FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission File Number 1-09623
IVAX CORPORATION
FLORIDA 16-1003559
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33137
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 575-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
121,467,435 SHARES OF COMMON STOCK, $.10 PAR VALUE, OUTSTANDING
AS OF JULY 30, 1996.
IVAX CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 2
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 18
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
1996 1995
(unaudited) (audited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,808 $ 14,720
Accounts receivable, net 378,288 359,165
Inventories 310,009 242,260
Other current assets 107,856 60,673
------------- -------------
Total current assets 812,961 676,818
Property, plant and equipment, net 406,335 385,419
Cost in excess of net assets of acquired companies, net 145,268 138,423
Patents, trademarks, licenses and other intangibles, net 50,971 50,859
Other 89,272 83,791
------------- -------------
Total assets $ 1,504,807 $ 1,335,310
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 3,111 $ 4,807
Current portion of long-term debt 284,065 3,521
Accounts payable 104,263 92,343
Accrued income taxes payable 13,107 8,632
Accrued expenses and other current liabilities 98,273 96,610
------------- -------------
Total current liabilities 502,819 205,913
Long-term debt, net of current portion 111,271 298,857
Other long-term liabilities 26,736 26,314
Minority interest 13,061 15,054
------------- -------------
Total liabilities 653,887 546,138
------------- -------------
Shareholders' equity:
Common stock 12,146 11,803
Capital in excess of par value 502,580 461,603
Retained earnings 341,604 322,117
Cumulative translation adjustment and other (5,410) (6,351)
------------- -------------
Total shareholders' equity 850,920 789,172
------------- -------------
Total liabilities and shareholders' equity $ 1,504,807 $ 1,335,310
============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
2
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
PERIOD ENDED JUNE 30, THREE MONTHS SIX MONTHS
(In thousands, except per share data) 1996 1995 1996 1995
------------ ------------ ------------ ------------
NET REVENUES $ 273,883 $ 306,684 $ 607,928 $ 587,764
COST OF SALES 191,078 176,849 380,648 338,211
------------ ------------ ------------ ------------
Gross Profit 82,805 129,835 227,280 249,553
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling 54,534 44,412 105,499 87,645
General and administrative 32,359 24,876 60,857 49,665
Research and development 18,085 16,479 34,607 31,664
Amortization of intangible assets 2,797 2,559 5,360 4,942
Merger expenses - - 184 -
------------ ------------ ------------ ------------
Total operating expenses 107,775 88,326 206,507 173,916
------------ ------------ ------------ ------------
Income (loss) from operations (24,970) 41,509 20,773 75,637
OTHER INCOME (EXPENSE):
Interest income 171 385 492 946
Interest expense (6,206) (5,190) (11,897) (10,591)
Other income (expense), net (674) 1,069 3,166 4,280
------------ ------------ ------------ ------------
(6,709) (3,736) (8,239) (5,365)
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority
interest and extraordinary items (31,679) 37,773 12,534 70,272
PROVISION (BENEFIT) FOR INCOME TAXES (19,466) 8,793 (13,333) 16,653
------------ ------------ ------------ ------------
Income (loss) before minority interest and
extraordinary items (12,213) 28,980 25,867 53,619
MINORITY INTEREST (1,718) (855) (3,902) (2,191)
------------ ------------ ------------ ------------
Income (loss) before extraordinary items (13,931) 28,125 21,965 51,428
Extraordinary items, net of taxes (2,072) (20) (2,073) 34
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (16,003) $ 28,105 $ 19,892 $ 51,462
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Primary:
Earnings (loss) before extraordinary items $ (.11) $ .24 $ .18 $ .44
Extraordinary items (.02) - (.02) -
------------ ------------ ------------ ------------
Net earnings (loss) $ (.13) $ .24 $ .16 $ .44
============ ============ ============ ============
Fully Diluted:
Earnings (loss) before extraordinary items $ (.11) $ .24 $ .18 $ .43
Extraordinary items (.02) - (.02) -
------------ ------------ ------------ ------------
Net earnings (loss) $ (.13) $ .24 $ .16 $ .43
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Primary 121,015 118,741 121,858 118,061
============ ============ ============ ============
Fully Diluted 121,015 119,030 121,882 118,586
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1996 1995
------------- -------------
(In thousands)
Cash flows from operating activities:
Net income $ 19,892 $ 51,462
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 27,198 27,063
Provision (benefit) for deferred taxes (20,501) 777
Provision for allowances for doubtful accounts 2,706 1,646
Gains on sale of long-term assets - (2,921)
Losses (gains) on extinguishment of debt 1,640 (63)
Minority interest 3,902 2,191
Changes in assets and liabilities:
Increase in accounts receivable (13,397) (27,048)
Increase in inventories (64,005) (21,794)
Increase in other current assets (18,515) (3,613)
Increase in other assets (3,209) (1,168)
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities 11,103 (22,066)
Decrease in other long-term liabilities (3,322) (629)
Other, net (972) 677
------------- -------------
Net cash provided by (used for) operating activities (57,480) 4,514
------------- -------------
Cash flows from investing activities:
Capital expenditures, net of proceeds from sales (39,827) (49,733)
Acquisitions of patents, trademarks, licenses,
and other intangibles, net of sales proceeds (1,267) (401)
Acquisitions of businesses, net of cash acquired (12,110) (2,106)
Other, net - (303)
------------- -------------
Net cash used for investing activities (53,204) (52,543)
------------- -------------
Cash flows from financing activities:
Payments on long-term debt and loans payable (398,224) (32,134)
Borrowings on long-term debt and loans payable 485,665 56,027
Issuance of common stock 31,777 8,244
Cash dividends paid (6,057) (4,632)
------------- -------------
Net cash provided by financing activities 113,161 27,505
------------- -------------
Effect of exchange rate changes on cash (389) (722)
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,088 (21,246)
Cash and cash equivalents at the beginning of the year 14,720 37,045
------------- -------------
Cash and cash equivalents at the end of the period $ 16,808 $ 15,799
============= =============
Supplemental disclosures:
Interest paid $ 14,696 $ 11,255
============= =============
Income tax payments $ 9,775 $ 9,799
============= =============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL:
In management's opinion, the accompanying unaudited condensed
consolidated financial statements of IVAX Corporation and subsidiaries ("IVAX")
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of IVAX as of June 30, 1996,
and the results of its operations for the three and six months ended June 30,
1996 and 1995. The results of operations and cash flows for the six months ended
June 30, 1996 are not necessarily indicative of the results of operations or
cash flows which may be reported for the remainder of 1996.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The condensed consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements included
in IVAX' Annual Report on Form 10-K for the year ended December 31, 1995.
The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the Notes to Consolidated Financial
Statements included in IVAX' Annual Report on Form 10-K for the year ended
December 31, 1995.
(2) EARNINGS (LOSS) PER SHARE:
Primary earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common and dilutive common equivalent
shares outstanding for each period. Common stock equivalents include the
dilutive effect of all outstanding stock options and warrants using the treasury
stock method. Fully diluted earnings (loss) per share assumes the maximum
dilutive effect from stock options and warrants, and if applicable, the
conversion equivalents of the 6-1/2% Convertible Subordinated Notes due 2001
and, for the three and six months ended June 30, 1995, the 9.00% Convertible
Subordinated Debentures due 1995.
(3) 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. IVAX utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities using 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.
5
The provision (benefit) for income taxes consists of the following (in
thousands):
Three Months Six Months
Period Ended June 30, 1996 1995 1996 1995
------------- -------------- ------------- --------------
Current:
United States $ (1,663) $ 5,802 $ (8,076) $ 11,332
Foreign, including Puerto Rico
and U.S. Virgin Islands 2,703 2,301 15,244 4,544
Deferred (20,506) 690 (20,501) 777
------------- -------------- ------------- --------------
Provision (benefit) for income taxes $ (19,466) $ 8,793 $ (13,333) $ 16,653
============= ============== ============= ==============
(4) BUSINESS COMBINATIONS:
On March 1, 1996, IVAX acquired Elvetium S.A. (Argentina), Alet
Laboratorios S.A.E.C.I. y E. and Elvetium S.A. (Uruguay), three affiliated
companies engaged in the manufacture and marketing of pharmaceuticals in
Argentina and Uruguay, in exchange for 1,490,909 shares of IVAX' common stock.
Although the acquisition was accounted for using the pooling of interests method
of accounting, the acquisition was recorded as of January 1, 1996 and the
accompanying historical condensed consolidated financial statements have not
been restated to give retroactive effect to the acquisition due to the
immateriality of the related amounts.
During the first half of 1996, IVAX purchased additional shares of
Galena a.s. increasing its ownership interest to 74%.
(5) DEBT:
On May 14, 1996, IVAX entered into a new revolving line of credit with
a bank syndicate permitting borrowings of up to $425,000,000. Pursuant to the
terms of the credit facility, IVAX has agreed not to pledge or dispose of
certain of IVAX' significant subsidiaries. Borrowings under the credit facility
generally accrue interest at the London Interbank Offer Rate (LIBOR) plus .45%
through August 19, 1996, and thereafter at LIBOR plus between .35% to .70%,
depending on certain financial ratios. The credit facility has a five year term
and contains various financial covenants, including a restriction on the payment
of dividends by IVAX in excess of 35% of IVAX' consolidated net income for any
consecutive four-quarter period. Proceeds from the credit facility have been
used to refinance previously existing credit facilities and, as discussed below,
to make an investment in and advances to McGaw, Inc. ("McGaw"), and will be used
for working capital and general corporate purposes, including to finance
acquisitions.
On June 17, 1996, IVAX made an investment in and advances to McGaw in
the aggregate amount of $91,150,000 using proceeds from the credit facility.
McGaw used the proceeds to redeem the remaining outstanding face value of its
10-3/8% Senior Notes due April 1, 1999 at a purchase price of approximately 102%
of their outstanding principal of $87,420,000, plus accrued interest. The
redemption resulted in a pre-tax extraordinary loss of $3,455,000.
IVAX was not in compliance with the fixed charge coverage ratio (the
ratio of consolidated earnings before income taxes, depreciation and
amortization less consolidated capital expenditures to consolidated fixed
charges) required by the credit facility at June 30, 1996. IVAX subsequently
obtained a waiver of such noncompliance from the lenders. IVAX intends to
request a permanent amendment to
6
the fixed charge coverage ratio covenant. Pending the execution of such an
amendment, the $281,820,330 outstanding under the credit facility at June 30,
1996 has been classified within current portion of long-term debt in the
accompanying condensed consolidated balance sheet. Although management believes
that the lenders will agree to amend the fixed charge coverage ratio covenant,
no assurance can be given that the amendment will be executed or that, as part
of the amendment, the lenders will not require other terms of the credit
facility to be amended, including the interest rate charged on borrowings and
other pricing terms.
(6) DIVIDENDS ON COMMON STOCK:
On June 3, 1996, IVAX paid a $.05 per share cash dividend to holders of
record of IVAX' common stock as of May 10, 1996.
7
ITEM 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 Consolidated Financial Statements, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in IVAX' Annual Report on Form 10-K
for the year ended December 31, 1995 and the Condensed Consolidated Financial
Statements and the related Notes to Condensed Consolidated Financial Statements
included in Item 1 of this Quarterly Report on Form 10-Q. Except for historical
information contained herein, the matters discussed below are forward looking
statements made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Such statements involve risks and uncertainties,
including but not limited to economic, competitive, governmental and
technological factors affecting IVAX' operations, markets, products and prices,
and other factors discussed elsewhere in this report and the documents filed by
IVAX with the Securities and Exchange Commission ("SEC").
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1995
IVAX reported net income of $19.9 million for the six months ended June
30, 1996, compared to $51.5 million for the six months ended June 30, 1995.
Income before extraordinary items was $22.0 million for the six months ended
June 30, 1996, compared to $51.4 million for the same period of the prior year.
Results for the first half of 1996 included $2.1 million in net extraordinary
losses from the early extinguishment of debt.
Primary earnings before extraordinary items per common share were $.18
for the six months ended June 30, 1996, compared to $.44 for the six months
ended June 30, 1995. Net earnings per primary common share were $.16 for the
first half of 1996, compared to $.44 for the same period of the prior year. The
net extraordinary loss of $.02 per common share recorded in the first half of
1996 related to the early extinguishment of debt.
NET REVENUES AND GROSS PROFIT BY BUSINESS SEGMENT:
(In thousands)
Six Months Ended June 30, 1996 1995
------------------------------- -------------------------------
NET GROSS NET GROSS
REVENUES PROFIT REVENUES PROFIT
------------- -------------- ------------- --------------
Pharmaceuticals $ 360,127 $ 132,989 $ 340,496 $ 147,246
Intravenous products 168,043 56,397 170,839 68,989
Other operations 80,663 37,894 76,871 33,318
Intersegment eliminations (905) - (442) -
------------- -------------- ------------- --------------
Total $ 607,928 $ 227,280 $ 587,764 $ 249,553
============= ============== ============= ==============
Net revenues for the first half of 1996 totaled $607.9 million, an
increase of $20.2 million, or 3%, compared to the same period of the prior year.
Gross profit for the first half of 1996 decreased $22.3 million, or 9%, from the
same period of the prior year. Gross profit was $227.3 million (37.4% of net
revenues) for the first half of 1996, compared to $249.6 million (42.5% of net
revenues) for the first half of 1995.
8
Net revenues of IVAX' pharmaceutical operations increased $19.6
million, or 6%, in comparison to the first six months of 1995 due to increased
net revenues from the international pharmaceutical operations, partially offset
by a reduction in net revenues of the domestic pharmaceutical operations.
Domestic pharmaceutical net revenues totaled $197.9 million for the
first six months of 1996, compared to $212.1 million for the same period of
1995. The $14.2 million, or 7%, decrease in domestic pharmaceuticals net
revenues was primarily due to the factors affecting IVAX' United States generic
pharmaceutical operations during the second quarter of 1996 discussed below,
partially offset by increased net revenues from the sale of certain new generic
products manufactured by IVAX and introduced during the past twelve months.
Significant customer inventories of many of IVAX' important generic
drugs combined with significant price declines for certain generic drugs in the
1996 second quarter were the primary factors which resulted in the decline in
the United States generic pharmaceutical operations' net revenues. During the
past twelve months, IVAX launched several new generic drugs and customers
established significant inventories of many of these and other IVAX generic
products. During the 1996 second quarter, the net selling price of certain of
these products was significantly reduced due to competition. Primarily as a
result of these factors, customer inventory credits and reserves for expected
returns increased, and net revenues correspondingly decreased, by approximately
$53.8 million as compared to the 1995 second quarter. Customer inventory
credits, which are made consistent with industry practice to adjust customer
accounts for price declines on their existing inventory, represent the majority
of this increase. These credits allow customers with established inventories to
compete with those buying product at the current market price, and allows IVAX
to maintain shelf space, market share and customer loyalty. The increase in
reserves for returns compared to the 1995 second quarter is a result of higher
levels of customer inventories. Significant customer inventories also resulted
in lower reorders and consequently lower sales volume of certain generic drugs.
As noted in documents previously filed with the SEC, the United States
generic drug industry is highly price competitive, with pricing determined by
many factors, including the number and timing of regulatory approvals and
product introductions by IVAX and its competitors. Although the price of a
generic product generally declines over time as competitors introduce additional
versions of the product, the actual degree and timing of price competition
generally is not predictable. IVAX establises reserves for customer inventory
credits in accordance with generally accepted accounting principles. Adjustments
to these reserves result from, among other things, the actual degree and timing
of additional price declines and the magnitude of customer inventories at the
time, and are recorded when identified.
Sales of cefadroxil, the generic equivalent of Bristol-Myers Squibb's
antibiotic Duricef(Registered trademark), approved in March 1996, contributed
$27.6 million in net revenues to the first half of 1996. IVAX experienced
limited price competition with respect to sales of cefadroxil during the 1996
second quarter and consequently customer inventory credits had a limited impact
on net revenues of this product. Although IVAX remains the only FDA approved
generic manufacturer of cefadroxil, the company marketing the brand name version
of this drug has launched and is currently marketing its own generic form of
this product.
Sales of albuterol metered dose inhaler, the generic equivalent of
Glaxo Inc.'s Ventolin(Registered trademark), Inhalation Aerosol, used in the
treatment of asthma, approved late in December 1995, generated $33.8 million of
net revenues during the first half of 1996. Net revenues attributable to sales
of albuterol metered dose inhaler were lower during the second quarter of 1996
as compared to the first quarter of
9
1996 primarily due to a decline in sales volume resulting from elevated customer
inventory levels following the drug's launch and, to a lesser extent, a higher
level of customer inventory credits in the 1996 second quarter. The company
marketing the brand name version of this drug is also marketing a generic form
of the drug, and in August 1996, at least one other generic manufacturer
received regulatory approval for an albuterol metered dose inhaler product.
Net revenues attributable to sales of cefaclor, approved in April 1995,
totaled $19.1 million for the first half of 1996 compared to $22.0 million for
the first half of 1995, the period in which the product was launched. The
decline in net revenues of cefaclor was primarily attributable to price
declines and higher levels of customer inventory credits and reserves for
expected returns as compared to the first half of 1995.
Net revenues attributable to sales of verapamil HCl ER tablets totaled
$17.4 million in the first half of 1996 compared to $42.4 million in the same
period of the prior year. The decline in verapamil net revenues was due
primarily to a reduction in the net selling price and, to a lesser extent, a
decline in unit volume and a higher level of customer inventory credits as
compared to the first half of 1995. During the second quarter of 1996, another
generic version of one of the dosage strengths of verapamil sold by IVAX was
introduced into the market by a competitor.
IVAX' international pharmaceutical operations generated net revenues of
$162.2 million for the first six months of 1996, compared to $128.4 million for
the same period of the prior year. The $33.8 million, or 26%, increase in
international pharmaceutical net revenues included an increase of $20.2 million
attributable to the combined operations of Elvetium S.A. (Argentina), Alet
Laboratorios S.A.E.C.I. y E. and Elvetium S.A. (Uruguay), (collectively,
"Elvetium"), acquired in March 1996. Although the acquisition of Elvetium was
accounted for as a pooling of interests, the acquisition was recorded as of
January 1, 1996 and IVAX' historical results of operations were not restated to
give retroactive effect to this acquisition due to the immateriality of the
related amounts. The remaining $13.6 million increase in net revenues of the
international pharmaceutical operations was due to higher net revenues of Galena
a.s. as a result of increased sales of several products and higher sales of
branded products in the United Kingdom, partially offset by lower sales volumes
of other products in the United Kingdom and the unfavorable impact of exchange
rate differences in comparison to the prior year period.
The gross profit percentage of IVAX' pharmaceutical operations was
36.9% in the first six months of 1996 compared to 43.2% for the first six months
of 1995. The decline in the gross profit percentage was primarily attributable
to the higher levels of customer inventory credits and reserves for expected
returns relating to the United States generic pharmaceutical operations
discussed above as well as price declines for U.S. generic drugs.
Net revenues of the intravenous products division totaled $168.0
million in the first six months of 1996, compared to $170.8 million in the same
period of 1995. The $2.8 million decrease in net revenues was primarily due to
lower net revenues attributable to Hespan(Registered trademark), McGaw's brand
name blood plasma expansion product, principally due to decreased sales prices
caused by generic competition, and, to a lesser extent, lower sales volumes of
basic nutrition solutions. The gross profit percentage of the intravenous
products division decreased from 40.4% for the first six months of 1995 to 33.6%
for the same period in 1996. The $12.6 million reduction in gross profit and the
decrease in the gross profit percentage were due to several factors: the
reduction in the net selling price of Hespan(Registered trademark), a charge to
cost of sales due to a decrease in inventory carrying costs as a result of lower
standard manufacturing costs adopted as a result of manufacturing efficiencies
achieved in 1995, an increase in inventory obsolescence reserves and less
favorable manufacturing variances. In February 1995, another pharmaceutical
company
10
introduced a generic version of Hespan(Registered trademark) in the United
States resulting in both lower prices and a reduction in the intravenous
products division's share of the market. Gross profit generated by the
intravenous products division is likely to continue to decrease in 1996 as
compared to 1995 as a result of competitive pressures in the industry.
Net revenues and gross profit of IVAX' personal care products,
diagnostics and specialty chemicals operations, excluding intersegment
eliminations, collectively represent 13.3% and 16.7%, respectively, of
consolidated net revenues and consolidated gross profit for the first half of
1996. Combined net revenues and combined gross profit of these other operations
increased $3.8 million and $4.6 million, respectively, compared with the first
half of 1995, primarily due to the introduction by the personal care products
group of the IMAN(TM) product line, which was acquired in November 1995.
OPERATING EXPENSES BY BUSINESS SEGMENT:
(In thousands)
GENERAL RESEARCH AMORTIZATION
AND AND OF MERGER
SELLING ADMINISTRATIVE DEVELOPMENT INTANGIBLES EXPENSES TOTAL
----------- --------------- ------------- ------------- ----------- -----------
1996 SIX MONTHS
- ---------------
Pharmaceuticals $ 54,066 $ 32,017 $ 23,805 $ 2,052 $ 71 $ 112,011
Intravenous products 27,605 10,356 8,637 1,741 - 48,339
Other operations 23,828 7,738 2,165 1,554 - 35,285
Corporate and other - 10,746 - 13 113 10,872
----------- -------------- ------------- ------------ ----------- -----------
Total $ 105,499 $ 60,857 $ 34,607 $ 5,360 $ 184 $ 206,507
=========== ============== ============= ============ =========== ===========
1995 SIX MONTHS
- ---------------
Pharmaceuticals $ 38,910 $ 23,887 $ 22,196 $ 1,402 $ - $ 86,395
Intravenous products 27,587 12,157 7,427 2,345 - 49,516
Other operations 21,148 6,635 2,041 1,195 - 31,019
Corporate and other - 6,986 - - - 6,986
----------- -------------- ------------- ------------ ----------- -----------
Total $ 87,645 $ 49,665 $ 31,664 $ 4,942 $ - $ 173,916
=========== ============== ============= ============ =========== ===========
Selling expenses totaled $105.5 million (17.4% of net revenues) for the
first six months of 1996, compared to $87.6 million (14.9% of net revenues) for
the first six months of 1995. Selling expenses of Elvetium, acquired during the
first quarter of 1996, accounted for $5.7 million of the total $17.9 million
increase. The remaining $12.2 million increase was primarily due to increased
sales and marketing expenses associated with the launch of newly approved
products of IVAX' pharmaceutical operations and the introduction by the personal
care products group of the IMAN(TM) product line.
General and administrative expenses totaled $60.9 million (10.0% of net
revenues) for the first half of 1996, compared to $49.7 million (8.5% of net
revenues) for the first half of 1995, an increase of $11.2 million. General and
administrative expenses of the pharmaceutical operations increased $8.1 million
as compared to the first half of 1995 primarily as a result of general and
administrative expenses associated with Elvetium and an increase in personnel
and office costs in the United Kingdom. Corporate general and administrative
expenses increased $3.8 million, as compared to the first half of 1995,
primarily due to increases in health insurance, personnel, travel and facilities
costs.
Research and development expenses for the first half of 1996 increased
$2.9 million, or 9%, compared to the first half of 1995, to a total of
$34.6 million. Expenditures by IVAX' pharmaceutical operations represented 69%
of the total research and development expenses for the first half of 1996.
Management intends to continue to increase the level of its research and
development efforts. Actual
11
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, and
strategic marketing decisions.
Other expense, net, increased $2.9 million in the first half of 1996,
as compared to the first half of the prior year, primarily due to an increase in
interest expense associated with additional borrowings to fund working capital,
as well as additional income in the first half of 1995 resulting from gains
recorded on the sale of an investment in equity securities of an affiliated
company and the sale of certain trademarks by the personal care products group.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1995
IVAX reported a net loss of $16.0 million for the three months ended
June 30, 1996, compared to net income of $28.1 million for the three months
ended June 30, 1995. Loss before extraordinary items was $13.9 million for the
1996 second quarter, compared to income before extraordinary items of $28.1
million for the same period of the prior year. Results for the 1996 second
quarter included a $2.1 million net extraordinary loss from the extinguishment
of debt.
Net loss per primary common share was $.13 for the second quarter of
1996 compared to $.24 in net earnings per primary common share reported for the
second quarter of 1995. The net loss per primary common share includes a net
extraordinary loss of $.02 per primary common share from the early
extinguishment of debt.
NET REVENUES AND GROSS PROFIT BY BUSINESS SEGMENT:
(In thousands)
Three Months Ended June 30, 1996 1995
------------------------------- -------------------------------
NET GROSS NET GROSS
REVENUES PROFIT REVENUES PROFIT
------------- -------------- ------------- --------------
Pharmaceuticals $ 147,997 $ 33,605 $ 181,764 $ 77,478
Intravenous products 84,840 29,569 87,592 36,498
Other operations 41,419 19,631 37,690 15,859
Intersegment eliminations (373) - (362) -
------------- -------------- ------------- --------------
Total $ 273,883 $ 82,805 $ 306,684 $ 129,835
============= ============== ============= ==============
Net revenues for the second quarter of 1996 totaled $273.9 million, a
decrease of $32.8 million, or 11%, compared to the same period of the prior
year. Gross profit in the second quarter of 1996 decreased $47.0 million, or
36%, from the same period of the prior year. Gross profit was $82.8 million
(30.2% of net revenues) for the 1996 second quarter, compared to $129.8 million
(42.3% of net revenues) for the 1995 second quarter.
Net revenues of IVAX' pharmaceuticals operations decreased $33.8
million, or 19%, in comparison to the second quarter of 1995. An increase of
$21.0 million in net revenues of IVAX' international pharmaceutical operations
was more than offset by a decrease of $54.8 million in net revenues of IVAX'
domestic pharmaceutical operations.
Domestic pharmaceutical net revenues totaled $63.7 million for the
second quarter of 1996, compared to $118.5 million for the same period of the
prior year. The $54.8 million decrease in net
12
revenues of the domestic pharmaceutical operations was primarily due to $53.8
million of higher levels of customer inventory credits and reserves for expected
returns as compared to the second quarter of 1995, as a result of price declines
at a time of significant customer inventory levels as discussed in "Results of
Operations - Six months ended June 30, 1996 compared to six months ended June
30, 1995." The decline in net revenues was also attributable to lower sales
volumes as a result of high customer inventory levels and decreased prices of
certain generic products, partially offset by an increase in net revenues
generated by certain new generic products manufactured by IVAX and introduced
into the market over the past twelve months.
Net revenues attributable to sales of cefadroxil, approved in March
1996, were $17.1 million in the 1996 second quarter. IVAX experienced limited
price competition with respect to sales of cefadroxil during the 1996 second
quarter and consequently customer inventory credits had a limited impact on net
revenues of this product.
Sales of IVAX' albuterol metered dose inhaler, approved in late
December 1995, contributed $5.4 million in net revenues to the second quarter of
1996.
Net revenues attributable to sales of cefaclor totaled $2.3 million in
the second quarter of 1996 compared to $22.0 million in the second quarter of
the prior year, the period in which the drug was launched. The decline in net
revenues of cefaclor was due to decreased selling prices and volume and higher
levels of customer inventory credits and reserves for expected returns as
compared to the second quarter of 1995.
Net revenues attributable to sales of verapamil HCl ER tablets totaled
$1.6 million in the second quarter of 1996 compared to $20.6 million in the
second quarter of the prior year. The decline in net revenues in the 1996 second
quarter compared to the same period of the prior year was due primarily to the
reduction in the net selling price of verapamil and higher levels of customer
inventory credits and, to a lesser extent, a decline in sales volume. During the
second quarter of 1996, another generic version of one of the dosage strengths
of verapamil sold by IVAX was introduced into the market by a competitor.
IVAX' international pharmaceutical operations generated net revenues of
$84.3 million in the second quarter of 1996, compared to $63.3 million for the
same quarter of the prior year. The $21.0 million, or 33%, increase in
international pharmaceutical net revenues was primarily due to $11.8 million in
net revenues attributable to the operations of Elvetium, acquired in March 1996.
The remaining $9.2 million increase in net revenues of the international
pharmaceutical operations was primarily due to an increase in sales of several
products by Galena a.s. and an increase in sales of branded and generic
products in the United Kingdom, partially offset by the unfavorable impact of
exchange rate differences.
The gross profit percentage of IVAX' pharmaceutical operations
decreased from 42.6% in the second quarter of 1995 to 22.7% in the second
quarter of 1996. The decline in gross profit percentage of IVAX' pharmaceutical
operations is primarily due to the higher levels of customer inventory credits
and reserves for expected returns relating to the United States generic
pharmaceutical operations discussed in "Results of Operations - Six months ended
June 30, 1996 compared to six months ended June 30, 1995" as well as price
declines for U.S. generic drugs.
The intravenous products division generated net revenues of $84.8
million during the second quarter of 1996, a decrease of $2.8 million from the
same quarter of 1995. Price decreases for
13
Hespan(Registered trademark), McGaw's brand name blood plasma expansion product,
and basic and specialty nutrition sets and solutions were primarily responsible
for the decline in the net revenues of the intravenous products division. The
gross profit percentage of the intravenous products division decreased from
41.7% for the second quarter of 1995 to 34.9% for the same period in 1996. The
$6.9 million reduction in gross profit and the decrease in the gross profit
percentage were due to the reduction in the net selling price of
Hespan(Registered trademark), an increase in inventory obsolescence reserves and
less favorable manufacturing variances.
Net revenues and gross profit of IVAX' personal care products,
diagnostics and specialty chemicals operations, excluding intersegment
eliminations, collectively represent 15.1% and 23.7%, respectively, of
consolidated net revenues and consolidated gross profit for the second quarter
of 1996. Combined net revenues and combined gross profit of these other
operations increased $3.7 million and $3.8 million, respectively, compared with
the second quarter of 1995, primarily due to the introduction by the personal
care products group of the IMAN(TM) product line, acquired in November
1995.
OPERATING EXPENSES BY BUSINESS SEGMENT:
(In thousands)
GENERAL RESEARCH AMORTIZATION
AND AND OF MERGER
SELLING ADMINISTRATIVE DEVELOPMENT INTANGIBLES EXPENSES TOTAL
----------- -------------- ------------- ------------ ----------- -----------
1996 THREE MONTHS
- -----------------
Pharmaceuticals $ 28,301 $ 17,335 $ 12,658 $ 1,303 $ - $ 59,597
Intravenous products 13,760 5,188 4,329 748 - 24,025
Other operations 12,473 3,994 1,098 734 - 18,299
Corporate and other - 5,842 - 12 - 5,854
----------- -------------- ------------- ------------ ----------- -----------
Total $ 54,534 $ 32,359 $ 18,085 $ 2,797 $ - $ 107,775
=========== ============== ============= ============ =========== ===========
1995 THREE MONTHS
- -----------------
Pharmaceuticals $ 20,048 $ 10,869 $ 11,523 $ 812 $ - $ 43,252
Intravenous products 13,719 6,030 3,880 1,173 - 24,802
Other operations 10,645 3,040 1,076 574 - 15,335
Corporate and other - 4,937 - - - 4,937
----------- -------------- ------------- ------------ ----------- -----------
Total $ 44,412 $ 24,876 $ 16,479 $ 2,559 $ - $ 88,326
=========== ============== ============= ============ =========== ===========
Selling expenses totaled $54.5 million (19.9% of net revenues) for the
second quarter of 1996, compared to $44.4 million (14.5% of net revenues) for
the second quarter of 1995. Selling expenses of Elvetium, which was acquired in
the first quarter of 1996, accounted for $3.2 million of the total $10.1 million
increase. The remaining $6.9 million increase was primarily due to increased
sales and marketing expenses associated with the launch of newly approved
products of IVAX' pharmaceutical operations and the personal care products
group's IMAN(TM) product line.
General and administrative expenses totaled $32.4 million (11.8% of net
revenues) for the second quarter of 1996, compared to $24.9 million (8.1% of net
revenues) for the second quarter of 1995, an increase of $7.5 million. General
and administrative expenses associated with Elvetium were responsible for $2.1
million of the increase in this expense category. The remaining $5.4 million
increase is primarily attributable to increases in personnel and office expenses
in the United Kingdom, as well as increases in health insurance costs at
corporate and personnel costs of the domestic pharmaceutical operations.
14
Research and development expenses for the second quarter of 1996
increased $1.6 million, or 10%, compared to the 1995 second quarter, to a total
of $18.1 million. Expenditures by IVAX' pharmaceutical operations represented
70% of the total research and development expenses for the second quarter of
1996.
Other expense, net, increased $3.0 million from the second quarter of
the prior year, primarily due to an increase in interest expense associated with
additional borrowings to fund working capital.
CURRENCY FLUCTUATIONS
For the three and six months ended June 30, 1996, approximately 26% and
25%, respectively, of IVAX' net revenues were attributable to operations which
principally generated revenues in currencies other than the United States
dollar, compared to approximately 22% and 23% for the three and six months ended
June 30, 1995, respectively. Fluctuations in the value of foreign currencies
relative to the United States dollar impact the reported 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. As a result of exchange
rate differences, net revenues decreased by approximately $3.0 million and $4.7
million for the three and six months ended June 30, 1996, respectively, as
compared to the same periods of the prior year.
INCOME TAXES
IVAX recognized a $13.3 million tax benefit for the six months ended
June 30, 1996. The tax benefit includes the recognition in the 1996 second
quarter of a deferred tax asset of $7.1 million by McGaw following an adjustment
by the Internal Revenue Service of the tax basis amortization of certain
intangible assets as well as the recognition in the 1996 first quarter of a $1.1
million tax incentive provided by the state of California. The tax benefit also
resulted from domestic losses benefited at the prevailing federal and state
statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
IVAX used $57.5 million in cash for operating activities during the
first six months of 1996, compared to $4.5 million in cash generated from
operating activities during the first six months of 1995. The increase in cash
used for operating activities, as compared to the first half of 1995, was
primarily the result of a higher rate of growth in inventories and accounts
receivable, partially offset by an increase in accounts payable and other
current liabilities compared to a decrease in the first six months of 1995. The
increase in inventories and accounts receivable is primarily due to the growth
in operations attributable to new generic products introduced into the market
over the past twelve months as well as higher levels of inventory resulting from
lower second quarter 1996 sales as discussed under "Results of Operations - Six
months ended June 30, 1996 compared to the six months ended June 30, 1995."
Net cash of $53.2 million was utilized for investing activities during
the first half of 1996 as compared to $52.5 million for the same period of the
prior year. A $9.9 million decline in capital expenditures was offset by IVAX'
purchase of additional shares of Galena a.s. increasing its ownership interest
to 74%.
15
Net cash of $113.2 million was provided by financing activities during
the first six months of 1996, compared to $27.5 million in the same period of
the prior year, primarily reflecting additional borrowings to finance the growth
in accounts receivable and inventories discussed above, as well as the
receipt of higher levels of cash on the exercise of stock options as compared to
the first six months of 1995.
As discussed in Note 5, Debt, in the Notes to Condensed Consolidated
Financial Statements, on May 14, 1996, IVAX entered into a new revolving line of
credit with a bank syndicate permitting borrowings of up to $425 million.
Proceeds from the credit facility have been used to refinance previously
existing credit facilities and to make an investment in and advances to McGaw to
permit it to redeem its 10-3/8% Senior Notes due 1999, and will be used for
working capital and general corporate purposes, including to finance
acquisitions.
IVAX was not in compliance with the fixed charge coverage ratio (the
ratio of consolidated earnings before income taxes, depreciation and
amortization less consolidated capital expenditures to consolidated fixed
charges) required by the credit facility at June 30, 1996. IVAX subsequently
obtained a waiver of such noncompliance from the lender. IVAX intends to request
a permanent amendment to the fixed charge coverage ratio covenant. Pending the
execution of such an amendment, the $281.8 million outstanding under the credit
facility at June 30, 1996 has been classified within current portion of
long-term debt in the accompanying condensed consolidated balance sheet.
Although management believes that the lenders will agree to amend the fixed
charge coverage ratio covenant, no assurance can be given that the amendment
will be executed or that, as part of the amendment, the lenders will not require
other terms of the credit facility to be amended, including the interest rate
charged on borrowings and other pricing terms.
IVAX' principal sources of short-term liquidity are borrowings under
the credit facility and internally generated funds. In the event that the
lenders do not agree to amend the fixed charge coverage ratio covenant and IVAX
does not satisfy the covenant in future periods, management believes that IVAX
will be able to secure alternate short-term financing to support its ongoing
operational requirements. However, finding alternate lenders and negotiating and
executing a new credit agreement may involve a significant amount of time, and
no assurance can be given that the terms of an alternate credit facility would
be the same or similar to the terms of the existing credit facility. For the
long-term, IVAX believes it will be able to obtain long-term capital and
financing to the extent necessary.
At June 30, 1996, IVAX' working capital was approximately $310.1
million, compared to $470.9 million at December 31, 1995. The reduction in
working capital is principally due to the classification of the revolving credit
facility within the current portion of long-term debt, as discussed above,
partially offset by a growth in the remaining components of working capital,
also as discussed above. Cash and cash equivalents totaled $16.8 million at June
30, 1996, as compared to $14.7 million at year-end 1995 and $15.8 million as of
June 30, 1995.
On June 3, 1996, IVAX paid a $.05 per share cash dividend to holders of
record of IVAX' common stock as of May 10, 1996. In each of June and December
1995, IVAX paid cash dividends of $.04 per share. Under the terms of the
revolving credit facility, IVAX is restricted from paying dividends in excess of
35% of consolidated net income for any consecutive four quarter period. The
declaration and payment of future dividends will be made at the discretion of
the board of directors and will depend to a large extent on future results of
operations.
16
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
In July and August 1996, individuals purporting to be shareholders of
IVAX filed actions styled MALIN VS. IVAX CORPORATION AND PHILLIP FROST, ET AL.;
STEINER, ET AL. VS. IVAX CORPORATION AND PHILLIP FROST, ET AL.; SALTZMAN, ET AL.
VS. IVAX CORPORATION AND PHILLIP FROST, ET AL.; KNOPF, ET AL. VS. IVAX
CORPORATION AND PHILLIP FROST, ET AL.; BRAUNSTEIN VS. IVAX CORPORATION AND
PHILLIP FROST, ET AL.; ZAPHIRIS, ET AL. VS. IVAX CORPORATION AND PHILLIP FROST,
ET AL.; PLEGGENKUHLE, ET AL. VS. IVAX CORPORATION AND PHILLIP FROST, ET AL;
WEISS VS. IVAX CORPORATION AND PHILLIP FROST, ET AL; and FERRETTI VS. IVAX
CORPORATION AND PHILLIP FROST, ET AL. against IVAX and certain of its officers
and directors in the United States District Court for the Southern District of
Florida. The plaintiffs in the MALIN, SALTZMAN, BRAUNSTEIN, ZAPHIRIS,
PLEGGENKUHLE, WEISS AND FERRETTI actions seek to act as representatives of a
class consisting of all purchasers of IVAX' common stock between February 26,
1996 and June 27, 1996. The plaintiffs in the STEINER action seek to act as
representatives of a class consisting of all purchasers of IVAX' common stock
between July 31, 1995 and June 27, 1996. The plaintiffs in the KNOPF action seek
to act as representatives of a class consisting of all purchasers of IVAX'
common stock between April 1, 1996 and June 27, 1996. The complaints, which
contain essentially the same allegations, allege violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the
Securities and Exchange Commission. The complaints generally assert that IVAX
made untrue statements of material fact and/or omitted to state material facts
necessary to make statements made not misleading in its public disclosure
documents and in communications to the public regarding its operations and
financial results. These allegations are centered around claims that IVAX failed
to disclose that it offered its customers credits on their inventories of IVAX
pharmaceutical products in the event of subsequent price declines and failed to
establish reserves for such credits. In general, the complaints seek an
unspecified amount of compensatory damages, pre-judgment interest, litigation
costs and attorney's fees. IVAX is aware of, but to date has not been served
with, other lawsuits which make essentially the same allegations and which seek
similar relief. IVAX intends to defend all of the lawsuits vigorously. Although
IVAX believes that these lawsuits are without merit, their respective outcomes
cannot be predicted. If determined adversely to IVAX, any of the lawsuits would
likely have a material adverse effect on IVAX' financial position and results
and operations.
In connection with the L-Tryptophan litigation previously reported in
IVAX' Annual Report on Form 10-K for the year ended December 31, 1995, as of
August 7, 1996, 109 of the L-Tryptophan lawsuits filed against Goldline
Laboratories, Inc. had been settled and only one remains pending.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At IVAX' annual meeting of shareholders held on June 7, 1996, IVAX'
shareholders elected fourteen directors and approved a proposal to amend the
IVAX Corporation 1994 Stock Option Plan (the "Plan") to increase the number of
shares issuable pursuant to the Plan and to modify the method of payment for the
exercise of stock options under the Plan.
17
The number of votes cast for and withheld for each nominee for
directors were as follows:
DIRECTOR FOR WITHHELD
-------- --- --------
Mark Andrews 100,159,551 452,539
Lloyd Bentsen 98,980,578 1,631,512
Ernst Biekert, Ph.D. 100,200,100 411,990
Dante B. Fascell 94,478,998 6,133,092
Jack Fishman, Ph.D. 100,215,333 396,757
Phillip Frost, M.D. 100,218,543 393,547
Harold S. Geneen 100,119,915 492,175
Jane Hsiao, Ph.D. 100,222,197 389,893
Lyle Kasprick 100,219,872 392,218
Isaac Kaye 100,216,616 395,474
Harvey M. Krueger 94,638,937 5,973,153
John H. Moxley, III, M.D. 100,219,478 392,612
M. Lee Pearce, M.D. 100,215,441 396,649
Michael Weintraub 100,210,831 401,259
The number of votes cast for and against the proposal to amend the
Plan, as well as the number of abstentions, were as follows: For: 91,589,915;
Against: 8,567,093; and Abstain: 455,082.
There were no broker non-votes with respect to either of the foregoing
matters.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Revolving Credit and Reimbursement Agreement by and among IVAX
Corporation, as Borrower, Norton Healthcare, Limited, as
Co-Borrower, and the Lenders party thereto or referenced
therein, and NationsBank, National Association, as
Administrative and Documentation Agent and Lender, and BA
Securities, Inc., as Syndication Agent, dated as of May 14,
1996*
11 Computation of Earnings (Loss) Per Share
27 Financial Data Schedule
99 August 2, 1996 press release regarding IVAX' announcement of
its 1996 second quarter results
(b) Current Report on Form 8-K
On June 27, 1996, IVAX filed a Current Report on Form 8-K relating to
its June 27, 1996 press release regarding its outlook for the 1996 second
quarter earnings.
- ----------
*Certain exhibits and schedules to this document have not been filed. The
Registrant agrees to furnish a copy of any omitted schedule or exhibit to the
Securities and Exchange Commission upon request.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IVAX CORPORATION
Date: August 14, 1996 By: /s/ MICHAEL W. FIPPS
--------------------
Michael W. Fipps
Senior Vice President-Finance
Chief Financial Officer