Exhibit 13
IVAX CORPORATION
2000
FINANCIAL INFORMATION
TABLE OF CONTENTS
Selected Financial Data 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 3
Report of Independent Certified Public Accountants 15
2000 Consolidated Financial Statements 16
1
SELECTED FINANCIAL DATA
Year Ended December 31,
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2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
OPERATING DATA
Net revenues (1) $ 793,405 $ 656,482 $ 625,727 $ 594,286 $ 658,745
Gross profit (1) 383,502 278,515 219,736 114,304 161,969
Selling (1) 92,032 71,131 71,152 100,220 98,770
General & administrative 84,900 85,092 88,434 116,185 111,122
Research and development (1) 65,331 53,403 47,886 53,409 51,729
Amortization 9,042 3,121 3,673 3,760 4,594
Restructuring & asset write-downs (4,535) (612) 12,222 38,088 69,073
Merger expenses -- -- -- 2,343 557
----------- ----------- ----------- ----------- -----------
Operating income (loss) 136,732 66,380 (3,631) (199,701) (173,876)
Interest income 13,986 6,142 11,972 5,738 1,126
Interest expense (14,624) (5,556) (6,857) (14,685) (15,996)
Other income 17,497 19,513 32,777 53,366 6,623
Income taxes (benefit) 13,214 14,850 10,047 60,166 (52,488)
Minority interest (608) (2,085) 403 (4,086) (5,354)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations 139,769 69,544 24,617 (219,534) (134,989)
Income (loss) from discontinued operations -- 585 48,904 (8,701) (23,690)
Net income (loss) 131,044 70,722 71,594 (233,254) (160,752)
Basic earnings (loss) per common share:
Continuing operations 0.89 0.43 0.14 (1.21) (0.76)
Discontinued operations -- -- 0.27 (0.05) (0.13)
Net earnings (loss) 0.83 0.44 0.40 (1.28) (0.89)
Diluted earnings (loss) per common share:
Continuing operations 0.86 0.42 0.14 (1.21) (0.76)
Discontinued operations -- -- 0.27 (0.05) (0.13)
Net earnings (loss) 0.80 0.43 0.40 (1.28) (0.89)
Weighted average number of
common shares outstanding:
Basic 157,021 161,508 178,674 182,243 181,424
Diluted 163,247 164,401 178,897 182,243 181,424
Cash dividends per common share $ -- $ -- $ -- $ -- $ 0.05
BALANCE SHEET DATA
Working capital (2) $ 438,490 $ 124,373 $ 269,511 $ 238,918 $ 415,927
Total assets 1,068,186 634,514 778,015 790,736 1,333,648
Total long-term debt, net of current portion 253,755 93,473 77,776 94,193 442,819
Shareholders' equity 484,120 292,371 453,208 435,039 695,128
OTHER INFORMATION
Ratio of Earnings to Fixed Charges 11.1 15.3 5.9 (9.7) (10.5)
(1) Figures for 1999 and 1998 have been reclassified to conform to current
classifications.
(2) Excludes net assets of discontinued operations.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the 2000 Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements on pages 22 to 47 of this Financial
Information Section. Certain prior period amounts presented herein have been
reclassified to conform to the current period's presentation.
Results of Operations
Year ended December 31, 2000 compared to the year ended December 31, 1999
Net income for the year ended December 31, 2000, was $131.0 million, or
$.80 per diluted share, compared to $70.7 million, or $.43 per diluted share,
for the prior year. Income from continuing operations was $139.8 million, or
$.86 per diluted share, for the year ended December 31, 2000 compared to $69.5
million, or $.42 per diluted share, for the prior year. During 2000, IVAX
recorded a cumulative change in accounting principle charge in the amount of
$6.5 million, or $.04 per diluted share, as a result of SAB No. 101, related to
up-front receipts previously recognized in income during 1998 and 1999. The
years ended December 31, 2000 included $2.3 million, or $.02 per diluted share,
extraordinary loss and 1999 included $.6 million, or $.01 per diluted share, net
extraordinary gain relating to the extinguishment of debt (See Note 9, Debt, in
the Notes to Consolidated Financial Statements).
Net Revenues and Gross Profit
Net revenues for the year ended December 31, 2000, totaled $793.4
million, an increase of $136.9 million, or 21%, from the $656.5 million reported
in the prior year. This increase was comprised of increases of $66.6 million,
$57.0 million and $30.5 million in net revenues from North American, European,
and Latin American subsidiaries, respectively, offset by a decrease of $17.2
million from other operations.
North American subsidiaries net revenues totaled $341.2 million for the
year ended December 31, 2000, compared to $274.6 million in 1999. The 24%
increase was primarily attributable to increased sales volume partially offset
by higher sales returns and allowances and lower sales prices of certain generic
pharmaceutical products.
North American subsidiaries recorded provisions for sales returns and
allowances that reduced gross sales by $182.8 million and $90.8 million in 2000
and 1999, respectively. The increase of $92 million, or 101%, was primarily due
to reduced prices on certain generic pharmaceuticals and increase in sales
volume.
European subsidiaries generated net revenues of $379.6 million for the
year ended December 31, 2000, compared to $322.6 million for 1999. The 18%
increase was primarily due to increased product development fees and higher
sales volumes of respiratory products partially offset by unfavorable effects of
currency exchange rates and lower prices for certain generic products. European
subsidiaries recorded provisions for sales returns and allowances that reduced
gross sales by $27.5 million and $26.2 million in 2000 and 1999, respectively.
Gross profit for the year ended December 31, 2000, increased $105.0
million, or 38%, to $383.5 million (48% of net revenues) from $278.5 million
(42% of net revenues) for the year ended December 31, 1999. The increase in the
gross profit percentage was primarily attributable to increased other
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revenue, higher margin sales from the acquisitions of Laboratorios Elmor S.A.
("Elmor") in Venezuela and Wakefield Pharmaceuticals, Inc. ("Wakefield") and
product mix.
Operating Expenses
Selling expenses increased $20.9 million, or 29%, to $92.0 million in
2000 (12% of net revenues) from $71.1 million (11% of net revenues) in 1999. The
increase was due to higher expense from the operations of Elmor and Wakefield,
increased sales force in North American and increased sales force and
promotional expenses at the European subsidiaries.
General and administrative expenses totaled $84.9 million (11% of net
revenues) in 2000, a decrease of $.2 million, or .1%, from $85.1 million (13% of
net revenues) in 1999. The decrease was comprised of a decrease in legal
expenses, favorable resolution of certain litigation at North American
subsidiaries, lower costs at the Far East subsidiaries, partially offset by $2.0
million additional general and administrative expenses from the operations of
Elmor and Wakefield.
Research and development expenses totaled $65.3 million (8% of net
revenues) in 2000 compared to $53.4 million (8% of net revenues) in 1999, an
increase of $11.9 million, or 22%. The increase in research and development
expenses was due to increased personnel at the North American and European
subsidiaries and biostudies associated with the development of generic
pharmaceuticals at North American and European subsidiaries. The future level of
research and development expenditures will depend on, among other things, the
outcome of clinical testing of products under development, delays or changes in
government required testing and approval procedures, technological and
competitive developments, strategic marketing decisions and liquidity.
During 2000 and 1999, IVAX reversed restructuring costs of $4.5 million
and $.6 million, respectively. During 1998, IVAX decided to cease manufacturing
at its Northvale, New Jersey plant for an estimated annual pre-tax cost savings
of $3.4 million. In the second quarter of 2000, as a result of a change in
strategy to keep the Northvale, New Jersey pharmaceutical facility operating as
back-up capacity in the event of hurricane damage at the Puerto Rico facility,
the related restructuring reserves were reversed. Also during 2000, IVAX was
released from certain non-cancelable operating leases associated with its United
Kingdom restructuring and determined that reserves previously established for
certain severance payments were determined to be unnecessary resulting in $1.4
million of the reversal of restructuring reserves. The credit recorded in 1999
was primarily due to the reversal of a previously recorded reserve for a note
receivable and 15% interest in a partnership received as consideration for the
1998 sale of a Ft. Lauderdale, Florida facility. Due to the uncertainty of
collectibility, these assets were fully reserved in 1998. In 1999, the note was
collected in full, the partnership interest was sold and the reserve against the
assets was reversed.
Other Income (Expense)
Interest income increased $7.8 million due to higher levels of cash on
hand primarily due to proceeds from the debt offering discussed below.
Interest expense increased $9.1 million primarily due to the issuance
of $250 million of 5 1/2% Convertible Senior Subordinated Notes partially offset
by the conversion of IVAX' 6 1/2% Convertible Subordinated Notes to common stock
and cash in 2000 and the payoff of the related-party Frost Nevada Limited
Partnership ("FNLP") note during 2000. Prior to the payoff, $2.1 million of the
warrant issued to FNLP in 1999 had been amortized to interest expense. In
addition, in connection with the payoff of the FNLP loan, the remaining value of
the warrant issued was recorded as an extraordinary loss on extinguishment of
debt in the amount of $2.3 million.
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Other income, net, totaled $17.5 million in 2000, compared to $19.5
million in 1999, a decrease of $2.0 million, or 10%. Royalty and milestone
payments from the 1997 sale of rights to Elmiron(R) and certain other urology
products in the United States and Canada to ALZA Corporation ("ALZA") amounted
to $7.2 million and $13.0 million in 2000 and 1999, respectively, and are
included in other income as additional gain on the sale of product rights.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Net income for the year ended December 31, 1999, was $70.7 million, or
$.43 per diluted share, compared to $71.6 million, or $.40 per diluted share,
for the prior year. Income from continuing operations was $69.5 million, or $.42
per diluted share, for the year ended December 31, 1999 compared to $24.6
million, or $.14 per diluted share, for the prior year. The years ended December
31, 1999 and 1998 included $.6 million and $1.1 million, or $.01 per diluted
share, net extraordinary gains relating to the extinguishment of debt (See Note
9, Debt, in the Notes to Consolidated Financial Statements). Results for the
year ended December 31, 1998 included a $48.9 million, or $.27 per diluted
share, gain from discontinued operations (See Note 7, Discontinued Operations,
in the Notes to Consolidated Financial Statements) and a $3.0 million, or $.02
per diluted share, charge resulting from the write-off of start-up costs
previously capitalized, reflected as a cumulative effect of a change in
accounting principle (See Note 2, Summary of Significant Accounting Policies -
Change in Accounting Principle, in the Notes to Consolidated Financial
Statements).
Net Revenues and Gross Profit
Net revenues for the year ended December 31, 1999, totaled $656.5
million, an increase of $30.8 million, or 5%, from the $625.7 million reported
in the prior year. This increase was comprised of an increase of $15.6 million
in net revenues from North American operations, an increase of $14.2 million in
net revenues from European operations and an increase of $1.0 million from Latin
American and other operations.
North American operations net revenues totaled $274.6 million for the
year ended December 31, 1999, compared to $259.0 million in 1998. The $15.6
million, or 6%, increase was primarily attributable to increased sales volume
and lower sales returns and allowances offset by lower sales prices of certain
generic pharmaceutical products. Net revenues included $19.4 million and $18.0
million in 1999 and 1998, respectively, from the settlement of litigation with
Abbott Laboratories ("Abbott") concerning patents for terazosin hydrochloride,
the generic equivalent of Abbott's Hytrin(R). Under the settlement, Abbott
agreed to pay IVAX $6.0 million per quarter until the earlier of February 2000
or the market introduction of a generic version of terazosin hydrochloride by
anyone other than IVAX. During the third quarter of 1999, a generic version of
terazosin hydrochloride was introduced into the market by a competitor reducing
quarterly payments that IVAX receives under the settlement from $6.0 million to
$3.0 million.
North American operations recorded provisions for sales returns and
allowances that reduced gross sales by $90.8 million and $112.8 million in 1999
and 1998, respectively. The decrease of $22 million, or 20%, was primarily due
to lower shelf-stock adjustments, promotions and returns in 1999 than 1998 due
to a combination of lower customer inventory levels and reduced price
discounting as a result of improved price stability of generic pharmaceuticals.
European operations generated net revenues of $322.6 million for the
year ended December 31, 1999, compared to $308.5 million for 1998. The $14.2
million, or 5%, increase was primarily due to increased net sales in the United
Kingdom partially offset by decreases in Eastern Europe. The increase
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resulted from higher sales volume. The decrease in Eastern Europe was due to
decreased volume and the effect of foreign exchange rate differences. European
operations recorded provisions for sales returns and allowances that reduced
gross sales by $26.2 million and $14.2 million in 1999 and 1998, respectively.
The increase of $12 million, or 85%, was primarily due to increased provision
for promotional allowances due to competitive generic market conditions within
the United Kingdom.
In November 1999, IVAX entered into a three-year product collaboration
and development services agreement with Bristol-Myers Squibb Company ("BMS") in
the areas of inhalation technology and oncology. With respect to inhalation
technology, the agreement calls for IVAX and BMS to collaborate to develop one
or more of BMS' proprietary molecules using IVAX' patented devices, which BMS
would purchase from IVAX. BMS would retain the worldwide rights to market
respiratory products containing its compounds. On the oncology side, BMS'
Taxol(R) (paclitaxel) is the leading anti-cancer drug in the world, with 1999
sales estimated to reach approximately $1.5 billion. However, Taxol is an
injectable product and is not orally available. As part of the agreement, BMS
has been granted an option to negotiate, for six months, a license to IVAX'
patented system for making paclitaxel orally available.
Gross profit for the year ended December 31, 1999 increased $58.8
million, or 27%, to $278.5 million (42% of net revenues) from $219.7 million
(35% of net revenues) for the year ended December 31, 1998. The increase in the
gross profit percentage was primarily attributable to product mix, lower cost of
sales due to reduced raw material costs, lower operating costs due to plant
consolidation, lower sales returns and allowances, and increased other revenue.
Operating Expenses
Selling expenses totaled $71.1 million, (11% of net revenues), in 1999
and in 1998.
General and administrative expenses totaled $85.1 million (13% of net
revenues) in 1999, a decrease of $3.3 million, or 4%, from $88.4 million (14% of
net revenues) in 1998. The decrease was primarily attributable to lower
executive severance payments at corporate headquarters and $3.2 million received
in settlement of a patent infringement lawsuit offset by higher legal fees at
North American operations, higher bad debt provisions at Asian operations and
increased accruals for incentive compensation.
Research and development expenses totaled $53.4 million (8% of net
revenues) in 1999 compared to $47.9 million (8% of net revenues) in 1998, an
increase of $5.5 million, or 11%. The increase in research and development
expenses in 1999 over 1998 was due to biostudies associated with the development
of generic pharmaceuticals at IVAX' North American operations and the initiation
of clinical trials in the United Kingdom. The future level of research and
development expenditures will depend on, among other things, the outcome of
clinical testing of products under development, delays or changes in government
required testing and approval procedures, technological and competitive
developments, strategic marketing decisions and liquidity.
During 1999 and 1998, IVAX recorded restructuring costs and asset
write-downs of ($.6) million and $12.2 million, respectively. The credit
recorded in 1999 was primarily due to the reversal of a previously recorded
reserve for a note receivable and 15% interest in a partnership received as
consideration for the 1998 sale of a Ft. Lauderdale, Florida facility. Due to
the uncertainty of collectibility, these assets were fully reserved in 1998. In
1999 the note was collected in full, the partnership interest was sold and the
reserve against the assets was reversed.
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During 1998, IVAX initiated restructuring programs at its United
Kingdom pharmaceutical operations. It was anticipated that these programs would
result in approximately $12.0 million in annual pre-tax cost savings. The
anticipated cost savings were substantially achieved in 1999. Also during 1998,
IVAX decided to cease manufacturing at its Northvale, New Jersey plant for an
estimated annual pre-tax cost savings of $3.4 million. However, the estimated
cost savings were not fully achieved in 1999 primarily because of delays in the
transfer of products from Northvale to its manufacturing plant in Cidra, Puerto
Rico.
Other Income (Expense)
Interest income decreased $5.8 million, or 48%, to $6.1 million in 1999
from $12.0 million in 1998 due to lower levels of cash on hand primarily due to
the repurchase of common stock outstanding.
Interest expense decreased $1.3 million, or 19%, to $5.6 million in
1999 from $6.9 million in 1998 primarily due to the retirement of IVAX' 6 1/2%
Convertible Subordinated Notes in the amount of $31.4 million during 1999.
Other income, net, totaled $19.5 million in 1999, compared to $32.8
million in 1998, a decrease of $13.3 million or 40%. Royalty and milestone
payments from the 1997 sale of rights to Elmiron(R) and certain other urology
products in the United States and Canada to ALZA amounted to $13.0 million and
$12.4 million in 1999 and 1998, respectively, and are included in other income
as additional gain on the sale of product rights. During 1998, IVAX reversed
$15.0 million of previously recorded reserves related to a 1997 research and
development cost sharing arrangement with ALZA that was terminated in July,
1998. The reserve was established for IVAX' obligations under the cost sharing
arrangement that resulted from IVAX' 1997 sale of product rights to Elmiron(R)
and three other urology products in the United States and Canada to ALZA. The
reserve reversal reflects an adjustment to increase a previously recognized gain
on the sale of the product rights.
Recently Issued Accounting Standards
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, was adopted for up-front licensing fees and milestone payments
during the fourth quarter of 2000 resulting in a cumulative change in accounting
principle charge of $6.5 million, net of tax, or $.04 per share, recorded
retroactively in the first quarter of 2000. The offsetting impact was recorded
in deferred revenue that will be recognized in income through 2011. IVAX
amortized $1.7 million of this deferred revenue to income during 2000.
Emerging Issues Task Force ("EITF") Issue No. 00-10, Accounting for
Shipping and Handling Fees and Costs, was adopted in the fourth quarter of 2000.
Prior quarters' and years' shipping and handling fees were reclassified to
revenue and shipping and handling costs were reclassified to cost of sales to
conform to current classification resulting in approximately 1% decrease in
gross profit margins from those previously reported.
EITF Issue No. 00-14, Accounting for Certain Sales Incentives,
addresses the recognition, measurement and income statement classification for
sales incentives offered voluntarily by a vendor, without charge to the customer
in a single exchange transaction at the point of sale. In addition to providing
guidance on when to recognize and how to measure the cost of sales incentives,
it requires that incentives in the form of a reduction in or refund of selling
prices of a product or service be classified as a reduction of revenue and
incentives in the form of free products or services delivered at the time of
sale should be classified as an expense. The effective date of its consensus is
the later of fiscal quarters
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beginning after March 15, 2001 or fiscal years beginning after December 15,
1999. IVAX elected to adopt EITF Issue No. 00-14 in the fourth quarter of 2000.
Effective January 1, 2001, IVAX adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income ("OCI") and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash flow
hedges are recognized in earnings.
Certain forecasted transactions are exposed to foreign currency risk.
The principal currency hedged is the Irish punt against the British pound.
Forward options used to hedge a portion of forecasted international expenses for
up to one year in the future are designated as cash flow hedging instruments.
The adoption of SFAS 133 resulted in a pre-tax increase to OCI of $1.8 million.
The increase to OCI is mostly attributable to gains on cash flow hedges. The net
derivative gains included in OCI as of January 1, 2001, will be reclassified
into earnings during the twelve months ended December 31, 2001.
EITF Issue No. 00-19, Determination of Whether Share Settlement is
within the Control of the Issuer for Purposes of Applying Issue No. 96-13, and
EITF Issue No. 00-7, Application of Issue No. 96-13 to Equity Derivative
Instruments that Contain Certain Provisions that Require Net Cash Settlement if
Certain Events Outside the Control of the Issuer Occur, address the
classification and accounting treatment of equity derivative contracts (such as
IVAX' put options) as equity instruments (either temporary or permanent) or
assets and liabilities. They are effective prospectively for contracts entered
into after September 20, 2000 as of June 30, 2001. Management believes that
adoption will not have a significant effect on the Company's financial position
or results of operations.
Liquidity and Capital Resources
At December 31, 2000, working capital was $438.5 million compared to
$124.4 million and $269.5 million at December 31, 1999 and 1998, respectively.
Cash and cash equivalents were $251.5 million at December 31, 2000, compared to
$41.4 million and $208.6 million at December 31, 1999 and 1998, respectively.
Net cash provided by operations during 2000 was $80.5 million compared
to $64.1 million and $60.7 million in 1999 and 1998, respectively. The increase
in cash provided by operating activities during 2000 compared to 1999 was due to
the $60.3 million increase in net income offset by larger accounts receivable
and inventory balances at December 31, 2000. The increase in cash provided by
operating activities during 1999 compared to 1998 was primarily due to the
decrease in income from discontinued operations offset by an increase in the
inventory balance at December 31, 1999.
Net cash of $59.5 million was used for investing activities during 2000
compared to $38.9 million in 1999 and $38.6 million provided by investing
activities in 1998. The increase in cash used by investing activities in 2000
compared to 1999 was due to the payment of $10.9 million for additional shares
of Galena a.s., increasing IVAX' ownership of this Czech Republic subsidiary
from 86% to 98%, as well as increased capital expenditures and reduced cash
proceeds from the sale of product rights. The increase in cash used by investing
activity in 1999 compared to 1998 is attributable to the payments of $5 million
for the acquisition of additional common stock of Galena. The 1998 cash
generated by investing
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activities was attributable to the sale of IVAX' personal care products business
for net proceeds of $84.7 million, two manufacturing facilities for $13.3
million, an office, packaging and warehousing facility for $5.8 million and
$12.4 million from the sale of product rights. Offsetting these impacts were
reductions of $21.9 million for capital expenditures and $16.6 million for
acquisition of patents, trademarks, licenses and other intangibles in 1999.
At the 1998 sale of the personal care products business, IVAX received
$35.0 million in cash and a $50 million secured note due November 30, 1998. In
August 1998, the $50 million note was sold without recourse for $48.5 million.
During the second quarter of 1998, IVAX sold its Kirkland, Quebec,
Canada pharmaceutical manufacturing facility (acquired in the first quarter of
1997) and its Syosset, New York pharmaceutical manufacturing facility for a
total of $13.3 million (subject to certain post-closing adjustments). During the
fourth quarter of 1998, IVAX sold its Ft. Lauderdale, Florida office, packaging
and warehouse facility for a total of $5.8 million.
Cash utilized for capital expenditures was $50 million in 2000 compared
to $42.7 million in 1999 and $64.6 million in 1998. The increase in 2000 was due
to increased investment in North America information systems. The decrease in
1999 compared to 1998 was due to $29.1 million of costs incurred in 1998 to
complete a new headquarters at IVAX' United Kingdom pharmaceutical operations
allowing consolidation into one location.
During 1998, IVAX paid $14.6 million to NaPro BioTherapeutics, Inc.
("NaPro") as consideration for a license to NaPro's pending patents for a
paclitaxel formulation in the United States, Europe and certain other world
markets. In connection with the license, IVAX and NaPro terminated their
paclitaxel development and marketing agreement. During the third quarter of
1998, IVAX purchased Immunex's Abbreviated New Drug Application for paclitaxel,
the first filed with the U.S. Food and Drug Administration.
On June 19, 2000 and August 2, 2000, IVAX acquired, through the
acquisition of three holding companies, Elmor, a company located in Caracas,
Venezuela for $63.9 million. Elmor manufactures, markets, and distributes
pharmaceutical products in Venezuela. In June, 2000, IVAX issued 1.6 million
shares of IVAX common stock (valued at $55.0 million) and paid $1.7 million in
cash, net of cash acquired, for two of the holding companies. In August, 2000,
IVAX acquired certain other assets utilized in the business of Elmor by the
purchase of the third holding company for additional cash of $3.9 million.
On September 7, 2000, IVAX acquired Wakefield, a U.S. pharmaceutical
company located in Georgia in exchange for 830,331 shares of IVAX common stock
(valued at $28.3 million), $3.64 million representing the fair value of stock
options granted, incurred $0.1 million of other costs and received $5.1 million
of cash in excess of cash paid.
During 2000, IVAX acquired 237,619 additional shares of Galena, for
$10.9 million, through open market transactions and 78,145 shares through a
tender offer. During 1999, IVAX paid $5.0 million for additional shares of
Galena primarily under a tender offer for all outstanding shares. IVAX may
purchase additional shares of the Czech Republic subsidiary, as they become
available.
On October 12, 1999, IVAX acquired 100% ownership of the Institute for
Drug Research, Ltd., ("IDR") a pharmaceutical research and development company
in Budapest, Hungary, for $3.4 million plus assumption of $3.5 million in loans.
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In connection with the sale of certain of its facilities, IVAX has
retained certain contingent liabilities related to, among other things,
environmental and litigation matters. In addition, IVAX has agreed to indemnify
the purchasers of these operations and facilities against losses resulting from
breaches of representations and warranties made by IVAX in the agreements
governing these dispositions, as well as against certain other potential risks
and contingencies. Although IVAX does not expect these indemnification
obligations to have a material, adverse effect on its operating results,
liquidity or financial position, there can be no assurance that IVAX will not be
subject to material indemnification claims arising out of these transactions.
Net cash of $195.8 million was provided by financing activities in 2000
compared to $189.0 million and $88.2 million used in financing activities in
1999 and 1998, respectively. The increase in 2000 was due to a private offering
of $250 million of 5 1/2% Convertible Senior Subordinated Notes completed during
2000. The increase in 1999 compared to 1998 was primarily due to increased
repurchases of common stock.
During May 2000, IVAX consummated a private offering of $250.0 million
of its 5 1/2% Convertible Senior Subordinated Notes due 2007 and received net
proceeds of approximately $243.8 million. The 5 1/2% Notes are convertible at
any time prior to maturity, unless previously redeemed, into 0.0269 shares of
IVAX' common stock per $1 of principal amount of the 5 1/2% Notes. This ratio
results in a conversion price of approximately $37.15 per share. The 5 1/2%
Notes are redeemable by IVAX on or after May 29, 2003.
On November 18, 1999, IVAX issued a $50 million promissory note to an
entity related to IVAX' Chairman and CEO. The note was due January 17, 2001 and
bears interest at 10% payable quarterly. Proceeds from the note were used to
purchase IVAX common stock under the share repurchase program (See Note 12,
Shareholders' Equity, in the Notes to Consolidated Financial Statements). In
conjunction with the loan, Frost-Nevada Limited Partnership ("FNLP") was issued
a warrant to purchase 750,000 shares of IVAX common stock at an exercise price
equal to the price paid for the repurchased shares, $12 per share. On June 30,
2000, the loan was repaid resulting in the write-off of the remaining $2.3
million of debt issue costs as an extraordinary item. During the first six
months of 2000, IVAX amortized to interest expense $2.1 million of the value of
the warrant issued to FNLP during 1999.
During the third quarter of 1998, IVAX' Board of Directors authorized
the repurchase of $20 million face value of its 6 1/2% Convertible Subordinated
Notes. In December 1998, IVAX' Board of Directors renewed its authorization to
purchase up to $20 million face value of the Notes, which included the amount
remaining unpurchased from the July authorization. On August 11, 1999, IVAX'
Board of Directors approved an increase of $15.0 million of repurchases of the 6
1/2% Notes. During 1999 and 1998, IVAX repurchased a total of $31.4 million and
$16.0 million of its 6 1/2% Convertible Subordinated Notes due November 2001.
In the first quarter of 1998, IVAX retired the remaining $6.7 million
of industrial revenue bonds that were due 2008. Also during 1998, IVAX'
international operations repaid $7.0 million of bank debt.
On June 19, 2000, IVAX issued 1.6 million shares of IVAX common stock
valued at $55.0 million in connection with its purchase of Elmor. On September
7, 2000, IVAX issued 830,331 shares of IVAX common stock valued at $28.3 million
in the purchase of Wakefield.
Proceeds from the exercise of stock options totaled $35.1 million,
$12.2 million and $3.0 million during 2000, 1999 and 1998, respectively.
10
In December 1998, IVAX' Board of Directors approved an increase of 11.3
million shares to the share repurchase program. On April 13, 1999, June 17,
1999, November 2, 1999, and August 17, 2000, IVAX' Board of Directors approved
additional increases in the share repurchase program of 7.5 million, 2.3
million, 7.5 million, and 10 million shares, respectively, of IVAX' common stock
to supplement the 18.8 million shares authorized in prior years, bringing the
total to 46.0 million shares authorized for repurchase. Through December 31,
2000, approximately 34.3 million shares have been repurchased and 11.7 million
remain authorized for repurchase. During 2000, in connection with its share
repurchase program, IVAX received $11.3 million in premiums on the issuance of
2.9 million freestanding put options for IVAX common stock, of which .5 million
options expired prior to December 31, 2000. In the event the put options are
exercised, IVAX may elect to settle by one of three methods: physical settlement
by payment in exchange for IVAX shares, net cash settlement or net share
settlement. The maximum repurchase obligation for put options outstanding at
December 31, 2000, under the physical settlement method is $84.5 million (See
Note 12, Shareholders' Equity, in the Notes to Consolidated Financial
Statements). During 1999, IVAX also received $2.1 million in premiums on the
issuance of 2.3 million freestanding put options for IVAX common stock that are
currently expired.
No cash dividends were paid during 2000, 1999 or 1998.
IVAX plans to spend substantial amounts of capital in 2001 to continue
the research and development of pharmaceutical products. Although research and
development expenditures are expected to be between $80 million and $90 million
during 2001, actual expenditures will depend on, among other things, the outcome
of clinical testing or products under development, delays or changes in
government required testing and approval procedures, technological and
competitive developments, strategic marketing decisions and liquidity. In
addition, IVAX plans to spend between $60 million and $70 million in 2001 to
improve and expand its pharmaceutical and other related facilities.
IVAX' principal source of short term liquidity are existing cash and
internally generated funds, which IVAX believes will be sufficient to meet its
operating needs and anticipated capital expenditures over the short term. For
the long term, IVAX intends to utilize principally internally generated funds,
which are anticipated to be derived primarily from the sale of existing
pharmaceutical products and pharmaceutical products currently under development.
There can be no assurance that IVAX will successfully complete products under
development, that IVAX will be able to obtain regulatory approval for any such
product, or that any approved product will be produced in commercial quantities,
at reasonable costs, and be successfully marketed. IVAX may consider issuing
debt or equity securities in the future to fund potential acquisitions and
growth.
In December 2000, IVAX filed a shelf registration statement on Form S-4
registering up to a total of 15.0 million shares of common stock that can be
issued in connection with the acquisition of businesses, assets or securities.
In conjunction with the availability under our previous S-4 registration
statement, as of the date of this report, IVAX had the ability to issue up to
25.2 million shares of our common stock under our shelf registration statements
in connection with the acquisition of businesses, assets or securities.
In December 2000, IVAX filed a universal shelf registration statement
on Form S-3 registering the sale of up to $400.0 million of any combination of
debt securities or common stock.
Currency Fluctuations
For 2000, 1999 and 1998, IVAX' net revenues attributable to operations
principally generated in currencies other than the United States dollar
approximated 51%, 54%, and 55%, respectively. Fluctuations in the value of
foreign currencies relative to the United States dollar affect the reported
11
results of operations for IVAX. If the United States dollar weakens relative to
the foreign currency, the earnings generated in the foreign currency will, in
effect, increase when converted into United States dollars and vice versa.
Although IVAX does not speculate in the foreign exchange market, it does from
time to time manage exposures that arise in the normal course of business
related to fluctuations in foreign currency exchange rates by entering into
offsetting positions through the use of foreign exchange forward contracts. At
December 31, 2000, IVAX had subsidiaries domiciled in Venezuela which is
considered a highly inflationary environment. The unrealized adjustment for
inflation attributable to the Venezuelan operations for 2000 was not significant
to IVAX' operations or its subsidiaries and it did not impact cash flows from
operations. During 1999, none of IVAX' subsidiaries were domiciled in highly
inflationary environments. As a result of exchange rate differences, net
revenues decreased by $22.6 million in 2000 compared to 1999, and decreased by
$11 million in 1999 compared to 1998. The effects of inflation on consolidated
net revenues and operating income were not significant.
Income Taxes
IVAX' effective tax rate was 9%, 17% and 29% in 2000, 1999 and 1998,
respectively. During 2000, IVAX recognized a $13.2 million tax provision. The
domestic current provision was favorably impacted by $29.3 million from
utilization of previously reserved net operating loss carryforwards. The current
tax provision for 2000 recognized by foreign operations was favorably impacted
by $3.2 million as a result of the resolution of an Inland Revenue audit in the
United Kingdom closing tax years 1992 through 1997. Payment of the current tax
provision for the year ended December 31, 2000, for domestic and foreign
operations will be reduced by $21.2 million and $4.3 million, respectively,
representing the incremental impact of compensation expense deductions
associated with non-qualified stock option exercises during the current year.
These amounts were credited to "capital in excess of par value" in the
accompanying balance sheet. During the second quarter of 2000, IVAX recognized
$45 million U.S. taxable income on the intercompany assignment of a contract.
For financial reporting purposes this income was eliminated in consolidation.
IVAX recognized a $14.9 million tax provision for 1999 of which $18.3 million
related to foreign operations and included a valuation allowance of $4.1 million
recorded in the second quarter against the UK deferred tax asset.
During 2000 and 1999, $31.1 million ($16.6 million during the fourth
quarter) and $11.4 million, respectively, of the valuation allowance previously
recorded against the domestic net deferred tax asset were also reversed due to
management's expectation of increased domestic taxable income in the coming
year.
At December 31, 2000, domestic and foreign net operating loss
carryforwards were $22.8 million and $46.2 million, respectively. At December
31, 1999 and 1998, IVAX had substantial net operating loss and credit
carryforwards (See Note 10, Income Taxes, in the Notes to Consolidated Financial
Statements).
IVAX' future effective tax rate will depend on the mix between foreign
and domestic taxable income or losses, the statutory tax rates of the related
tax jurisdictions, and the timing of the release, if any, of the domestic
valuation allowance. The mix between IVAX' foreign and domestic taxable income
may be significantly affected by the jurisdiction in which new products are
developed and manufactured.
At December 31, 2000, domestic and foreign net deferred tax assets
totaled $42.5 million and $10.6 million, respectively. Approximately $7.4
million of the valuation allowance relates to the tax benefit of stock options
exercised in prior years which has not yet been credited to capital in excess of
par value. Realization of the net deferred tax assets is dependent upon
generating sufficient future domestic and foreign taxable income. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized. Management's estimates of future
taxable
12
income are subject to revision due to, among other things, regulatory and
competitive factors affecting the pharmaceutical industries in the markets in
which IVAX operates.
IVAX has historically received a United States tax credit under Section
936 of the Internal Revenue Code for certain income generated by its Puerto Rico
and Virgin Islands operations. For 2000, 1999, and 1998, this credit was
approximately $1.6 million, $2.4 million and $0, respectively, and completely
offset the entire United States tax liability of such operations. The Section
936 tax credit will be phased out over 4 years beginning in 2002.
Sales Returns and Allowances
IVAX' pharmaceutical revenues may be affected by the level of
provisions for estimated returns, inventory credits and chargebacks, as well as
other sales allowances established by IVAX. The custom in the pharmaceutical
industry is generally to grant customers the right to return purchased goods. In
the generic pharmaceutical industry, this custom has resulted in a practice of
suppliers issuing inventory credits (also known as shelf-stock adjustments) to
customers based on the customers' existing inventory following decreases in the
market price of the related generic pharmaceutical product. The determination to
grant a credit to a customer following a price decrease is generally at the
discretion of IVAX, and generally not pursuant to contractual agreements with
customers. These credits allow customers with established inventories to compete
with those buying product at the current market price, and allow IVAX to
maintain shelf space, market share and customer loyalty.
Provisions for estimated returns, inventory credits, and chargebacks,
as well as other sales allowances, are established by IVAX concurrently with the
recognition of revenue. The provisions are established in accordance with
generally accepted accounting principles based upon consideration of a variety
of factors, including actual return and inventory credit experience for products
during the past several years by product type, the number and timing of
regulatory approvals for the product by competitors of IVAX, both historical and
projected, the market for the product, estimated customer inventory levels by
product and projected economic conditions. Actual product returns and inventory
credits incurred are, however, dependent upon future events, including price
competition and the level of customer inventories at the time of any price
decreases. IVAX continually monitors the factors that influence the pricing of
its products and customer inventory levels and makes adjustments to these
provisions when management believes that actual product returns, inventory
credits and other allowances may differ from established reserves.
Discontinued Operations
Income from discontinued operations totaled $0, $.6 million, and $48.9
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Discontinued operations, net of taxes, in 1999 and 1998 included the
amortization of a deferred gain ($2.5 million at time of sale) on the
divestiture of the personal care products business representing principal and
interest, as collected, on a note receivable from the 1998 sale of one of the
personal care products operations that was fully reserved at the time of the
sale. Discontinued operations, net of taxes, in 1998 includes the results of
operations of the personal care products business (through its sale in July
1998) and the vacuum pump fluids segment of the specialty chemical business
(through its sale in February 1998). The personal care products business had
break-even operations during 1998. Discontinued operations in 1998 reflected a
net gain on the divestiture of the personal care products business of $48.9
million. Losses incurred on the sales and operations of the vacuum pump fluids
segment were charged against previously established reserves. In 1998, IVAX
completed the divestiture of its businesses classified as discontinued
operations (See Note 5, Divestitures, and Note 7, Discontinued Operations, in
the Notes to Consolidated Financial Statements).
13
Risk of Product Liability Claims
Testing, manufacturing and marketing pharmaceutical products subject
IVAX to the risk of product liability claims. IVAX is a defendant in a number of
product liability cases, none of which IVAX believes will have a material
adverse effect on IVAX' business, results of operations or financial condition.
IVAX believes that it maintains an adequate amount of product liability
insurance, but there can be no assurance that its insurance will cover all
existing and future claims or that IVAX will be able to maintain existing
coverage or obtain additional coverage at reasonable rates. There can be no
assurance that claims arising under any pending or future product liability
cases, whether or not covered by insurance, will not have a material adverse
effect on IVAX' business, results of operations or financial condition (See Note
14, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements).
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of IVAX.
IVAX, in the normal course of doing business, is exposed to the risks associated
with foreign currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk - IVAX is exposed to exchange rate
risk when its U.S. and non-U.S. subsidiaries enter into transactions denominated
in currencies other than their functional currency. Certain firmly committed
transactions are hedged with foreign exchange forward contracts. As exchange
rates change, gains and losses on the exposed transactions are partially offset
by gains and losses related to the hedging contracts. Both the exposed
transactions and the hedging contracts are translated at current spot rates,
with gains and losses included in earnings. IVAX' derivative activities, which
primarily consist of foreign exchange forward contracts, are initiated primarily
to hedge forecasted cash flows that are exposed to foreign currency risk.
The foreign exchange forward contracts generally require IVAX to
exchange local currencies for foreign currencies based on pre-established
exchange rates at the contracts' maturity dates. If the counterparties to the
exchange contracts do not fulfill their obligations to deliver the contracted
currencies, IVAX could be at risk for currency related fluctuations. IVAX enters
into these contracts with counterparties that it believes to be credit worthy
and does not enter into any leveraged derivative transactions. As of December
31, 2000, IVAX had $27.6 million in foreign exchange forward contracts
outstanding.
Interest Rate Risk - IVAX' only material debt obligations relate to the
5 1/2% Convertible Notes, which bear fixed rates of interest. IVAX believes that
its exposure to market risk relating to interest rate risk is not material.
Commodity Price Risk - IVAX does not believe it is subject to any
material risk associated with commodity prices.
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders
of IVAX Corporation:
We have audited the accompanying consolidated balance sheets of IVAX Corporation
(a Florida corporation) and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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 in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IVAX Corporation and
subsidiaries as of 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.
As explained in Note 2 to the financial statements, effective January 1, 2000,
IVAX Corporation changed its method of accounting for up-front licensing fees to
comply with Securities and Exchange Commission Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements.
As explained in Note 2 to the financial statements, IVAX Corporation has given
retroactive effect to the change in accounting for Emerging Issues Task Force
No. 00-10, Accounting for Shipping and Handling Fees and Costs.
ARTHUR ANDERSEN LLP
Miami, Florida
February 5, 2001 (except with respect to
the matters discussed in Note 17, as to
which the date is March 14, 2001).
15
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
----------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 251,528 $ 41,408
Accounts receivable, net of allowances for doubtful
accounts of $19,703 in 2000 and $22,058 in 1999 155,685 110,472
Inventories 178,910 146,624
Other current assets 72,991 36,265
----------- -----------
Total current assets 659,114 334,769
Property, plant and equipment, net 250,852 226,198
Intangible assets, net 117,171 55,745
Other assets 41,049 17,802
----------- -----------
Total assets $ 1,068,186 $ 634,514
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 1,877 $ 746
Current portion of long-term debt 934 763
Accounts payable 49,951 48,675
Accrued income taxes payable 11,854 13,058
Accrued expenses and other current liabilities 156,008 147,154
----------- -----------
Total current liabilities 220,624 210,396
Long-term debt, net of current portion 253,755 47,854
Note payable - related party, net -- 45,619
Other long-term liabilities 23,472 8,672
Minority interest 1,712 9,414
Put options 84,503 20,188
Commitments and contingencies - see Note 14
Shareholders' equity:
Common stock, $.10 par value, authorized 350,000 shares,
issued and outstanding 158,837 shares in 2000 and 152,235 in 1999 15,884 15,224
Capital in excess of par value 319,010 232,318
Retained earnings 203,206 71,689
Accumulated other comprehensive loss (53,980) (26,860)
----------- -----------
Total shareholders' equity 484,120 292,371
----------- -----------
Total liabilities and shareholders' equity $ 1,068,186 $ 634,514
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
16
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Net product revenues $ 699,671 $ 604,619 $ 581,990
Other revenues 93,734 51,863 43,737
--------- --------- ---------
Total net revenues 793,405 656,482 625,727
--------- --------- ---------
Cost of product sales 408,599 376,206 404,407
Cost of other revenues 1,304 1,761 1,584
--------- --------- ---------
Total cost of sales 409,903 377,967 405,991
--------- --------- ---------
Gross profit 383,502 278,515 219,736
--------- --------- ---------
Operating expenses:
Selling 92,032 71,131 71,152
General and administrative 84,900 85,092 88,434
Research and development 65,331 53,403 47,886
Amortization of intangible assets 9,042 3,121 3,673
Restructuring accrual (reversal) (4,535) (612) 12,222
--------- --------- ---------
Total operating expenses 246,770 212,135 223,367
--------- --------- ---------
Income (loss) from operations 136,732 66,380 (3,631)
Other income (expense):
Interest income 13,986 6,142 11,972
Interest expense (14,624) (5,556) (6,857)
Other income, net 17,497 19,513 32,777
--------- --------- ---------
Total other income 16,859 20,099 37,892
--------- --------- ---------
Income from continuing operations before income taxes
and minority interest 153,591 86,479 34,261
Provision for income taxes 13,214 14,850 10,047
--------- --------- ---------
Income from continuing operations before minority interest 140,377 71,629 24,214
Minority interest (608) (2,085) 403
--------- --------- ---------
Income from continuing operations 139,769 69,544 24,617
Discontinued operations, net of taxes -- 585 48,904
--------- --------- ---------
Income before extraordinary item and cumulative effect of
a change in accounting principle 139,769 70,129 73,521
Extraordinary item:
Gains (losses) on extinguishment of debt (2,254) 593 1,121
Cumulative effect of a change in accounting principle, net of
tax benefit of $2,773 in 2000 (6,471) -- (3,048)
--------- --------- ---------
Net income $ 131,044 $ 70,722 $ 71,594
========= ========= =========
(Continued)
17
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Continuation)
Year Ended December 31,
--------------------------------------------
2000 1999 1998
----------- ----------- -----------
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ 0.89 $ 0.43 $ 0.14
Discontinued operations -- -- 0.27
Extraordinary items (0.02) 0.01 0.01
Cumulative effect of a change in accounting principle (0.04) -- (0.02)
----------- ----------- -----------
Net income $ 0.83 $ 0.44 $ 0.40
=========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations $ 0.86 $ 0.42 $ 0.14
Discontinued operations -- -- 0.27
Extraordinary items (0.02) 0.01 0.01
Cumulative effect of a change in accounting principle (0.04) -- (0.02)
----------- ----------- -----------
Net income $ 0.80 $ 0.43 $ 0.40
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 157,021 161,508 178,674
=========== =========== ===========
Diluted 163,247 164,401 178,897
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
18
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Retained Accumulated
------------------------ Capital in Earnings Other
Number of Excess of (Accumulated Comprehensive
Shares Amount Par Value Deficit) Income(Loss) Total
----------- --------- ------------ ------------- -------------- -----------
BALANCE, January 1, 1998 121,518 $ 12,152 $ 515,234 $ (72,294) $ (20,053) $ 435,039
Comprehensive income:
Net income -- -- -- 71,594 -- 71,594
Translation adjustment -- -- -- -- 8,225 8,225
Unrealized net gain on
available-for-sale equity
securities -- -- -- -- 959 959
---------
Comprehensive income 80,778
Exercise of stock options 397 40 2,918 -- -- 2,958
Repurchase and retirement of
common stock (7,080) (708) (65,223) -- -- (65,931)
Value of stock options issued
to non-employees -- -- 364 -- -- 364
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1998 114,835 11,484 453,293 (700) (10,869) 453,208
Comprehensive income:
Net income -- -- -- 70,722 -- 70,722
Translation adjustment -- -- -- -- (16,077) (16,077)
Unrealized net gain on
available-for-sale equity
securities, net of tax -- -- -- -- 86 86
---------
Comprehensive income 54,731
Exercise of stock options 1,263 126 12,098 -- -- 12,224
Repurchase and retirement of
common stock (14,851) (1,485) (219,913) -- -- (221,398)
Shares issued in acquisitions 243 24 4,976 -- -- 5,000
Premium received on put options -- -- 2,079 -- -- 2,079
Put options - temporary equity -- -- (20,188) -- -- (20,188)
Warrants issued -- -- 4,875 -- -- 4,875
Pre-acquisition earnings of
acquired company -- -- -- 1,667 -- 1,667
Value of stock options issued
to non-employees -- -- 173 -- -- 173
Effect of 3-for-2 stock split 50,745 5,075 (5,075) -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1999 152,235 15,224 232,318 71,689 (26,860) 292,371
Comprehensive income:
Net income -- -- -- 131,044 -- 131,044
Translation adjustment -- -- -- -- (27,125) (27,125)
Unrealized net gain on
available-for-sale equity
securities, net of tax -- -- -- -- 5 5
---------
Comprehensive income 103,924
Exercise of stock options 3,586 358 34,726 -- -- 35,084
Tax effect of option exercises -- -- 25,469 -- -- 25,469
Employee stock purchases 24 2 515 -- -- 517
Repurchase and retirement of
common stock (1,473) (147) (51,450) -- -- (51,597)
Convertible debt conversion 2,050 205 43,808 -- -- 44,013
Shares issued in acquisitions 2,415 242 86,680 -- -- 86,922
Premium received on put options -- -- 11,259 -- -- 11,259
Put options - temporary equity -- -- (64,315) -- -- (64,315)
Pre-acquisition earnings of
acquired company -- -- -- 473 -- 473
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 2000 158,837 $ 15,884 $ 319,010 $ 203,206 $ (53,980) $ 484,120
========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
19
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 131,044 $ 70,722 $ 71,594
Adjustments to reconcile net income to net cash
flows from operating activities:
Restructuring accrual (reversal) (4,535) (612) 12,222
Depreciation and amortization 32,948 29,108 32,552
Deferred tax provision (benefit) (29,084) (4,910) 3,623
Tax effect of stock option exercises 25,469 -- --
Provision for doubtful accounts (132) 4,147 7,650
Provision for inventory obsolescence 12,801 16,696 35,075
Minority interest 608 2,085 (403)
Gain on sale of product rights (7,175) (13,033) (27,350)
Gains (losses) on disposal of assets, net (310) 338 844
Losses (gains) on extinguishment of debt 2,254 (593) (1,121)
Cumulative effect of a change in accounting principle 6,471 -- 3,048
Income from discontinued operations -- (585) (48,904)
Changes in operating assets and liabilities:
Accounts receivable (45,111) (9,195) (9,586)
Inventories (44,254) (33,327) (21,376)
Other current assets 1,143 6,785 (10,567)
Other assets (6,156) 1,266 8,000
Accounts payable, accrued expenses, and other
current liabilities 6,805 (3,038) (2,867)
Other long-term liabilities (2,164) (3,310) 907
Other, net (79) (446) 891
Net operating activities of discontinued operations -- 585 5,028
--------- --------- ---------
Net cash flows from operating activities 80,543 62,683 59,260
--------- --------- ---------
Cash flows from investing activities:
Proceeds from divestitures -- -- 87,885
Proceeds from sale of product rights 7,175 13,033 12,350
Capital expenditures (49,955) (42,685) (64,622)
Proceeds from sales of assets 1,350 932 22,159
Acquisitions of patents, trademarks, licenses and other
intangibles (1,537) (903) (17,543)
Acquisitions of businesses, net of cash acquired (11,359) (8,345) --
Investment in affiliated companies (5,137) 465 --
Net investing activities of discontinued operations -- -- (202)
--------- --------- ---------
Net cash flows from investing activities (59,463) (37,503) 40,027
--------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 254,048 53,059 3,905
Payments on long-term debt and loans payable (53,495) (34,956) (29,152)
Exercise of stock options and employee stock purchases 35,601 12,224 2,958
Repurchase of common stock net of put option premium (40,338) (219,319) (65,931)
--------- --------- ---------
Net cash flows from financing activities 195,816 (188,992) (88,220)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents (6,776) (3,373) (1,709)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 210,120 (167,185) 9,358
Cash and cash equivalents at the beginning of the year 41,408 208,593 199,235
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 251,528 $ 41,408 $ 208,593
========= ========= =========
(Continued)
20
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continuation)
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Supplemental disclosures:
Interest paid $ 10,311 $ 4,572 $ 6,628
========= ========= =========
Income tax payments $ 20,355 $ 3,913 $ 16,196
========= ========= =========
Supplemental schedule of non-cash investing and financing
activities:
Information with respect to acquisitions which were
accounted for under the purchase method of
accounting is summarized as follows:
Fair value of assets acquired $ 24,712 $ 12,308
Liabilities assumed 10,154 3,941
--------- ---------
14,558 8,367
Reduction of minority interest 9,832 7,046
--------- ---------
Net assets acquired 24,390 15,413
--------- ---------
Purchase price:
Cash, net of cash acquired 11,359 8,345
Acquisition costs 138 --
Fair market value of stock and options issued 86,922 5,000
--------- ---------
Total 98,419 13,345
--------- ---------
Goodwill $ 74,029 $ (2,068)
========= =========
See Note 9, Debt, for information with respect to non-cash conversion of
6 1/2% Convertible Subordinated Notes.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
21
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) ORGANIZATION:
IVAX Corporation is a multinational company engaged in the research,
development, manufacture and marketing of pharmaceutical products. These
products are sold primarily to customers within the United States and the United
Kingdom. All references to "IVAX" mean IVAX Corporation and its subsidiaries
unless otherwise required by the context.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of IVAX Corporation and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Investments in affiliates representing 20% to 50% ownership
interests are recorded under the equity method of accounting. Investments in
affiliates representing less than 20% ownership interests are recorded at cost.
The minority interest held by third parties in a majority owned subsidiary is
separately stated. Certain amounts presented in the accompanying consolidated
financial statements for prior periods have been reclassified to conform to the
current period's presentation. Included in the consolidated financial statements
are the financial results of IVAX International, B.V., a wholly-owned subsidiary
of IVAX.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles in the United States
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 date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. IVAX' actual results in
subsequent periods may differ from the estimates and assumptions used in the
preparation of the accompanying consolidated financial statements. Significant
estimates include amounts for accounts receivable exposures, deferred tax asset
allowances, inventory reserves, environmental reserves, litigation,
restructuring costs and sales returns and allowances, including chargebacks,
rebates, returns and shelf-stock adjustments.
Cash and Cash Equivalents - IVAX considers all investments with a
maturity of three months or less as of the date of purchase to be cash
equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market. Components of inventory cost include materials, labor and
manufacturing overhead. In evaluating whether inventory is stated at the lower
of cost or market, management considers such factors as the amount of inventory
on hand, estimated time required to sell such inventory, remaining shelf life
and current market conditions. Reserves are provided as appropriate.
Inventories consist of the following:
December 31,
--------------------------
2000 1999
---------- -----------
Raw materials $ 72,991 $ 62,932
Work-in-process 27,683 10,773
Finished goods 78,236 72,919
---------- -----------
Total inventories $ 178,910 $ 146,624
========== ===========
22
Property, Plant and Equipment - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization and consist of
the following:
December 31,
--------------------------
2000 1999
----------- -----------
Land $ 14,116 $ 12,443
Buildings and improvements 161,737 164,139
Machinery and equipment 167,203 159,654
Furniture and computer equipment 56,942 55,577
----------- -----------
Total cost 399,998 391,813
Less: Accumulated depreciation and amortization 149,146 165,615
----------- -----------
Property, plant and equipment, net $ 250,852 $ 226,198
=========== ===========
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows: buildings and improvements
(4-50 years), machinery and equipment (3-15 years) and furniture and computer
equipment (3-10 years). Leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease or their estimated useful lives.
Costs of major additions and improvements are capitalized and expenditures for
maintenance and repairs that do not extend the life of the assets are expensed.
Upon sale or disposition of property, plant and equipment, the cost and related
accumulated depreciation or amortization are eliminated from the accounts and
any resulting gain or loss is credited or charged to operations.
Capitalization of Software Development Costs - Costs associated with
software developed or obtained for internal use are capitalized when (1) the
preliminary project stage is completed and (2) management has authorized further
funding for the project, it is probable that the project will be completed and
the software will be used for the intended purpose. Costs capitalized include
(1) external direct costs of materials and services consumed (2) payroll and
payroll-related costs for employees directly associated with or who devote time
to the project and (3) interest costs, if material, incurred while developing
the software. Upgrades and enhancements that add functionality are capitalized.
Costs of training, maintenance, data conversion and nonspecific upgrades and
enhancements are expensed.
Capitalization of Interest - During 2000, IVAX capitalized $148 of
interest costs on certain software development projects.
Intangible Assets - Intangible assets are carried at cost less
accumulated amortization and consist of the following:
December 31,
-------------------------
2000 1999
---------- -----------
Cost in excess of net assets of acquired companies $ 84,450 $ 12,936
Patents, trademarks, licenses and other intangibles 64,595 60,986
---------- -----------
Total cost 149,045 73,922
Less: Accumulated amortization 31,874 18,177
---------- -----------
Intangible assets, net $ 117,171 $ 55,745
========== ===========
Cost in excess of net assets of acquired companies (goodwill) is
amortized using the straight-line method over periods not exceeding 40 years.
Patents, trademarks, licenses and other intangibles are amortized using the
straight-line method over their respective estimated lives (ranging from 4-20
years). As of December 31, 2000, the weighted average life of patents,
trademarks, licenses and other intangibles was 9.7 years. During 2000, IVAX paid
$10,943 for additional shares of Galena a.s. which resulted in goodwill of
$1,111. IVAX also acquired Laboratorios Elmor S.A. ("Elmor") and Wakefield
23
Pharmaceuticals, Inc. ("Wakefield") which resulted in goodwill of $46,959 and
$25,959, respectively. During 1999, IVAX acquired a variety of patents in a
purchase of Soft Drugs for $5,000 of IVAX stock and paid $5,000 for additional
shares of Galena a.s. which resulted in negative goodwill of $2,068.
Impairment of Long-lived Assets - IVAX continually evaluates whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of long-lived assets may require revision or that the
remaining net book value may not be recoverable. When factors indicate that an
asset may be impaired, IVAX uses various methods to estimate the asset's future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is recognized based on
the excess of the carrying amount over the estimated fair value of the asset.
Any impairment amount is charged to operations (See Note 3, Restructuring Costs
and Asset Write-Downs).
Foreign Currencies - IVAX' operations include subsidiaries which are
located outside of the United States. Assets and liabilities as stated in local
currencies are translated at the rate of exchange prevailing at the balance
sheet date. The gains or losses that result from this process are shown in the
"Accumulated Other Comprehensive Loss" caption in the shareholders' equity
section of the accompanying consolidated balance sheets. Amounts in the
statements of operations are translated at the average rates for the period.
Elmor is located in Venezuela, a hyperinflationary economic environment. Its
local currency financial statements are remeasured into the U.S. dollar by
translating monetary assets at the current exchange rate, non-monetary assets
and expenses related to non-monetary assets at the historical rates, and
revenues and expenses at the average exchange rate in effect during the year.
The resulting translation adjustment is included in the results of operations.
Financial Instruments - The carrying amounts of cash and cash
equivalents, accounts receivable, loans payable and accounts payable approximate
fair value due to the short maturity of the instruments and reserves for
potential losses, as applicable. The disclosed fair value of other assets and
long-term debt is estimated using quoted market prices, whenever available, or
an appropriate valuation method (See Note 8, Investments In and Advances to
Unconsolidated Affiliates, and Note 9, Debt).
IVAX does not speculate in the foreign exchange market. IVAX may,
however, from time to time, manage exposures that arise in the normal course of
business related to fluctuations in foreign currency rates by entering into
foreign exchange forward contracts. IVAX enters into these contracts with
counterparties that it believes to be creditworthy and does not enter into any
leveraged derivative transactions. Gains and losses on these contracts are
included in the consolidated statements of operations as they arise. Costs
associated with entering into these contracts are amortized over the contracts'
lives, which typically are less than one year. IVAX held foreign exchange
forward contracts with notional principal amounts of $27,621 at December 31,
2000, which mature January 2001 through December 2001, and $35,515 at December
31, 1999, which matured in January 2000 through September 2000.
In addition, IVAX has short-term intercompany balances that are
denominated in foreign currencies. A portion of these balances are hedged, from
time to time, using foreign exchange forward contracts, and gains and losses on
these contracts are included in the consolidated statements of operations as
they arise. For the years ended December 31, 2000, 1999 and 1998, IVAX recorded
net foreign exchange transaction losses of $2,297, $2,934 and $893,
respectively, which are included in "Other income, net" in the accompanying
consolidated statements of operations.
Concentration of Credit Risk - IVAX sells a significant amount of
United States generic pharmaceutical products to a relatively small number of
drug wholesalers and retail drug chains, which represent an essential part of
the distribution chain of pharmaceutical products in the United States.
24
IVAX monitors the creditworthiness of its customers and reviews outstanding
receivable balances for collectibility on a regular basis and records allowances
for bad debts as necessary.
IVAX follows an investment policy that limits investments in individual
issuers, generally, to the lesser of $10,000 or 10% of program size, that meet
certain minimum credit rating and size requirements.
Revenue Recognition - Revenues and the related cost of sales are
recognized at the time product is shipped. Net revenues are comprised of gross
revenues less provisions for expected customer returns, inventory credits,
discounts, promotional allowances, volume rebates, chargebacks and other
allowances. These sales provisions totaled $215,433, $121,286 and $131,273 in
the years ended December 31, 2000, 1999 and 1998, respectively. The reserve
balances related to these provisions and included in "Accounts receivable, net
of allowances for doubtful accounts" and "Accrued expenses and other current
liabilities" in the accompanying consolidated balance sheets are $51,080 and
$63,448, respectively, at December 31, 2000 and $38,065 and $61,241,
respectively, at December 31, 1999.
The custom in the pharmaceutical industry is generally to grant
customers the right to return purchased goods. In the generic pharmaceutical
industry, this custom has resulted in a practice of suppliers issuing inventory
credits (also known as shelf-stock adjustments) to customers based on the
customers' existing inventory following decreases in the market price of the
related generic pharmaceutical product. The determination to grant a credit to a
customer following a price decrease is generally at the discretion of IVAX, and
generally not pursuant to contractual arrangements with customers.
Provisions for estimated returns, inventory credits, chargebacks and
other sales allowances are established by IVAX concurrently with the recognition
of revenue. The provisions are established in accordance with generally accepted
accounting principles based upon consideration of a variety of factors,
including actual return and inventory credit experience for products during the
past several years by product type, the number and timing of regulatory
approvals for the product by competitors of IVAX, both historical and projected,
the market for the product, estimated customer inventory levels by product and
projected economic conditions. Actual product returns and inventory credits
incurred are, however, dependent upon future events, including price competition
and the level of customer inventories at the time of any price declines. IVAX
continually monitors the factors that influence the pricing of its products and
customer inventory levels and makes adjustments to these provisions when
management believes that actual product returns, inventory credits and other
allowances may differ from established reserves.
Royalty and license fee income are recognized when obligations
associated with earning the royalty or licensing fee have been satisfied and are
included in "Other revenues" in the accompanying consolidated statements of
operations. Other revenues in 2000, 1999 and 1998 included $1,820, $1,214 and
$8,286, respectively, of milestone and up-front payments received under a
license agreement. Through 1999, IVAX' accounting policy was to immediately
recognize as revenue such cash payments that are nonrefundable or where the
probability of refund is remote. As a result of SAB No. 101, IVAX has revised
its accounting policy to defer up-front payments, whether or not they are
refundable, and recognizes them in income over the license period. Where IVAX
expends resources to achieve milestones, IVAX recognizes the milestone payments
in income currently. The total amortization of up-front payments and current
recognition of milestones is limited to nonrefundable provisions of the
contract. Other revenues in 2000 included $1,725 of amortization of revenue
deferred in accordance with SAB No. 101.
Shipping and handling fees billed to customers are recognized in net
product revenues. Shipping and handling costs are included in cost of sales.
25
Legal Costs - Legal charges are recorded for the costs anticipated to
be incurred in connection with litigation and claims against IVAX when
management can reasonably estimate these costs.
Research and Development Costs - Research and developments costs
related to future products are expensed currently.
Income Taxes - The provision for income taxes is based on the
consolidated United States entities' and individual foreign companies' estimated
tax rates for the applicable year. Deferred taxes are determined utilizing the
asset and liability method based on the estimated future tax effects of
differences between the financial accounting and tax bases of assets and
liabilities under the applicable tax laws. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax liability
from period to period (See Note 10, Income Taxes).
Earnings Per Common Share - A reconciliation of the denominator of the
basic and diluted earnings per share computation is as follows:
Year Ended December 31,
---------------------------------------
2000 1999 1998
---------- --------- ----------
Basic weighted average number of shares outstanding 157,021 161,508 178,674
Effect of dilutive securities - stock options and warrants 6,226 2,893 223
---------- --------- ----------
Diluted weighted average number of shares outstanding 163,247 164,401 178,897
========== ========= ==========
Not included in the calculation of diluted earnings per
share because their impact is antidilutive:
Stock options outstanding 165 3,179 6,953
Convertible debt 6,730 2,063 3,546
Put options 2,440 2,250 -
Accumulated Other Comprehensive Loss - Other comprehensive loss ("OCL")
refers to revenues, expenses, gains and losses that under generally accepted
accounting principles are excluded from net income as these amounts are recorded
directly as an adjustment to shareholders' equity. Accumulated other
comprehensive loss is comprised of the cumulative effects of foreign currency
translation and unrealized gains on securities.
Stock-Based Compensation Plans - As permissible under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, IVAX accounts for all stock-based compensation arrangements using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and discloses pro forma net
earnings and earnings per share amounts as if the fair value method had been
adopted. Accordingly, no compensation cost is recognized for stock option awards
granted to employees at or above fair market value. Pro forma net earnings and
earnings per share amounts are presented in Note 12, Shareholders' Equity.
Changes in Accounting Principle - Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, was adopted for up-front licensing
fees during the fourth quarter of 2000, resulting in a cumulative change in
accounting principle charge of $6,471, or $.04 per share, net of tax of $2,773,
recorded as of the beginning of the first quarter of 2000. The offsetting impact
was recorded in deferred revenue that will be recognized in income through 2011.
IVAX amortized $1,725 of this deferred revenue to income during 2000.
26
During 1998, Statement of Position ("SOP") 98-5, Reporting on the Cost
of Start-Up Activities, was adopted and reported as a cumulative effect of a
change in accounting principle reflecting a write-off of capitalized start-up
costs of $3,048, or $.02 per share.
Recently Issued Accounting Standards - Effective January 1, 2001, IVAX
adopted SFAS No. 133, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in OCL and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings.
Certain forecasted transactions are exposed to foreign currency risk.
The principal currency hedged is the Irish punt against the British pound.
Forward options used to hedge a portion of forecasted international expenses for
up to one year in the future are designated as cash flow hedging instruments.
The adoption of SFAS 133 on January 1, 2001 resulted in an increase to OCL of
$1,613, net of tax of $179. The increase to OCL is mostly attributable to gains
on cash flow hedges. The net derivative gains included in OCL as of January 1,
2001, will be reclassified into earnings during the twelve months ended December
31, 2001.
EITF Issue No. 00-2, Accounting for Web Site Development Costs, adopted
in the third quarter of 2000, did not have a significant effect on the Company's
financial position or results of operations.
EITF Issue No. 00-10, Accounting for Shipping and Handling Fees and
Costs, requires that amounts billed to a customer related to shipping and
handling be classified as revenue, and allows companies to adopt a policy of
including shipping and handling costs in cost of sales or another income
statement line item. IVAX adopted EITF Issue No. 00-10 in the fourth quarter of
2000 and elected to report the costs of shipping and handling in cost of sales.
Prior quarter and annual amounts have been reclassified to conform to current
classification resulting in approximately 1% decrease in gross profit margins
from those previously reported.
EITF Issue No. 00-14, Accounting for Certain Sales Incentives,
addresses the recognition, measurement and income statement classification for
sales incentives offered voluntarily by a vendor, without charge to the
customer, in a single exchange transaction at the point of sale. In addition to
providing guidance on when to recognize and how to measure the cost of sales
incentives, it requires that incentives in the form of a reduction in or refund
of the selling price of a product or service be classified as a reduction of
revenue and incentives in the form of free products or services delivered at the
time of sale should be classified as an expense. The amended effective date of
adoption is the later of fiscal quarters beginning after March 15, 2001 or
fiscal years beginning after December 15, 1999. IVAX elected to adopt EITF Issue
No. 00-14 in the fourth quarter of 2000. The impact of adoption was not
significant.
EITF Issue No. 00-19, Determination of Whether Share Settlement is
within the Control of the Issuer for Purposes of Applying Issue No. 96-13, and
EITF Issue No. 00-7, Application of Issue No. 96-13 to Equity Derivative
Instruments that Contain Certain Provisions that Require Net Cash Settlement if
Certain Events Outside the Control of the Issuer Occur, address the
classification and accounting treatment of equity derivative contracts (such as
IVAX' put options) as equity instruments (either temporary or permanent) or
assets and liabilities. They are effective prospectively for contracts entered
27
into after September 20, 2000 as of June 30, 2001. Management believes that
adoption will not have a significant effect on the Company's financial position
or results of operations.
(3) RESTRUCTURING COSTS AND ASSET WRITE-DOWNS:
During 1998, IVAX continued its efforts to reduce costs and enhance
operating efficiency by initiating restructuring programs at its United Kingdom
pharmaceutical operations and continuing restructuring of its United States
pharmaceutical operations. During 1998, IVAX recorded a pre-tax charge of
$13,562 comprised of $3,648 for severance and other employee termination
benefits, $4,308 associated with lease commitments, $215 for the write-down of
leasehold improvements and $5,391 in asset write-downs resulting from
management's re-evaluation of the carrying value of certain long-lived assets
primarily in conjunction with initiatives to further consolidate facilities of
IVAX' United Kingdom operations. This restructuring plan eliminated 260
positions from the workforce throughout all functions.
Also during 1998, IVAX recorded a pre-tax charge of $15,647 comprised
of $2,657 for severance and other employee termination benefits, $4,432 for
estimated plant closure costs and $8,558 for asset write-downs resulting from
management's decision to cease manufacturing at its Northvale, New Jersey
pharmaceutical facility and the re-evaluation of the carrying value of certain
long-lived assets of IVAX' domestic generic pharmaceutical operations due to
facility consolidation and market conditions. The New Jersey restructuring plan
eliminated 165 positions. This restructuring and the continued consolidation of
manufacturing are anticipated to generate approximately $3,400 of annual pre-tax
cost savings. This impact was offset by the reversal of $16,987 of previously
recorded restructuring reserves that were ultimately not needed primarily
related to two facilities that were sold in 1998.
During 1998, pursuant to the restructuring programs, IVAX sold its Ft.
Lauderdale, Florida office, packaging and warehouse facility, its Syosset, New
York pharmaceutical manufacturing facility, its Kirkland, Quebec, Canada
pharmaceutical manufacturing facility, and its Shreveport, Louisiana
pharmaceutical manufacturing facility and closed two of its London, England
manufacturing facilities. During 1997, IVAX consolidated its United States
pharmaceutical distribution facilities into a single leased distribution center
in Kenton County, Kentucky. In 1999, IVAX substantially ceased manufacturing at
its Northvale, New Jersey manufacturing facility. Production from these
facilities has been transferred to other IVAX manufacturing facilities.
These restructuring costs and asset write-downs are shown as
"Restructuring accruals (reversals)" in the accompanying consolidated statements
of operations. Management determined the amount of the write-downs by estimating
the fair market value of the impaired assets using various valuation techniques,
including discounted cash flow analysis, independent appraisals and third party
offers.
The components of the restructuring costs and asset write-downs,
spending and other activity, as well as the remaining restructuring reserve
balances at December 31, 2000, 1999 and 1998 are shown in the table below. The
restructuring reserve balances are included in "Accrued expenses and other
current liabilities" in the accompanying consolidated balance sheets. The asset
write-down column represents asset impairment losses for assets to be used in
operations as well as assets to be disposed of. During 2000 and 1999, IVAX
reversed restructuring costs of $4,535 and $612, respectively. In the second
quarter of 2000, as a result of a change in strategy to keep the Northvale, New
Jersey pharmaceutical facility operating as back-up capacity in the event of
hurricane damage at the Puerto Rico facility, the related restructuring reserves
were reversed. Also during 2000, IVAX was released from certain non-cancelable
operating leases associated with its United Kingdom restructuring and determined
that reserves previously established for certain severance payments were
determined to be unnecessary resulting in $1,324 of the reversal of
restructuring reserves. The credit recorded in 1999 was primarily due to the
reversal of a previously recorded reserve for a note receivable and 15% interest
in a partnership received
28
as consideration for the 1998 sale of a Ft. Lauderdale, Florida facility. Due to
the uncertainty of collectibility, these assets were fully reserved in 1998. In
1999, the note was collected in full, the partnership interest was sold and the
reserve against the assets was reversed.
Annual
Employee Total Asset Restructuring
Termination Plant Restructuring Write- Accrual
Benefits Closures Reserves Downs (Reversal)
---------------------- ------------------------- ---------
Balance at January 1, 1998 $ 4,547 $ 9,367 $ 13,914 $ 38,088
==========
1998 restructuring costs and asset
write-downs 6,305 8,740 15,045 $ 14,164 29,209
Reversal of restructuring costs and
asset write-downs charged in
prior years (442) (7,741) (8,183) (8,804) (16,987)
Cash payments during 1998 (3,538) (3,042) (6,580) -
Non-cash activity (1,098) 936 (162) -
---------- --------- ---------- ----------
Balance at December 31, 1998 5,774 8,260 14,034 12,222
==========
Reversal of restructuring costs and
asset write-downs charged in
prior years (73) - (73) (539) (612)
Cash payments during 1999 (4,264) (3,539) (7,803) -
Non-cash activities 123 (298) (175) -
---------- --------- ---------- ----------
Balance at December 31, 1999 1,560 4,423 5,983 (612)
==========
Reversal of restructuring costs and
asset write-downs charged in
prior years (628) (3,907) (4,535) (4,535)
Cash payments during 2000 (795) (422) (1,217) -
Non-cash activities (27) 525 498 -
---------- --------- ---------- ----------
Balance at December 31, 2000 $ 110 $ 619 $ 729 $ (4,535)
========== ========= ========== ==========
(4) MERGERS AND ACQUISITIONS:
During 2000, IVAX, through its Netherlands subsidiary IVAX
International B.V., purchased 238 additional shares of Galena, a.s., its
majority-owned subsidiary in the Czech Republic. The total cost of the shares
acquired through open market transactions during 2000 was $8,190. The net book
value underlying the shares purchased was $5,362 resulting in goodwill of $2,828
being recorded in the accompanying consolidated balance sheet at December 31,
2000. On September 1, 2000, Galena commenced a tender offer for 9.26% of all
outstanding shares. The tender offer was for a period of 60 days. During the
second half of 2000, Galena acquired 78 shares of its own stock at a cost of
$2,753 through the tender offer. The book value of shares repurchased was $4,470
resulting in negative goodwill of $1,717 being recorded in the accompanying
balance sheet as of December 31, 2000. Prior to these purchases, IVAX owned 86%
of the outstanding shares of Galena, a.s. At December 31, 2000, IVAX owned 98.1%
of the outstanding shares of Galena, a.s.
On June 19, 2000 and August 2, 2000, IVAX acquired, through the
acquisition of three holding companies, Elmor, a company located in Caracas,
Venezuela for $63,911. Elmor manufactures, markets, and distributes
pharmaceutical products in Venezuela. On June 19, 2000, IVAX issued 1,585 shares
of IVAX common stock (valued at $55,000) and paid $1,663 in cash, net of cash
acquired, for two of the holding companies. On August 1, 2000, IVAX acquired
certain other assets utilized in the business of Elmor by the purchase of the
third holding company for additional cash of $3,875 and other costs of $35. The
fair value of net assets acquired was $16,951, resulting in goodwill of $46,959
which is included in "Intangible assets - net" in the accompanying consolidated
balance sheet at December 31, 2000. The goodwill will be amortized over 20
years. The operating results of Elmor are included in the consolidated financial
statements subsequent to the June 19, 2000 acquisition date.
29
On September 7, 2000, IVAX acquired Wakefield, a U.S. pharmaceutical
company located in Georgia, in exchange for 830 shares of IVAX common stock
(valued at $28,273), $3,649 representing the fair value of stock options
granted, $102 of other costs and received $5,120 of cash in excess of cash paid.
The fair value of net assets acquired was $7,430 resulting in goodwill of
$25,959 which is included in "Intangible assets - net" in the accompanying
consolidated balance sheet at December 31, 2000. The goodwill will be amortized
over 25 years. The operating results of Wakefield are included in the
consolidated financial statements subsequent to the September 7, 2000
acquisition date.
Pro-forma information for the above acquisitions as if the purchases
occurred on January 1 of each year are presented below.
Period Ended December 31, Twelve Months
(In thousands) ------------------------
2000 1999
----------- ----------
Revenues $ 818,547 $ 704,115
Net income 129,262 75,482
Diluted weighted average shares 164,560 166,951
Diluted earnings per share $ 0.79 $ 0.45
These pro-forma results of operations are not necessarily indicative of
results that might have been achieved if the acquisitions had actually occurred
on January 1 of the periods presented. The preacquisition results of the
acquisitions completed in 1999 were not material to IVAX' results of operations.
During 1999, IVAX increased its ownership interest in Galena, a.s. from
74% to 86% primarily through a tender offer and open market purchases. The total
cost of the shares acquired was $4,978. The net book value underlying the share
purchases was $7,046, resulting in negative goodwill of $2,068 being recorded.
On August 9, 1999, IVAX acquired a 30% interest in Indiana Protein
Technologies ("IPT"), a U.S. biotechnology research company, in exchange for a
development agreement in which IVAX, through its U.S. subsidiary, Baker Norton
Pharmaceuticals, will fund research and development of certain peptide-based
biotech pharmaceutical products. In the event that these projects are
successful, IVAX will receive an exclusive worldwide license to market the
products, with a royalty payable to IPT on profit from the sale of the products.
During 1999, $775 was funded to IPT, $233 of which is recorded in other assets
and the remainder is expensed as "Research and development expenses" in the
accompanying consolidated statement of operations for 1999.
On October 12, 1999, IVAX, through its Netherlands subsidiary, IVAX
International B.V. and Swiss subsidiary, IVAX Holdings A.G., acquired 100%
ownership of the Institute for Drug Research, Ltd., ("IDR") a pharmaceutical
research and development company in Budapest, Hungary, for $3,367 in cash plus
assumption of $3,540 in loans.
On December 20, 1999, IVAX acquired Soft Drugs, a U.S. company with
ownership of certain patents for $5,000 in stock of IVAX, which was accounted
for as a purchase. In the event that IVAX does not utilize at least one of these
patents within thirty months, the prior owners may be required to return half of
the stock in exchange for the return of certain patents.
30
(5) DIVESTITURES:
During the first quarter of 1998, IVAX sold its vacuum pump fluids
business, the only remaining segment of IVAX' specialty chemicals business, for
$3,885 in cash (subject to certain post-closing adjustments). IVAX retained
certain real estate assets of the specialty chemicals business, which are held
for sale.
Effective July 14, 1998, IVAX completed the sale of its personal care
products business for $84,700 (after certain post-closing adjustments). At
closing IVAX received $35,000 in cash and a $50,000 secured note due November
30, 1998. On August 27, 1998, IVAX sold the $50,000 note, without recourse, for
$48,500 in cash. In addition, IVAX received a note for $2,500 as partial
consideration from the sale of one of the personal care product subsidiaries.
The note is payable at $250 of principal plus interest per quarter. As of
December 31, 2000 and 1999, $563 and $1,500, respectively, of the gain on sale
related to this note was deferred. The gain on sale and results of operations of
the intravenous products, specialty chemicals and personal care products
businesses were classified as part of discontinued operations during 1998 (See
Note 7, Discontinued Operations).
(6) SALE OF PRODUCT RIGHTS:
On September 18, 1997, IVAX sold the United States and Canadian
marketing rights to its proprietary drug Elmiron(R) and three additional urology
products to ALZA Corporation ("ALZA"). Although this sale represented an exit by
IVAX from the urology business in 1997, IVAX retained the rights to these
products outside of the United States and Canada. On July 24, 1998, IVAX and
ALZA terminated a research and development cost-sharing arrangement and, as a
result of the termination, a reserve of $15,000 which was recorded concurrent
with the sale was reversed during the third quarter of 1998, reflecting an
adjustment to increase the previously recognized gain on the sale of those
product rights. Royalty and milestone payments from the 1997 sale of rights to
Elmiron(R) and certain other urology products in the United States and Canada to
ALZA amounted to $7,175, $13,033, and $12,350 in 2000, 1999 and 1998,
respectively, and are included in other income as additional gain on the sale of
product rights. Royalties and milestone payments receivable from ALZA included
in "Other current assets" in the accompanying consolidated balance sheets
totaled $5,524 and $10,344 at December 31, 2000 and 1999, respectively. IVAX may
receive additional royalties and milestone payments from ALZA based on sales of
the products during the next few years. A portion of the up-front and milestone
payments received and included in other income in prior years, $33,688 as of
December 31, 2000, is refundable if IVAX' patent rights are found to be invalid
and a generic equivalent of Elmiron(R) is introduced by another company. IVAX
believes the probability of occurrence of these events is remote.
(7) DISCONTINUED OPERATIONS:
During 1997, IVAX' Board of Directors decided to divest its intravenous
products, personal care products and specialty chemicals businesses. As a
result, IVAX classified these businesses as discontinued operations and has
included their results of operations in "Discontinued operations, net of taxes"
in the accompanying consolidated statements of operations. The divestiture of
businesses classified as discontinued operations was completed in 1998. During
1998, the Personal Care Products division had net revenues of $42,583 and the
Specialty Chemicals division's vacuum pump fluids business had net revenues of
$850. These amounts include intersegment sales of $14. The sale of assets of
these divested businesses generated pretax gains of $585 in 1999 and $48,904 in
1998.
31
(8) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
IVAX has ownership interests of 50% or less in various unconsolidated
affiliates. At December 31, 2000 and 1999, IVAX' nonmarketable investments in
these affiliates totaled $10,293 and $3,851, respectively, and are included in
"Other assets" in the accompanying balance sheets. Undistributed earnings of
these affiliates, as well as IVAX' equity in their earnings, were not
significant in any of the periods presented in the accompanying consolidated
financial statements.
At December 31, 2000 and 1999, IVAX held marketable equity securities
which it classified as available-for-sale. Based on quoted market prices, the
securities are stated at fair value of $926 and $918, respectively, and are
included in "Other assets" in the accompanying consolidated balance sheets. At
December 31, 2000 and 1999, net unrealized gains of $5 and $86, respectively,
are included in "Accumulated other comprehensive loss" in the accompanying
consolidated balance sheets.
(9) DEBT:
Long-term debt consists of the following:
December 31,
--------------------------
2000 1999
---------- -----------
5 1/2% Convertible Senior Subordinated Notes due 2007. Interest
payable semi-annually. Convertible at the option of the holders into
6,730 shares of common stock at December 31, 2000 at a
conversion rate of $37.15 per share. 5 4/5% effective interest rate. $ 250,000 $ -
6 1/2% Convertible Subordinated Notes due 2001. Interest payable
semi-annually. Convertible at the option of the holders into
2,063 shares of common stock at December 31, 1999 at a
conversion rate of $21.17 per share. 6 3/5% effective interest rate. - 43,661
International subsidiaries' debt 4,248 4,945
Other 441 11
---------- -----------
Total long-term debt 254,689 48,617
Less: Current portion of long-term debt 934 763
---------- -----------
Long-term debt, net of current portion $ 253,755 $ 47,854
========== ===========
10% Note from related party due January 2001. Interest payable quarterly.
22 3/5% effective interest rate. $ - $ 45,619
========== ===========
In July 1998, IVAX' Board of Directors authorized the repurchase of
$20,000 face value of its 6 1/2% Convertible Subordinated Notes. In December
1998, IVAX' Board of Directors renewed its authorization to purchase up to
$20,000 face value of the Notes, which included the amount remaining unpurchased
from the July authorization. On August 11, 1999, IVAX' Board of Directors
approved an increase of $15,000 of repurchases of the 6 1/2% Notes. During 1999
and 1998, IVAX repurchased a total of $31,405 and $15,959 of its 6 1/2%
Convertible Subordinated Notes due November 2001. Extraordinary gains of $593
and $1,121 were recorded related to the debt repurchases during the years ended
December 31, 1999 and 1998, respectively.
On November 18, 1999, IVAX issued a $50,000 promissory note to
Frost-Nevada, Limited Partnership ("FNLP"), an entity related to IVAX' Chairman
and CEO. The note was due January 17, 2001 and bore interest at 10% payable
quarterly. Proceeds from the note were used to purchase IVAX common stock under
the share repurchase program (See Note 12, Shareholders' Equity). In conjunction
with the loan, FNLP was issued a warrant to purchase 750 shares of IVAX common
stock at an exercise price equal to the price paid for the repurchased shares,
$12 per share. The warrant is exercisable through
32
November 2006. The fair value of the warrant using the Black-Scholes option
pricing model was $4,875 which was credited to capital in excess of par value.
During 2000, IVAX paid $3,074 of interest to FNLP. During the first six months
of 2000 and in 1999, IVAX amortized to interest expense $2,128 and $493,
respectively, of the value of the warrant issued to FNLP. On June 30, 2000, the
$50,000 loan from FNLP was repaid resulting in the write-off of the remaining
$2,254 of debt issue costs as an extraordinary item.
On February 9, 2000, IVAX called the remaining $43,661 face value of
its 6 1/2% Convertible Subordinated Notes for redemption. During February 2000,
IVAX converted $43,388 face value of the 6 1/2% Notes into 2,050 shares of IVAX
common stock. In addition, IVAX charged $190 of unamortized debt issue cost and
credited $815 of interest forfeited on the conversion to "Capital in excess of
par value." On March 10, 2000, IVAX redeemed $273 face value of the 6 1/2%
Notes, plus accrued interest, for cash.
During May 2000, IVAX consummated a private offering of $250,000 of its
5 1/2% Convertible Senior Subordinated Notes due 2007 pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act"), and
received net proceeds of approximately $243,750. The 5 1/2% Notes were
registered during the fourth quarter of 2000. The 5 1/2% Notes are convertible
at any time prior to maturity, unless previously redeemed, into 0.0269 shares of
IVAX' common stock per $1 of principal amount of the 5 1/2% Notes. This ratio
results in a conversion price of approximately $37.15 per share. The 5 1/2%
Notes are redeemable by IVAX on or after May 29, 2003. The net proceeds from the
sale of the 5 1/2% Notes are expected to be used primarily to acquire
technology, products or other businesses, to fund the research, development,
testing and commercialization of pharmaceutical products, and for general
corporate purposes. At December 31, 2000, the unamortized discount related to
the 5 1/2% Notes is $5,834, which is being amortized to interest expense over
the life of the 5 1/2% Notes.
Certain of IVAX' international subsidiaries maintain relationships with
foreign banks providing short-term lines of credit in the aggregate amount of
approximately $17,000 and $19,000 at December 31, 2000 and 1999, respectively.
Short-term borrowings totaled $1,877 and $746 at December 31, 2000 and 1999,
respectively, and are included as "Loans payable" in the accompanying
consolidated balance sheets.
The estimated fair values of long-term notes and debt are as follows:
December 31,
------------------------
2000 1999
----------- ----------
5 1/2% Convertible Senior Subordinated Notes due 2007 $ 311,450 $ -
6 1/2% Convertible Subordinated Notes due 2001 - 42,569
10% Note - 45,619
Other 4,689 4,956
----------- ----------
Total $ 316,139 $ 93,144
=========== ==========
Fair value of the 5 1/2% and 6 1/2% Convertible Subordinated Notes is
based on available quoted market prices. Management believes that the carrying
amounts of other debt approximate the fair value.
The stated future maturities of all long-term debt for the next five
years and thereafter are approximately $934, $1,338, $152, $40, $37 and
$252,188, respectively.
(10) INCOME TAXES:
The provision for income taxes on continuing operations before minority
interest consists of the
33
following:
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Current:
U.S. Federal $ 25,111 $ 6,505 $ --
State 966 1,439 --
Puerto Rico and the U.S. Virgin Islands 999 81 509
Foreign 15,222 11,735 5,915
Deferred (29,084) (4,910) 3,623
--------- --------- ---------
Total $ 13,214 $ 14,850 $ 10,047
========= ========= =========
The components of income from continuing operations before income taxes
and minority interest are as follows:
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
United States $ 112,656 $ 43,339 $ 29,128
Puerto Rico and the U.S. Virgin Islands 4,451 6,874 (991)
Foreign 36,484 36,266 6,124
--------- --------- ---------
Total $ 153,591 $ 86,479 $ 34,261
========= ========= =========
A reconciliation of the difference between the expected provision for
income taxes using the statutory U.S. Federal tax rate and IVAX' actual
provision is as follows:
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Tax using statutory U.S. Federal tax rate at 35% $ 53,757 $ 30,268 $ 11,991
Effect of state income taxes 59 833 --
Write-down of non-deductible cost in excess of
net assets of acquired companies 66 63 71
Utilization of net operating loss carryforwards (29,326) (18,900) (10,575)
Tax effect of intercompany income eliminated on books 17,500 -- --
Reduction of valuation allowance on deferred
tax assets (31,113) (11,365) --
Foreign tax rate differential (8,374) (2,194) (2,476)
Effect of Puerto Rico taxes and tollgate 999 81 509
Puerto Rico and U.S. possessions tax incentives (1,558) (2,406) --
Foreign operating losses not benefited 11,290 5,275 3,523
Tax claims and other matters (3,180) 5,094 3,033
Other 3,094 8,101 3,971
--------- --------- ---------
Total $ 13,214 $ 14,850 $ 10,047
========= ========= =========
The domestic current provision was favorably impacted by $29,326,
$18,900 and $44,975 during 2000, 1999 and 1998, respectively, from utilization
of previously reserved net operating loss ("NOL") carryforwards. All of the
reductions in 2000 and 1999 were used against continuing operations. The $44,975
reduction in 1998 was comprised of a $10,575 decrease related to utilization
against domestic continuing operations, a $28,200 decrease due to utilization
against domestic discontinued operations, and a $6,200 decrease related to an
adjustment to the domestic NOL carryforward based on adjustments made to prior
tax periods. The current tax provision for 2000 recognized by foreign operations
was favorably impacted by $3,180 as a result of the resolution of an Inland
Revenue audit in the United Kingdom closing tax years 1992 through 1997. Payment
of the current tax provision for the year ended December
34
31, 2000, for domestic and foreign operations will be reduced by $21,161 and
$4,308, respectively, representing the incremental impact of compensation
expense deductions associated with non-qualified stock option exercises during
the current year. These amounts were credited to "capital in excess of par
value". During the second quarter of 2000, IVAX recognized $45,000 U.S. taxable
income on the intercompany assignment of a contract. For financial reporting
purposes this income was eliminated in consolidation.
During 2000 and 1999, $31,113 ($16,591 during the fourth quarter) and
$11,365, respectively, of the valuation allowance previously recorded against
the domestic net deferred tax asset was also reversed due to management's
expectation of increased domestic taxable income in the coming year. As of
December 31, 2000, the domestic net deferred tax asset was $42,478 and the
aggregate net deferred tax asset in foreign countries with positive net deferred
tax assets was $10,581. The domestic deferred tax asset was fully reserved as of
December 31, 1998, approximately 90 percent reserved as of December 31, 1999 and
approximately 50 percent reserved as of December 31, 2000. Approximately $7,390
of the valuation allowance relates to the tax benefit of stock options exercised
in prior years which has not yet been credited to capital in excess of par
value. Realization of the net deferred tax assets is dependent upon generating
sufficient future domestic and foreign taxable income. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized.
Deferred taxes arise due to temporary differences in reporting of
certain income and expense items for book purposes and income tax purposes. A
detail of the significant components of deferred tax assets (liabilities) in the
accompanying consolidated balance sheets is as follows:
December 31,
----------------------
2000 1999
-------- --------
Accounts receivable allowances $ 35,781 $ 26,698
Reserves and accruals 18,221 18,939
Differences in capitalization of inventory costs 1,102 347
Other 798 217
Valuation allowance (7,742) (33,952)
-------- --------
Amount included in "Other current assets" 48,160 12,249
-------- --------
Basis differences on fixed assets 7,013 9,240
Depreciation differences on fixed assets 3,828 3,640
Recognition of revenue (734) (1,137)
Carrying value of long-term assets 1,099 18
Other 5,175 (288)
Tax credits 15,184 10,960
Net operating losses 8,652 39,977
Valuation allowance (21,641) (52,957)
-------- --------
Amount included in "Other assets" 18,576 9,453
-------- --------
Other (9,841) --
-------- --------
Amount included in "Accrued expenses and other current
liabilities" (9,841) --
-------- --------
Other (8,797) (2,286)
-------- --------
Amount included in "Other long-term liabilities" (8,797) (2,286)
-------- --------
Net deferred tax asset $ 48,098 $ 19,416
======== ========
United States income taxes have not been provided on undistributed
earnings of foreign subsidiaries, as such earnings are being retained
indefinitely by such subsidiaries for reinvestment. The
35
distribution of these earnings would first reduce the domestic valuation
allowance before resulting in additional United States income taxes. The
cumulative amount of such undistributed earnings is approximately $128,600. Any
U.S. tax amounts due would be reduced by allowable foreign tax credits.
Income from IVAX Pharmaceuticals, Inc.'s (which changed its name from
Zenith Goldline Pharmaceuticals, Inc.) Puerto Rico manufacturing operations is
subject to certain tax exemptions under the terms of a grant from the Puerto
Rico government which will expire in 2017. The grant reduced tax expense by
approximately $721, $747 and $0 for the years ended December 31, 2000, 1999 and
1998, respectively. Under the terms of the grant, IVAX Pharmaceuticals is
required to maintain certain employment levels.
IVAX has historically received a United States tax credit under Section
936 of the Internal Revenue Code for certain income generated by its Puerto Rico
and Virgin Islands operations. For 2000, 1999, and 1998, this credit was
approximately $1,558, $2,406 and $0, respectively, and completely offset the
entire United States tax liability of such operations. In 1996, Congress
repealed the Section 936 tax credit and it will be phased out over 4 years
beginning in 2002. Under the current tax law, no tax credit will be available
after December 31, 2005.
At December 31, 2000, IVAX has a limited U.S. NOL carryforward which
can be used only at an annual rate of $3,028 and foreign NOL carryforwards which
are comprised of:
Expire U.S. Foreign
------ -------- --------
2001 $ - $ 300
2002 - 200
2003 - 1,800
2004 1,943 2,200
2005 2,884 6,800
2006 10,313 -
2007 2,733 16,300
2008 4,896 -
Indefinite - 18,600
-------- --------
Total $ 22,769 $ 46,200
======== ========
At December 31, 2000, IVAX had consolidated tax credit carryforwards of
$15,184. The tax credits are comprised of foreign tax credits of $936, which
expire in 2001, $1,132 of research and development credits, which begin to
expire in 2008, and $13,116 of minimum tax credits, which never expire.
Minority interest included in the accompanying consolidated statements
of operations is net of a provision for income taxes of ($1,855), ($2,049) and
$996 for the years ended December 31, 2000, 1999 and 1998, respectively.
(11) 401(k) PLANS:
IVAX' employees within the United States and the Virgin Islands are
eligible to participate in a 401(k) retirement plan and Puerto Rico employees
are eligible to participate in a 165(e) plan, which permit pre-tax employee
payroll contributions (subject to certain limitations) and discretionary
employer matching contributions. Total matching contributions (including those
of discontinued operations) for the years ended December 31, 2000, 1999 and 1998
were $1,092, $816 and $627, respectively.
36
(12) SHAREHOLDERS' EQUITY:
Authorized shares - At the June 15, 2000 Annual Meeting of
Shareholders, IVAX' shareholders approved an increase in the number of
authorized shares of common stock from 250,000 to 350,000.
Stock Split - On January 14, 2000, IVAX' Board of Directors approved a
3-for-2 stock split effective February 22, 2000, in the form of a stock dividend
for shareholders of record February 1, 2000. All weighted average share,
outstanding share, per share earnings and price and stock plan data contained in
the accompanying consolidated financial statements have been retroactively
restated to give effect to the stock split. To reflect the split, common stock
was increased and capital in excess of par value was decreased by $5,075 in
1999.
Stock Option Plans - IVAX administers and has stock options outstanding
under IVAX' 1997 Employee Stock Option Plan ("1997 Plan"), IVAX' 1994 Stock
Option Plan ("1994 Plan"), IVAX' 1985 Stock Option Plan ("1985 Plan"), and
certain stock option plans assumed in business acquisitions. The options
outstanding under the plans assumed in the business acquisitions were converted
into options to acquire IVAX common stock using the applicable exchange ratios.
No additional stock options may be issued under the 1985 Plan or the plans
assumed in the business acquisitions.
The 1997 Plan permits the issuance of options to employees and
consultants to purchase up to 6,000 shares of IVAX common stock. On February 26,
1999, IVAX' Board of Directors approved an increase to 12,000 shares of IVAX
common stock that may be issued under the 1997 Plan. The 1994 Plan permits the
issuance of options to employees, non-employee directors and consultants to
purchase up to 10,500 shares of IVAX common stock. Both plans provide that the
exercise price of the issued options shall be no less than the fair market value
of the common stock on the date of grant and that the option terms shall not
exceed ten years.
The following table presents additional information concerning the
activity in the stock option plans (number of shares in thousands):
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Balance at beginning of year 9,792 $ 9.14 13,445 $ 9.50 15,086 $ 13.25
Granted 5,307 22.04 894 9.53 8,046 5.83
Exercised (3,586) 9.78 (1,895) 6.45 (597) 4.96
Terminated/exchanged (565) 13.35 (2,652) 12.00 (9,090) 12.77
---------- ---------- ---------
Balance at end of year 10,948 14.85 9,792 9.14 13,445 9.50
========== ========== =========
Exercisable at December 31, 3,674 $ 9.44 5,326 $ 10.83 7,395 $ 11.62
37
The following table summarizes information about fixed stock options
outstanding at December 31, 2000 (number of shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price At 12/31/00 Exercise Price
--------------- ----------- ----------------- -------------- ----------- --------------
0.00 - 4.93 116 3.7 $ 4.52 98 $ 4.50
4.94 - 9.85 4,340 4.2 6.40 2,355 6.25
9.86 - 14.78 751 2.2 12.67 601 13.01
14.79 - 19.70 3,339 7.1 18.18 513 17.55
19.71 - 24.63 1,623 6.0 23.08 87 23.00
24.64 - 29.55 323 6.3 27.18 - -
29.56 - 34.48 1 6.6 29.75 - -
34.49 - 39.40 256 6.7 35.77 20 35.25
39.41 - 44.33 184 6.7 42.86 - -
44.34 - 49.25 15 6.6 48.67 - -
------- -------
10,948 5.4 $ 14.85 3,674 $ 9.44
======= =======
In December 1997, IVAX instituted a stock option exchange program in
which it offered holders of certain outstanding out-of-the-money (exercise price
in excess of then market prices) stock options, excluding executive officers and
directors of IVAX, the right to exchange such options for the same or a lesser
number of new options with a lower exercise price and, in some cases, a modified
vesting schedule and term. As a result of the exchange program, on January 23,
1998, approximately 4,500 stock options with exercise prices ranging from $6.59
to $23.25 were exchanged for approximately 3,150 stock options with an exercise
price of $5.55.
IVAX' pro forma net income, pro forma net income per common share and
pro forma weighted average fair value of options granted, with related
assumptions, assuming IVAX had adopted the fair value method of accounting for
all stock-based compensation arrangements consistent with the provisions of SFAS
No. 123, using the Black-Scholes option pricing model for all options granted
after January 1, 1995, are indicated below:
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ----------- ------------
Net income as reported $ 131,044 $ 70,722 $ 71,594
Pro forma net income 114,098 66,298 65,973
Basic EPS as reported 0.83 0.44 0.40
Pro forma basic EPS 0.73 0.41 0.37
Diluted EPS as reported 0.80 0.43 0.40
Pro forma diluted EPS 0.70 0.40 0.37
Pro forma weighted average fair value of options granted $ 10.39 $ 4.05 $ 1.53
Expected life (years) 5.4 4.1 4.6
Risk-free interest rate 5.44-6.63% 4.57-6.08% 4.37-5.65%
Expected volatility 25% 27% 27%
Dividend yield 0% 0% 0%
As the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. In
addition, valuations are based on highly subjective assumptions about the
future, including stock price, volatility and exercise patterns.
38
Employee Stock Purchase Program - On June 17, 1999, the IVAX
Corporation 1999 Employee Stock Purchase Plan ("ESPP") was approved at the
Annual Meeting of Shareholders. IVAX' Board of Directors also approved the
purchase of common stock in the open market, as needed, for the ESPP. The
maximum number of shares available for sale under the ESPP is 4,200 subject to
future increases as stated in the plan. The ESPP became effective January 1,
2000 for employees based in the United States and Puerto Rico and allows them to
purchase IVAX common stock at 85% of the fair market value on the enrollment
date or exercise date, whichever is lower. The maximum amount of stock an
employee may purchase in a year is $25 and subsequent resale is restricted as
stated in the plan. The ESPP is accounted for as a non-compensatory plan.
Share Repurchase Program - In December 1998, IVAX' Board of Directors
approved an increase of 11,250 shares to a total of 18,750 shares of IVAX common
stock that may be repurchased. In April, June and November 1999, IVAX' Board of
Directors approved increases of 7,500, 2,250 and 7,500 shares, respectively in
the share repurchase program. In August 2000, IVAX' Board of Directors approved
an increase of 10,000 shares, bringing the total authorized for repurchase to
46,000 shares. Cumulatively through December 31, 2000, IVAX repurchased 34,380
shares of common stock at a total cost, including commissions, of $338,926.
Under Florida law, repurchased shares constitute authorized but unissued shares.
Put Options - During 2000, IVAX issued 2,940 freestanding put options
for IVAX common stock in connection with the share repurchase program; 500 of
which have expired as of December 31, 2000. IVAX collected $11,259 in premiums
that were credited to "Capital in excess of par value" in the accompanying
consolidated balance sheet at December 31, 2000. The put options that are
outstanding at December 31, 2000 bear strike prices ranging from $27.69 to
$38.00 and will mature between February and July 2001. In the event the put
options are exercised, IVAX may elect to settle by one of three methods:
physical settlement by payment in exchange for IVAX shares, net cash settlement
or net share settlement. These European style options are exercisable only on
the respective expiration dates and would be exercised "in the money" once the
strike price reduced by the premium paid per option exceeds the market value of
IVAX' common stock on the expiration date of the option (or the market value of
IVAX' common stock falls below a trigger price). The maximum potential
repurchase obligation of $84,503 for physical settlement has been reclassified
from "Capital in excess of par value" into a temporary equity account - "Put
options" in the accompanying consolidated balance sheet at December 31, 2000. In
the event the put options expire unexercised, the obligation associated with
these instruments will be extinguished and the amount in the temporary account
"Put Options" will be reclassified into "Capital in excess of par value." At
December 31, 2000, the market value of IVAX' common stock was $38.30, which was
higher than the strike prices for the put options. During 1999, IVAX issued
2,250 free-standing put options for IVAX common stock, now expired, and
generated premiums totaling $2,079 which were credited to "Capital in excess of
par value" in the accompanying consolidated balance sheet at December 31, 1999.
The maximum potential repurchase obligation, now extinguished, of $20,188 for
physical settlement was reclassified from "Capital in excess of par value" into
a temporary equity account - "Put options" in the accompanying consolidated
balance sheet at December 31, 1999.
Diagnostics Stock Option Plan - Effective June 29, 1999, the Board of
Directors of IVAX Diagnostics, Inc., a wholly owned subsidiary of IVAX, approved
the IVAX Diagnostics, Inc. 1999 Stock Option Plan. The plan permits the issuance
of options to employees, non-employee directors and consultants of IVAX
Diagnostics to purchase up to 1,460 shares of the 14,600 authorized shares of
IVAX Diagnostics, Inc. On June 29, 1999, non-qualified options of 835.7 shares
of common stock were granted to employees of IVAX Diagnostics with an exercise
price of $1 per share, a vesting schedule of 50% at the end of year 2 and 25% at
the end of years 3 and 4 and an expiration date of June 28, 2006. The plan
converts to a fair value plan upon an initial public offering.
39
Convertible Debt - See Note 9, Debt, for comments regarding convertible
subordinated debt.
Dividends - IVAX did not pay dividends during the years ended December
31, 2000, 1999 and 1998.
(13) BUSINESS SEGMENT INFORMATION:
IVAX is a multinational company with subsidiaries that operate in the
pharmaceutical business and are engaged in the research, development,
manufacture, marketing and sale of pharmaceutical products. Pharmaceutical
products include prescription drugs and over-the-counter products (See Note 5,
Divestitures, and Note 7, Discontinued Operations for information regarding
operations that have been sold). IVAX reviews financial information, allocates
resources and manages its business by major operating subsidiary. However, IVAX'
pharmaceutical subsidiaries utilize similar production processes, and sell
similar types of products to similar types of customers under similar regulatory
environments using similar methods of distribution. IVAX also expects these
subsidiaries to have similar long-term financial performance. Since these
pharmaceutical subsidiaries meet the aggregation criteria under paragraph 17 of
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, the pharmaceutical operating
subsidiaries are aggregated into one reportable segment, pharmaceutical, and all
other subsidiaries are reported in Corporate and Other.
To provide additional information, IVAX has disaggregated its
pharmaceutical segment results into the geographic regions in which the
subsidiaries are located. The North America region contains IVAX subsidiaries in
the United States and Canada. The Europe region contains subsidiaries located in
Europe. Latin America consists of subsidiaries in South America. Corporate and
Other includes the diagnostic subsidiaries, animal health subsidiary and
subsidiaries located in other geographic regions as well as corporate activities
and elimination of intercompany transactions.
The information provided is based on internal reports and was developed
and utilized by management for the sole purpose of tracking trends and changes
in the results of the regions. The information, including the allocations of
expense and overhead, were calculated based on a management approach and may not
reflect the actual economic costs, contributions or results of operations of the
regions as stand alone businesses. If a different basis of presentation or
allocation were utilized, the relative contributions of the regions might differ
but the relative trends would, in management's view, likely not be materially
impacted.
40
The table below sets forth net revenues and profits in the regional
presentation.
North Latin Corporate Total
YEAR America Europe America & Other IVAX
- -------------------------------------------------------------------------------------------------------------------
External net sales $ 319,028 $ 278,627 $ 62,299 $ 39,717 $ 699,671
Intercompany sales 1,638 28,999 - (30,637) -
Other revenues 20,573 71,996 1,136 29 93,734
---------- ---------- ---------- --------- ----------
Net revenues 341,239 379,622 63,435 9,109 793,405
---------- ---------- ---------- --------- ----------
Asset impairment and restructuring (3,677) (858) - - (4,535)
Income from operations 64,121 39,626 6,570 26,415 136,732
Interest income 115 2,219 371 11,281 13,986
Interest expense (20) (135) (55) (14,414) (14,624)
Other income/expense 53,633 (3,741) 816 (34,060) 16,648
Equity earnings of affiliates - (210) - 1,059 849
Tax provision (benefit) 40,781 9,993 3,120 (40,680) 13,214
Income from continuing operations before
minority interest and extraordinary items 77,068 27,766 4,582 30,961 140,377
1999
- -------------------------------------------------------------------------------------------------------------------
External net sales $ 247,424 $ 290,743 $ 31,469 $ 34,983 $ 604,619
Intercompany sales 461 8,332 - (8,793) -
Other revenues 26,761 23,570 1,512 20 51,863
---------- ---------- ---------- --------- ----------
Net revenues 274,646 322,645 32,981 26,210 656,482
---------- ---------- ---------- --------- ----------
Asset impairment and restructuring (1,289) 677 - - (612)
Income (loss) from operations 45,745 39,483 2,342 (21,190) 66,380
Interest income 95 931 4 5,112 6,142
Interest expense 53 (188) (84) (5,337) (5,556)
Other income/expense 26,886 (5,157) (735) (1,927) 19,067
Equity earnings of affiliates - - - 446 446
Tax provision (benefit) 9,129 19,679 1,067 (15,025) 14,850
Income (loss) from continuing operations
before minority interest and
extraordinary items 63,650 15,390 460 (7,871) 71,629
1998
- -------------------------------------------------------------------------------------------------------------------
External net sales $ 239,393 $ 272,479 $ 33,547 $ 36,571 $ 581,990
Intercompany sales 701 12,414 - (13,115) -
Other revenues 18,956 23,559 1,221 1 43,737
---------- ---------- ---------- --------- ----------
Net revenues 259,050 308,452 34,768 23,457 625,727
---------- ---------- ---------- --------- ----------
Asset impairment and restructuring (875) 13,150 - (53) 12,222
Income (loss) from operations 8,892 5,506 1,329 (19,358) (3,631)
Interest income 47 1,612 3 10,310 11,972
Interest expense (63) (368) (316) (6,110) (6,857)
Other income/expense 14,530 (608) 478 16,746 31,146
Equity earnings of affiliates - - - 1,631 1,631
Tax provision (benefit) 10,553 9,437 754 (10,697) 10,047
Income (loss) from continuing operations
before minority interest and
extraordinary items 12,853 (3,295) 740 13,916 24,214
41
The following table reconciles long-lived assets by geographic region
to the consolidated total:
North Latin Corporate Total
Year America Europe America & Other IVAX
- -------------------------------------------------------------------------------------------------------------------
2000 $ 60,624 $ 219,701 $ 63,443 $ 46,728 $ 390,496
1999 54,491 207,188 7,413 21,200 290,292
1998 57,793 184,174 7,977 25,601 275,545
Long-lived assets exclude the long-term net deferred tax asset included
in "Other assets" on the accompanying consolidated balance sheets.
The following table shows capital expenditures and
depreciation/amortization by region:
Region Capital Expenditures Depreciation/Amortization
- ------ -------------------------------------- ---------------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
North America $ 17,510 $ 6,386 $ 5,006 $ 12,357 $ 8,005 $ 10,168
Europe 31,294 33,588 58,299 15,072 16,446 20,634
Latin America 429 539 463 2,576 1,133 987
IVAX sells products in a large number of countries; however, only two
countries, the United States and the United Kingdom, have net revenues that are
material to consolidated net revenues. Additionally, IVAX has material amounts
of long-lived assets in only those two countries. The following table summarizes
net revenues based on the location of the third party customer and long-lived
assets based on the country of physical location:
United United
GEOGRAPHIC AREAS: States Kingdom Other Total
---------------------------------------------------------
Net revenues 2000 $ 389,055 $ 220,191 $ 184,159 $ 793,405
1999 303,607 229,769 123,106 656,482
1998 279,660 203,869 142,198 625,727
Long-lived assets 2000 106,977 153,021 130,498 390,496
1999 75,569 158,544 56,179 290,292
1998 83,007 149,569 42,969 275,545
NET REVENUES BY PRODUCT TYPE:
Net Revenues
-----------------------------------------
2000 1999 1998
---------- ---------- ----------
Proprietary and branded $ 367,760 $ 237,615 $ 246,272
Generic 389,421 369,520 318,633
Other 36,224 49,347 60,822
---------- ---------- ----------
Total $ 793,405 $ 656,482 $ 625,727
========== ========== ==========
No single customer accounted for 10% or more of IVAX' consolidated net
revenues for any of the three years ended December 31, 2000. Other revenues
included in net revenues in the accompanying consolidated statements of
operations consist of license fees, royalties, and development service fees.
Other revenues include $19,402 and $18,000 during 1999 and 1998, respectively,
from the settlement of patent litigation with Abbott Laboratories discussed in
Note 14, Commitments and Contingencies.
42
In November 1999, IVAX entered into a three-year product collaboration
and development services agreement with Bristol-Myers Squibb Company ("BMS") in
the areas of inhalation technology and oncology. With respect to inhalation
technology, the agreement calls for IVAX and BMS to collaborate to develop one
or more of BMS' proprietary molecules using IVAX' patented devices, which BMS
would purchase from IVAX. BMS would retain the worldwide rights to market
respiratory products containing its compounds. On the oncology side, BMS'
Taxol(R) (paclitaxel) is the leading anti-cancer drug in the world, with 1999
sales estimated to reach approximately $1.5 billion. However, Taxol(R) is an
injectable product and is not orally available. As part of the agreement, BMS
was granted an option to negotiate, for six months, a license to IVAX' patented
system for making paclitaxel orally available.
(14) COMMITMENTS AND CONTINGENCIES:
Sales of Businesses and Gain on Sale - Significant assumptions in the
preparation of the financial statements include IVAX' belief that the outcome of
contingencies indemnified by IVAX in the sale of certain businesses will not
have a material effect on future operations and that the probability of a refund
of previously recognized gain on sale of product rights is remote.
Leases - IVAX leases office, plant and warehouse facilities and
automobiles under noncancellable operating leases. Motor vehicles, production
equipment and certain manufacturing facilities are also leased under capital
leases. Rent expense for the three years ended December 31, 2000 totaled
approximately $6,360, $5,626 and $5,226, respectively. The future minimum lease
payments under noncancellable capital leases and their related assets recorded
at December 31, 2000 and 1999 were not material. The future minimum lease
payments under noncancellable operating leases with initial or remaining terms
of one year or more at December 31, 2000, were as follows:
Operating
Leases
---------
2001 $ 4,469
2002 3,027
2003 1,575
2004 906
2005 329
Thereafter 282
---------
Total minimum lease payments $ 10,588
=========
Legal Proceedings - In April 1995, IVAX Pharmaceuticals received
approvals from the FDA to manufacture and market the antibiotic cefaclor in
capsule and oral suspension formulations. Cefaclor is the generic equivalent of
Ceclor(R), a product of Eli Lilly and Company ("Lilly"). On April 27, 1995,
Lilly filed a lawsuit against IVAX Pharmaceuticals and others in federal court
alleging that IVAX Pharmaceuticals' cefaclor raw material supplier, a third
party unaffiliated with IVAX, manufactured cefaclor raw material in a manner
which infringed two process patents owned by Lilly, and that IVAX
Pharmaceuticals and the other defendants knowingly and willfully infringed and
induced the supplier to infringe the patents by importing the raw material into
the United States. The lawsuit seeks to enjoin IVAX Pharmaceuticals and the
other defendants from infringing or inducing the infringement of the patents and
from making, using or selling any product incorporating the raw material
provided by such supplier, and seeks an unspecified amount of monetary damages
and the destruction of all cefaclor raw material manufactured by the supplier
and imported into the United States. In August 1995, the Court denied Lilly's
motion for preliminary injunction which sought to prevent IVAX Pharmaceuticals
from selling cefaclor until the merits of Lilly's allegations could be
determined at trial. On May 10, 1996, the United States Court of Appeals for the
Federal Circuit affirmed the district court's denial of Lilly's motion for
preliminary injunction. On February 28, 1997, Lilly filed an amended complaint
alleging the
43
infringement of an additional patent. Lilly subsequently filed a second amended
complaint but did not revise its allegations regarding IVAX Pharmaceuticals.
IVAX Pharmaceuticals has asserted a counterclaim, which remains pending. IVAX
Pharmaceuticals ceased selling cefaclor in January 1997, when it announced a
recall in the United States of cefaclor as a result of the recall by IVAX
Pharmaceuticals' supplier of raw material used to manufacture the product.
In December 1998, Louisiana Wholesale Drug Co. filed an action
purporting to be a class action in the United States District Court for the
Southern District of Florida against Abbott Laboratories, Geneva Pharmaceuticals
and IVAX Pharmaceuticals, alleging a violation of Section 1 of the Sherman
Antitrust Act. Plaintiffs purport to represent a class consisting of customers
who purchased a certain proprietary drug directly from Abbott during the period
beginning on October 29, 1998. Plaintiffs allege that, by settling
patent-related litigation against Abbott in exchange for quarterly payments, the
defendants engaged in an unlawful restraint of trade. The complaint seeks
unspecified treble damages and injunctive relief. Fourteen additional class
action lawsuits containing allegations similar to those in the Louisiana
Wholesale suit were filed in various jurisdictions between July 1999 and
February 2001, the majority of which have been consolidated with the Louisiana
Wholesale suit. On December 13, 2000, plaintiffs' motion for summary judgement
on the issue of whether the settlement agreement constituted a per se violation
of Section 1 of the Sherman Antitrust Act in the Louisiana Wholesale case was
granted. IVAX Pharmaceuticals has sought leave to appeal to the United States
Court of Appeals for the Eleventh Circuit. On March 13, 2000 the Federal Trade
Commission ("FTC") announced that it had issued complaints against, and
negotiated consent decrees with Abbott and Geneva Pharmaceuticals arising out of
an investigation of the same subject matter that is involved in these lawsuits.
The FTC took no action against IVAX Pharmaceuticals.
IVAX Pharmaceuticals has been named in a number of individual and class
action lawsuits in both state and federal courts involving the diet drug
combination of fenfluramine and phentermine, commonly known as "fen-phen."
Generally, these lawsuits seek damages for personal injury, wrongful death and
loss of consortium, as well as punitive damages, under a variety of liability
theories including strict products liability, breach of warranty and negligence.
IVAX Pharmaceuticals did not manufacture either fenfluramine or phentermine, but
did distribute the generic version of phentermine manufactured by Eon Labs
Manufacturing, Inc. ("Eon") and Camall Company. Although IVAX Pharmaceuticals
had a very small market share, as of January 31, 2001, IVAX Pharmaceuticals has
been named in approximately 4,950 cases and has been dismissed from
approximately 3,381 cases, with additional dismissals pending. IVAX
Pharmaceuticals intends to vigorously defend all of the lawsuits, and while
management believes that its defense will succeed, as with any litigation, there
can be no assurance of this. Currently, Eon is paying for approximately 50% of
IVAX Pharmaceuticals' costs in defending these suits and is fully indemnifying
IVAX Pharmaceuticals against any damages IVAX Pharmaceuticals may suffer as a
result of cases involving product manufactured by Eon. In the event Eon
discontinues providing this defense and indemnity, IVAX Pharmaceuticals has its
own product liability insurance. While IVAX Pharmaceuticals' insurance carriers
have issued reservations of rights, IVAX Pharmaceuticals believes that it has
adequate coverage. Although it is impossible to predict with certainty the
outcome of litigation, in the opinion of management, this litigation will not
have a material adverse impact on IVAX' financial condition or results of
operations.
On March 7, 2000, individuals purporting to be IVAX shareholders filed
a class action complaint against IVAX and certain current and former officers
and directors in the Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida. The plaintiff seeks to act as the representative of a class
consisting of all purchasers of IVAX' common stock between December 19, 1997 and
the date of class certification. The complaint generally alleges that IVAX'
adoption of a shareholder rights plan containing a provision that would limit
the ability of certain members who might be added to the Board of
44
Directors following a change of control to approve a decision to redeem the
rights, which is commonly known as a "dead hand" provision, is a violation of
the Florida Business Corporation Act and IVAX' articles of incorporation and
by-laws. Plaintiffs seek an injunction invalidating this provision, as well as
damages in an unspecified amount which, in the opinion of management, would not
be material. On February 8, 2001, a motion for summary judgement was granted in
IVAX' favor. Plaintiffs have a Motion for Attorneys' Fees pending.
Paclitaxel Related Litigation
On March 26, 1998, BMS filed a complaint against IVAX Pharmaceuticals
in the United States District Court for the District of New Jersey alleging
patent infringement of two of its patents relating to Taxol(R). IVAX
Pharmaceuticals filed various counterclaims based on antitrust and unfair
competition. On March 3, 2000, the court granted IVAX Pharmaceuticals' motion
for summary judgment of invalidity. On April 17, 2000, BMS filed an appeal which
remains pending. IVAX Pharmaceuticals' counterclaims have been stayed.
On August 11, 2000, American BioScience, Inc. ("ABI") filed a complaint
in the United States District Court for the Central District of California for a
temporary restraining order and preliminary injunction compelling BMS to list in
the FDA's Orange Book ABI's '331 patent, which purportedly covers BMS's Taxol(R)
product. A hearing was held on September 6, 2000 and the Court denied ABI's
request for preliminary injunction, declined to approve the settlement between
ABI and BMS and dismissed ABI's complaint and ordered that BMS de-list the '331
patent. ABI appealed and sought a stay of the Order from the Ninth Circuit Court
of Appeals, which was denied on September 13, 2000. The appeal remains pending.
On September 7, 2000, ABI filed a lawsuit against IVAX, IVAX
Pharmaceuticals and Baker Norton Pharmaceuticals, Inc. ("BNP"), a wholly-owned
subsidiary of IVAX, in the United States District Court for Central District of
California alleging infringement of its '331 patent, which purports to cover
paclitaxel. This matter remains pending.
On September 20, 2000, ABI filed a complaint in the United States
District Court for the District of Columbia which sought by temporary
restraining order and preliminary injunction a rescission of BNP's final
marketing approval for its generic paclitaxel product. Both BMS and BNP
intervened in the action. On October 3, 2000, the Court denied ABI's request for
relief. Thereafter, ABI sought an emergency injunction pending appeal from the
United States Court of Appeals for the District of Columbia Circuit, which was
also denied on October 13, 2000. ABI's appeal remains pending.
On October 16, 2000, ABI filed a complaint in the United States
District Court for the Central District of California which recites virtually
the same claims as the action ABI filed in the District of Columbia Court set
out above. BNP moved to intervene and opposed ABI's request for preliminary
injunction. On November 7, 2000, the United States District Court of the
District of Columbia ordered ABI to refrain from pursuing this litigation, or
any other litigation that duplicates the litigation ABI initiated in the
District of Columbia Circuit.
IVAX intends to vigorously defend each of the foregoing lawsuits, but
their respective outcomes cannot be predicted. Any of such lawsuits, if
determined adversely to IVAX, could have a material adverse effect on IVAX'
financial position and results of operations. IVAX' ultimate liability with
respect to any of the foregoing proceedings is not presently determinable.
IVAX is involved in various other legal proceedings arising in the
ordinary course of business, some of which involve substantial amounts. In order
to obtain generic approvals prior to the expiration of patents on branded
products, and to benefit from the exclusivity allowed to ANDA applicants that
successfully challenge these patents, IVAX frequently becomes involved in patent
infringement litigation
45
brought by branded pharmaceutical companies. Although these lawsuits involve
products that are not yet marketed and therefore pose little or no risk of
liability for damages, the legal fees and costs incurred in defending such
litigation can be substantial. While it is not feasible to predict or determine
the outcome or the total cost of these proceedings, in the opinion of
management, based on a review with legal counsel, any losses resulting from such
legal proceedings will not have a material adverse impact on IVAX' financial
position or results of operations.
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following tables summarize selected quarterly data of IVAX for the
years ended December 31, 2000 and 1999:
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
2000
- ----
Net revenues (1) $ 183,258 $ 184,827 $ 182,566 $ 242,754 $ 793,405
Gross profit (1) 88,085 89,620 88,174 117,623 383,502
Income from continuing operations (2) 26,666 32,480 30,920 49,703 139,769
Net income (3) 20,195 30,226 30,920 49,703 131,044
Basic earnings per common share:
Continuing operations 0.17 0.21 0.19 0.32 0.89
Extraordinary item - (0.01) - - (0.02)
Net earnings 0.12 0.20 0.19 0.32 0.83
Diluted earnings per common share:
Continuing operations 0.17 0.20 0.19 0.30 0.86
Extraordinary item - (0.01) - - (0.02)
Net earnings 0.13 0.19 0.19 0.30 0.80
1999
- ----
Net revenues (1) $ 147,658 $ 154,354 $ 163,399 $ 191,071 $ 656,482
Gross profit (1) 60,008 65,820 70,988 81,699 278,515
Income from continuing operations (2) 9,717 13,120 16,929 29,778 69,544
Income from discontinued operations 290 290 5 - 585
Net income 10,040 13,495 17,409 29,778 70,722
Basic earnings per common share:
Continuing operations 0.06 0.08 0.10 0.19 0.43
Extraordinary item - - 0.01 - 0.01
Net earnings 0.06 0.08 0.11 0.19 0.44
Diluted earnings per common share:
Continuing operations 0.06 0.08 0.10 0.18 0.42
Extraordinary item - - 0.01 - 0.01
Net earnings 0.06 0.08 0.11 0.18 0.43
(1) Amounts have been restated to conform to current period's presentation.
(2) The second, third and fourth quarters of 2000 include reversals of
previously recorded restructuring reserves of $3,144, $895 and $496,
respectively. The third and fourth quarters of 1999 include
restructuring costs of $586 and a reversal of previously recorded
restructuring reserves of $1,198, respectively.
(3) The first quarter of 2000 includes a cumulative effect of a change in
accounting principle charge of $6.5 million which was recorded during
the fourth quarter. The first, second, third and fourth quarters
include $1,245, $160, $160 and $160 pretax increases in other revenue
from amortization of deferred revenue related to the accounting change.
46
(16) RELATED PARTY TRANSACTIONS:
IVAX paid $1,969 and $1,637 during 2000 and 1999, respectively, to
PharmAir Corporation for use of an airplane. PharmAir Corporation is indirectly,
beneficially owned by IVAX' Chairman and CEO.
(17) SUBSEQUENT EVENTS:
During January and February, 2001, IVAX repurchased 585 shares of its
stock at a total cost, including commissions, of $20,278.
On February 9, 2001, IVAX indirectly acquired Laboratorios Fustery,
S.A. de C.V., a corporation organized under the laws of Mexico ("Fustery"), by
purchasing the outstanding securities of Fustery's parent, Maancirkel Holding
BV, a corporation organized under the laws of The Netherlands, from Morcob CVA,
an entity organized under the laws of Belgium pursuant to a stock purchase
agreement entered into among the parties on October 11, 2000. Under the terms of
the stock purchase agreement, IVAX acquired Maancirkel for 1,325 shares of
common stock of IVAX, valued at $57,000, and $60,000 in cash. Pursuant to the
term of the stock purchase agreement, the amount of common stock may be adjusted
within 180 days based on the per share market price of IVAX' common stock.
Fustery manufactures, markets and distributes pharmaceutical products in Mexico.
On February 26, 2001, IVAX acquired the assets of a research
organization located in the United States for 487 shares of common stock of
IVAX, valued at $18,000, and $5,000 in cash.
On March 13, 2001, IVAX acquired Netpharma Scandinavia AB, a Swedish
pharmaceutical company, for $100 in cash, 499 shares of common stock of IVAX,
valued at $18,365, and additional shares of IVAX common stock, valued at
$2,052, subject to achievement of earnout targets for each of the next two
years. If the earnout targets are achieved, the number of additional shares
issued will be based on the exchange rate in effect on the payment dates and the
average price of IVAX common stock just prior to April 30, 2002 and 2003.
On March 14, 2001, IVAX' wholly-owned subsidiary, IVAX Diagnostics,
Inc., was merged with b2bstores.com, a non-operating company, resulting in IVAX
owning approximately 70% of the newly merged public company. IVAX received
20,000 shares of b2bstores.com common stock in exchange for all the outstanding
shares of IVAX Diagnostics, Inc. and b2bstores.com's name was changed to IVAX
Diagnostics, Inc. For accounting purposes, this transaction is treated as the
sale of a minority interest in IVAX Diagnostics, Inc. resulting in an estimated
gain of $8,000, net of $2,378 of compensation expense from outstanding options
under the IVAX Diagnostics, Inc. 1999 Stock Option Plan converting to a fair
value plan as a result of the merger.
47