves, such
amounts shall constitute "Net Proceeds" hereunder.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Investments" means (i) any Investment in the Company or any
Restricted Subsidiary; provided, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) any investment in cash or Cash
Equivalents; (iii) any Investment in a Person (an "Acquired Person") the primary
business of which is a Related Business if, as a result of such Investment, (a)
the Acquired Person becomes a Restricted Subsidiary, or (b) the Acquired Person
either (1) is merged, consolidated or amalgamated with or into the Company or
one of its Restricted Subsidiaries and the Company or such Restricted Subsidiary
is the Surviving Person, or (2) transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or one of its Restricted
Subsidiaries; (iv) Investments in accounts and notes receivable acquired in the
ordinary course of business; (v) any notes, obligations or other securities
received in connection with an Asset Sale that complies with the covenant
described under "Limitation on Asset Sales" or any other disposition not
constituting an "Asset Sale"; (vi) Interest Rate Agreement Obligations and
Currency Agreement Obligations permitted pursuant to clause (v) of the second
paragraph of the covenant described under "Limitation on Incurrence of
Indebtedness" above; (vii) investments in or acquisitions of Capital Stock or
similar interests in Persons (other than Affiliates of the Company) received in
the bankruptcy or
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reorganization of or by such Person or any exchange of such investment with the
issuer thereof or taken in settlement of or other resolution of claims or
disputes and (viii) other Investments not to exceed $50.0 million, which shall
be reinstated to the extent of any net cash proceeds, dividends, repayments of
loans or other transfers of cash or assets received by the Company or any
Restricted Subsidiary as a return of or on such Investment.
"Permitted Liens" means (i) Liens on assets or property of the Company that
secure Senior Bank Debt of the Company and Liens on assets or property of a
Restricted Subsidiary that secure Indebtedness of a Restricted Subsidiary; (ii)
Liens securing Indebtedness of a Person existing at the time that such Person is
merged into or consolidated with the Company or a Restricted Subsidiary;
provided, however, that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of such Person; (iii) Liens on property acquired by the Company or a Restricted
Subsidiary; provided, however, that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any other property; (iv)
Liens in respect of Interest Rate Agreement Obligations and Currency Agreement
Obligations permitted under the Indenture; (v) Liens in favor of the Company or
any Restricted Subsidiary; (vi) Liens existing or created on the Issue Date; and
(vii) Liens securing the Notes.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"Purchase Money Obligation" means any Indebtedness which is incurred in
connection with the purchase, construction or improvement of assets and is
secured by a Lien on such assets related to the business of the Company or the
Restricted Subsidiaries, and any additions and accessions thereto, which are
purchased, constructed or improved by the Company or any Restricted Subsidiary.
"Related Business" means any business that is reasonably related to or
complementary to the businesses conducted by the Company and the Restricted
Subsidiaries on the Issue Date.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company (other than (A) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company, or (B) dividends or distributions payable to the Company or any
Restricted Subsidiary); (ii) any payment to purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Company; (iii) any payment
to purchase, redeem, defease or otherwise acquire or retire for value, prior to
any scheduled maturity, repayment or sinking fund payment, any subordinated
Indebtedness other than a purchase, redemption, defeasance or other acquisition
or retirement for value that is paid for with the proceeds of Refinancing
Indebtedness that is permitted under the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness"; or (iv) any Restricted
Investment.
"Restricted Subsidiary" means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
"Senior Bank Debt" means Indebtedness incurred under any credit facility
entered into between the Company, any Restricted Subsidiary and bank lenders at
any time, as the same may be amended, modified, renewed, refunded, replaced or
refinanced from time to time, including (i) any related notes, letters of
credit, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time, and (ii) any notes, guarantees,
collateral documents, instruments and agreements executed in connection with any
such amendment, modification, renewal, refunding, replacement or refinancing.
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"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, or
(ii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or (iii) any other Person (other than a corporation
or limited partnership) in which such Person or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has more than 50% of the outstanding partnership or
similar interests or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries" and not
redesignated a Restricted Subsidiary in compliance with such covenant.
"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
aggregate principal amount of such Indebtedness.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Old Notes were and the certificates
representing the New Notes will be issued in fully registered form. Except as
described in the next paragraph, the Old Notes initially were represented by
global certificates in fully registered form (the "Global Notes") that were
deposited with the Trustee as custodian for The Depository Trust Company ("DTC")
and registered in the name of a nominee of DTC. The Global Notes (and any Notes
issued in exchange therefor) will be subject to restrictions on transfer set
forth therein and will bear a restrictive legend.
Notes (i) originally purchased by "foreign purchasers" or (ii) held by
qualified institutional buyers as defined in Rule 144A under the Securities Act
("QIBs") which elect to take physical delivery of their certificates instead of
holding their interest through the Global Notes (and which are thus ineligible
to trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers") will be issued in registered form (the "Certificated Notes").
Certificated Notes will initially be registered in the name of a nominee of DTC
and be deposited with, or on behalf of, DTC. Beneficial owners of Certificated
Notes, however, may request registration of such Certificated Notes in their
names or in the names of their nominees. The Company expects that upon the
transfer to a QIB of Certificated Notes initially issued to a Non-Global
Purchaser, such Certificated Notes will, unless the transferee requests
otherwise or the Global Note has previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in the Global Note.
Global Note. DTC or its custodian will credit, on its book-entry
registration and transfer system, the respective principal amount of Notes of
the individual beneficial interests represented by such Global Note to the
accounts of persons who have accounts with such depository. Ownership of
beneficial interest in the Global Notes will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Notes will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other
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than participants). QIBs may hold their interests in the Global Notes directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Notes for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in the Global Notes will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, premium (if any) and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspect of the record relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any record relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Notes, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Notes as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Notes
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
The Company expects that transfers between participants in DTC will be
effected in the ordinary way in accordance with DTC rules and will be settled in
same-day funds. If a holder requires physical delivery of a Certificated Note
for any reason, including to sell Notes to persons in states which require
physical delivery of such Notes or to pledge such Notes, such holder must
transfer its interest in the Global Notes in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interest in the Global Notes is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Notes or the Indenture, DTC will exchange the Global
Notes for Certificated Notes, which it will distribute to its participants and
which, if representing interests in the Global Notes, will be legended.
To the Company's knowledge, DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). DTC was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies and clearing corporations and other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC customarily agrees to the foregoing procedures in order to
facilitate transfers of interests in global notes among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
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Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Notes will be issued in
exchange for the Global Note which certificates will bear a restrictive legend.
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Proskauer Rose LLP, counsel to ICN, the following are the
material U.S. federal income tax consequences of the Exchange Offer and the
ownership and disposition of the New Notes. The summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
(including proposed Treasury regulations) ("Regulations"), Internal Revenue
Service ("IRS") rulings and pronouncements and judicial decisions currently in
effect. Legislative, judicial or administrative changes or interpretations may
be forthcoming that could alter or modify the validity of the statements and
conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect a holder of the New Notes. This
discussion assumes that the New Notes are or will be held as capital assets (as
defined in Section 1221 of the Code) by the holders thereof. Except as otherwise
described herein, this discussion applies only to a holder who is:
(1) a citizen or resident of the United States for U.S. federal income
tax purposes,
(2) a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or
(4) a trust that is subject to the primary supervision of a court
within the U.S. and the control of one or more U.S. persons as described in
Section 7701(a)(30) of the Code (a "U.S. Holder").
The following discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to particular holders in light of
their personal investment circumstances or status (including non-U.S. holders
who realize income or gain in respect of the Notes which is effectively
connected with their conduct of a U.S. trade or business), nor does it discuss
the U.S. federal income tax consequences to holders subject to special treatment
under the U.S. federal income tax laws, such as financial institutions,
insurance companies, dealers in securities, persons who hold their Notes through
partnerships or other pass-through entities, tax-exempt organizations, or
persons that hold Notes as part of a straddle or a hedging or conversion
transaction. Moreover, the effect of any applicable state, local or foreign tax
laws is not discussed.
ICN has not sought and will not seek any rulings from the IRS with respect
to the positions discussed below. There can be no assurance that the IRS will
not take a different position concerning the tax consequences of the Exchange
Offer and ownership or disposition of the Old Notes or New Notes or that any
such position would not be sustained.
THE FOLLOWING DISCUSSION IS FOR YOUR GENERAL INFORMATION ONLY. YOU ARE
STRONGLY URGED TO CONSULT WITH YOUR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF
YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES.
Exchange Offer. The exchange pursuant to the Exchange Offer of (i) the
1998 Old Notes for 1998 New Notes and (ii) the 1999 Old Notes for 1999 New Notes
will not be treated as taxable exchanges for U.S. federal income tax purposes
and the 1998 and 1999 New Notes will be treated as a continuation of the 1998
and 1999 Old Notes, respectively, because the terms of the New Notes are
identical in all material respects to the terms of the Old Notes. Accordingly, a
U.S. Holder will not recognize gain or loss upon such exchange.
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PAYMENTS OF STATED INTEREST
Interest paid on a New Note will generally be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received in accordance
with the U.S. Holder's method of accounting for U.S. federal income tax
purposes.
ORIGINAL ISSUE DISCOUNT
1999 New Notes
The 1999 New Notes bear original issue discount ("OID"), and each U.S.
Holder is required to include in income, in each year (regardless of whether
such U.S. Holder is a cash or accrual basis taxpayer), in advance of the receipt
of cash payments on such Notes, that portion of the OID, computed on a constant
yield-to-maturity basis, attributable to each day during such year on which the
U.S. Holder held the 1999 New Notes.
The 1998 New Notes were issued with de minimis OID. The amount of OID on a
Note is de minimis if the amount of OID is less than 0.25% of a Note's stated
redemption price at maturity multiplied by the number of complete years to
maturity (in the case of an installment obligation a Note's weighted average
maturity is used instead of the number of complete years to maturity). If the
amount of OID with respect to a Note is less than the de minimis amount, the
amount of OID is treated as zero, and all stated interest (including stated
interest that would otherwise be characterized as OID) is treated as "qualified
stated interest." Qualified stated interest generally means stated interest at
the lowest rate provided for over the term of the debt instrument that is
unconditionally payable at least annually at a fixed rate (or subject to
specific conditions, based on one or more indices).
The Amount of Original Issue Discount
The amount of OID with respect to each 1999 New Note is equal to the excess
of (1) its "stated redemption price at maturity" over (2) its "issue price."
Under the OID Regulations, the "issue price" of the New Notes is the initial
offering price to the public (not including any bond house, broker or similar
person or organization acting in the capacity of an underwriter, placement agent
or wholesaler) at which a substantial amount of the Notes are sold, and the
"stated redemption price at maturity" of each New Note is the sum of all cash
payments (whether denominated as principal or interest) provided by the New
Note.
Taxation of Original Issue Discount
A U.S. Holder of a debt instrument issued with OID is required to include
in gross income (generally as ordinary interest income) for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which the holder holds the debt instrument.
The daily portions of OID required to be included in a holder's gross income in
a taxable year is determined upon a constant yield-to-maturity basis by
allocating to each day during the taxable year on which the holder holds the
debt instrument a pro rata portion of the OID on such debt instrument which is
attributable to the "accrual period" (generally the period between interest
payment or compounding dates) in which such day is included. The amount of the
OID attributable to each "accrual period" is the product of (1) the "adjusted
issue price" at the beginning of such accrual period and (2) the "yield to
maturity" of the debt instrument (stated in a manner appropriately taking into
account the length of the accrual period). The "adjusted issue price" of a Note
at the beginning of an accrual period generally will be equal to the issue price
of the Note plus the aggregate amount of OID that accrued in all prior accrual
periods, less any cash payments that have been made on the Note. Payments on the
Notes are not separately included in a U.S. Holder's income as interest, but
rather are treated first as payments of previously accrued and unpaid OID and
then as payments of principal.
We will furnish annually to the IRS and to record holders of the 1999 New
Notes (other than with respect to exempt holders) information relating to the
stated interest and the OID accruing during the
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calendar year. Such information will be based on the amount of OID that would
have accrued to a holder who acquired the 1999 New Note on original issue.
Sales, Exchange or Redemption of Notes. Unless a nonrecognition provision
applies, upon the sale, exchange (except pursuant to the Exchange Offer as
provided above), redemption (including pursuant to an offer by the Company or
other disposition of a Note, a U.S. Holder will recognize gain or loss equal to
the difference between the amount realized (except to the extent attributable to
accrued interest) and the U.S. Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in a Note will be equal to the cost of the Note,
increased by the amount of OID, if any, previously included in such U.S.
Holder's income and by accrued market discount, if any, if the U.S. Holder has
included such market discount in income (see "Market Discount" below), and
decreased by any amortized bond or acquisition premium (defined below) and
payments of principal and any interest, other than stated interest, received.
Generally, and subject to the discussion under "Market Discount" below, any gain
or loss recognized by a U.S. Holder upon a sale, retirement or other disposition
of the Note will be long-term capital gain or loss if the Note has been held for
more than one year, generally subject to maximum tax rate of 20 percent. The
deductibility of capital losses is subject to limitations.
Acquisition at a Premium. If a subsequent U.S. Holder acquires a Note for
an amount (exclusive of accrued and unpaid stated interest through the
acquisition date) in excess of the Note's stated redemption price at maturity
("Bond Premium"), the U.S. Holder may elect, in accordance with applicable Code
provisions, to amortize the Bond Premium using a constant yield method. The
amount of Bond Premium amortized in any year will be treated as a reduction of
the U.S. Holder's interest income from the Note. Similarly, if a subsequent U.S.
Holder acquires a Note for an amount (exclusive of accrued and unpaid stated
interest through the acquisition date) in excess of the Note's adjusted issue
price ("Acquisition Premium"), the U.S. Holder may amortize the Acquisition
Premium using a constant yield method to reduce the amount of OID required to be
included in income.
Market Discount. If a U.S. Holder purchases a Note for an amount that is
less than its issue price (or, in the case of a subsequent purchaser, its
"revised issue price," as defined in the Code) as of the purchase date, the
amount of the difference will be treated as "market discount," unless such
difference is less than a specified de minimis amount. Market discount generally
will accrue ratably during the period from the date of acquisition to the
maturity date of the Note, unless the U.S. Holder elects to accrue such discount
on the basis of the constant interest method, in accordance with applicable Code
provisions.
A U.S. Holder of a Note with market discount generally will be required to
treat as ordinary income any gain recognized on the sale, exchange, retirement
or other disposition of the Note to the extent of accrued market discount unless
the U.S. Holder elects in accordance with the applicable Code provisions to
include market discount in income as it accrues. A U.S. Holder of a Note
acquired at market discount who does not make a current inclusion election will
be required to defer the deduction of all or a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the Note until the
maturity of the Note or its earlier disposition in a taxable transaction.
NON-U.S. HOLDERS
Payments of principal, if any, and interest (including OID) by the Company
or its agent (in its capacity as such) to any holder who is a beneficial owner
of a Note and who holds the Note as a capital asset but who is not a U.S. Holder
are not subject to U.S. federal income or withholding tax provided, in the case
of interest (including OID) that:
(1) such holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of our stock entitled to
vote and, is not a controlled foreign corporation for U.S. federal income
tax purposes that is related to the Company through stock ownership, and
(2) such holder either (A) certifies to the Company or its agent,
under penalties of perjury, that it is not a U.S. Holder and provides its
name and address, or (B) is a securities clearing organization, bank or
other financial institution that holds customers' securities in the
ordinary course of its trade or business (a
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"financial institution") and certifies to the Company or its agent, under
penalties of perjury, that the certification described in clause (A) hereof
has been received from the beneficial owner by it or by another financial
institution acting for the beneficial owner and furnishes the Company with
a copy thereof.
A holder of a note who is not a U.S. Holder, and who does not meet the
requirements of (1) or (2) above, would generally be subject to U.S. federal
withholding tax at a flat rate of 30% (or a lower applicable treaty rate) on
payments of interest (including OID) on the Notes.
Treasury Regulations recently issued by the IRS, which became effective
January 1, 2001, make modifications to the certification procedures applicable
to non-U.S. Holders. In general, these regulations unify certification
procedures and forms and clarify and modify reliance standards. A non-U.S.
Holder should consult its own advisor regarding the effect of the new Treasury
Regulations.
Any capital gain realized upon the sale, exchange, redemption or other
disposition of a Note by a holder who is not a U.S. Holder and who holds the
note as a capital asset is not subject to U.S. federal income or withholding
taxes unless, in the case of an individual, such holder is present in the United
States for 183 days or more in the taxable year of the sale, exchange,
redemption or other disposition and other conditions are met.
BACKUP WITHHOLDING AND INFORMATION REPORTING FOR U.S. AND NON-U.S. HOLDERS
Noncorporate U.S. Holders may be subject to backup withholding at a rate of
31% on payments of principal and interest (including OID) on, and the proceeds
of a disposition of, a Note. Backup withholding will apply only if the U.S.
Holder (1) fails to furnish its taxpayer identification number ("TIN") which, in
the case of an individual, would be his or her Social Security number, (2)
furnishes an incorrect TIN, (3) is notified by the IRS that it has failed to
properly report payments of interest and dividends or (4) under circumstances,
fails to certify, under penalty of perjury, that it has furnished a correct TIN
and has not been notified by the IRS that it is subject to backup withholding.
U.S. Holders should consult their tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
Treasury Regulations provide that backup withholding will not apply to
payments on the Notes by us to a non-U.S. Holder if the holder certifies as to
its non-U.S. status under penalties of perjury or otherwise establishes an
exemption provided that neither the Company nor its paying agent has actual
knowledge that the holder is a U.S. person or that the conditions of any other
exception are not, in fact, satisfied.
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any broker, U.S. or foreign, will be subject to possible backup
withholding unless the owner certifies as to its non-U.S. Holder status under
penalty of perjury or otherwise establishes an exemption, provided that the
broker does not have actual knowledge that the holder is a U.S. person or that
the conditions of any other exemption are not, in fact, satisfied. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is a U.S. person). For purposes of this paragraph, a "U.S. related
person" is (1) a "controlled foreign corporation" for U.S. federal income tax
purposes, (2) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business, or (3) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more (by income or capital interest) owned by U.S. persons or is
engaged in the conduct of a U.S. trade or business. Treasury Regulations provide
presumptions under which a non-U.S. Holder will be subject to backup withholding
unless the non-U.S. Holder provides a certification as to its non-U.S. Holder
status.
The amount of any backup withholding from a payment to a U.S. Holder or a
non-U.S. Holder will be allowed as a credit against such holder's U.S. federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
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HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE EXCHANGE OFFER AND THE OWNERSHIP
AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. ICN has agreed that for a period of 10 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
ICN will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market rates prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The legality of the New Notes offered hereby will be passed upon for the
Company by Proskauer Rose LLP, 1585 Broadway, New York, New York 10036.
INDEPENDENT ACCOUNTANTS
The financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000 included in this
Prospectus have been so included in reliance on the report, which includes an
emphasis-of-a-matter paragraph related to the Company's change in method of
accounting for its investment in ICN Yugoslavia, a previously consolidated
subsidiary, of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. With respect to
the unaudited consolidated financial information of the Company for the three
month periods ended March 31, 2001 and 2000, incorporated by reference in this
Prospectus, and the six month periods ended June 30, 2001 and 2000, included in
and incorporated by reference in this Prospectus, PricewaterhouseCoopers LLP
reported that they applied limited procedures in accordance with professional
standards for a review of such information. However, their separate reports
dated May 3, 2001 and August 2, 2001 incorporated by reference herein, states
that they did not audit and they do not express an opinion on that unaudited
consolidated financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated financial information because that report
is not a "report" or a "part" of the registration statement prepared or
certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11
of the Act.
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INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
As of June 30, 2001 and December 31, 2000, and for the three
months and six months ended June 30, 2001 and 2000
(unaudited):
Unaudited Consolidated Condensed Balance Sheets........... F-2
Unaudited Consolidated Condensed Statements of Income..... F-3
Unaudited Consolidated Condensed Statements of
Comprehensive Income................................... F-4
Unaudited Consolidated Condensed Statements of Cash
Flows.................................................. F-5
Management's Statement Regarding Unaudited Financial
Statements............................................. F-6
Notes to Consolidated Condensed Financial Statements...... F-7
As of December 31, 2000 and 1999, and for the years ended
December 31, 2000, 1999 and 1998:
Report of Independent Accountants......................... F-14
Consolidated Balance Sheets............................... F-15
Consolidated Statements of Income......................... F-16
Consolidated Statements of Stockholders' Equity........... F-17
Consolidated Statements of Cash Flows..................... F-18
Notes to Consolidated Financial Statements................ F-19
F-1
106
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 165,899 $ 155,205
Restricted cash........................................... 1,975 380
Accounts receivable, net.................................. 207,879 225,639
Inventories, net.......................................... 159,915 170,263
Prepaid expenses and other current assets................. 18,405 13,929
---------- ----------
Total current assets.............................. 554,073 565,416
Property, plant and equipment, net.......................... 389,562 367,229
Deferred income taxes, net.................................. 74,837 75,037
Other assets................................................ 42,087 32,300
Goodwill and intangibles, net............................... 430,666 437,090
---------- ----------
$1,491,225 $1,477,072
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables............................................ $ 44,701 $ 61,741
Accrued liabilities....................................... 96,065 91,447
Notes payable and current portion of long-term debt....... 845 907
Income taxes payable...................................... 14,573 4,682
---------- ----------
Total current liabilities......................... 156,184 158,777
Long-term debt, less current portion........................ 505,517 510,781
Deferred income and other liabilities....................... 34,247 40,988
Minority interest........................................... 9,640 9,332
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized;
81,391 (June 30, 2001) and 80,197 (December 31, 2000)
shares outstanding (after deducting shares in treasury
of 814 and 814, respectively).......................... 814 802
Additional capital........................................ 982,279 973,157
Accumulated deficit....................................... (105,696) (130,087)
Accumulated other comprehensive loss...................... (91,760) (86,678)
---------- ----------
Total stockholders' equity........................ 785,637 757,194
---------- ----------
$1,491,225 $1,477,072
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-2
107
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Product sales................................... $174,340 $148,331 $345,759 $307,671
Royalties....................................... 31,431 43,102 58,981 76,102
-------- -------- -------- --------
Total revenues.......................... 205,771 191,433 404,740 383,773
-------- -------- -------- --------
Costs and expenses:
Cost of product sales........................... 69,176 60,935 138,950 121,701
Selling, general and administrative expenses.... 79,221 71,430 152,640 138,865
Research and development costs.................. 6,451 2,852 12,823 6,853
Amortization of goodwill and intangibles........ 7,902 7,837 16,108 15,410
-------- -------- -------- --------
Total expenses.......................... 162,750 143,054 320,521 282,829
-------- -------- -------- --------
Income from operations.................. 43,021 48,379 84,219 100,944
Other (income) loss, net including translation and
exchange........................................ (4,740) 2,465 (4,340) 4,056
Interest income................................... (1,894) (3,117) (4,134) (5,812)
Interest expense.................................. 12,803 15,414 25,820 30,635
-------- -------- -------- --------
Income before income taxes, minority interest and
extraordinary loss.............................. 36,852 33,617 66,873 72,065
Provision for income taxes........................ 14,530 3,431 23,793 14,542
Minority interest................................. 845 (907) 581 (969)
-------- -------- -------- --------
Income before extraordinary loss................ 21,477 31,093 42,499 58,492
Extraordinary loss, net of income taxes......... 214 -- 214 --
-------- -------- -------- --------
Net income...................................... $ 21,263 $ 31,093 $ 42,285 $ 58,492
======== ======== ======== ========
Basic earnings per share:
Income per share before extraordinary loss...... $ 0.27 $ 0.39 $ 0.53 $ 0.74
Extraordinary loss per share.................... 0.01 -- 0.01 --
-------- -------- -------- --------
Basic net income per share...................... $ 0.26 $ 0.39 $ 0.52 $ 0.74
======== ======== ======== ========
Diluted earnings per share:
Income per share before extraordinary loss...... $ 0.26 $ 0.38 $ 0.51 $ 0.72
Extraordinary loss per share.................... -- -- -- --
-------- -------- -------- --------
Diluted net income per share.................... $ 0.26 $ 0.38 $ 0.51 $ 0.72
======== ======== ======== ========
Shares used in per share computation:
Basic........................................... 80,911 79,072 80,653 79,024
======== ======== ======== ========
Diluted......................................... 83,175 81,957 82,733 81,790
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-3
108
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------
2001 2000
------- --------
Net income.................................................. $42,285 $ 58,492
Other comprehensive income:
Foreign currency translation adjustments.................. (5,082) (15,305)
------- --------
Comprehensive income........................................ $37,203 $ 43,187
======= ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-4
109
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income................................................ $ 42,285 $ 58,492
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 35,219 31,377
Provision for losses on accounts receivable............ 1,208 4,638
Provision for inventory obsolescence................... 1,423 3,784
Translation and exchange losses, net................... 660 4,056
Loss on sale of assets................................. 83 696
Other non-cash losses.................................. 1,166 1,167
Deferred income taxes.................................. 516 4,338
Minority interest...................................... 581 (969)
Change in assets and liabilities, net of effects of
acquisitions:
Accounts and notes receivable.......................... 18,435 (3,085)
Inventories............................................ 7,424 (9,098)
Prepaid expenses and other assets...................... (15,833) 2,156
Trade payables and accrued liabilities................. (20,853) (17,839)
Income taxes payable................................... 10,024 226
Other liabilities...................................... (5,130) 2,324
-------- --------
Net cash provided by operating activities......... 77,208 82,263
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (36,974) (13,923)
Proceeds from sale of assets.............................. 742 603
(Increase) decrease in restricted cash.................... (1,595) 71
Acquisition of license rights, product lines and
businesses............................................. (19,897) (34,153)
-------- --------
Net cash used in investing activities............. (57,724) (47,402)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 315 --
Proceeds from issuance of notes payable................... 22 4,856
Payments on long-term debt................................ (5,738) (12,734)
Payments on notes payable................................. -- (6,080)
Proceeds from exercise of stock options................... 8,301 2,994
Dividends paid............................................ (11,818) (11,173)
-------- --------
Net cash used in financing activities............. (8,918) (22,137)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 128 (1,493)
-------- --------
Net increase in cash and cash equivalents................... 10,694 11,231
Cash and cash equivalents at beginning of period............ 155,205 177,577
-------- --------
Cash and cash equivalents at end of period.................. $165,899 $188,808
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-5
110
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The results of operations presented
herein are not necessarily indicative of the results to be expected for a full
year. Although the Company believes that all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of the interim
periods presented are included and that the disclosures are adequate to make the
information presented not misleading, these consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Forms
10-K and 10-K/A for the year ended December 31, 2000.
F-6
111
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated condensed
financial statements include the accounts of ICN Pharmaceuticals, Inc. and
Subsidiaries (the "Company") and all of its majority-owned subsidiaries.
Investments in 20% through 50% owned affiliated companies are included under the
equity method where the Company exercises significant influence over operating
and financial affairs. Investments in less than 20% owned companies are recorded
at the lower of cost or fair value. All significant intercompany account
balances and transactions have been eliminated.
Effective November 26, 1998, the Company's equity ownership of ICN
Yugoslavia was effectively reduced from 75% to 35% based upon a decision by the
Yugoslavia Ministry of Economic and Property Transformation. Additionally,
representatives of the Company and ICN Yugoslavia's management have limited
access to the premises and representation as to the management of ICN
Yugoslavia. As a result, the Company had and continues to have no effective
control over 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 fair
value, estimated to be zero. The Company accounts for its ongoing investment in
ICN Yugoslavia under the cost method. The Company did not recognize any income
or losses from ICN Yugoslavia in the quarter and six months ended June 30, 2000
and 2001.
Comprehensive Income: The balance of accumulated other comprehensive loss
at June 30, 2001 and December 31, 2000 consists of accumulated foreign currency
translation adjustments. Other comprehensive loss has not been recorded net of
any tax provision or benefit as the Company does not expect to realize any
significant tax benefit or expense from this item.
Per Share Information: In January 2001, the Company's Board of Directors
declared a fourth quarter 2000 cash dividend of $0.0725 per share, which was
paid in January 2001. In February 2001, the Company's Board of Directors
declared a first quarter cash dividend of $.075 per share, which was paid in
April 2001. In June 2001, the Company's Board of Directors declared a second
quarter cash dividend of $0.075, which was paid on July 25, 2001, to
stockholders of record on July 11, 2001.
Reclassifications: Certain prior year amounts have been reclassified to
conform with the current period presentation, with no effect on previously
reported net income or stockholders' equity.
New Accounting Pronouncements: In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and FASB No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 142 changes
the accounting for goodwill from an amortization approach to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of that Statement, which for the
Company, will be January 1, 2002.
F-7
112
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2001 2000 2001 2000
-------- -------- ------- -------
Income:
Net income.......................................... $21,263 $31,093 $42,285 $58,492
------- ------- ------- -------
Numerator for basic earnings per share -- income
available to common stockholders................. 21,263 31,093 42,285 58,492
Effect of dilutive securities....................... (1) 3 (3) 1
------- ------- ------- -------
Numerator for diluted earnings per share -- income
available to common stockholders after assumed
conversions...................................... $21,262 $31,096 $42,282 $58,493
======= ======= ======= =======
Shares:
Denominator for basic earnings per
share -- weighted-average shares outstanding..... 80,911 79,072 80,653 79,024
Effect of dilutive securities:
Employee stock options........................... 2,243 2,705 2,059 2,545
Other dilutive securities........................ 21 180 21 221
------- ------- ------- -------
Dilutive potential common shares.................... 2,264 2,885 2,080 2,766
------- ------- ------- -------
Denominator for diluted earnings per
share -- weighted-average shares adjusted for
assumed conversions.............................. 83,175 81,957 82,733 81,790
======= ======= ======= =======
Basic earnings per share:
Income per share before extraordinary loss.......... $ 0.27 $ 0.39 $ 0.53 $ 0.74
Extraordinary loss per share........................ 0.01 -- 0.01 --
------- ------- ------- -------
Basic net income per share.......................... $ 0.26 $ 0.39 $ 0.52 $ 0.74
======= ======= ======= =======
Diluted earnings per share:
Income per share before extraordinary loss.......... $ 0.26 $ 0.38 $ 0.51 $ 0.72
Extraordinary loss per share........................ -- -- -- --
------- ------- ------- -------
Diluted net income per share........................ $ 0.26 $ 0.38 $ 0.51 $ 0.72
======= ======= ======= =======
F-8
113
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
3. DETAIL OF CERTAIN ACCOUNTS
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
(IN THOUSANDS)
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable................................. $ 166,582 $ 190,386
Royalties receivable...................................... 35,723 39,741
Other receivables......................................... 19,798 15,372
--------- ---------
222,103 245,499
Allowance for doubtful accounts........................... (14,224) (19,860)
--------- ---------
$ 207,879 $ 225,639
========= =========
INVENTORIES, NET:
Raw materials and supplies................................ $ 52,198 $ 61,623
Work-in-process........................................... 24,476 22,701
Finished goods............................................ 101,943 103,932
--------- ---------
178,617 188,256
Allowance for inventory obsolescence...................... (18,702) (17,993)
--------- ---------
$ 159,915 $ 170,263
========= =========
PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, at cost.................... $ 506,257 $ 471,386
Accumulated depreciation and amortization................. (116,695) (104,157)
--------- ---------
$ 389,562 $ 367,229
========= =========
4. RELATED PARTY TRANSACTIONS
In January 2001, the Company made a loan to Mr. Adam Jerney, Chief
Operating Officer and President of the Company, of $1,197,864 as part of a
program adopted by the Board of Directors of the Company to encourage directors
and officers of the Company to exercise stock options (the "Stock Option
Program"). The loan is collateralized by 148,537 shares of the Company's Common
Stock and is due in payments through January 2003. In April 2001, the Company
made a loan to Mr. Milan Panic, Chairman of the Board and Chief Executive
Officer of the Company, of $2,731,519 as part of the Stock Option Program. The
loan is collateralized by 286,879 shares of the Company's Common Stock and is
due in April 2004. These loans bear interest at a rate of 5.61% per annum in the
case of Mr. Jerney and 4.63% per annum in the case of Mr. Panic, compounded
annually. Interest is payable annually. These loans are non-recourse with
respect to principal and full recourse to the obligor with respect to interest.
As of June 30, 2001, the loans are included in the accompanying consolidated
condensed balance sheet as a reduction of stockholders' equity.
5. LICENSE AGREEMENT
In June 2001, the Company's 100% owned subsidiary Ribapharm, Inc.
("Ribapharm") licensed Levovirin(TM), a compound that is currently in Phase I
clinical trials for the treatment of hepatitis C, to
F-9
114
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
F. Hoffmann-La Roche ("Roche"). Ribapharm received a one time licensing fee and
will be eligible to receive future payments based upon Roche achieving certain
milestones. Roche will be responsible for all future development costs of
Levovirin. If Levovirin is successfully developed and receives regulatory
approval, Ribapharm will be entitled to receive royalty payments. In addition,
Roche licensed to the Company a compound that is at a similar stage of
development. The Company will be responsible for the development costs of this
compound, milestone payments and royalties if the compound is successfully
developed.
6. COMMITMENTS AND CONTINGENCIES
On August 11, 1999, the United States Securities and Exchange Commission
filed a complaint in the United States District Court for the Central District
of California captioned Securities and Exchange Commission v. ICN
Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt,
Civil Action No. SACV 99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint
alleges that the Company and the individual named defendants made untrue
statements of material fact or omitted to state material facts necessary in
order to make the statements made, in the light of the circumstances under which
they were made, not misleading and engaged in acts, practices, and courses of
business which operated as a fraud and deceit upon other persons in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The SEC Complaint concerns the status and disposition of the
Company's 1994 New Drug Application for Virazole as a monotherapy treatment for
Hepatitis C (the "NDA"). The SEC Complaint seeks injunctive relief, unspecified
civil penalties, and an order barring Mr. Panic from acting as an officer or
director of any publicly-traded company. A pre-trial schedule has been set which
requires the submission of summary judgment motions in late 2002, the end of
discovery by March 17, 2003, and the commencement of trial on May 6, 2003. The
Company and the SEC are engaged in discussions in an effort to determine whether
the litigation can be resolved by settlement agreement.
Beginning in 1996, the Company received subpoenas from a Grand Jury in the
United States District Court for the Central District of California requesting
the production of documents covering a broad range of matters over various time
periods. The Company understood that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee, and a former
employee of the Company were targets of the investigation. The Company also
understood that a senior executive officer and a director were subjects of the
investigation. The United States Attorney for the Central District of California
(the "Office") advised counsel for the Company that the areas of its
investigation included disclosures made and not made concerning the 1994
Hepatitis C monotherapy 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 monotherapy 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 cooperated, and continues to cooperate, in the
Grand Jury investigation. A number of current and former officers and employees
of the Company were interviewed by the government in connection with the
investigation. The Office had issued subpoenas requiring various current and
former officers and employees of the Company to testify before the Grand Jury.
Certain current and former officers and employees testified before the Grand
Jury beginning in July 1998.
On March 15, 2001, the Company was notified by the Office that a decision
had been made to decline prosecution of all of the individual targets and
subjects of the Grand Jury investigation. At the same time, the Company was also
notified that the United States Attorney had authorized the Office to seek an
indictment of the Company based upon alleged false and misleading
misrepresentations concerning the 1994 hepatitis C
F-10
115
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
monotherapy NDA. The Company and the Office are engaged in discussions in an
effort to determine whether the matter can be settled by plea bargain, which
could include a plea by the Company to one felony count.
In connection with the Grand Jury investigation and SEC litigation, the
Company recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover
the potential combined settlement liability and all other related costs. The
Company's estimate of the fourth quarter reserve was based upon the nature and
amounts noted during settlement discussions with the SEC and the Office. The
Company believes that additional loss in settling these matters, based upon
discussions to date, is not reasonably possible. There can, of course, be no
assurance that the Grand Jury investigation will be settled by plea agreement or
that the SEC litigation will be settled by mutual agreement or what the amount
of any settlement may ultimately be. In the event that a settlement of either
matter is not reached, the Company will vigorously defend any litigation.
The Company is a party to a legal matter at one of its distribution
companies in Russia. The matter involves a claim relating to non-payment under a
contract entered into in January 1995, prior to the Company's acquisition of
this Russian distribution company. The claimant is seeking to recover $6.2
million in damages, plus expenses. Due to the complex and changing legal
environment in Russia, the Company can not estimate the range or amount of
possible loss, if any, that may be incurred. The Company intends to vigorously
defend this matter, however, an adverse decision could have a material effect on
the results of operations of the Company.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation cannot be predicted with certainty,
and an unfavorable outcome could have a negative impact on the Company, at this
time in the opinion of management, the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity.
7. BUSINESS SEGMENTS
The Company's six reportable pharmaceutical segments have been combined
into two geographical groups: ICN Americas (comprised of the Company's
pharmaceutical operations in North America and Latin America) and ICN
International (comprised of the Company's pharmaceutical operations in Western
Europe, Eastern Europe and Asia, Africa and Australia).
Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. Due to the Company's proposed restructuring
plan, the Company now evaluates the performance of its North America
Pharmaceuticals segment in a manner consistent with how the Company will be
organized subsequent to the proposed restructuring. All amounts for 2000 have
been restated to conform with the current year presentation.
F-11
116
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
The following table sets forth the amounts of segment revenues and
operating income of the Company for the three months and six months ended June
30, 2001 and 2000 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES
Product Sales
Pharmaceuticals
ICN Americas
North America................................ $ 44,137 $ 26,960 $ 86,420 $ 56,759
Latin America................................ 29,638 28,757 55,730 57,984
-------- -------- -------- --------
Total ICN Americas...................... 73,775 55,717 142,150 114,743
-------- -------- -------- --------
ICN International
Western Europe............................... 49,844 43,317 102,377 90,074
Russia....................................... 22,957 23,464 47,356 50,034
Asia, Africa, Australia...................... 13,003 10,625 23,641 22,024
-------- -------- -------- --------
Total ICN International................. 85,804 77,406 173,374 162,132
-------- -------- -------- --------
Total Pharmaceuticals................... 159,579 133,123 315,524 276,875
Biomedicals....................................... 14,761 15,210 30,235 30,796
-------- -------- -------- --------
Total product sales..................... 174,340 148,333 345,759 307,671
Royalties......................................... 31,431 43,100 58,981 76,102
-------- -------- -------- --------
Consolidated revenues................... $205,771 $191,433 $404,740 $383,773
======== ======== ======== ========
OPERATING INCOME
Pharmaceuticals
ICN Americas
North America................................ $ 18,967 $ 11,582 $ 37,277 $ 26,101
Latin America................................ 9,501 8,506 17,656 17,413
-------- -------- -------- --------
Total ICN Americas...................... 28,468 20,088 54,933 43,514
-------- -------- -------- --------
ICN International
Western Europe............................... 6,525 4,395 10,847 10,650
Russia....................................... (4,328) (3,596) (6,503) (2,071)
Asia, Africa, Australia...................... 1,606 590 2,867 1,843
-------- -------- -------- --------
Total ICN International................. 3,803 1,389 7,211 10,422
Biomedicals....................................... 1,939 (658) 4,614 1,621
Royalties......................................... 31,431 43,100 58,981 76,100
-------- -------- -------- --------
Consolidated segment operating income... 65,641 63,919 125,739 131,657
Corporate expenses................................ 22,620 15,540 41,520 30,713
Interest income................................... (1,894) (3,117) (4,134) (5,812)
Interest expense.................................. 12,803 15,414 25,820 30,635
Other (income) loss, net including translation and
exchange........................................ (4,740) 2,465 (4,340) 4,056
-------- -------- -------- --------
Income before provision for income taxes, minority
interest and extraordinary loss................. $ 36,852 $ 33,617 $ 66,873 $ 72,065
======== ======== ======== ========
F-12
117
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
The following table sets forth the segment total assets of the Company as
of June 30, 2001 and December 31, 2000 (in thousands):
ASSETS
--------------------------
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Pharmaceuticals
ICN Americas
North America......................................... $ 535,212 $ 518,033
Latin America......................................... 138,929 127,031
---------- ----------
Total ICN Americas............................... 674,141 645,064
---------- ----------
ICN International
Western Europe........................................ 264,698 271,914
Russia................................................ 161,837 169,032
Asia, Africa, Australia............................... 70,996 82,206
---------- ----------
Total ICN International.......................... 497,531 523,152
---------- ----------
Total Pharmaceuticals............................ 1,171,672 1,168,216
Biomedicals................................................ 58,571 61,938
Corporate.................................................. 260,982 246,918
---------- ----------
Total............................................ $1,491,225 $1,477,072
========== ==========
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes for the six months ended June 30, 2001 and 2000
was $10,688,000 and $10,658,000, respectively. Cash paid for interest for the
six months ended June 30, 2001 and 2000 was $24,196,000 and $28,883,000,
respectively.
Other non-cash losses for the six months ended June 30, 2001 and 2000
included $1,166,000 and $1,167,000, respectively, for compensation expense
related to the vesting of restricted stock under the Company's long-term
incentive plan.
9. SUBSEQUENT EVENTS
In July 2001, the Company completed an offering of $525 million of 6 1/2%
convertible subordinated notes due 2008. The notes are convertible into the
Company's common stock at a conversion rate of 29.1924 shares per $1,000
principal amount of notes. Upon the earlier to occur of a public offering of
Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm
will become jointly and severally liable for the obligations under the notes. In
the event of a spin-off of Ribapharm, converting note holders would receive the
Company's common stock and the number of shares of Ribapharm common stock the
note holders would have received had the notes been converted immediately prior
to the spin-off. In addition, on July 18, 2001, the Company mailed a notice of
redemption with respect to the entire aggregate principal amount outstanding of
$188,978,000 of the Company's 9 1/4% Senior Notes due 2005. Pursuant to the
notice, the Company will redeem the 9 1/4% Senior Notes on August 17, 2001 at a
redemption price of 104.625% of the principal amount thereof, plus accrued and
unpaid interest. In connection with this redemption, the Company will record an
extraordinary loss on extinguishment of debt of $7,900,000, net of tax, in the
third quarter of 2001.
In July and August 2001, the Company repurchased $114,221,000 principal
amount of its 8 3/4% Senior Notes due 2008. In connection with these
repurchases, the Company will record an extraordinary loss on extinguishment of
debt of $13,160,000, net of tax, in the third quarter of 2001.
F-13
118
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, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.
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
Orange County, California
March 1, 2001, except for Note 12,
as to which the date is March 15, 2001
F-14
119
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 155,205 $ 177,577
Restricted cash........................................... 380 414
Accounts receivable, net.................................. 225,639 231,902
Inventories, net.......................................... 170,263 136,762
Prepaid expenses and other current assets................. 13,929 18,075
---------- ----------
Total current assets.............................. 565,416 564,730
Property, plant and equipment, net.......................... 367,229 332,360
Deferred income taxes, net.................................. 75,037 81,095
Other assets................................................ 32,300 37,625
Goodwill and intangibles, net............................... 437,090 456,451
---------- ----------
$1,477,072 $1,472,261
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables............................................ $ 61,741 $ 65,195
Accrued liabilities....................................... 91,447 66,185
Notes payable............................................. 9 8,762
Current portion of long-term debt......................... 898 312
Income taxes payable...................................... 4,682 168
---------- ----------
Total current liabilities......................... 158,777 140,622
Long-term debt, less current portion........................ 510,781 596,961
Deferred income and other liabilities....................... 40,988 28,628
Minority interest........................................... 9,332 22,478
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value; 200,000 shares authorized;
80,197 (2000) and 78,950 (1999) shares outstanding
(after deducting shares in treasury of 814 and 814,
respectively).......................................... 802 789
Additional capital........................................ 973,157 949,181
Accumulated deficit....................................... (130,087) (197,602)
Accumulated other comprehensive income.................... (86,678) (68,796)
---------- ----------
Total stockholders' equity........................ 757,194 683,572
---------- ----------
$1,477,072 $1,472,261
========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-15
120
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- ----------
Revenues:
Product sales........................................... $645,190 $638,475 $ 800,639
Royalties............................................... 155,114 108,937 37,425
-------- -------- ----------
Total revenues.................................. 800,304 747,412 838,064
-------- -------- ----------
Costs and expenses:
Cost of product sales................................... 262,818 256,146 353,600
Selling, general and administrative..................... 304,314 252,207 291,776
Research and development................................ 18,769 10,963 20,835
Amortization of goodwill and intangibles................ 30,448 29,239 20,601
Eastern European charges................................ -- -- 440,820
-------- -------- ----------
Total expenses.................................. 616,349 548,555 1,127,632
-------- -------- ----------
Income (loss) from operations........................... 183,955 198,857 (289,568)
Translation and exchange losses, net...................... 6,587 11,823 80,501
Interest income........................................... (12,542) (8,894) (13,057)
Interest expense.......................................... 60,356 55,943 38,069
-------- -------- ----------
Income (loss) before income taxes, minority interest and
extraordinary loss...................................... 129,554 139,985 (395,081)
Provision for income taxes................................ 37,683 28,996 1,983
Minority interest......................................... (1,534) (7,637) (44,990)
-------- -------- ----------
Income (loss) before extraordinary loss................. 93,405 118,626 (352,074)
Extraordinary loss, net of income taxes................... 3,225 -- --
-------- -------- ----------
Net income................................................ $ 90,180 $118,626 $ (352,074)
======== ======== ==========
Basic earnings per share:
Income (loss) per share before extraordinary loss....... $ 1.18 $ 1.52 $ (4.78)
Extraordinary loss per share............................ 0.04 -- --
-------- -------- ----------
Basic net income (loss) per share....................... $ 1.14 $ 1.52 $ (4.78)
======== ======== ==========
Diluted earnings per share:
Income (loss) per share before extraordinary loss....... $ 1.14 $ 1.45 $ (4.78)
Extraordinary loss per share............................ 0.04 -- --
-------- -------- ----------
Diluted net income (loss) per share..................... $ 1.10 $ 1.45 $ (4.78)
======== ======== ==========
Shares used in per share computation:
Basic................................................... 79,395 77,833 73,637
======== ======== ==========
Diluted................................................. 82,264 82,089 73,637
======== ======== ==========
The accompanying notes are an integral part of these consolidated statements.
F-16
121
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RETAINED ACCUMULATED
PREFERRED STOCK COMMON STOCK EARNINGS OTHER
--------------- --------------- ADDITIONAL (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) INCOME TOTAL
------ ------ ------ ------ ---------- ------------ ------------- ---------
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
Comprehensive income:
Net income.......................... -- -- -- -- -- 118,626 -- 118,626
Foreign currency translation
adjustments....................... -- -- -- -- -- -- (20,450) (20,450)
---------
Total comprehensive income........ 98,176
Exercise of stock options............. -- -- 1,148 11 12,883 -- -- 12,894
Tax benefit of stock options
exercised........................... -- -- -- -- 5,173 -- -- 5,173
Stock compensation.................... -- -- (53) -- 2,043 -- -- 2,043
Settlement related to acquisition
contingency......................... (1) (1) -- -- (28,312) -- -- (28,313)
Issuance of common stock:
In connection with license
agreement......................... -- -- 2,041 20 41,980 -- -- 42,000
In connection with acquisitions..... -- -- 17 -- 1,756 -- -- 1,756
Purchase of treasury stock............ -- -- (614) (6) (15,298) -- -- (15,304)
Cash dividends........................ -- -- -- -- -- (21,017) -- (21,017)
-- ---- ------ ---- -------- --------- -------- ---------
BALANCE AT DECEMBER 31, 1999.......... -- -- 78,950 789 949,181 (197,602) (68,796) 683,572
Comprehensive income:
Net income.......................... -- -- -- -- -- 90,180 -- 90,180
Foreign currency translation
adjustments....................... -- -- -- -- -- -- (17,882) (17,882)
---------
Total comprehensive income........ 72,298
Exercise of stock options............. -- -- 1,193 12 14,556 -- -- 14,568
Tax benefit of stock options
exercised........................... -- -- -- -- 2,721 -- -- 2,721
Stock compensation.................... -- -- (25) -- 1,720 -- -- 1,720
Redemption of common stock............ -- -- (46) -- (20) -- -- (20)
Issuance of common stock in connection
with acquisitions................... -- -- 125 1 4,999 -- -- 5,000
Cash dividends........................ -- -- -- -- -- (22,665) -- (22,665)
-- ---- ------ ---- -------- --------- -------- ---------
BALANCE AT DECEMBER 31, 2000.......... -- $ -- 80,197 $802 $973,157 $(130,087) $(86,678) $ 757,194
== ==== ====== ==== ======== ========= ======== =========
The accompanying notes are an integral part of these consolidated statements.
F-17
122
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
--------- -------- ---------
Cash flows from operating activities:
Net income (loss)......................................... $ 90,180 $118,626 $(352,074)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 64,540 65,502 51,096
Eastern European charges.................................. -- -- 451,019
Provision for losses on accounts receivable............... 9,303 2,291 7,559
Provision for inventory obsolescence...................... 8,561 5,880 602
Translation and exchange losses, net...................... 6,587 11,823 80,501
Deferred income........................................... -- (4,983) (6,112)
Loss on sale of assets.................................... 1,223 882 100
Deferred income taxes..................................... 8,051 (1,112) (8,223)
Other non-cash losses..................................... 2,333 4,016 3,314
Minority interest......................................... (1,534) (7,637) (44,990)
Extraordinary loss........................................ 3,225 -- --
Change in assets and liabilities, net of effects of
acquisitions:
Accounts and notes receivable........................... 3,755 (66,927) (160,345)
Inventories............................................. (34,129) (13,236) (29,075)
Prepaid expenses and other assets....................... 2,909 (6,497) (22,290)
Trade payables and accrued liabilities.................. 5,856 (24,601) 38,912
Income taxes payable.................................... 6,907 (60) 2,555
Other liabilities....................................... 3,917 3,156 (2,925)
--------- -------- ---------
Net cash provided by operating activities............. 181,684 87,123 9,624
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities............... -- -- 22,958
Proceeds from sale of assets.............................. 2,707 2,167 1,202
Increase (decrease) in restricted cash.................... 34 15,144 (15,009)
Cash acquired in connection with acquisitions............. 4,613 288 1,111
Capital expenditures...................................... (49,330) (44,083) (110,281)
Acquisition of license rights, product lines and
businesses.............................................. (45,581) (23,876) (172,926)
Termination of joint venture.............................. (3,238) -- --
Loss of Yugoslavian cash balance.......................... -- -- (22,101)
--------- -------- ---------
Net cash used in investing activities................. (90,795) (50,360) (295,046)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 3,420 145,490 225,082
Proceeds from issuance of notes payable................... 5,724 19,976 26,720
Proceeds from exercise of stock options................... 14,568 12,894 6,783
Proceeds from issuance of common stock.................... -- 42,000 4,299
Payments on long-term debt................................ (105,901) (87,632) (27,381)
Payments on notes payable................................. (7,911) (31,695) (27,965)
Dividends paid............................................ (22,665) (21,017) (17,069)
Purchase of treasury stock................................ -- (15,304) (4,450)
Repurchase of preferred stock............................. -- (28,313) --
--------- -------- ---------
Net cash (used in) provided by financing activities... (112,765) 36,399 186,019
--------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (496) (506) (5,572)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents........ (22,372) 72,656 (104,975)
Cash and cash equivalents at beginning of year.............. 177,577 104,921 209,896
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 155,205 $177,577 $ 104,921
========= ======== =========
The accompanying notes are an integral part of these consolidated statements.
F-18
123
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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"),
in a transaction accounted for using the purchase method of accounting (the
"Merger"). The Company is a global research based pharmaceutical company that
develops, manufactures, distributes and sells pharmaceutical, research and
diagnostic products.
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 fair 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 of 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
any significant access to the premises and representation as to the management
of ICN Yugoslavia. As a result, the Company had and continues to have no
effective control over the operating and financial affairs of ICN Yugoslavia.
Accordingly, the Company deconsolidated the financial statements of ICN
Yugoslavia as of November 26, 1998, and reduced the carrying value of its
investment to fair value, estimated to be zero. The Company accounts for its
ongoing investment in ICN Yugoslavia under the cost method. The Company did not
recognize any revenues or expenses related to its investment in Yugoslavia in
2000 or 1999. 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, 2000 and 1999, cash
equivalents totaled $119,861,000 and $159,544,000, 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.
Allowance for Doubtful Accounts: The Company evaluates the collectibility
of its receivables at least quarterly, based upon various factors including the
financial condition and payment history of major customers, an overall review of
collections experience on other accounts and economic factors or events expected
to affect the Company's future collections experience.
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. The Company evaluates the carrying value of
its inventories at least quarterly, taking into account such factors as
historical and anticipated future sales compared with quantities on hand, the
price the Company expects to obtain for its products in their respective markets
compared with historical cost and the remaining shelf life of goods on hand.
F-19
124
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 10 to 20 years depending upon the nature of the
business or product acquired. The Company periodically evaluates the carrying
value of goodwill and intangibles including the related amortization periods. In
evaluating goodwill, the Company determines whether there has been an impairment
and the amount thereof, if any, by comparing the undiscounted future operating
income of the acquired business with the carrying value of the goodwill. In
evaluating acquired product rights and other intangible assets, the Company
determines whether there has been impairment by comparing the anticipated
undiscounted future operating income of the product line with its carrying
value. If the undiscounted operating income is less than the carrying value, the
amount of the impairment, if any, will be determined by comparing the carrying
value of each intangible asset with its fair value. Fair value is generally
based on a discounted cash flows analysis. Based on its review, the Company does
not believe that any impairment of its goodwill and intangibles has occurred.
As of December 31, 2000 and 1999, goodwill and intangibles included the
following:
2000 1999 AMORTIZATION PERIODS
-------- -------- --------------------
(IN THOUSANDS)
Goodwill.............................. $ 80,849 $ 73,943 10-20 years
Acquired product rights............... 440,760 436,380 15-18 years
Other intangible assets............... 12,508 13,952 10-18 years
-------- --------
534,117 524,275
Accumulated amortization.............. (97,027) (67,824)
-------- --------
$437,090 $456,451
======== ========
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. The Company earns royalty
revenue as a result of the sale of product rights and technologies to third
parties. Royalty revenue is earned at the time the products subject to the
royalty are sold by the third party.
In December 1999, the Securities and Exchange Commission (the "SEC")
released Staff Accounting Bulletin ("SAB") No. 101, which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company adopted the provisions of SAB 101 in the fourth
quarter of 2000. Adoption of SAB 101 did not cause a material change in the
Company's financial condition or results of operations.
Barter Transactions: The Company periodically engages in barter
transactions, primarily in Russia, related to the sale of its products in
exchange for raw materials, other finished goods and costs of services incurred
in the conduct of its operations. The Company accounts for these transactions in
accordance with
F-20
125
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APB No. 29 "Accounting for Nonmonetary Transactions", whereby the cost of the
assets or service acquired is based upon the fair value of the asset surrendered
or received whichever is more clearly evident. For each of the periods ended
December 31, 2000, 1999 and 1998, the Company's Russian subsidiaries recorded
approximately $3,000,000, $8,000,000 and $8,000,000, respectively, in revenue
related to barter transactions.
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 transactions
amounted to $3,062,000, $5,085,000 and $2,788,000 for 2000, 1999 and 1998,
respectively. Recorded losses from foreign exchange translation amounted to
$3,525,000, $6,738,000 and $77,713,000 for 2000, 1999 and 1998, 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.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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: The Company has adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized holding gains and losses
on available-for-sale securities and is presented as a component of
stockholders' equity.
The balance of accumulated other comprehensive income at December 31, 2000
and 1999 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: 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's Board of Directors declared a quarterly cash distribution of
$.0725 per share for each fiscal quarter of 2000. During 1999, the Company's
Board of Directors declared a quarterly cash distribution of $0.07 per share for
each fiscal quarter. During 1998, the Company's Board of Directors declared a
quarterly cash dividend or distribution of $0.06 per share for each fiscal
quarter.
F-21
126
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 issued to employees 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
On July 1, 2000, the Company acquired 100% ownership of the Swiss
pharmaceuticals company Solco Basel AG for $30,368,000, of which $25,156,000 was
paid in cash ($4,026,000 of cash was received as part of the Solco assets) and
the balance in 125,000 shares of the Company's common stock. Goodwill of
$2,821,000 was recorded in connection with the acquisition and is being
amortized over a 20 year estimated useful life. Under the terms of the Company's
agreement with the sellers, the Company has guaranteed a per share price
initially at CHF 64 ($40.00 as of December 31, 2000), increasing at a rate of 4%
per annum through June 30, 2002. If the holders of the shares sell any of the
shares prior to June 30, 2002, the Company is entitled to one-half of any
proceeds realized 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 in cash. The aggregate guaranteed value of the shares held by the
sellers exceeds the market value by approximately $1,386,000. This acquisition
was accounted for as a purchase and is not material to the financial position or
results of operations of the Company. The initial purchase of the Solco
acquisition is based upon current estimates. The Company will make final
purchase price allocations based upon final values for certain long-lived
assets. As a result, the final purchase price allocation may differ from the
presented estimates.
During 2000, the Company acquired various other businesses for a total of
$4,075,000 in cash. These acquisitions were accounted for as purchases and are
not material to the financial position or results of operations of the Company.
The Company acquired an additional 6.47% interest in its subsidiary in Poland
for $3,194,000 in cash, which increased the Company's ownership to 97.73% and an
additional 25% interest in a subsidiary in Hungary for $3,186,000 in cash, which
increased the Company's ownership to 91.3%.
Product Acquisitions: In 2000, the Company acquired the rights to certain
products for the total consideration of $9,383,000. None of the above product
acquisitions are material to the financial results of the Company.
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 personal legal obligations. During August 1996,
this amount was repaid to the Company. In connection with this transaction, the
Company guaranteed $3,600,000 of demand debt of the Chairman with a third party
bank, which is renewable by the Chairman annually until repaid. In addition to
the guarantee, the Company deposited $3,600,000 with this bank as collateral to
the Chairman's debt, which will remain in place until such time as the Chairman
repays his obligation to the bank. This deposit is recorded as a long-term asset
on the consolidated balance sheet. The Company is not aware of the time frame in
which the Chairman expects to repay this obligation. Interest paid by the
Company on behalf of the Chairman was charged to the Chairman as compensation
expense and amounted to $160,916, $163,166 and $181,901 for the years ended
December 31, 2000, 1999 and 1998. The Company recognized interest income on the
bank deposit of $124,330, $126,097 and $134,151 for the years ended December 31,
2000, 1999 and 1998. 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
F-22
127
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is limited to the collateral described above. Both the transaction and the
sufficiency of the collateral for the guarantee were approved by the Board of
Directors.
5. 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. The Company's cash and cash
equivalents and restricted cash include $120,000,000 and $160,000,000, at
December 31, 2000 and 1999, respectively, held in time deposits, money market
funds, and municipal debt securities through approximately ten major financial
institutions. The Company is also exposed to credit risk on its accounts
receivable balances in Russia as a result of the current economic situation. The
Russian accounts receivable balances at December 31, 2000 and 1999 are
$15,414,000 and $22,772,000, which is net of the allowances for doubtful
accounts of $10,276,000 and $9,142,000, respectively.
6. INCOME TAXES
Pretax income (loss) from continuing operations before minority interest
and extraordinary loss for each of the years ended December 31, consists of the
following (in thousands):
2000 1999 1998
-------- -------- ---------
Domestic.................................. $ 85,826 $ 96,270 $(252,597)
Foreign................................... 43,728 43,715 (142,484)
-------- -------- ---------
$129,554 $139,985 $(395,081)
======== ======== =========
The income tax (benefit) provision for each of the years ended December 31,
consists of the following (in thousands):
2000 1999 1998
------- ------- --------
Current
Federal.................................. $ 1,159 $ 6,206 $ --
State.................................... 2,563 674 640
Foreign.................................. 16,642 15,469 9,566
------- ------- --------
20,364 22,349 10,206
Deferred
Federal.................................. 16,298 8,779 (11,409)
State.................................... (165) 1,199 --
Foreign.................................. 1,186 (3,331) 3,186
------- ------- --------
17,319 6,647 (8,223)
------- ------- --------
$37,683 $28,996 $ 1,983
======= ======= ========
The current federal tax provision has not been reduced for the tax benefit
associated with the exercise of employee stock options. The 2000 and 1999 tax
benefit of $2,721,000 and $5,173,000, respectively, were credited directly to
additional capital and the 1998 tax benefit amount of $5,845,000 has been
included in the valuation allowance.
F-23
128
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The primary components of the Company's net deferred tax asset at December
31, 2000 and 1999 are as follows (in thousands):
2000 1999
-------- --------
Deferred tax assets:
NOL carryforwards.................................... $ 54,568 $ 73,719
Capital loss carryforward............................ 25,458 25,458
Inventory and other reserves......................... 3,934 8,809
Tax credit carryforwards............................. 2,581 1,544
Other................................................ 9,925 8,191
Valuation allowance.................................. (21,429) (36,626)
-------- --------
Total deferred tax asset.......................... 75,037 81,095
-------- --------
Deferred tax liabilities:
Foreign fixed assets, intangibles, and other......... (13,028) (7,697)
Intangibles.......................................... (2,992) (1,813)
-------- --------
Total deferred tax liability...................... (16,020) (9,510)
-------- --------
Net deferred tax asset............................ $ 59,017 $ 71,585
======== ========
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 domestic NOLs that can be used to reduce taxable income
after certain substantial ownership changes of a corporation.
At December 31, 2000, the Company has domestic and foreign NOLs of
approximately $130,626,000 and $41,508,000, respectively, and a capital loss
carryforward of $72,736,000. The Company's NOLs begin to expire in the year 2005
and the majority of capital loss carryforward expires in the year 2008.
In 2000, the valuation allowance primarily relates to foreign net operating
losses, primarily in Hungary, and a $12,548,000 tax benefit from the exercise of
stock options included in the NOL carryforward. In 1999, the valuation allowance
primarily relates to the deduction for the write-off of ICN Yugoslavia and a
$12,548,000 tax benefit from the exercise of stock options included in the NOL
carryforward. 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.
F-24
129
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate differs from the applicable U.S. statutory
federal income tax rate due to the following:
2000 1999 1998
---- ---- ----
Statutory rate.......................................... 35% 35% (35)%
Foreign source income taxed at other effective rates:
Yugoslavia............................................ -- -- 15
Russia................................................ 5 1 3
Hungary............................................... 1 5 --
China................................................. 1 1 --
Latin America and Puerto Rico......................... (5) (5) --
Other Countries....................................... -- -- (1)
Change in valuation allowance........................... (12) (18) 5
Basis difference in Yugoslavia.......................... -- -- 14
Other, net.............................................. 4 2 --
--- --- ---
Effective rate.......................................... 29% 21% 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 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.
In 1998, the Company received the benefit of certain favorable tax laws in
Yugoslavia that resulted in income taxes at a rate lower than the 25%
Yugoslavian statutory rate.
In 2000 and 1999, the provision for income taxes includes deferred tax
benefits of $16,284,000 and $25,286,000, respectively, resulting from the
recognition of certain deferred tax assets through the reduction of the
valuation allowance, primarily related to the capital loss carryforward. The
Company has announced its intention to reorganize into three separately held
public companies which management expects will result in a net capital gain
allowing utilization of the capital loss carryforward. In addition to the
reorganization, management is pursuing other tax planning strategies designed to
facilitate the use of its capital loss carryforwards prior to their expiration.
The Company is aware of audits being conducted by various tax authorities.
At this time the Company does not feel that they will result in material
adjustments.
During 2000, 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, 2000, is
approximately $227,000,000 of accumulated earnings of foreign operations that
would be subject to U.S. income or foreign withholding taxes, if and when
repatriated.
F-25
130
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
2000 1999 1998
------- -------- ---------
Income:
Net income (loss)........................ $90,180 $118,626 $(352,074)
Dividends and accretion on preferred
stock.................................... -- -- (34)
------- -------- ---------
Numerator for basic earnings per share --
income available to common
Stockholders............................. 90,180 118,626 (352,108)
Effect of dilutive securities:
Other dilutive securities................ 5 (5) --
------- -------- ---------
Numerator for diluted earnings per share --
income available to common stockholders
after assumed conversions................ $90,185 $118,621 $(352,108)
======= ======== =========
Shares:
Denominator for basic earnings per
share -- weighted-average shares
Outstanding........................... 79,395 77,833 73,637
Effect of dilutive securities:
Employee stock options................ 2,755 2,680 --
Series D Convertible Preferred
Stock............................... -- 599 --
Other dilutive securities............. 114 977 --
------- -------- ---------
Dilutive potential common shares......... 2,869 4,256 --
------- -------- ---------
Denominator for diluted earnings per
share --
adjusted weighted-average shares and
assumed conversions................... 82,264 82,089 73,637
======= ======== =========
Basic earnings per share:
Income (loss) per share before
extraordinary loss.................... $ 1.18 $ 1.52 $ (4.78)
Extraordinary loss per share............. 0.04 -- --
------- -------- ---------
Basic net income (loss) per share........ $ 1.14 $ 1.52 $ (4.78)
======= ======== =========
Diluted earnings per share:
Income (loss) per share before
extraordinary loss.................... $ 1.14 $ 1.45 $ (4.78)
Extraordinary loss per share............. 0.04 -- --
------- -------- ---------
Diluted net income (loss) per share...... $ 1.10 $ 1.45 $ (4.78)
======= ======== =========
F-26
131
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DETAIL OF CERTAIN ACCOUNTS
2000 1999
--------- --------
(IN THOUSANDS)
Accounts receivable, net:
Trade accounts receivable........................... $ 190,386 $206,766
Royalties receivable................................ 39,741 34,725
Other receivables................................... 15,372 16,958
--------- --------
245,499 258,449
Allowance for doubtful accounts..................... (19,860) (26,547)
--------- --------
$ 225,639 $231,902
========= ========
Inventories, net:
Raw materials and supplies.......................... $ 61,623 $ 32,683
Work-in-process..................................... 22,701 12,610
Finished goods...................................... 103,932 99,429
--------- --------
188,256 144,722
Allowance for inventory obsolescence................ (17,993) (7,960)
--------- --------
$ 170,263 $136,762
========= ========
Property, plant and equipment, net:
Land................................................ $ 16,154 $ 18,869
Buildings........................................... 163,453 146,402
Machinery and equipment............................. 222,693 184,230
Furniture and fixtures.............................. 23,196 20,588
Leasehold improvements.............................. 6,610 5,964
--------- --------
432,106 376,053
Accumulated depreciation and amortization........... (104,157) (77,122)
Construction in progress............................ 39,280 33,429
--------- --------
$ 367,229 $332,360
========= ========
At December 31, 2000, construction in progress includes costs incurred to
date for the construction of a new research and development facility in North
America and other plant expansion projects. At December 31, 1999 construction in
progress includes costs incurred for the construction of a new pharmaceutical
factory at the Company's Rzeszow, Poland facility and other plant expansion
projects.
Accrued liabilities:
Payroll and related items........................... $ 18,425 $ 13,397
Interest............................................ 10,738 14,287
Legal and professional fees......................... 11,969 5,234
Other............................................... 50,315 33,267
--------- --------
$ 91,447 $ 66,185
========= ========
F-27
132
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEBT
Long-term debt consists of the following (in thousands):
2000 1999
-------- --------
9 1/4% Senior Notes due 2005........................... $190,645 $275,000
8 3/4% Senior Notes due 2008 (net of unamortized
discount of $5,943).................................. 306,227 318,415
U.S. mortgage with fixed interest rate of 8.9%,
interest and principal payable monthly through
2022................................................. 3,033 3,081
Mortgages in Swiss francs with an interest rate of
LIBOR + 1.5% (4.9% at December 31, 2000); interest
and principal payable semi-annually through 2030..... 10,862 --
Other.................................................. 912 777
-------- --------
511,679 597,273
Less current portion................................... 898 312
-------- --------
Total long-term debt.............................. $510,781 $596,961
======== ========
In July 1999 and August 1998, the Company completed private placements of
$125,000,000 and $200,000,000 principal amount, respectively, of its 8 3/4%
Senior Notes due 2008 (the "8 3/4% Senior Notes"). Net proceeds to the Company,
after discounts and costs of issuance, were $118,485,000 and $190,821,000,
respectively. The 8 3/4% Senior Notes are non-callable; however, pursuant to the
bond's Indenture these notes are redeemable at the Company's option prior to
November 15, 2001. The Indenture provides for the Company to redeem up to $70.0
million aggregate principal amount of the notes from the net proceeds of a
public equity offering for a price equal to 108.75% plus accrued and unpaid
interest. In connection with the private placement, the Company granted the
purchasers of the 8 3/4% Senior Notes registration rights relating to the
exchange offer and shelf registration rights. The Company used a portion of the
proceeds from the 1999 issuance for principal payments of long-term debt and
short-term borrowings.
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 qualifications and
exceptions.
During 2000, the Company repurchased $84,355,000 of its outstanding 9 1/4%
Senior Notes for $89,880,000 cash and $12,830,000 of its outstanding 8 3/4%
Senior Notes for $12,515,000 cash. The repurchase generated an extraordinary
loss on early extinguishment of debt of $3,225,000 ($.04 per share), net of an
income tax benefit of $1,737,000.
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
F-28
133
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company has mortgages totaling $13,895,000 payable in U.S. dollars and
Swiss francs, collateralized by certain real property of the Company having a
net book value of $15,310,000 at December 31, 2000.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
2001.............................................. $ 898
2002.............................................. 554
2003.............................................. 515
2004.............................................. 480
2005.............................................. 191,131
Thereafter........................................ 318,101
--------
Total........................................ $511,679
========
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 $527,072,000 and $585,108,000 compared to its
carrying value of $511,679,000 and $597,273,000 at December 31, 2000 and 1999,
respectively.
The Company has short and long-term lines of credit aggregating $12,851,000
under which no borrowings were outstanding at December 31, 2000. The lines of
credit provide for short-term borrowings and bear interest at variable rates
based upon LIBOR (approximately 3.4% at December 31, 2000) or other indices.
10. PREFERRED STOCK
In connection with the acquisition of rights to certain products from
SmithKline Beecham plc ("SKB") in 1998, the Company issued 821 shares of its
Series D Convertible Preferred Stock to SKB. Each share of the Series D
Convertible Preferred Stock was initially convertible into 750 shares of the
Company's common stock (together, the "SKB Shares"), subject to certain
antidilution adjustments, and had a liquidation preference of $28,000 per share.
Except under certain circumstances, SKB agreed not to sell the SKB Shares until
November 4, 1999, unless the market price of the Company's common stock exceeded
$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 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 did not provide SKB with an average value of
$46.00 per common share (including any dividend paid on the SKB Shares). In
December 1999, the Company satisfied its obligation to SKB by repurchasing the
821 shares of Series D Convertible Preferred Stock for $28,313,000 in cash.
11. COMMON STOCK
During 2000, 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 11,604,000 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
F-29
134
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
15,000 options on each April 18.
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 2000,
1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been the unaudited pro
forma amounts indicated below (in thousands, except per share data):
2000 1999 1998
------- -------- ---------
Net income (loss).......................... $81,643 $109,876 $(359,757)
Earnings (loss) per share -- basic......... 1.03 1.41 (4.89)
Earnings (loss) per share -- diluted....... 0.99 1.34 (4.89)
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions:
2000 1999 1998
------ ------ ------
Weighted-average life (years).................... 4.8 4.4 5.0
Volatility....................................... 55% 54% 56%
Expected dividend per share...................... $ 0.36 $ 0.36 $ 0.36
Risk-free interest rate.......................... 5.80% 5.40% 5.15%
Weighted-average fair value of options granted... $12.91 $12.51 $19.54
The following table sets forth information relating to stock option plans
during the years ended December 31, 2000, 1999 and 1998 (in thousands, except
per share data):
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
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
Granted......................................... 1,451 25.66
Exercised....................................... (1,148) 11.10
Canceled........................................ (288) 24.52
------
F-30
135
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Shares under option, December 31, 1999............ 10,368 20.59
Granted......................................... 571 25.05
Exercised....................................... (1,193) 12.21
Canceled........................................ (586) 31.00
------
Shares under option, December 31, 2000............ 9,160 $21.25
======
Exercisable at December 31, 1998.................. 6,841 $13.43
======
Exercisable at December 31, 1999.................. 6,962 $16.10
======
Exercisable at December 31, 2000.................. 6,903 $18.36
======
Options available for grant at December 31,
1999............................................ 270
======
Options available for grant at December 31,
2000............................................ 4,034
======
The schedule below reflects the number of outstanding and exercisable
options as of December 31, 2000 segregated by price range (in thousands, except
per share data):
OUTSTANDING EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE REMAINING
RANGE OF EXERCISE PRICES OF SHARES PRICE OF SHARES PRICE LIFE (YEARS)
------------------------ --------- -------- --------- -------- ------------
$ 5.11 to $13.67 3,534 $10.95 3,494 $10.91 3.72
$13.92 to $26.88 3,613 $20.01 2,336 $18.21 5.22
$27.25 to $46.25 2,013 $41.58 1,073 $42.95 7.35
----- -----
9,160 6,903
===== =====
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.
Stock Repurchase Plan: In 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.
In March 1999, the Company repurchased additional shares of 223,967 of its
common stock for $5,550,000, completing its first stock repurchase program. In
December 1999, the Company repurchased additional shares of 390,200 of its
common stock for $9,754,000, initiating the second stock repurchase program.
During 1999, the Company sold certain put options to an independent third
party; the proceeds were used to purchase call options from the same party in a
private placement transaction not requiring any net cash outlay at the time. The
put options and the corresponding call options expired from August 2000 through
December 2000. The Company, at its option, could make a physical settlement, a
cash settlement, or a net share settlement of its positions under the put
options and the call options. The Company received 46,014
F-31
136
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of its common stock and paid $20,000 in cash to settle its positions
under the put options and the call options.
Stockholder Rights Plan: The Company has 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 2000 and 1999, no shares were
issued under the plan. 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. During
2000, 1999 and 1998, the Company recorded an other non-cash charge relating to
the compensation expense of $2,333,000, $2,737,000 and $2,398,000, respectively.
As of December 31, 2000, the unamortized compensation cost related to the
restricted shares was $2,528,000. The amount expected to be recognized in 2001
and 2002, assuming that all current participants in the long-term incentive plan
remain in the plan through the vesting period, is $2,333,000 and $195,000,
respectively.
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 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. On February 28, 2001, the Company issued 92,975 shares of
its common stock valued at approximately $2,723,000 in settlement of the
guarantee.
Other: During 1999, the Company sold 2,041,498 shares of its common stock
to Schering-Plough for $42,000,000. The sale was pursuant to the terms of a
Stock Purchase Agreement made between the Company and Schering-Plough in 1995.
See Note 16.
12. COMMITMENTS AND CONTINGENCIES
On August 11, 1999, the United States Securities and Exchange Commission
filed a complaint in the United States District Court for the Central District
of California captioned Securities and Exchange Commission v. ICN
Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt,
Civil Action No. SACV 99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint
alleges that the Company and the individual named defendants made untrue
statements of material fact or omitted to state material facts necessary in
order to make the statements made, in the light of the circumstances under which
they were made, not misleading and engaged in acts, practices, and courses of
business which operated as a fraud and deceit upon other persons in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The SEC Complaint concerns the status and disposition of the
Company's 1994 New Drug Application for Virazole as a monotherapy treatment for
Hepatitis C (the "NDA"). The SEC Complaint seeks injunctive relief, unspecified
civil penalties, and an order barring Mr. Panic from acting as an officer or
director of any publicly-traded company. A pre-trial schedule has been set which
requires the submission of summary judgment motions in late 2002, the end of
discovery by
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 17, 2003, and the commencement of trial on May 6, 2003. The Company and
the SEC are engaged in discussions in an effort to determine whether the
litigation can be resolved by settlement agreement.
Beginning in 1996, the Company received subpoenas from a Grand Jury in the
United States District Court for the Central District of California requesting
the production of documents covering a broad range of matters over various time
periods. The Company understood that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee, and a former
employee of the Company were targets of the investigation. The Company also
understood that a senior executive officer and a director were subjects of the
investigation. The United States Attorney for the Central District of California
(the "Office") advised counsel for the Company that the areas of its
investigation included disclosures made and not made concerning the 1994
Hepatitis C monotherapy 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 monotherapy 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 cooperated, and continues to cooperate, in the
Grand Jury investigation. A number of current and former officers and employees
of the Company were interviewed by the government in connection with the
investigation. The Office had issued subpoenas requiring various current and
former officers and employees of the Company to testify before the Grand Jury.
Certain current and former officers and employees testified before the Grand
Jury beginning in July 1998.
On March 15, 2001, the Company was notified by the Office that a decision
had been made to decline prosecution of all of the individual targets and
subjects of the Grand Jury investigation. At the same time, the Company was also
notified that the United States Attorney had authorized the Office to seek an
indictment of the Company based upon alleged false and misleading
misrepresentations concerning the 1994 hepatitis C monotherapy NDA. The Company
and the Office are engaged in discussions in an effort to determine whether the
matter can be settled by plea bargain, which could include a plea by the Company
to one felony count.
In connection with the Grand Jury investigation and SEC litigation, the
Company has recorded a reserve in the fourth quarter of 2000 of $9,250,000 to
cover the potential combined settlement liability and all other related costs.
The Company's estimate of the fourth quarter reserve was based upon the nature
and amounts noted during settlement discussions with the SEC and the Office. The
Company believes that additional loss in settling these matters, based upon
discussions to date, is not reasonably possible. There can, of course, be no
assurance that the Grand Jury investigation will be settled by plea agreement or
that the SEC litigation will be settled by mutual agreement or what the amount
of any settlement may ultimately be. In the event that a settlement of either
matter is not reached, the Company will vigorously defend any litigation.
On or about February 9, 1999, the Company commenced an action in the United
States District Court for the District of Columbia ("District Court") against
the Federal Republic of Yugoslavia ("FRY"), the Republic of Serbia ("ROS"), and
the State Health Fund of Serbia ("State Fund") seeking damages in the amount of
at least $500,000,000 and declaratory relief arising out of the FRY and ROS's
seizure of the Company's majority ownership interest in ICN Yugoslavia and the
failure of the ROS and 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 ("ICC") 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, in turn, counterclaimed against the
State Fund, and commenced an arbitration against the FRY and the ROS in the ICC
arising out of the seizure of ICN Yugoslavia and the failure to pay for goods
sold and delivered, seeking damages and other relief. The District Court stayed
the action (while retaining jurisdiction) so that issues of jurisdiction by and
among the parties could be resolved at the ICC. On February 23, 2001, the
Arbitration
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
panel issued decisions holding that: (i) the State Fund is a proper party to the
ICC arbitration; (ii) the issue of jurisdiction over the ROS in the ICC
arbitration will be joined to the merits of the case and decided in conjunction
therewith; and (iii) there is no jurisdiction over the FRY in the ICC
arbitration. The Company intends to prosecute vigorously its claims against the
FRY, the ROS, and the State Fund, 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 action filed earlier by the Company in the District Court.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation cannot be predicted with certainty,
and an unfavorable outcome could have a negative impact on the Company, at this
time in the opinion of management, the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity.
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 negative impact on the results of operations
and cash flows of 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 2000, 1999
and 1998.
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 and will be entitled, when serving as a
consultant, to participate in the Company's medical and dental plans. 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 eleven 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 or for the chairman five times salary and other benefits.
As of December 31, 2000, the Company's obligation, assuming a change in control
had occurred would be $26,330,000 for all employment contracts.
13. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company is a global, research-based pharmaceutical company that
develops, manufactures, distributes and sells pharmaceutical, research, and
diagnostic products. The Company is organized and operates in the
Pharmaceuticals group and the Biomedicals 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 2000, the principal markets for the Company's pharmaceutical products
were North America, Western Europe (including Poland, Hungary and the Czech
Republic), Russia and Latin America, which represented approximately 34%, 23%,
13% and 16%, respectively, of the Company's revenues for the year. Approximately
63%, 64%, and 76% of the Company's revenues for the years ended December 31,
2000, 1999 and 1998, respectively, were generated from operations outside the
United States. The Company's foreign
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Company is organized into business units on the basis of geographic
region. In applying SFAS 131, these business units have been aggregated into
seven reportable segments based on similar long-term economic characteristics.
The accounting policies of the segments are the same as those described in 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, 2000, 1999, and 1998 (in thousands):
REVENUES OPERATING INCOME (LOSS)
-------------------------------- ---------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- ---------
Pharmaceuticals
North America......... $275,687 $254,694 $182,778 $203,031 $172,391 $ 100,311
Western Europe........ 187,206 185,417 154,346 16,404 15,633 11,559
Latin America......... 127,485 100,325 85,351 41,951 34,859 26,791
Russia................ 106,271 91,648 163,691 (3,856) 9,005 9,340
Yugoslavia............ -- -- 141,740 -- -- (140,419)
Asia, Africa,
Australia.......... 45,133 54,131 48,649 (500) 13,682 10,062
-------- -------- -------- -------- -------- ---------
Total Pharmaceuticals... 741,782 686,215 776,555 257,030 245,570 17,644
Biomedicals............. 58,522 61,197 61,509 3,379 6,416 5,471
-------- -------- -------- -------- -------- ---------
Consolidated revenues
and segment operating
income................ $800,304 $747,412 $838,064 260,409 251,986 23,115
======== ======== ========
Corporate expenses...... 76,454 53,129 312,683
Interest income......... (12,542) (8,894) (13,057)
Interest expense........ 60,356 55,943 38,069
Translation and exchange
losses, net........... 6,587 11,823 80,501
-------- -------- ---------
Income (loss) before
income taxes, minority
interest and
extraordinary loss.... $129,554 $139,985 $(395,081)
======== ======== =========
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating income for 2000 and 1999 did not include any revenues or expenses
related to the Company's investment in ICN Yugoslavia. 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), Western 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.
DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES(1)
----------------------------- ------------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- --------
Pharmaceuticals
North America............... $16,657 $16,042 $13,609 $ 5,789 $ 8,088 $ 2,425
Western Europe.............. 19,602 15,603 10,993 10,763 10,111 22,082
Latin America............... 5,230 8,381 5,563 2,968 3,198 2,366
Russia...................... 4,845 4,544 104 7,028 12,636 41,803
Yugoslavia.................. -- -- 3,720 -- -- 22,472
Asia, Africa, Australia..... 4,699 5,398 5,488 172 103 13
------- ------- ------- ------- ------- --------
Total Pharmaceuticals......... 51,033 49,968 39,477 26,720 34,136 91,161
Biomedicals................... 5,530 7,302 4,669 2,366 2,379 3,019
Corporate..................... 7,977 8,232 6,950 20,244 9,124 16,101
------- ------- ------- ------- ------- --------
$64,540 $65,502 $51,096 $49,330 $45,639 $110,281
======= ======= ======= ======= ======= ========
---------------
(1) Includes noncash capital expenditures of $1,556 for 1999.
ASSETS
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Pharmaceuticals
North America........................................ $ 518,033 $ 516,231 $ 519,920
Western Europe....................................... 271,914 218,577 226,436
Latin America........................................ 127,031 100,118 66,486
Russia............................................... 169,032 174,838 154,424
Asia, Africa, Australia.............................. 82,206 98,402 79,274
---------- ---------- ----------
Total Pharmaceuticals.................................. 1,168,216 1,108,166 1,046,540
Biomedicals............................................ 61,938 67,692 76,671
Corporate.............................................. 246,918 296,403 233,185
---------- ---------- ----------
$1,477,072 $1,472,261 $1,356,396
========== ========== ==========
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic Data
REVENUES LONG-LIVED ASSETS
-------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
United States............ $292,213 $271,217 $199,234 $497,817 $500,981 $512,261
Canada................... 20,711 19,799 18,960 4,630 3,289 3,345
Western Europe........... 200,708 201,825 172,919 159,350 133,565 145,541
Latin America(1)......... 128,586 101,728 86,634 35,598 38,846 34,456
Russia................... 106,271 91,648 163,691 99,625 99,870 86,969
Yugoslavia............... -- -- 141,740 -- -- --
Asia, Africa,
Australia.............. 51,815 61,195 54,886 39,599 49,885 55,143
-------- -------- -------- -------- -------- --------
$800,304 $747,412 $838,064 $836,619 $826,436 $837,715
======== ======== ======== ======== ======== ========
---------------
(1) Latin American region is principally Mexico.
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. Long-lived assets principally consist of property, plant, and
equipment, acquired product rights, and goodwill.
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. As a result, the Company had and continues to
have no effective control over 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 reduced the carrying
value of the Company's investment in ICN Yugoslavia to its fair value, estimated
to be zero.
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents the Consolidated Statements of Income of the
Company, ICN Yugoslavia and the pro-forma results excluding ICN Yugoslavia for
the year 1998.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
----------------------------------------
EXCLUDING
CONSOLIDATED YUGOSLAVIA YUGOSLAVIA
------------ ---------- ----------
Net Revenues..................................... $ 838,064 $ 141,740 $696,324
Cost and expenses:
Cost of product sales.......................... 353,600 80,430 273,170
Selling, general and administrative............ 312,377 25,081 287,296
Research and development....................... 20,835 3,140 17,695
Eastern European charges....................... 440,820 408,798 32,022
---------- --------- --------
Total expenses.............................. 1,127,632 517,449 610,183
---------- --------- --------
Income (loss) from operations.................. (289,568) (375,709) 86,141
Translation and exchange losses, net............. 80,501 23,865 56,636
Interest expense (income), net................... 25,012 (630) 25,642
Provision (benefit) for income taxes............. 1,983 1,029 954
Minority interest................................ (44,990) (41,173) (3,817)
---------- --------- --------
Net income (loss).............................. $ (352,074) $(358,800) $ 6,726
========== ========= ========
Basic earnings (loss) per share................ $ (4.78) $ 0.09
========== ========
Diluted earnings (loss) per share.............. $ (4.78) $ 0.09
========== ========
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. During the
first quarter of 1998, the Company continued to make sales to the Yugoslavian
government and government-sponsored entities under similar fixed dollar terms in
order to reduce the Company's exposure to losses resulting from exchange rate
fluctuations. In the second quarter 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 the third quarter of 1998 ICN Yugoslavia recorded a charge for losses on
accounts receivable of $7,862,000 as a result of the Russian economic situation.
See Note 15.
15. ICN RUSSIA
The Company's Russian operations generated 13%, 12%, and 20% of the
Company's total revenues for the years 2000, 1999 and 1998, respectively.
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143
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While the Russian economy continues to show improvement since the financial
crisis that began in August 1998, the economy continues to experience
difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to
a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999 and 2000, the
ruble continued to fluctuate, there is continued volatility in the debt and
equity market, hyperinflation persists, confidence in the banking sector has yet
to be restored and there continues to be general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
Russia continue to evolve. Russia's return to economic stability is dependent to
a large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the Company's control.
At December 31, 2000, the ruble exchange rate was 28.2 rubles to $1 as
compared with the rate of 27.5 rubles to $1 and 20.7 rubles to $1 as of December
31, 1999 and 1998, respectively. As a result of the change in the ruble exchange
rate, the Company recorded translation and exchange losses of $3,525,000,
$6,738,000 and $53,848,000, related to its Russian operations during 2000, 1999
and 1998, respectively. As of December 31, 2000, ICN Russia had a net monetary
asset position of approximately $12,423,000, which is subject to foreign
exchange loss as further declines in the value of the ruble in relation to the
dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate
amount of any future translation and exchange loss the Company may incur cannot
presently be determined and such loss may have a negative impact on the
Company's results of operations. The Company's management continues to work to
manage its net monetary exposure. However, there can be no assurance that such
efforts will be successful.
The Company's collections on accounts receivable in Russia have been
adversely affected by the Russian economic situation. Prior to the August 1998
devaluation of the ruble, the Company had a favorable experience with the
collection of receivables from its customers in the region. Subsequently, the
Company has taken additional steps to ensure the creditworthiness of its
customers and the collectibility of accounts receivable by tightening its credit
policies in the region. These steps include a shortening of credit periods,
suspension of sales to customers with past-due balances and discounts for cash
sales.
The Company believes that the economic and political environment in Russia
has affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience liquidity
problems as monetary policy has limited the money supply, and Russian companies
often lack access to an effective banking system. As a result, many Russian
companies have limited ability to pay their debts, which has led to a number of
business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, thus increasing pressure on
the Company and other producers to limit price increases in hard currency terms.
These factors have affected, and may continue to affect, sales and gross margins
in the Company's Russian operations. As a result of the Russian economic
situation, the Company recorded a charge in 1998 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.
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 (the
"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 was obligated to purchase up to $42,000,000 in common
stock of the Company upon the achievement of certain regulatory milestones.
Under
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In addition, the
Company received a one-time payment of $16,500,000 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.
Schering-Plough has informed the Company that it believes royalties for the
fourth quarter should not include royalties of approximately $1,800,000 on
products distributed as part of an indigent patient marketing program. It also
informed the Company that amounts that had previously been paid under this
program, which they estimate to be approximately $11,900,000, should be returned
to Schering-Plough. In raising the dispute, Schering-Plough has not clearly
articulated a contractual basis for the nonpayment of royalties. Rather it has
based its arguments on primarily moral or humanitarian grounds, essentially
equitable arguments, indicating that they believe they should not have an
obligation to pay royalties on product given to indigent patients. The Company
has not been provided with appropriate information or documentation, and does
not agree with such adjustment as the Agreement articulates those programs for
which royalties would not be due. Should Schering-Plough successfully apply this
adjustment retroactively, it could have an impact on the Company's results of
operations. Further, if Schering-Plough were to apply the proposed adjustment to
future royalty payments, royalties could be reduced in approximately the same
proportion as the proposed historical adjustment.
In November 2000, the Company entered into an agreement to provide
Schering-Plough with certain rights to license various products the Company may
develop. Under the terms of the strategic agreement, Schering-Plough has the
option to exclusively license on a worldwide basis up to three compounds that
the Company may develop for the treatment of hepatitis C on terms specified in
the agreement. The option does not apply to Levovirin or Viramidine. The option
is exercisable as to a particular compound at any time prior to the start of
Phase II clinical studies for that compound. Once it exercises the option with
respect to a compound, Schering-Plough is required to take over all
developmental costs and responsibility for regulatory approval for that
compound.
Under the terms of the agreement, the Company also granted Schering-Plough
the right of first/last refusal to license compounds relating to the treatment
of infectious diseases (other than hepatitis C) or cancer or other oncology
indications as well as the right of first/last refusal with respect to Levovirin
and Viramidine (collectively, the "Refusal Rights"). Under the terms of the
Refusal Rights, if the Company intends to offer a license or other rights with
respect to any of these compounds to a third party, the Company is required to
notify Schering-Plough. At Schering-Plough's request, the Company is required to
negotiate in good faith with Schering-Plough on an exclusive basis the terms of
a mutually acceptable exclusive worldwide license or other form of agreement on
commercial terms to be mutually agreed upon. If the Company cannot reach an
agreement with Schering-Plough, the Company is permitted to negotiate a license
agreement or other arrangement with a third party. Prior to entering into any
final arrangement with the third party, the Company is required to offer
substantially similar terms to Schering-Plough, which terms Schering-Plough has
the right to match.
If Schering-Plough does not exercise its option or Refusal Rights as to a
particular compound, the Company may continue to develop that compound or
license that compound to other third parties. The agreement with Schering-Plough
will terminate the later of 12 years from the date of the agreement or the
termination of the 1995 license agreement with Schering-Plough. The agreement
was entered into as part of the resolution of claims asserted by Schering-Plough
against the Company, including claims regarding the Company's alleged improper
hiring of former Schering-Plough research and development personnel and claims
that the Company was not permitted to conduct hepatitis C research.
F-40
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ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February and December 1999, Schering-Plough purchased 1,141,498 and
900,000 shares of the Company's common stock for $27,000,000 and $15,000,000,
respectively, pursuant to the Stock Purchase Agreement entered into in
connection with the License Agreement.
17. SUPPLEMENTAL CASH FLOW DISCLOSURES
In 1998, the Company sold marketable securities and recognized other
non-cash gains of $1,993,000.
In 1999, the Company recorded an other non-cash charge of $1,000,000
related to the abandonment of unproductive assets.
The following table sets forth the amounts of interest and income taxes
paid during 2000, 1999 and 1998 (in thousands):
2000 1999 1998
------- ------- -------
Interest paid (net of amounts capitalized of $-0-,
$-0-, and $3,540 in 2000, 1999, and 1998,
respectively)....................................... $57,514 $52,165 $34,240
======= ======= =======
Income taxes paid..................................... $20,299 $21,049 $15,207
======= ======= =======
F-41
146
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Available Information................. i
Incorporation of Documents by
Reference........................... ii
Summary............................... 1
The Company........................... 1
Offering of the Old Notes............. 5
The Exchange Offer.................... 5
The New Notes......................... 8
Risk Factors.......................... 12
Use of Proceeds....................... 26
Capitalization........................ 27
Selected Financial Data............... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
The Exchange Offer.................... 47
Business.............................. 54
Management............................ 70
Description of the New Notes.......... 73
Book Entry; Delivery and Form......... 92
U.S. Federal Income Tax
Consequences........................ 94
Plan of Distribution.................. 98
Legal Matters......................... 98
Independent Accountants............... 98
Index to Financial Statements......... F-1
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$194,611,000
[ICN LOGO]
ICN PHARMACEUTICALS, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
8 3/4% SENIOR NOTES DUE 2008
FOR
8 3/4% SERIES B SENIOR NOTES DUE 2008
------------------------
PROSPECTUS
------------------------
, 2001
------------------------------------------------------
------------------------------------------------------
147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation, and with respect to any criminal action or proceeding, had no
cause to believe his or her conduct was unlawful. In the case of an action by or
in the right of the corporation, no indemnification may be made in respect to
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or matter therein, he or
she shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection therewith. However, if the
director or officer is not successful in the defense of any action, suit or
proceeding as referred to above or in the defense of any claim, issue or matter
therein, he shall only be indemnified by the corporation as authorized in the
specific case upon a determination that indemnification is proper because he or
she met the applicable standard set forth above as determined by a majority of
the disinterested Board of Directors or by the stockholders.
The Registrant's bylaws provide indemnification to its officers and
directors against liability they may incur in their capacity as such, which
indemnification is similar to that provided by Section 145, unless a
determination is reasonably and promptly made by a majority of the disinterested
Board of Directors that the indemnitee acted in bad faith and in a manner that
the indemnitee did not believe to be in or not opposed to the best interests of
the Registrant, or, with respect to any criminal proceeding, that the indemnitee
believed or had reasonable cause to believe that his or her conduct was
unlawful.
The Registrant carries directors' and officers' liability insurance,
covering losses up to $10,000,000 (subject to a $250,000 deductible). The
Registrant, as a matter of policy, enters into indemnification agreements with
its directors and officers indemnifying them against liability they may incur in
their capacity as such. The indemnification agreements require no specific
standard of conduct for indemnification and make no distinction between civil
and criminal proceedings, except in proceedings where the dishonesty of an
indemnitee is alleged. Such indemnification is not available if an indemnitee is
adjudicated to have acted in a deliberately dishonest manner with actual
dishonest purpose and intent where such acts were material to the adjudicated
proceeding. Additionally, the indemnity agreements do not provide
indemnification for any claim against an indemnitee where the claim is based
upon the indemnitee obtaining personal advantage or profit to which he or she
was not legally entitled, the claim is for an accounting of profits made in
connection with a violation of Section 16(b) of the Securities Exchange Act of
1934, or similar state law provision, or the claim was brought about or
contributed to by the dishonesty of the indemnitee.
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to include in its certificate of incorporation a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of a director (i) for any breach of the directors' duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which
II-1
148
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law (relating to unlawful
payment of dividend and unlawful stock purchase and redemption), or (iv) for any
transaction from which the director derived an improper personal benefit. The
Registrant has provided in its certificate of incorporation, as amended, that
its directors shall be exculpated from liability as provided under Section
102(b)(7).
The foregoing summaries are necessarily subject to the complete text of the
Delaware General Corporation Law, the Registrant's Certificate of Incorporation
and the agreements referred to above and are qualified in their entirety by
reference thereto.
ITEM 21. EXHIBITS
A list of exhibits included as a part of this Registration Statement is set
forth in the Exhibit Index which immediately precedes such exhibits and is
hereby incorporated by reference herein.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) To file, during any period in which officers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
in Item 15, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against
II-2
149
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(f) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(g) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-3
150
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Costa Mesa, State of California, on the 24th day of
August 2001.
ICN PHARMACEUTICALS, INC.
By: /s/ MILAN PANIC
------------------------------------
Milan Panic,
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Milan Panic and Gregory Keever, and each of them,
each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for such person and in his name, place and stead, in any and all
capacities, to sign any or all further amendments or supplements (including
post-effective amendments filed pursuant to Rule 462(b) of the Securities Act of
1933) to this Form S-4 Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each of said attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully as
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MILAN PANIC Chairman of the Board and August 21, 2001
--------------------------------------------------- Chief Executive Officer
Milan Panic
/s/ RICHARD A. MEIER Executive Vice President and August 21, 2001
--------------------------------------------------- Chief Financial Officer
Richard A. Meier (principal financial officer
and principal accounting
officer)
/s/ NORMAN BARKER, JR. Director August 21, 2001
---------------------------------------------------
Norman Barker, Jr.
/s/ SENATOR BIRCH E. BAYH Director August 21, 2001
---------------------------------------------------
Senator Birch E. Bayh
/s/ EDWARD A. BURKHARDT Director August 21, 2001
---------------------------------------------------
Edward A. Burkhardt
II-4
151
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALAN F. CHARLES Director August 21, 2001
---------------------------------------------------
Alan F. Charles
/s/ RONALD R. FOGLEMAN Director August 21, 2001
---------------------------------------------------
Ronald R. Fogleman
/s/ ROGER GUILLEMIN, M.D., PH.D. Director August 21, 2001
---------------------------------------------------
Roger Guillemin, M.D., Ph.D.
/s/ ADAM JERNEY Director August 21, 2001
---------------------------------------------------
Adam Jerney
/s/ JEAN-FRANCOIS KURZ Director August 21, 2001
---------------------------------------------------
Jean-Francois Kurz
/s/ STEVEN J. LEE Director August 21, 2001
---------------------------------------------------
Steven J. Lee
/s/ STEPHEN D. MOSES Director August 21, 2001
---------------------------------------------------
Stephen D. Moses
/s/ ROSEMARY TOMICH Director August 21, 2001
---------------------------------------------------
Rosemary Tomich
II-5
152
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* Restated Certificate of Incorporation of Registrant
previously filed as Exhibit 3.1 to Registration Statement
No. 33-84534 on Form S-4, which is incorporated herein by
reference, as amended by the Certificate of Merger, dated
November 10, 1994, of ICN Pharmaceuticals, Inc., SPI
Pharmaceuticals, Inc. and Viratek, Inc. with and into ICN
Merger Corp. previously filed as Exhibit 4.1 to Registration
Statement No. 333-08179 on Form S-3, which is incorporated
herein by reference.
3.2* Amended and Restated By-Laws of the Registrant previously
filed as Exhibit 3.3 to ICN Pharmaceutical, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2000, as
amended by Form 10-K/A, which is incorporated herein by
reference.
4.1* Indenture, dated as of August 20, 1998, by and among ICN and
United States Trust Company of New York, as trustee,
relating to the 8 3/4% Notes Senior Notes due 2008.
4.2* Registration Rights Agreement, dated as of August 20, 1998,
by and among ICN, Schroder & Co. Inc. and Warburg Dillon
Read LLC.
4.3* Form of 8 3/4% Senior Note due 2008 of ICN (the "Initial
Note") (included as Exhibit A to the Indenture filed as
Exhibit 4.1).
4.4* Form of 8 3/4% Senior Note due 2008 of ICN (the "Exchange
Note") (included as Exhibit B to the Indenture filed as
Exhibit 4.1).
5.1** Opinion of Proskauer Rose LLP, regarding the legality of the
Exchange Notes.
5.2* Form of tax opinion of Proskauer Rose LLP.
10.1* 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.
10.2* 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.
10.3* Application for Registration, Foundation Agreement, Joint
Venture -- ICN Oktyabr previously filed as Exhibit 10.46 to
ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1992, which is incorporated
herein by reference.
10.4* Charter of the Joint Stock Company -- ICN Oktyabr previously
filed as Exhibit 10.47 to ICN Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992,
which is incorporated herein by reference.
10.5* Agreement between ICN Pharmaceuticals, Inc. and Milan Panic,
dated October 1, 1998, previously filed as Exhibit 10.51 to
ICN Pharmaceuticals, Inc.'s Annual Report on Form 10-K for
the year ended November 30, 1989, which is incorporated
herein by reference.
10.6* Amendment to Employment Contract between ICN
Pharmaceuticals, Inc. and Milan Panic, dated September 6,
1995, previously filed as Exhibit 10.29 to ICN
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1995, which is incorporated herein
by reference.
10.7* Amendment to Employment Contract between ICN
Pharmaceuticals, Inc. and Milan Panic, dated January 1,
1999, previously filed as Exhibit 10.8 to ICN
Pharmaceutical, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2000, as amended by Form 10-K/A,
which is incorporated herein by reference.
153
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.8* 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.
10.9* 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.
10.10* 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.
10.11* 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.
10.12* Agreement between ICN Pharmaceuticals, Inc. and Benjamin Lap
dated April 1, 1999, previously filed as Exhibit 10.14 for
the Registrant's Form 10-K for the year ended December 31,
1999, which is incorporated herein by reference.
10.13* 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.
10.14* Agreement among ICN Pharmaceuticals, Inc. and Richard A.
Meier, dated December 31, 1998, previously filed as Exhibit
10.16 to the Registrant's Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference.
10.15* 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.
10.16* 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.
10.17* 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.
10.18* ICN Pharmaceuticals, Inc. 1998 Stock Option Plan, previously
filed as Exhibit 10.20 to the Registrant's Form 10-K for the
year ended December 31, 1998, which is incorporated herein
by reference.
10.19* 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.
10.20* 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.
10.21* 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.
154
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.22* 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.
10.23* 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.
10.24* 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.
10.25* Asset Purchase Agreement dated October 2, 1998, by and
between F. Hoffman-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.
10.26* 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.
10.27* Amendment to Exclusive License and Supply Agreement between
ICN Pharmaceuticals, Inc. and Schering-Plough Ltd.,
previously filed as Exhibit 10.32 to ICN Pharmaceutical,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference. Portions of this exhibit
have been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended.
10.28* Amendment to Exclusive License and Supply Agreement between
ICN Pharmaceuticals, Inc. and Schering-Plough Ltd., dated
July 16, 1998, previously filed as Exhibit 10.33 to ICN
Pharmaceutical, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2000, as amended by Form 10-K/A,
which is incorporated herein by reference. Portions of this
exhibit have been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended.
10.29* Agreement among Schering Corporation, ICN Pharmaceuticals,
Inc. and Ribapharm Inc. dated as of November 14, 2000,
previously filed as Exhibit 10.34 to ICN Pharmaceutical,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A, which is
incorporated herein by reference. Portions of this exhibit
have been omitted pursuant to an application for
confidential treatment pursuant to Rule 406 under the
Securities Act of 1933, as amended.
10.30* Amendment to the Employment Agreement between ICN
Pharmaceuticals, Inc. and Richard A. Meier dated April 14,
2000, previously filed as Exhibit 10.35 to ICN
Pharmaceutical, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2000, as amended by Form 10-K/A,
which is incorporated herein by reference.
10.31* Agreement between ICN Pharmaceuticals, Inc. and Johnson
Yiu-Nam Lau, dated February 24, 2000, previously filed as
Exhibit 10.36 to ICN Pharmaceutical, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2000, as amended
by Form 10-K/A, which is incorporated herein by reference.
10.32* Agreement between ICN Pharmaceuticals, Inc. and James McCoy,
dated July 14, 2000, previously filed as Exhibit 10.37 to
ICN Pharmaceutical, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2000, as amended by Form 10-K/A,
which is incorporated herein by reference.
155
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33* Agreement between ICN Pharmaceuticals, Inc. and Harry
Roosje, dated September 15, 2000, previously filed as
Exhibit 10.38 to ICN Pharmaceutical, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2000, as amended
by Form 10-K/A, which is incorporated herein by reference.
10.34* Agreement between ICN Pharmaceuticals, Inc. and Clifford
Saffron, dated January 18, 2001, previously filed as Exhibit
10.39 to ICN Pharmaceutical, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2000, as amended by
Form 10-K/A which is incorporated herein by reference.
10.35 Indenture, dated as of July 18, 2001, by and among ICN
Pharmaceuticals, Inc., Ribapharm Inc. and The Bank of New
York, as trustee, relating to the 6 1/2% Convertible
Subordinated Notes due 2008, previously filed as Exhibit 4.2
to Registration Statement No. 333-67376 on Form S-3 dated
August 13, 2001, which is incorporated herein by reference.
10.36 Registration Rights Agreement, dated as of July 18, 2001 by
and among ICN Pharmaceuticals, Inc., Ribapharm Inc. and UBS
Warburg LLC, previously filed as Exhibit 4.3 to Registration
Statement No. 333-67376 on Form S-3 dated August 13, 2001,
which is incorporated herein by reference.
12.1** Statement re computation of ratios
15.1** Awareness letter of PricewaterhouseCoopers LLP regarding
Unaudited Interim Financial Information
21.1* Subsidiaries of the Registrant
23.1** Consent of PricewaterhouseCoopers LLP
23.2* Consent of Proskauer Rose LLP (contained in opinion filed as
Exhibit 5.1)
23.3* Form of Consent of Proskauer Rose LLP (contained in the tax
opinion filed as Exhibit 5.2)
24.1** Power of Attorney (see page II-4)
25.1* Statement of eligibility of trustee
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
---------------
* Previously filed.
** Previously filed and filed herewith in revised form.