EXHIBIT 13.1
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IVAX CORPORATION
1997 ANNUAL REPORT
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TO OUR SHAREHOLDERS AND EMPLOYEES:
If 1996 is to be remembered as a year of challenge for IVAX, let 1997 be
remembered as a year of constructive change. In 1997, we developed and
implemented a comprehensive plan that changed the face of our company and
positioned it for a significant improvement in 1998 and beyond. The plan has two
parts and, in some respects, it is ongoing. Part one was to improve our
operations through divestitures, restructuring and cost reduction initiatives;
part two was to refocus our energies and resources on businesses in which we
have special strengths and substantial scientific expertise.
DIVESTITURES
Our plan included the divestiture of certain businesses; as a result, we are now
a smaller, more focused company. In the 1997 second quarter, we sold McGaw, our
intravenous products business. In early 1998, we completed the process we began
in 1997 of selling our specialty chemicals businesses. We have also expressed
our intention to sell our personal care products business and expect to complete
that disposition in 1998. In December 1997, we announced our intention to
spin-off our veterinary business, DVM Pharmaceuticals, by combining it with a
publicly-traded shell corporation. Under the terms of that agreement, IVAX will
own about 80% of the combined company's outstanding common stock while the
remainder will be held by public investors. This arrangement allows the DVM
management to pursue its independent goals and objectives while benefiting from
the synergies available as a member of the IVAX family of companies.
RESTRUCTURING
We also restructured and improved our manufacturing, sales, administrative and
distribution functions. We closed our Shreveport, Louisiana and Syosset, New
York manufacturing facilities and our administrative and packaging facility in
Fort Lauderdale, Florida, consolidating the functions performed there into other
existing facilities. We consolidated our distribution operations into a more
efficient, centrally located facility and expect to close or sell several other
underutilized facilities. These actions are expected to lower our costs to
manufacture and distribute products.
Also during 1997, we streamlined our U.S. generic drug product portfolio by
weeding out lower margin products; this process is ongoing.
MANAGEMENT
Additional talent in the form of experienced pharmaceutical industry managers
has been added at the corporate level, at Zenith Goldline, our domestic generic
drug subsidiary, and at Galena, our 74% owned subsidiary in the Czech Republic.
We also hired key sales and marketing professionals at Zenith Goldline in an
effort to improve customer relations and service.
COST REDUCTION
During 1997, we implemented stringent cost reduction measures and reduced
staffing levels at all of our operating units, including our corporate
headquarters. Zenith Goldline now has approximately one-half of the personnel it
employed a year ago. At our corporate headquarters in Miami, we eliminated 30%
of the positions that existed at the beginning of 1997. Other subsidiaries have
significantly reduced staff as well.
As a result of divestitures, facility consolidations and workforce reductions,
IVAX lowered worldwide staff from approximately 8,100 at the end of 1996 to
approximately 4,500 at the end of 1997.
FOCUS
Improving our operations and reducing our cost structure was only part of our
plan. We intend to develop our business by focusing primarily on certain key
areas: oncology and respiratory diseases and specialty generics products. Our
strategy is to leverage our expertise and talent in each of these areas. In
oncology, we intend to build a franchise around our paclitaxel product,
Paxene/Registered trademark/. Although we have been delayed in our attempt to
launch Paxene in the United States, we are nonetheless continuing our efforts to
bring this product to market as soon as possible. We have filed proprietary drug
applications with regulatory authorities in Europe and a generic drug
application with the United States Food and Drug Administration. In addition,
our research and development group has made exciting progress on an orally
effective form of Paxene which currently is in human trials. We have also
implemented an aggressive screening program to in-license other oncology
compounds.
In the respiratory area, our goal is to expand our participation in the growing
asthma market by leveraging our drug delivery device expertise. We receive
significant royalties from our worldwide license agreement with Glaxo Wellcome
for the use of our proprietary Easi-Breathe/Trademark/ breath-activated inhaler
with certain Glaxo asthma compounds. Through our United Kingdom subsidiary,
Norton Healthcare, we received marketing clearance in France and Ireland for the
world's first CFC-free metered-dose inhaler for the asthma medication,
BECLOMETHASONE DIPROPIONATE. We are also developing a number of respiratory
products using CFC-free propellants and a multi-dose dry powder metered-dose
inhaler. Finally, we are developing a new molecule, still at the pre-clinical
stage, which shows promise as a totally new approach to treating asthma.
Our strategy to improve our worldwide generic drug business is to realize higher
margins through the development and marketing of specialty generic drugs. While
we will continue to offer other important generic drugs that fulfill our
customers' needs, we will emphasize the development of products with significant
barriers to entry because they are difficult to formulate or manufacture, they
involve regulatory challenges or potential patent challenges, or for which raw
material supplies are problematic. Developing and marketing these products
should mitigate the pricing pressures faced by common generic products.
CONCLUSION
Together, we hold shares in a very different company from the IVAX of 1997, a
year of constructive change. Our company is now smaller, more efficiently
organized and more disciplined. I firmly believe that these changes, some of
which are ongoing, have laid the groundwork for our turnaround in 1998.
Sincerely,
Phillip Frost, M.D.
Chairman & Chief Executive Officer
TABLE OF CONTENTS
Selected Financial Data 1
Management's Discussion and Analysis of Financial Condition
and Results of Operations 2
Report of Independent Certified Public Accountants 16
1997 Consolidated Financial Statements 17
Directors and Officers 47
Common Stock and Investor Information 48
IVAX Corporation, headquartered in Miami, Florida, is a holding company with
subsidiaries engaged primarily in the research, development, manufacture and
marketing of generic and branded pharmaceuticals.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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(in thousands, except per share data) (1) (2)
OPERATING DATA
Net revenues $ 602,110 $ 662,587 $ 788,988 $ 661,098 $ 606,945
Income (loss) from continuing
operations (3) (219,534) (134,989) 94,319 57,941 100,102
Income (loss) from discontinued
operations (4) (8,701) (23,690) 20,482 31,931 7,880
Net income (loss) (233,254) (160,752) 114,835 89,049 99,354
Basic earnings (loss) per common
share:
Continuing operations (3) (1.81) (1.12) .81 .51 .91
Discontinued operations (4) (.07) (.19) .18 .28 .07
Net earnings (loss) (1.92) (1.33) .99 .78 .90
Diluted earnings (loss) per
common share:
Continuing operations (3) (1.81) (1.12) .79 .46 .81
Discontinued operations (4) (.07) (.19) .17 .26 .06
Net earnings (loss) (1.92) (1.33) .96 .71 .81
Weighted average number of
common shares outstanding:
Basic 121,496 120,949 116,065 113,565 110,364
Diluted 121,496 120,949 119,539 124,675 123,058
Cash dividends per common share $ - $ .05 $ .08 $ .06 $ .04
BALANCE SHEET DATA
Working capital (5) $ 238,918 $ 415,927 $ 354,733 $ 265,656 $ 261,602
Total assets 790,736 1,333,648 1,184,828 946,313 770,150
Total long-term debt, net of
current portion 94,193 442,819 210,759 162,305 130,708
Shareholders' equity 435,039 695,128 789,172 634,456 527,772
Book value per common share (6) 3.58 5.72 6.69 5.56 4.65
<FN>
(1) Figures have been restated to reflect the acquisition of Zenith
Laboratories, Inc. in 1994 which was accounted for under the pooling of
interests method of accounting. The March 1, 1996 acquisition of Elvetium
S.A. (Argentina), Alet Laboratories S.A.E.C.I. y E. and Elvetium S.A.
(Uruguay), (collectively "Elvetium"), and the September 30, 1995
acquisition of Pharmatop Limited, which were accounted for under the
pooling of interests method of accounting, were recorded as of January 1,
1996 and 1995, respectively. Historical figures have not been restated to
give retroactive effect to the Elvetium and Pharmatop Limited acquisitions
due to the immateriality of the related amounts. Figures include the
results of the following businesses acquired by purchase since their
respective acquisition dates: ImmunoVision, Inc. on July 17, 1995; and 60%
of the shares of Galena a.s., on July 25, 1994 (subsequently increased
through open market purchases to 74%).
(2) Figures have been restated to reflect the classification of IVAX's
intravenous products, personal care products and specialty chemicals
businesses as discontinued operations.
(3) Includes restructuring costs of $14,274 and $5,324 and asset write-downs
of $23,814 and $63,749 in 1997 and 1996, respectively.
(4) Includes asset write-downs of $48,442 in 1996 and net gain on the sales of
the intravenous products and specialty chemicals businesses of $12,623 in
1997.
(5) Excludes net assets of discontinued operations.
(6) Assumes conversion of Zenith Laboratories, Inc.'s cumulative convertible
preferred stock in 1994 and 1993.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the 1997 Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements included on pages 17 to 46 of this Annual
Report. 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's
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. These factors may cause IVAX's results to differ materially from the
forward looking statements made in this report or otherwise made by or on
behalf of IVAX.
Results for the three years ending December 31, 1997 have been restated
to reflect the classification of certain businesses as discontinued operations.
See "Discontinued Operations" for a further discussion. Additionally, the
diagnostics business' results of operations, previously reported as part of the
"Other Operations" segment, are not disclosed as a separate segment because they
are not significant.
RESULTS OF OPERATIONS
OVERVIEW
IVAX's operations are conducted through subsidiaries involved primarily
in generic and branded pharmaceuticals. Presently, a significant portion of
IVAX's revenues and gross profits are generated from sales of generic
prescription and over-the-counter pharmaceutical products. IVAX's future success
is largely dependent upon its ability to develop, obtain approval for,
efficiently manufacture, and market, in the short term, commercially viable
generic pharmaceutical products, and in the long term, commercially viable
generic and branded pharmaceutical products.
In the short term, IVAX's revenues and profits may vary significantly
from period to period, as well as in comparison to corresponding prior periods,
as a result of regulatory and competitive factors unique to the generic
pharmaceutical industry. Such factors include the timing of new generic drug
approvals received by IVAX, the number and timing of generic drug approvals for
competing products, the timing of IVAX's initial shipments of newly approved
generic drugs, strategies adopted by brand name companies to maintain market
share, and IVAX's cost of manufacturing. The first company to receive regulatory
approval for and to introduce a generic drug is usually able to capture
significant market share from the branded drug and to achieve relatively high
market share, revenues and gross profits from sales of the drug. As other
generic versions of the same drug enter the market, however, sales volumes,
market share, prices, revenues and gross profits decline, sometimes
significantly. In addition, the initial shipments by the first company to
introduce a generic drug are often significant as customers fill their initial
inventory requirements.
Because of these competitive factors, IVAX has determined to emphasize
the development of generic pharmaceutical products that are expected to
encounter less intensive competition, such as drugs which are difficult to
formulate or manufacture, which involve regulatory challenges or potential
patent challenges, or for which limited raw material suppliers exist. IVAX
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believes that, by developing and marketing these specialty generics, it can
mitigate the pricing pressures facing other generic drugs. Developing specialty
generics involves a greater degree of risk than developing common generic
pharmaceutical products, and will require substantial time and resources. No
assurance can be given that IVAX will successfully build a consistent,
profitable pipeline of specialty generics or be able to obtain regulatory
approval to market any such products.
In addition to competition from other generic drug manufacturers, IVAX
faces competition from brand name companies as they increasingly sell their
products into the generic market directly by establishing, acquiring or forming
licensing or business arrangements with generic pharmaceutical companies. No
regulatory approvals are required for a brand name manufacturer to sell directly
or through a third party to the generic market, nor do such manufacturers face
any other significant barriers to entry into such market. In addition, brand
name companies are increasingly pursuing strategies to prevent or delay the
introduction of generic competition. These strategies include, among other
things, seeking to establish regulatory obstacles to the demonstration of the
bio-equivalence of generic drugs to their brand name counterparts and
instituting legal actions based on process or other patents that allegedly are
infringed by the generic products.
IVAX's pharmaceutical revenues may also be affected by the level of
reserves for estimated returns and inventory credits 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 price of the supplier's generic pharmaceutical
products. 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. 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.
Reserves for estimated returns and inventory credits are established by
IVAX concurrently with the recognition of revenue. The amount of reserves 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 reserves when management
believes that actual product returns and inventory credits may differ from
established reserves.
IVAX's pharmaceutical revenues and profits may also be affected by
other factors. Certain raw materials and components used in the manufacture of
IVAX's products are available from limited sources, and in some cases, a single
source. Any curtailment in the availability of such raw materials could be
accompanied by production or other delays, and, in the case of products for
which only one raw material supplier exists, could result in a material loss of
sales, with consequent adverse effects on IVAX's business and results of
operations. In addition, because raw material sources for pharmaceutical
products must generally be approved by regulatory authorities, changes in raw
material suppliers could result in delays in production, higher raw material
costs and loss of sales and customers.
3
During 1996 and 1997, certain national drug wholesalers instituted
programs designed to provide cost savings to independent retail pharmacies on
their purchases of certain generic pharmaceutical products. Pursuant to the
programs, independent retail pharmacies generally agreed to purchase their
requirements of generic pharmaceutical products from one wholesaler and
permitted the wholesaler to select the product suppliers. Each wholesaler
encouraged generic drug suppliers to participate in its program by offering to
purchase the wholesaler's requirements of particular products from a single
supplier. The programs encouraged generic drug suppliers to aggressively bid to
be the exclusive supplier of products under the programs. The existence of the
programs also resulted in reduced prices to non-wholesaler customers. As a
result of the institution of the programs, the generic drug industry experienced
a significant reduction in the prices charged by suppliers for many generic
pharmaceutical products during the second and third quarters of 1996. Price
declines continued throughout 1997 but at a slower rate than in 1996. Also
during 1996, IVAX experienced increased competition for certain of its more
important United States generic pharmaceutical products as a result of product
approvals obtained by competitors. The price declines for certain generic
pharmaceutical products manufactured by IVAX caused by the competitive factors
and industry practices described above, including the wholesaler programs,
combined with certain other factors discussed herein, were the primary factors
causing the decline in IVAX's operating results and the losses that began in
1996.
Price is a key competitive factor in the generic pharmaceutical
business. To effectively compete on the basis of price and remain profitable, a
generic drug manufacturer must manufacture its products in a cost-effective
manner. IVAX's manufacturing costs have had a negative impact on its operating
results. Therefore, beginning in the third quarter of 1996 and continuing
throughout 1997, IVAX announced and initiated several restructuring programs in
an effort to enhance operating efficiencies and reduce costs. These objectives
are to be achieved through workforce reductions, facility consolidations and
other cost saving measures throughout the organization, with primary emphasis on
IVAX's United States generic pharmaceutical business.
A significant amount of IVAX's United States generic pharmaceutical
sales are made 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. Both of these industries have
undergone, and are continuing to undergo, significant consolidation, which has
resulted in IVAX's customers gaining more purchasing leverage and consequently
increasing the pricing pressures facing IVAX's United States generic
pharmaceutical business. Further consolidation among IVAX's customers may result
in even greater pricing pressures and correspondingly reduce the gross margins
of this business, and may also cause such customers to reduce their purchases of
IVAX's products.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
IVAX reported a net loss of $233.3 million for the year ended December
31, 1997, compared to a net loss of $160.8 million for the year ended December
31, 1996. Loss from continuing operations was $219.5 million for the year ended
December 31, 1997, compared to a loss from continuing operations of $135.0
million for the prior year. Loss from discontinued operations was $8.7 million
for the year ended December 31, 1997, compared to a loss from discontinued
operations of $23.7 million for the prior year. Results for both periods
included a $2.1 million net extraordinary loss relating to the extinguishment of
debt. Results for the year ended December 31, 1997 also included a $2.9 million
charge resulting from a cumulative effect of a change in accounting principle.
4
Net loss per common share was $1.92 for the year ended December 31,
1997, compared to a net loss of $1.33 for the prior year. Loss per common share
from continuing operations was $1.81 for the year ended December 31, 1997,
compared to a loss of $1.12 for the prior year. Loss per common share from
discontinued operations was $.07 for the year ended December 31, 1997, compared
to a loss from discontinued operations of $.19 for the prior year. The net
extraordinary losses recorded in both periods relating to the early
extinguishment of debt and the cumulative effect of a change in accounting
principle in 1997 each resulted in a $.02 loss per common share.
NET REVENUES AND GROSS PROFIT
Net revenues for the year ended December 31, 1997 totaled $602.1
million, a decrease of $60.5 million, or 9%, from the $662.6 million reported in
the prior year. An increase of $12.1 million in net revenues of IVAX's
international operations was more than offset by a decrease of $72.6 million in
net revenues of IVAX's domestic operations.
Domestic net revenues totaled $231.3 million for the year ended
December 31, 1997, compared to $303.9 million for the same period of 1996. The
$72.6 million, or 24%, decrease in domestic net revenues was primarily
attributable to lower prices and sales volumes of certain generic pharmaceutical
products. This decline was partially offset by lower sales returns and
allowances as well as net revenues generated by certain new generic
pharmaceutical products manufactured by IVAX and introduced into the market
during 1997.
The decline in sales returns and allowances during the year ended
December 31, 1997 compared to the same period of the prior year was primarily
due to unusually high provisions for these items during 1996. The factors
contributing to the unusually high provisions in 1996 are discussed in "Results
of Operations - Overview" and "Results of Operations - Year ended December 31,
1996 compared to the year ended December 31, 1995."
During 1997 and 1996, IVAX's United States generic pharmaceutical
operations provided reserves which reduced gross sales by $215.7 million and
$277.0 million, respectively. At December 31, 1997 and 1996, these reserve
balances totaled $105.4 million and $105.8 million, respectively, and are
included in accounts receivable, net of allowances for doubtful accounts and
accrued expenses and other current liabilities in the Consolidated Balance
Sheets.
IVAX's international operations generated net revenues of $370.8
million for the year ended December 31, 1997, compared to $358.7 million for the
same period of the prior year. The $12.1 million, or 3%, increase in
international net revenues was primarily due to increased sales volumes of
generic pharmaceutical products and, to a lesser extent, the favorable impact of
foreign currency fluctuations. These increases were partially offset by lower
fees from a license agreement relating to IVAX's breath operated inhaler device.
Gross profit for the year ended December 31, 1997 decreased $47.7
million, or 29%, from the same period of the prior year. Gross profit was $114.3
million (19.0% of net revenues) for the year ended December 31, 1997, compared
to $162.0 million (24.4% of net revenues) for the year ended December 31, 1996.
The decrease in gross profit percentage is primarily due to price declines and
unfavorable product mix for both the United States generic pharmaceutical and
international operations. These decreases were partially offset by lower sales
returns and allowances at IVAX's United States generic pharmaceutical
operations.
As noted in "Results of Operations - Overview," other manufacturers may
obtain regulatory approvals or otherwise determine to market generic products
equivalent to IVAX's manufactured generic
5
products in 1998 and thereafter. As other companies commence to market products
which compete with those manufactured by IVAX, the resulting competition is
likely to reduce IVAX's net revenues and gross profit generated from those
products.
OPERATING EXPENSES
Selling expenses totaled $100.2 million (16.6% of net revenues) in
1997, compared to $98.8 million (14.9% of net revenues) in 1996, an increase of
$1.4 million. The increase was primarily attributable to additional sales force
and promotional costs related to IVAX's international operations. These
increases were partially offset by a decrease in selling expenses of the United
States generic pharmaceutical operations as a result of fewer product promotions
and reductions in sales and marketing personnel.
General and administrative expenses totaled $116.2 million (19.3% of
net revenues) in 1997, compared to $111.1 million (16.8% of net revenues) in
1996, an increase of $5.1 million. The increase is primarily attributable to an
increase in salary costs, legal expenses and settlement costs, and consulting
fees related to Year 2000 compliance (see "Liquidity and Capital Resources").
These increases were partially offset by lower bad debt provisions at IVAX's
United States generic pharmaceutical operations which were unusually high in the
comparable period of the prior year as a result of the 1996 bankruptcy of a
wholesaler customer.
Research and development expenses in 1997 increased 3% compared to
1996, to a total of $53.4 million (8.9% of net revenues). 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 1997 and 1996, IVAX recorded restructuring costs and asset
write-downs of $38.1 million and $69.1 million, respectively. During 1996, IVAX
instituted a restructuring program aimed at reducing costs and enhancing
operating efficiency at its United States generic pharmaceutical operations. The
restructuring program primarily involved facility consolidations, workforce
reductions and other cost saving measures. As a result, during 1996, IVAX
recorded a pre-tax charge of $13.2 million ($7.9 million after-tax) associated
with the United States generic pharmaceutical operations comprised of $2.3
million for severance and other employee termination benefits; $3.0 million for
plant closure and related costs; and $7.9 million to reduce the carrying value
of facilities to be closed and held for sale to their estimated fair market
value. The employee termination benefits during 1996 primarily represent
severance pay and other benefits associated with the elimination of
approximately 358 employee positions in the manufacturing, sales and marketing
and research and development areas of IVAX's United States generic
pharmaceutical operations.
During 1997, IVAX continued its ongoing efforts to reduce costs and
enhance operating efficiency by initiating further restructuring programs
primarily at its corporate headquarters and United States generic pharmaceutical
operations. As a result, during 1997, IVAX recorded a pre-tax charge of $14.3
million ($14.0 million after-tax) comprised of $5.1 million for severance and
other employee termination benefits and $9.2 million for certain costs
associated primarily with further manufacturing facility closures and additional
costs associated with facilities held for sale in connection with the 1996
restructuring program. The employee termination benefits during 1997 primarily
represent severance pay and other benefits associated with the elimination of
approximately 275
6
employee positions at IVAX's corporate headquarters and throughout all functions
of IVAX's United States generic pharmaceutical operations.
Pursuant to the restructuring programs, IVAX closed its Shreveport,
Louisiana pharmaceutical manufacturing facility in the fourth quarter of 1996;
consolidated its United States pharmaceutical distribution facilities into a
single leased distribution center in Kenton County, Kentucky in 1997; closed its
Ft. Lauderdale, Florida office, packaging and warehouse facility in the first
quarter of 1998; closed its Syosset, New York pharmaceutical manufacturing
facility in the first quarter of 1998; is pursuing the sale of its Kirkland,
Canada pharmaceutical manufacturing facility; expects to close one of its
London, England manufacturing facilities in 1998; and may sell its Falkenhagen,
Germany facility and one of its Miami, Florida manufacturing facilities before
the end of 1998. The closed facilities are held for sale. Production from these
facilities has been or will be transferred to other IVAX manufacturing
facilities.
During 1996, IVAX management reevaluated the carrying value of certain
long-lived assets and goodwill related to those assets held and used in IVAX's
United States generic pharmaceutical operations. This reevaluation was
necessitated by management's determination that the expected future results of
operations and cash flows from that business would be substantially lower than
previously expected. As a result, IVAX recorded a charge of $55.9 million (pre-
and after-tax) to reduce the carrying value of goodwill related to those
operations. The write-down reduced amortization expense by approximately $1.6
million annually. See Note 7, Discontinued Operations, in the Notes to
Consolidated Financial Statements for a discussion of asset write-downs of the
specialty chemicals business.
During 1997, management again reevaluated the carrying value of certain
long-lived assets, primarily in conjunction with the initiatives noted above to
further consolidate facilities of IVAX's United States generic pharmaceutical
operations in a continuing effort to improve its efficiency. As a result of
these initiatives, management recorded a charge of $23.8 million (pre- and
after-tax) to reduce the carrying value of certain assets to their estimated
fair market value.
The workforce reductions, facility closures and other cost saving
measures implemented as part of these restructuring programs are expected to
generate between $20 million and $25 million in operating expense reductions
and between $5 million and $10 million in reductions in manufacturing costs in
1998.
The $2.3 million and $.6 million of merger expenses incurred in 1997
and 1996, respectively, were primarily related to a proposed merger with Bergen
Brunswig Corporation ("Bergen"), which was terminated in March 1997.
OTHER INCOME (EXPENSE)
Interest income increased $4.6 million in 1997, as compared to 1996,
primarily due to higher levels of cash on hand resulting from the proceeds
received from the divestiture of certain businesses classified as discontinued
operations and the sale of certain product rights. See Note 5, Divestitures, and
Note 6, Sale of Product Rights, in the Notes to Consolidated Financial
Statements for further discussion.
7
Interest expense decreased $1.3 million in 1997, as compared to 1996,
primarily due to the repayment of IVAX's revolving credit facility. See Note 9,
Debt, in the Notes to Consolidated Financial Statements for further discussion.
Other income, net increased $46.7 million in 1997, as compared to 1996,
primarily due to the $43.2 million pre-tax gain on the sale of the rights to
Elmiron/Registered trademark/ and three other urology products in the 1997 third
quarter. See Note 6, Sale of Product Rights, in the Notes to Consolidated
Financial Statements for further discussion.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
IVAX reported a net loss of $160.8 million for the year ended December
31, 1996, compared to net income of $114.8 million for the prior year. Loss from
continuing operations was $135.0 million for the year ended December 31, 1996,
compared to income from continuing operations of $94.3 million for the prior
year. Loss from discontinued operations was $23.7 million for the year ended
December 31, 1996, compared to income from discontinued operations of $20.5
million for the prior year. Net loss for 1996 included $2.1 million in
extraordinary losses, net of tax, from the early extinguishment of debt.
Net loss per common share was $1.33 for the year ended December 31,
1996, compared to net earnings per common share of $.99 for the prior year. Loss
from continuing operations per common share was $1.12 for the year ended
December 31, 1996, compared to earnings from continuing operations per common
share of $.81 in the prior year. Loss from discontinued operations per common
share was $.19 for the year ended December 31, 1996, compared to earnings from
discontinued operations per common share of $.18 in the prior year. The net
extraordinary loss of $.02 per common share recorded in 1996 related to the
early extinguishment of debt.
NET REVENUES AND GROSS PROFIT
Net revenues totaled $662.6 million for 1996, a decrease of $126.4
million, or 16%, from the $789.0 million reported in the prior year. An increase
of $90.7 million in net revenues of IVAX's international operations was more
than offset by a decrease of $217.1 million in net revenues of IVAX's domestic
operations.
Domestic net revenues totaled $303.9 million for the year ended
December 31, 1996, compared to $521.0 million for the prior year. The $217.1
million, or 42%, decrease in domestic net revenues was primarily attributable to
significant price and volume declines for generic drugs manufactured by IVAX
during the second and third quarters of 1996, a time when customers had
significant inventories of such drugs. The significant price and volume declines
were caused by the competitive factors described in the "Results of
Operations - Overview," including the introduction of additional competing
products by other generic drug suppliers and the effect of the wholesaler
programs instituted during the year. These factors resulted in depressed
customer re-orders and increases in the reserves for customer inventory credits
and expected returns. In addition, to avoid exacerbating the inventory
situation, IVAX decreased promotional activities during the 1996 third quarter
which further reduced sales volumes. The declines were partially offset by net
revenues generated by certain new generic pharmaceutical products manufactured
by IVAX and introduced during 1996 and at the end of 1995.
During 1996 and 1995, IVAX's United States generic pharmaceutical
operations provided reserves which reduced gross sales by $277.0 million and
$150.7 million, respectively.
8
IVAX's international operations generated net revenues of $358.7
million in 1996 compared to $268.0 million in 1995. The $90.7 million, or 33.8%,
increase in international net revenues included an increase of $36.1 million
attributable to the 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's historical results of operations were not restated to give retroactive
effect to the acquisition due to the immateriality of the related amounts. The
remaining $54.6 million increase in net revenues of IVAX's international
operations was primarily due to higher sales of branded respiratory products and
licensing fees. Net revenues attributable to branded respiratory products (not
including licensing fees) represented approximately 13% of total international
net revenues in both 1996 and 1995. In the fourth quarter of 1996, IVAX entered
into a license agreement relating to its breath operated inhaler device pursuant
to which it recognized fees of $26.5 million in the 1996 fourth quarter.
Gross profit for the year ended December 31, 1996 decreased $150.8
million, or 48.2%, from the same period of the prior year. The gross profit
percentage was 24.4% of net revenues in 1996 as compared to 39.6% of net
revenues in 1995. The decline in the gross profit percentage was primarily
attributable to price declines for United States generic drugs and higher levels
of customer inventory credits and reserves for expected returns relating to the
United States generic pharmaceutical operations discussed above.
OPERATING EXPENSES
Selling expenses totaled $98.8 million (14.9% of net revenues) in 1996
compared to $71.0 million (9.0% of net revenues) in 1995, an increase of $27.8
million. Selling expenses of Elvetium, acquired during the first quarter of
1996, accounted for $14.1 million of the increase. The remaining $13.7 million
increase was primarily due to increased sales and marketing expenses associated
with the launch of newly approved products of IVAX's pharmaceutical operations.
General and administrative expenses totaled $111.1 million (16.8% of
net revenues) in 1996 compared to $71.8 million (9.1% of net revenues) for the
prior year. The $39.3 million increase in general and administrative expenses,
in comparison to the prior year, was principally the result of the impact of a
full twelve months of general and administrative expenses of Elvetium during
1996, increased bad debt expense and higher personnel related expenditures of
the international operations, and an increase in bad debt expense of the United
States generic pharmaceutical operations mainly resulting from the bankruptcy of
a wholesaler customer during the third quarter of 1996. Corporate general and
administrative expenses increased $6.6 million from the prior year primarily due
to increases in personnel, insurance and facilities costs.
Research and development expenses for 1996 totaled $51.7 million, an
increase of $6.1 million, or 13.5%, in comparison to the prior year.
The $.6 million of merger expenses recorded in 1996 were primarily
related to the proposed merger with Bergen. The $3.4 million of merger expenses
reported
9
for 1995 were primarily related to a proposed merger with Hafslund Nycomed which
was abandoned in November 1995.
See "Results of Operations - Year ended December 31, 1997 compared to
the year ended December 31, 1996 - Operating Expenses" for a discussion of the
1996 restructuring costs and asset write-downs.
OTHER INCOME (EXPENSE)
Other income, net, decreased $10.9 million in 1996 compared to 1995,
primarily due to the sale of IVAX's investment in preferred stock of North
American Vaccine, Inc. which resulted in a pre-tax gain of $12.8 million in
1995. Interest expense increased $7.9 million in 1996, as compared to the prior
year, primarily because of additional borrowings to fund working capital.
DISCONTINUED OPERATIONS
During 1997, IVAX's Board of Directors determined to divest its
intravenous products, personal care products and specialty chemicals businesses.
As a result, IVAX classified these businesses as discontinued operations. Income
(loss) from discontinued operations totaled $(8,701), $(23,690) and $20,482 for
the years ended December 31, 1997, 1996 and 1995, respectively. The third
quarter of 1996 included charges of $9.8 million ($6.2 million after-tax) and
$38.7 million (pre- and after-tax) to reduce the carrying value of certain fixed
assets and goodwill, respectively, related to certain segments of the specialty
chemicals business. In addition, 1997 included the net gain on sales of the
intravenous products and specialty chemicals businesses of $12.6 million. See
Note 7, Discontinued Operations, in the Notes to Consolidated Financial
Statements for further information.
CURRENCY FLUCTUATIONS
For 1997, 1996 and 1995, approximately 67%, 56% and 36%, respectively,
of IVAX's net revenues were attributable to operations which principally
generated revenues in currencies other than the United States dollar.
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. 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, 1997, no IVAX subsidiaries were domiciled in highly
inflationary environments. As a result of exchange rate differences, net
revenues increased by $1.3 million in 1997 as compared to 1996, and decreased by
$3.3 million in 1996 as compared to 1995.
INCOME TAXES
IVAX's effective tax rate was (39%), 29% and 23% in 1997, 1996 and
1995, respectively. For the three years ended December 31, 1997, the effective
tax rate for IVAX's foreign subsidiaries was 31%, 17% and 22%, respectively.
IVAX's effective tax rate in 1996 was higher than in 1995 primarily as a result
of domestic losses benefited at the prevailing federal and state statutory rates
which exceeded foreign income taxed at the prevailing generally lower foreign
rates. IVAX's effective tax rate in 1997 was negative due to an increase in its
tax provision for the establishment of a valuation allowance on deferred tax
assets of $114.7 million at a time when domestic operations had significant
losses. The $114.7 million was comprised of a $62.8 million increase as a result
of recognizing a valuation allowance against the domestic deferred
10
tax asset existing at December 31, 1996, a $12.7 million decrease due to an
additional tax refund received by the carrying back of the 1996 loss to earlier
years, and a $64.6 million increase as a result of recognizing a valuation
allowance against 1997 domestic losses. The establishment of this valuation
allowance in 1997 generated domestic deferred tax expense of $50.1 million,
despite the fact that IVAX's domestic operations generated losses.
At December 31, 1997, IVAX had substantial net operating loss and
credit carryforwards, some of which are subject to certain limitations. See Note
10, Income Taxes, in the Notes to Consolidated Financial Statements for further
information.
IVAX's 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's foreign and domestic taxable income
may be significantly affected by the jurisdictions in which new products are
developed and manufactured.
As a result of establishing the $114.7 million valuation allowance
discussed above, the domestic deferred tax asset is fully reserved as of
December 31, 1997. Management expects that it will also recognize additional
valuation allowances related to any future deferred tax assets generated from
its domestic operations until such time as sustainable domestic taxable income
is achieved.
At December 31, 1997, other current assets, other assets, and other
long-term liabilities include a $19.6 million net deferred tax asset, which
relates to foreign operations. Realization of this asset is dependent upon
generating sufficient future foreign taxable income. Although realization is not
assured, management believes it is more likely than not that the remaining
foreign net deferred tax asset will be realized based upon estimated future
taxable income of IVAX's foreign operations and, accordingly, no valuation
allowances for this asset were deemed necessary at December 31, 1997.
Management's estimates of future taxable 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. Such factors
are discussed in the "Results of Operations - Overview" and elsewhere in this
report.
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 1997, 1996 and 1995, this credit was
approximately $1.5 million, $5.7 million and $11.2 million, respectively, and
completely offset the entire United States tax liability of such operations. The
Section 936 tax credit will be phased out over 5 years beginning in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, IVAX's working capital, excluding net assets of
discontinued operations, totaled $238.9 million, compared to $415.9 million and
$354.7 million at December 31, 1996 and 1995, respectively. Cash and cash
equivalents were $199.2 million at December 31, 1997, compared to $80.8 million
and $14.7 million at December 31, 1996 and 1995, respectively.
Net cash provided by operating activities during 1997 was $90.8 million
compared to net cash used for operating activities of $13.2 million in 1996 and
net cash provided by operating activities of $16.4 million in 1995. The increase
in cash provided by operating activities during 1997 was primarily the result of
reductions in accounts receivable and inventory due to lower sales and improved
inventory management at IVAX's United States generic pharmaceutical operations
and a reduction in other current
11
assets due to IVAX's receipt of a $52.5 million refund of federal income taxes
paid in prior years. The increase in cash used for operating activities during
1996 as compared to 1995 was primarily the result of operating losses incurred
during 1996, partially offset by a decrease in the level of accounts receivable
due to the decline in sales during the period.
Net cash of $372.7 million was provided by investing activities in
1997, compared to net cash used for investing activities of $86.9 million and
$97.3 million in 1996 and 1995, respectively. The increase was primarily
attributable to cash proceeds received during 1997 from the sale of the
intravenous products business, a significant portion of the specialty chemicals
business, and certain product rights.
Effective May 30, 1997, IVAX sold McGaw, Inc. ("McGaw"), its
intravenous products business, to B. Braun of America, Inc. ("B. Braun"), a
subsidiary of B. Braun Melsungen AG, for $320.0 million in cash (subject to
certain post-closing adjustments), additional payments of up to $80.0 million
contingent upon the combined operating results of McGaw and B. Braun's principal
United States operating subsidiary, and certain royalties based on sales of the
Duplex/Trademark/ drug delivery system. The Duplex/Trademark/ system, presently
in development by McGaw, is a multi-compartment intravenous drug delivery system
devised for drugs that have limited stability after mixing.
During July and August 1997, IVAX completed the sale of a significant
portion of the assets of its specialty chemicals business in three separate
transactions in which IVAX received an aggregate of $41.1 million in cash.
During February 1998, IVAX sold its vacuum pump fluids business, the only
remaining segment of IVAX's specialty chemicals business, for $3.9 million in
cash (subject to certain post-closing adjustments).
On September 18, 1997, IVAX sold the rights to its proprietary drug
Elmiron/Registered trademark/ and three additional urology products in the
United States and Canada to ALZA Corporation ("ALZA"). IVAX retained the rights
to these products outside of the United States and Canada. IVAX received $75
million in up-front payments and may receive additional fees based on the
achievement of specified sales levels of Elmiron/Registered trademark/ during
the next five years. IVAX will receive payments from ALZA based on sales of the
products.
In connection with the sale of its intravenous products and specialty
chemicals businesses, as well as 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 materially adversely affect its earnings or operating results, there can be
no assurance that IVAX will not be subject to material indemnification claims
arising out of these transactions.
On March 20, 1998, IVAX terminated its paclitaxel development and
marketing agreement with NaPro BioTherapeutics, Inc. ("NaPro"). As part of the
termination, IVAX received, in perpetuity, a royalty-free, non-exclusive license
to NaPro's pending patents for a stable formulation of paclitaxel in the United
States, Europe and certain other world markets. IVAX paid consideration totaling
$8.1 million, and may pay up to an additional $6.4 million contingent upon the
issuance of the patents in certain jurisdictions.
12
Cash utilized for capital expenditures decreased from $71.8 million in
1995 to $50.0 million in 1996 and $45.7 million in 1997 due to spending
constraints imposed by IVAX's revolving credit facility and, after termination
of the facility, further constraints imposed by management.
During the first quarter of 1997, IVAX purchased a pharmaceutical
manufacturing facility in Kirkland, Canada for $10.5 million. During 1996 and
1995, IVAX purchased additional shares of Galena, a.s. for cash of $12.4 million
and $2.1 million, respectively, increasing its ownership interest from 60% to
approximately 74%. During 1995, IVAX sold its investment in preferred stock of
North American Vaccine, Inc. for approximately $16.3 million in cash.
Net cash of $344.9 million was used for financing activities in 1997,
compared to net cash provided by financing activities of $165.4 million and
$58.5 million in 1996 and 1995, respectively, primarily reflecting the payoff of
IVAX's revolving credit facility in June 1997.
During 1995, IVAX had a revolving credit facility permitting borrowings
of up to $130.0 million. Amounts borrowed under the revolving credit facility
were primarily used to fund working capital requirements and to fund capital
expenditure programs within IVAX's pharmaceuticals and intravenous products
operations.
On May 14, 1996, IVAX entered into a revolving credit agreement with a
bank syndicate which permitted borrowings of up to $425.0 million, and IVAX
terminated the revolving credit facility discussed above. On November 14, 1996,
IVAX entered into an amendment to the May 14, 1996 revolving credit agreement
which, among other things, reduced permitted borrowings to $375.0 million and
shortened the maturity of the line of credit from May 2001 to November 1999.
During 1996, proceeds from the credit facility were 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 (the "Senior Notes"), and
for working capital and general corporate purposes. At December 31, 1996, $337.1
million in borrowings were outstanding under this credit facility.
On June 24, 1997, IVAX utilized a portion of the McGaw sale proceeds in
the amount of $270.1 million to pay off the outstanding balance of its revolving
credit facility. The facility was terminated in conjunction with the payment and
IVAX recognized a net extraordinary loss of $2.1 million on the early
extinguishment of debt.
During 1995, IVAX redeemed a total of $1.0 million face value of its 6
1/2% Convertible Subordinated Notes Due 2001 (the "6-1/2% Notes"). Additionally,
during 1995, McGaw repurchased $3.4 million face value of the Senior Notes at a
purchase price of 101% of the outstanding principal amount plus accrued and
unpaid interest. During 1996, McGaw repurchased the remaining face value of the
Senior Notes at a purchase price of 102% of the outstanding principal amount of
$87.6 million, plus accrued and unpaid interest, using proceeds from the May 14,
1996 credit facility contributed to McGaw by IVAX. Cash flows related to the
redemption of the Senior Notes are included in "Net financing activities of
discontinued operations" in the Consolidated Statements of Cash Flows included
in the Consolidated Financial Statements.
Proceeds from the exercise of stock options and warrants totaled $.2
million in 1997 compared to $31.8 million in 1996 and $24.6 million in 1995.
13
During the first half of 1996, IVAX paid total cash dividends of $6.1
million, or $.05 per share, on its common stock, compared to the $9.3 million,
or $.08 per share, paid during 1995. No cash dividends were paid during 1997.
During 1996, IVAX issued 1.5 million shares of its common stock to
acquire Elvetium, valued at approximately $42.3 million as of the acquisition
date. During 1995, IVAX issued 350,000 shares of its common stock valued at
approximately $10.5 million as of the acquisition date in connection with the
acquisition of a pharmaceutical distribution company in Poland, and
approximately $4.9 million in cash in connection with three other acquisitions.
See Note 4, Mergers and Acquisitions, in the Notes to Consolidated Financial
Statements for further information concerning these acquisitions.
In December 1997, IVAX's Board of Directors approved a share
repurchase program authorizing IVAX to repurchase up to 5 million shares of IVAX
common stock. Through March 20, 1998, IVAX repurchased 1,686,800 shares of
common stock at a total cost, including commissions, of $14.5 million.
IVAX has engaged a consultant to assist in evaluating its computer
systems and facilities for any potential Year 2000 compliance issues. IVAX has
determined that a portion of its operating systems and equipment require
modification or replacement to ensure that they will be capable of recognizing
and processing dates beyond December 31, 1999. IVAX believes, based on existing
information, that its Year 2000 compliance issues can be mitigated, and it has
developed a plan to implement the required system and equipment modifications
and replacements. IVAX is also coordinating with its customers, suppliers and
other persons with which it interacts electronically to coordinate its Year 2000
compliance program.
IVAX anticipates that it will spend up to $15 million over the next two
years in connection with its plans to implement the required system and
equipment modifications and replacements. Amounts spent on modifying existing
systems and equipment will be expensed as incurred, and the cost of any new
software and equipment purchased will be capitalized. IVAX expects to complete
the implementation of its system and equipment modifications or replacements by
mid-1999. The expected costs of the Year 2000 compliance program and the date on
which IVAX expects to complete the implementation of the plan are based on
management's best estimates and involve certain assumptions, and actual results
could differ materially from the estimates set forth herein. There can be no
assurance that IVAX's Year 2000 compliance program will be successful. In
addition, the implementation of new information systems and the modification or
replacement of equipment involves risks that the systems and equipment will not
perform as expected and that productivity may suffer until employees are
properly trained. No assurance can be given that any such implementation will
not adversely affect IVAX's operations.
IVAX plans to spend substantial amounts of capital in 1998 to continue
the research and development of pharmaceutical products. Although research and
development expenditures are expected to be between $50 million and $60 million
during 1998, actual 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. In
addition, IVAX plans to spend between $50 million and $55 million in 1998 to
improve and expand its pharmaceutical and other related facilities.
IVAX's principal sources of short term liquidity are existing cash and
cash generated from the disposition of certain non-strategic assets, including
those currently classified as discontinued
14
operations, 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 the development of products
under development, that IVAX will be able to obtain regulatory approval for any
such product, or that any approved product may be produced in commercial
quantities, at reasonable costs, and be successfully marketed. In addition, the
6-1/2% Notes are scheduled to mature in November 2001. To the extent that
capital requirements exceed available capital or that IVAX is required to
refinance the 6-1/2% Notes, IVAX will need to seek alternative sources of
financing to fund its operations. IVAX has no existing credit facility and no
assurance can be given that alternative financing will be available, if at all,
in a timely manner, on favorable terms. If IVAX is unable to obtain satisfactory
alternative financing, IVAX may be required to delay or reduce its proposed
expenditures, including expenditures for research and development, or sell
additional assets in order to meet its future obligations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IVAX does not believe that it has material exposure to market rate
risk. IVAX's only material debt obligation relates to the 6-1/2% Notes, which
bear a fixed rate of interest. As noted above, IVAX may, however, require
additional financing to fund future obligations and no assurance can be given
that the terms of future sources of financing will not expose IVAX to material
market rate risk. IVAX does 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 contracts. IVAX enters into these contracts with
counterparties that it believes to be creditworthy and does not enter into any
leveraged derivative transactions. IVAX does not believe that it has material
market rate risk associated with its foreign exchange forward contracts due to
the short term nature of the contracts and the notional amounts outstanding.
Information about IVAX's market sensitive instruments constitutes a "forward
looking statement."
15
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
and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 20, 1998.
16
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31,
--------------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 199,235 $ 80,806
Accounts receivable, net of allowances for doubtful
accounts of $19,226 ($20,061 in 1996) 104,994 198,009
Inventories 145,716 204,194
Net assets of discontinued operations 37,820 398,329
Other current assets 22,939 101,117
------------- -------------
Total current assets 510,704 982,455
Property, plant and equipment, net 193,741 223,312
Intangible assets, net 39,458 54,726
Other assets 46,833 73,155
------------- -------------
Total assets $ 790,736 $ 1,333,648
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 4,025 $ 5,027
Current portion of long-term debt 7,858 5,595
Accounts payable 42,578 58,075
Accrued income taxes payable 9,126 13,437
Accrued expenses and other current liabilities 170,379 86,065
------------- -------------
Total current liabilities 233,966 168,199
Long-term debt, net of current portion 94,193 442,819
Other long-term liabilities 12,600 12,934
Minority interest 14,938 14,568
Shareholders' equity:
Common stock, $.10 par value, authorized 250,000 shares,
issued and outstanding 121,518 shares (121,476 in 1996) 12,152 12,148
Capital in excess of par value 515,234 515,070
Retained (deficit) earnings (72,294) 160,960
Cumulative translation adjustment and other (20,053) 6,950
------------- -------------
Total shareholders' equity 435,039 695,128
------------- -------------
Total liabilities and shareholders' equity $ 790,736 $ 1,333,648
============= =============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE BALANCE SHEETS.
17
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
NET REVENUES $ 602,110 $ 662,587 $ 788,988
COST OF SALES 487,806 500,618 476,235
------------- ------------- -------------
Gross Profit 114,304 161,969 312,753
------------- ------------- -------------
OPERATING EXPENSES:
Selling 100,220 98,770 70,964
General and administrative 116,185 111,122 71,769
Research and development 53,409 51,729 45,594
Amortization of intangible assets 3,760 4,594 2,632
Restructuring costs and asset write-downs 38,088 69,073 -
Merger expenses 2,343 557 3,392
------------- ------------- -------------
Total operating expenses 314,005 335,845 194,351
------------- ------------- -------------
Income (loss) from operations (199,701) (173,876) 118,402
OTHER INCOME (EXPENSE):
Interest income 5,738 1,126 1,453
Interest expense (14,685) (15,996) (8,066)
Other income, net 53,366 6,623 17,533
------------- ------------- -------------
Total other income (expense) 44,419 (8,247) 10,920
------------- ------------- -------------
Income (loss) from continuing operations before income
taxes and minority interest (155,282) (182,123) 129,322
PROVISION (BENEFIT) FOR INCOME TAXES 60,166 (52,488) 29,701
------------- ------------- -------------
Income (loss) from continuing operations before minority
interest (215,448) (129,635) 99,621
MINORITY INTEREST (4,086) (5,354) (5,302)
------------- ------------- -------------
Income (loss) from continuing operations (219,534) (134,989) 94,319
DISCONTINUED OPERATIONS, NET OF TAXES (8,701) (23,690) 20,482
------------- ------------- -------------
Income (loss) before extraordinary items and cumulative effect
of a change in accounting principle (228,235) (158,679) 114,801
EXTRAORDINARY ITEMS:
Gains (losses) on extinguishment of debt, net of a tax provision
(benefit) of $0 in 1997, $(1,382) in 1996 and $29 in 1995 (2,137) (2,073) 34
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE, net of a tax benefit of $1,295 (2,882) - -
------------- ------------- -------------
NET INCOME (LOSS) $ (233,254) $ (160,752) $ 114,835
============= ============= =============
(Continued)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
18
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Continued)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ (1.81) $ (1.12) $ .81
Discontinued operations (.07) (.19) .18
Extraordinary items (.02) (.02) -
Cumulative effect of a change in accounting principle (.02) - -
------------ ------------- -------------
Net earnings (loss) $ (1.92) $ (1.33) $ .99
============ ============= =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ (1.81) $ (1.12) $ .79
Discontinued operations (.07) (.19) .17
Extraordinary items (.02) (.02) -
Cumulative effect of a change in accounting principle (.02) - -
------------ ------------- -------------
Net earnings (loss) $ (1.92) $ (1.33) $ .96
============ ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 121,496 120,949 116,065
============ ============= =============
Diluted 121,496 120,949 119,539
============ ============= =============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
19
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
COMMON STOCK CUMULATIVE
--------------------- CAPITAL IN RETAINED TRANSLATION
NUMBER EXCESS OF (DEFICIT) ADJUSTMENT
OF SHARES AMOUNT PAR VALUE EARNINGS AND OTHER TOTAL
--------- -------- ---------- ---------- ----------- ----------
BALANCE, January 1, 1995 114,046 $ 11,405 $ 417,734 $ 216,156 $ (10,839) $ 634,456
Issuances of common stock:
Exercise of stock options and warrants 3,313 331 24,237 - - 24,568
Conversion of 9.00% Convertible
Subordinated Debentures 286 29 1,471 - - 1,500
Contribution to 401(k) plan 31 3 778 - - 781
Acquisition accounted for under the
pooling of interests method of accounting 350 35 (35) 68 - 68
Effect of tax deductions received from
the exercise of stock options - - 17,418 - - 17,418
Unrealized net gain on available-for-sale
equity securities - - - - 4,805 4,805
Distribution to shareholders by pooled
company - - - (66) - (66)
Minimum pension liability adjustment - - - 471 - 471
Sale of investment in affiliate which held
interest in IVAX stock - - - - 272 272
Cash dividends paid - - - (9,347) - (9,347)
Translation adjustment - - - - (589) (589)
Net income - - - 114,835 - 114,835
-------- -------- --------- ---------- --------- ----------
BALANCE, December 31, 1995 118,026 11,803 461,603 322,117 (6,351) 789,172
Issuances of common stock:
Exercise of stock options 1,881 188 31,651 - - 31,839
Contribution to 401(k) plan 78 8 2,078 - - 2,086
Acquisition accounted for under the
pooling of interests method of
accounting 1,491 149 (46) 5,652 - 5,755
Effect of tax deductions received from
the exercise of stock options - - 19,784 - - 19,784
Unrealized net gain on available-for-sale
equity securities - - - - 461 461
Cash dividends paid - - - (6,057) - (6,057)
Translation adjustment - - - - 12,840 12,840
Net loss - - - (160,752) - (160,752)
-------- -------- --------- ---------- --------- ----------
BALANCE, December 31, 1996 121,476 12,148 515,070 160,960 6,950 695,128
Issuances of common stock:
Exercise of stock options 42 4 148 - - 152
Effect of tax deductions received from
the exercise of stock options - - 16 - - 16
Unrealized net loss on available-for-sale
equity securities - - - - (6,230) (6,230)
Translation adjustment - - - - (20,773) (20,773)
Net loss - - - (233,254) - (233,254)
-------- -------- --------- ---------- --------- ----------
BALANCE, December 31, 1997 121,518 $ 12,152 $ 515,234 $ (72,294) $ (20,053) $ 435,039
======== ======== ========= ========== ========= ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
20
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (233,254) $ (160,752) $ 114,835
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Restructuring costs and asset write-downs 38,088 69,073 -
Depreciation and amortization 38,462 32,371 21,587
Deferred tax provision (benefit) 50,194 (50,243) (4,175)
Provision for allowances for doubtful accounts 8,973 30,737 4,579
Minority interest 4,086 5,354 5,302
Gain on sale of product rights (43,224) - -
Losses (gains) on disposal of assets, net 2,861 (3,969) (12,095)
Losses (gains) on extinguishment of debt 2,137 1,640 (63)
Cumulative effect of a change in accounting principle 4,177 - -
Loss (income) from discontinued operations 8,701 23,690 (20,482)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 75,783 80,184 (133,965)
Decrease (increase) in inventories 50,294 (28,947) (16,640)
Decrease (increase) in other current assets 51,583 (21,918) 3,849
Increase in other assets (5,603) (4,230) (6,179)
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities 21,954 (1,579) 37,973
(Decrease) increase in other long-term liabilities (292) 2,864 1,326
Other, net (998) (1,753) 6
Net cash provided by operating activities of discontinued
operations 16,876 14,277 20,531
------------- ------------- -------------
Net cash provided by (used for) operating activities 90,798 (13,201) 16,389
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from divestitures 361,105 - -
Proceeds from sale of product rights 75,000 - -
Capital expenditures (45,741) (49,982) (71,761)
Proceeds from sale of assets 8,752 9,470 17,077
Acquisitions of patents, trademarks, licenses and other
intangibles (1,710) (1,848) (921)
Acquisitions of businesses and facilities, net of cash acquired (10,500) (12,006) (4,740)
Other, net 5 - (196)
Net investing activities of discontinued operations (14,186) (32,579) (36,777)
------------- ------------- -------------
Net cash provided by (used for) investing activities 372,725 (86,945) (97,318)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 47,989 600,371 111,145
Payments on long-term debt and loans payable (392,914) (373,293) (63,808)
Issuance of common stock 152 31,839 24,568
Cash dividends paid - (6,057) (9,347)
Distributions to shareholders by pooled companies - - (66)
Net financing activities of discontinued operations (92) (87,473) (3,992)
------------- ------------- -------------
Net cash (used for) provided by financing activities (344,865) 165,387 58,500
------------- ------------- -------------
Effect of exchange rate changes on cash (229) 845 104
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 118,429 66,086 (22,325)
Cash and cash equivalents at the beginning of the year 80,806 14,720 37,045
------------- ------------- -------------
Cash and cash equivalents at the end of the year $ 199,235 $ 80,806 $ 14,720
============= ============= =============
(Continued)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
21
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Supplemental disclosures:
Interest paid $ 21,313 $ 21,172 $ 13,001
============== ============= ==============
Income tax (refunds) payments $ (42,683) $ 12,870 $ 11,459
============== ============= ==============
Supplemental schedule of non-cash investing and financing activities:
Information with respect to IVAX's 1996 and 1995 acquisitions which were
accounted for under the purchase method of accounting are summarized as follows:
1996 1995
------------- --------------
Fair value of assets acquired $ - $ 718
Liabilities assumed - 181
------------- --------------
- 537
Reduction of minority interest (5,219) (813)
------------- --------------
5,219 1,350
============= ==============
Purchase price:
Cash (including related acquisition costs) 12,362 4,935
------------- --------------
Cost in excess of net assets of acquired companies $ 7,143 $ 3,585
============= ==============
During the year ended December 31, 1995, 286 shares of IVAX common stock
were issued upon the conversion of $1,500 in debentures.
During the years ended December 31, 1996 and 1995, contributions to the
401(k) retirement plan resulted in the issuance of 78 and 31 shares of IVAX
common stock totaling $2,086 and $781, respectively.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
22
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Financial amounts in thousands, except share data)
(1) ORGANIZATION:
IVAX Corporation is a holding company with subsidiaries engaged
primarily in the research, development, manufacture and marketing of generic and
branded pharmaceuticals. 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.
During 1997, IVAX's Board of Directors approved a plan to dispose of
IVAX's intravenous products, specialty chemicals and personal care products
businesses. Accordingly, the consolidated financial statements have been
restated to reflect the intravenous products, specialty chemicals and personal
care products businesses as discontinued operations (See Note 7, Discontinued
Operations). Effective May 30, 1997, IVAX sold McGaw, Inc. ("McGaw"), its
intravenous products business. During the third quarter of 1997, IVAX completed
the sale of a significant portion of the assets of its specialty chemicals
business in three separate transactions (See Note 5, Divestitures).
IVAX's future revenues and profitability are largely dependent upon its
ability to continue to develop, obtain approval for, efficiently manufacture and
market pharmaceutical products. Revenues and profits derived from generic
pharmaceuticals, which presently constitute IVAX's principal business, can be
significantly affected by a variety of factors, including, among other things,
the timing of new generic drug approvals received by IVAX, the number and timing
of generic drug approvals for competing products, the timing of IVAX's initial
shipments of newly approved generic drugs, strategies adopted by brand name
companies to maintain market share, and IVAX's cost of manufacturing. Certain
raw materials and components used in the manufacture of IVAX's products are
available from limited sources, and in some cases, a single source. In addition,
because raw material sources for pharmaceutical products must generally be
approved by regulatory authorities, changes in raw material suppliers could
result in delays in production, higher raw material costs and loss of sales and
customers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - Overview" for additional
discussion of IVAX's business.
(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 and as required with respect to discontinued
operations (See Note 7, Discontinued Operations).
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period.
23
IVAX's actual results in subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying consolidated financial
statements.
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,
---------------------------------
1997 1996
------------- --------------
Raw materials $ 49,227 $ 70,375
Work-in-process 25,386 23,703
Finished goods 71,103 110,116
------------- --------------
$ 145,716 $ 204,194
============= ==============
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization and consist of
the following:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
Land $ 10,932 $ 8,228
Buildings and improvements 116,978 142,358
Machinery and equipment 152,396 131,559
Furniture and computer equipment 55,881 45,893
------------- --------------
336,187 328,038
Less: Accumulated depreciation and
amortization 142,446 104,726
------------- --------------
$ 193,741 $ 223,312
============= ==============
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows: buildings and improvements
(10-50 years), machinery and equipment (3-15 years) and furniture and computer
equipment (2-10 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 which 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.
24
INTANGIBLE ASSETS - Intangible assets are carried at cost less
accumulated amortization and consist of the following:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
Cost in excess of net assets of
acquired companies $ 15,343 $ 26,160
Patents, trademarks, licenses and
other intangibles 41,226 42,767
------------- --------------
56,569 68,927
Less: Accumulated amortization 17,111 14,201
------------- --------------
$ 39,458 $ 54,726
============= ==============
Cost in excess of net assets of acquired companies 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 3-25 years).
Following any acquisition, IVAX continually evaluates whether later
events and circumstances have occurred that indicate that the remaining
estimated useful life of intangible assets may require revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate that
an asset acquired in a purchase business combination and related goodwill 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).
LONG-LIVED ASSETS - On January 1, 1996, IVAX adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Adoption did
not have a material effect on the consolidated financial statements (See Note 3,
Restructuring Costs and Asset Write-Downs).
MINORITY INTEREST - At December 31, 1997, IVAX owned 74% of the capital
stock of Galena a.s., a pharmaceutical company based in the Czech Republic
("Galena") (See Note 4, Mergers and Acquisitions). The accompanying consolidated
financial statements of IVAX reflect the full consolidation of the accounts of
Galena. Minority interest represents the minority shareholders' proportional
share of the equity in the income and net assets of Galena.
FOREIGN CURRENCIES - IVAX's operations include subsidiaries which are
located outside of the United States. Assets and liabilities as stated in the
local reporting currency 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 "Cumulative translation adjustment and other" caption in the
shareholders' equity section of the accompanying consolidated balance sheets.
Statement of operations amounts are translated at the average rates for the
period.
FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts receivable, loans payable, accounts payable and accrued
income taxes 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
25
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 $2,870 at December 31,
1997, which mature January 1998 through May 1998, and $4,908 at December 31,
1996, which matured in January 1997.
In addition, IVAX has intercompany balances that are denominated in
foreign currencies. A portion of these balances are hedged using foreign
exchange forward contracts, and gains and losses on these contracts are included
in the consolidated statements of operations as they arise. IVAX Corporation,
the parent company, itself did not hold foreign exchange forward contracts at
December 31, 1997. IVAX Corporation held purchased foreign exchange forward
contracts with a notional principal amount of $3,018 at December 31, 1996.
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 $220,810, $287,540 and $156,522 in
the years ended December 31, 1997, 1996 and 1995, respectively. The reserve
balances included in "Accounts receivable, net of allowances for doubtful
accounts and "Accrued expenses and other current liabilities" in the
accompanying consolidated balance sheets are $53,702 and $54,257, respectively,
at December 31,1997, and $100,898 and $8,936, respectively, at December 31,
1996.
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 price of the supplier's
generic pharmaceutical products. 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.
Reserves for estimated returns and inventory credits are established by
IVAX concurrently with the recognition of revenue. The amount of reserves 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 reserves when management
believes that actual product returns and inventory credits may differ from
established reserves.
26
Royalty and licensing fee income are recognized when obligations
associated with earning the royalty or licensing fee have been satisfied and are
included in "Net revenues" in the accompanying consolidated statements of
operations.
RESEARCH AND DEVELOPMENT COSTS - IVAX-sponsored research and
development costs related to future products are expensed currently.
INCOME TAXES - The provision (benefit) 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 asset and liability method,
and deferred taxes are determined 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.
STOCK-BASED COMPENSATION PLANS - In 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 allows either adoption of a fair value method of
accounting for stock-based compensation plans or continuation of accounting
under Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations with supplemental disclosures.
IVAX has chosen to account for all stock-based compensation arrangements under
which employees receive shares of IVAX common stock under APB Opinion No. 25
with related disclosures under SFAS No. 123. Pro forma net earnings (loss) per
common share amounts, as if the fair value method had been adopted, are
presented in Note 12, Shareholders' Equity. The adoption of SFAS No. 123 did not
have a material impact on IVAX's results of operations, financial position or
cash flows.
EARNINGS (LOSS) PER COMMON SHARE - During 1997, IVAX adopted SFAS No.
128, EARNINGS PER SHARE. SFAS No. 128 establishes standards for computing and
presenting basic and diluted earnings (loss) per share. Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. In the computation of
diluted earnings (loss) per share, the weighted average number of common
shares outstanding is adjusted for the effect of all dilutive potential common
stock. In computing diluted earnings (loss) per share, IVAX has utilized the
treasury stock method. All prior periods earnings (loss) per share data have
been restated to conform with SFAS No. 128.
27
For the years ended December 31, 1996 and 1997, there was no difference
between basic and diluted loss per common share. A reconciliation of the
numerator and the denominator of the basic and diluted earnings per share
computation for income from continuing operations is as follows for the year
ended December 31, 1995:
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- --------------
Basic EPS:
Income from continuing operations $ 94,319 116,065 $ 0.81
==============
Effect of Dilutive Securities:
9.0% Convertible Subordinated Debentures 62 286
Stock options - 3,188
-------------- ---------------
Diluted EPS:
Income from continuing operations
plus assumed conversions $ 94,381 119,539 $ 0.79
============== =============== ==============
CHANGE IN ACCOUNTING PRINCIPLE - On November 20, 1997, the Emerging
Issues Task Force ("EITF") of the FASB reached a consensus in EITF Abstract No.
97-3 that the costs of business process reengineering activities are to be
expensed as incurred. This consensus applies to business process reengineering
activities that are part of an information technology project. Beginning in
1995, IVAX's wholly-owned subsidiary, Norton Healthcare Limited ("Norton
Healthcare"), initiated an enterprise Business Excellence program that combines
design and installation of business processes and software packages to achieve
global best practices. Under the Business Excellence initiatives, Norton
Healthcare had capitalized certain external costs associated with business
process reengineering activities as part of the software asset. EITF Abstract
No. 97-3 prescribes that previously capitalized business process reengineering
costs should be expensed and reported as a cumulative effect of a change in
accounting principle. Accordingly, for the fourth quarter of 1997, IVAX reported
a charge of $2,882 (net of a tax benefit of $1,295), or $.02 per share, for the
write-off of business process reengineering costs previously capitalized. Such
costs are being expensed as incurred prospectively.
RECENTLY ISSUED ACCOUNTING STANDARDS - IVAX is required to adopt SFAS
No. 130, REPORTING COMPREHENSIVE INCOME, in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of financial statements. The objective of SFAS No.
130 is to report comprehensive income, a measure of all changes in equity of an
enterprise that result from transactions and other economic events in a period,
other than transactions with owners. Management believes that the adoption of
SFAS No. 130 will not have a material impact on IVAX's consolidated financial
statements and IVAX has elected to disclose comprehensive income in the
consolidated statement of shareholders' equity upon adoption.
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for the way that public business enterprises
report information about operating segments and for related disclosures about
products and services, geographic areas and major customers. IVAX will implement
the disclosure provisions of SFAS No. 131 effective December 31, 1998.
28
(3) RESTRUCTURING COSTS AND ASSET WRITE-DOWNS:
During 1996, IVAX instituted a restructuring program aimed at reducing
costs and enhancing operating efficiency in IVAX's United States generic
pharmaceutical operations by consolidating facilities and reducing the
workforce. As a result, during the third quarter of 1996, IVAX recorded a
pre-tax charge of $13,974 associated with the United States generic
pharmaceutical operations comprised of $2,324 for severance and other employee
termination benefits; $3,000 for plant closure and related costs; and $8,650 to
reduce the carrying value of facilities to be closed and held for sale to their
estimated fair market value. In the fourth quarter of 1996, the charge related
to reducing the carrying value of certain assets to their estimated fair market
value was adjusted by $800 as it was expected that certain assets would be
transferred to IVAX's Kirkland, Canada facility, acquired in January 1997, for
use in operations. The employee termination benefits during 1996 primarily
represent severance pay and other benefits associated with the elimination of
approximately 358 employee positions in the manufacturing, sales and marketing
and research and development areas of IVAX's United States generic
pharmaceutical operations.
During 1997, IVAX continued its ongoing efforts to reduce costs and
enhance operating efficiency by initiating further restructuring programs
primarily at its corporate headquarters and United States generic pharmaceutical
operations. As a result, during 1997, IVAX recorded a pre-tax charge of $14,274
comprised of $5,094 for severance and other employee termination benefits and
$9,180 for certain costs associated primarily with further manufacturing
facility closures and additional costs associated with facilities held for sale
in connection with the 1996 restructuring programs. The employee termination
benefits during 1997 primarily represent severance pay and other benefits
associated with the elimination of approximately 275 employee positions at
IVAX's corporate headquarters and throughout all functions of IVAX's United
States generic pharmaceutical operations.
Pursuant to the restructuring programs, IVAX closed its Shreveport,
Louisiana pharmaceutical manufacturing facility in the fourth quarter of 1996;
consolidated its United States pharmaceutical distribution facilities into a
single leased distribution center in Kenton County, Kentucky in 1997; closed its
Ft. Lauderdale, Florida office, packaging and warehouse facility in the first
quarter of 1998; closed its Syosset, New York pharmaceutical manufacturing
facility in the first quarter of 1998; is pursuing the sale of its Kirkland,
Canada pharmaceutical manufacturing facility; expects to close one of its
London, England manufacturing facilities in 1998; and may sell its Falkenhagen,
Germany facility and one of its Miami, Florida manufacturing facilities before
the end of 1998. The closed facilities are held for sale. Production from these
facilities has been or will be transferred to other IVAX manufacturing
facilities.
During 1996, IVAX management reevaluated the carrying value of certain
long-lived assets and goodwill related to those assets held and used in IVAX's
United States generic pharmaceutical operations. This reevaluation was required
by management's determination that, based on results of operations during that
period and conditions and trends within the generic pharmaceutical industry, the
expected future cash flows to be derived from the assets and related goodwill
would be substantially lower than previously expected. As a result, management
reduced the carrying value of goodwill related to the United States generic
pharmaceutical operations by recording a pre-tax charge of $55,899. See Note 7,
Discontinued Operations, for a discussion of asset write-downs of the specialty
chemicals business.
During 1997, management again reevaluated the carrying value of certain
long-lived assets, primarily in conjunction with the initiatives noted above to
further consolidate facilities of IVAX's United States generic pharmaceutical
operations in a continuing effort to improve its efficiency. As a result of
29
these initiatives, management reduced the carrying value of certain assets to
their estimated fair market value by recording a pre-tax charge of $23,814.
These restructuring costs and asset write-downs were recorded in
accordance with EITF Abstract No. 94-3, LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AND ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING), and SFAS No. 121, respectively, and
are shown as "Restructuring costs and asset write-downs" 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 reserve balances at
December 31, 1997 and 1996, which are included in "Accrued expenses and other
current liabilities" in the accompanying consolidated balance sheets, are as
follows:
EMPLOYEE
ASSET TERMINATION PLANT
WRITE-DOWNS BENEFITS CLOSURES TOTAL
------------- -------------- ------------- --------------
1996 restructuring costs and asset
write-downs $ 63,749 $ 2,324 $ 3,000 $ 69,073
Cash payments during 1996 - (370) (346) (716)
Non-cash activity (63,749) - - (63,749)
------------- -------------- ------------- --------------
Balance at December 31, 1996 - 1,954 2,654 4,608
1997 restructuring costs and asset
write-downs 23,814 5,094 9,180 38,088
Cash payments during 1997 - (2,400) (1,360) (3,760)
Non-cash activity (23,814) (101) (1,107) (25,022)
------------- -------------- ------------- --------------
Balance at December 31, 1997 $ - $ 4,547 $ 9,367 $ 13,914
============= ============== ============= ==============
(4) MERGERS AND ACQUISITIONS:
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 consolidated financial statements have not been restated to give
retroactive effect to the acquisition due to the immateriality of the related
amounts.
On September 30, 1995, IVAX acquired Pharmatop Limited, a company
engaged exclusively in the distribution and marketing in Poland of products of
Norton Healthcare in consideration for 350,000 shares of IVAX common stock.
Although the acquisition was accounted for using the pooling of interests method
of accounting, the accompanying consolidated financial statements have not been
restated to give retroactive effect to the acquisition due to the immateriality
of the related amounts.
On July 17, 1995, IVAX paid approximately $2,783 in cash to acquire
ImmunoVision, Inc. ("ImmunoVision"), a company engaged in the manufacture and
sale of certain diagnostic products. The
30
acquisition was accounted for using the purchase method of accounting. The
historical operations of ImmunoVision, when compared to the historical
operations of IVAX, were not significant.
In 1995, IVAX increased its ownership interest in Galena from 60% to
62%. In 1996, IVAX increased its ownership interest to 74% with additional open
market purchases totaling $12,362.
(5) DIVESTITURES:
Effective May 30, 1997, IVAX sold McGaw to B. Braun of America, Inc.
("B. Braun"), a subsidiary of B. Braun Melsungen AG, for $320,000 in cash
(subject to certain post-closing adjustments), additional payments of up to
$80,000 contingent upon the combined operating results of McGaw and B. Braun's
principal United States operating subsidiary and certain royalties based on
sales of the Duplex/Trademark/ drug delivery system. The Duplex/Trademark/
system, presently in development by McGaw, is a multi-compartment intravenous
drug delivery system devised for drugs that have limited stability after mixing.
During the third quarter of 1997, IVAX completed the sale of a
significant portion of the assets of its specialty chemicals business in three
separate transactions in which IVAX received an aggregate of $41,105 in cash.
During February 1998, IVAX sold its vacuum pumps fluids business, the only
remaining segment of IVAX's 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.
The gain on sale and results of operations of both the intravenous
products and specialty chemicals businesses were classified as part of
discontinued operations for all periods presented (See Note 7, Discontinued
Operations).
(6) SALE OF PRODUCT RIGHTS:
On September 18, 1997, IVAX sold the rights to its proprietary drug
Elmiron/Registered trademark/ and three additional urology products in the
United States and Canada to ALZA Corporation ("ALZA"). IVAX retained the rights
to these products outside of the United States and Canada. IVAX received $75
million in up-front payments and may receive additional fees based on the
achievement of specified sales levels of Elmiron/Registered trademark/ during
the next five years. IVAX will receive payments from ALZA based on sales of the
products. Included in "Other income, net" in the accompanying consolidated
statements of operations is a $43,224 pre- and after-tax gain on the
transaction. The gain is net of $15,000 in reserves provided for a related
research and development cost sharing arrangement included in "Accrued expenses
and other current liabilities" in the accompanying consolidated balance sheets,
the write-off of $11,774 in certain assets of the domestic proprietary
pharmaceutical operations, $3,000 in payments due to a third party associated
with an existing licensing agreement, and $2,002 primarily in severance and
other employee termination benefits associated with workforce reductions in
IVAX's domestic proprietary pharmaceutical operations.
31
(7) DISCONTINUED OPERATIONS:
During 1997, IVAX's Board of Directors determined 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. Results of these
operations were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
INTRAVENOUS PRODUCTS (THROUGH MAY 30, 1997)
Net revenues (1) $ 140,634 $ 343,028 $ 339,978
============== ============= ==============
Income from operations before taxes (2) $ 3,770 $ 13,759 $ 17,161
Income tax benefit (427) (6,771) (2,564)
-------------- ------------- --------------
Income from operations $ 4,197 $ 20,530 $ 19,725
-------------- ------------- --------------
PERSONAL CARE PRODUCTS
Net revenues (1) $ 73,870 $ 80,000 $ 65,368
============== ============= ==============
Income (loss) from operations before taxes (2) $ (18,254) $ 6,089 $ 3,885
Income tax provision 3,283 1,686 1,652
-------------- ------------- --------------
Income (loss) from operations $ (21,537) $ 4,403 $ 2,233
-------------- ------------- --------------
SPECIALTY CHEMICALS
Net revenues (1) $ 41,562 $ 67,857 $ 66,886
============== ============= ==============
Loss from operations before taxes (2) $ (1,749) $ (53,274) $ (1,927)
Income tax provision (benefit) 2,235 (4,651) (451)
-------------- ------------- --------------
Loss from operations $ (3,984) $ (48,623) $ (1,476)
-------------- ------------- --------------
Sub-total income (loss) from operations $ (21,324) $ (23,690) $ 20,482
-------------- ------------- --------------
DIVESTITURES (SEE NOTE 5)
Pre-tax gain on divestitures $ 44,715 $ - $ -
Income tax provision 32,092 - -
-------------- ------------- --------------
Net gain on divestitures $ 12,623 $ - $ -
-------------- ------------- --------------
Total income (loss) from discontinued operations $ (8,701) $ (23,690) $ 20,482
============== ============= ==============
<FN>
(1) Net revenues include intersegment sales of $569, $2,165 and $1,454 for
1997, 1996 and 1995, respectively.
(2) Includes an allocation of interest expense based on the ratio of net assets
of each of the discontinued businesses to IVAX's consolidated total
capital. The above operating results include interest expense allocations
of $5,799, $6,556 and $3,250 for 1997, 1996 and 1995, respectively.
</FN>
32
The net assets of IVAX's remaining discontinued operations (excluding
intercompany balances) at December 31, 1997, as presented in the accompanying
consolidated balance sheets, are as follows:
PERSONAL CARE SPECIALTY
PRODUCTS CHEMICALS
BUSINESS BUSINESS TOTAL
---------------- ------------- --------------
Current assets $ 24,419 $ 1,919 $ 26,338
Property, plant and equipment, net 5,572 926 6,498
Other assets 19,676 3,717 23,393
---------------- ------------- --------------
Total assets 49,667 6,562 56,229
---------------- ------------- --------------
Current liabilities 13,599 3,958 17,557
Other liabilities - 852 852
---------------- ------------- --------------
Total liabilities 13,599 4,810 18,409
---------------- ------------- --------------
Net assets of discontinued operations $ 36,068 $ 1,752 $ 37,820
================ ============= ==============
During 1996, IVAX management reevaluated the carrying value of certain
long-lived assets and goodwill related to those assets to be held and used in
IVAX's specialty chemicals business. This reevaluation was necessitated by
management's determination that, based on recent results of operations during
that period and conditions and trends of that business, the expected future cash
flows to be derived from the assets and related goodwill would be substantially
lower than had previously been expected. As a result, management reduced the
carrying value of certain long-lived assets and goodwill of the specialty
chemicals business by recording pre-tax charges of $9,753 and $38,689,
respectively. Management determined the amount of the charges based on various
valuation techniques, including discounted cash flow analysis and net realizable
value for assets to be held and used. The asset write-downs related to the
specialty chemicals business have been included in "Discontinued operations, net
of taxes" in the accompanying consolidated statements of operations.
(8) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
In November 1995, IVAX sold its investment in 1,000,000 shares of North
American Vaccine, Inc. ("NAVA") Series A Convertible Preferred Stock at fair
value to a limited partnership beneficially owned by IVAX's chairman and chief
executive officer for $16,250 in cash. IVAX considered a variety of factors in
determining the fair value of the preferred shares, including, among other
things, the market price of the common stock and an opinion from an independent
valuation firm. The investment had been recorded at $3,415, the historical cost
of the preferred shares, less $272 which represented IVAX's interest in shares
of IVAX common stock held by NAVA. The pre-tax gain of $12,835 resulting from
the sale of the preferred shares is included in "Other income, net" in the
accompanying consolidated statement of operations for the year ended December
31, 1995.
In March 1995, IVAX and Knoll AG ("Knoll"), a wholly-owned subsidiary
of BASF Aktiengesellschaft, established a joint venture for the marketing of
generic pharmaceutical products in Europe. In December 1996, IVAX sold its share
of the joint venture to Knoll and terminated the joint venture agreement. The
results of the joint venture, IVAX's equity in its earnings, and the sale of
IVAX's interest were not significant to IVAX.
33
IVAX has ownership interests of 50% in various other unconsolidated
affiliates. Undistributed earnings of these affiliates, as well as IVAX's equity
in their earnings, were not significant in any of the periods presented in the
accompanying consolidated financial statements.
At December 31, 1997 and 1996, 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 $3,405 and $12,094, respectively, and are
included in "Other assets" in the accompanying consolidated balance sheets. At
December 31, 1997 and 1996, net unrealized gains (losses) of $(963) and $5,267,
respectively, are included in "Cumulative translation adjustment and other" in
the accompanying consolidated balance sheets.
(9) DEBT:
Long-term debt consists of the following:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
Borrowings under revolving line of credit due November 14, 1999
at LIBOR plus 2% (7.51% - 8.19% at December 31, 1996).
Paid in full in 1997. $ - $ 337,150
6 1/2% Convertible Subordinated Notes due 2001. Interest payable
semi-annually. Convertible at the option of the holders into
2,866,929 shares of common stock at a conversion rate of $31.75
per share. 91,025 91,025
Industrial revenue bonds due 2008. Collateralized by mortgages on
real property and equipment and a standby letter of credit. Interest
payable semi-annually at adjustable rates (4.35% at December 31,
1997). Paid in full in the first quarter of 1998. 6,700 6,700
Industrial revenue bonds due 2006. Interest at adjustable rates
(3.85% at December 31, 1996). Paid in full in 1997. - 3,680
Mortgage loans, payable at adjustable rates (6.25% - 9.0%
at December 31, 1996 ). Paid in full in 1997. - 3,978
International subsidiaries' debt 3,862 4,858
Other 464 1,023
------------- --------------
102,051 448,414
Current portion of long-term debt 7,858 5,595
------------- --------------
$ 94,193 $ 442,819
============= ==============
On May 14, 1996, IVAX entered into a revolving line of credit agreement
with a bank syndicate which permitted borrowings of up to $425,000. On November
14, 1996, IVAX entered into an amendment to the May 14, 1996 line of credit
agreement which, among other things, reduced permitted borrowings to $375,000
and shortened the maturity of the line of credit from May 2001 to November 1999.
Proceeds from the credit facility were used to refinance previously existing
credit facilities and for working capital and general corporate purposes.
On June 17, 1996, IVAX made an investment in and advances to McGaw in
the aggregate amount of $91,150 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, plus accrued interest. The redemption
resulted in a pre-tax extraordinary loss of $3,455.
34
During 1997, IVAX utilized a portion of the proceeds from the sale of
its intravenous products business (See Note 5, Divestitures) to pay the $270,147
outstanding balance of its revolving credit facility. The facility was
terminated in conjunction with this payment, resulting in IVAX recording an
extraordinary loss of $2,137 primarily related to the write-off of deferred
financing costs.
Certain of IVAX's international subsidiaries maintain relationships
with foreign banks providing uncommitted borrowings in the aggregate amounts of
approximately $7,033 and $6,273 at December 31, 1997 and 1996, respectively.
Outstanding borrowings under these lines of credit totaled $4,025 and $5,027 at
December 31, 1997 and 1996, respectively, and are included as "Loans payable" in
the accompanying consolidated balance sheets.
The estimated fair values of IVAX's long-term debt are as follows:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
6 1/2% Convertible Subordinated
Notes due 2001 $ 77,826 $ 85,108
Other 11,026 357,389
------------- --------------
$ 88,852 $ 442,497
============= ==============
Fair value of the 6 1/2% Convertible Subordinated Notes due 2001 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 $7,858, $758, $636, $91,617, $591 and
$591, respectively.
(10) INCOME TAXES:
The provision (benefit) for income taxes of consolidated operations
consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Current
U.S. Federal $ - $ (24,581) $ 16,590
State - (5,198) 2,861
Puerto Rico and the U.S.
Virgin Islands 1,607 5,752 4,216
Foreign 7,851 20,719 6,904
Deferred 84,368 (63,415) (5,248)
-------------- ------------- --------------
$ 93,826 $ (66,723) $ 25,323
============== ============= ==============
35
The provision (benefit) for income taxes of continuing operations
consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Current
U.S. Federal $ - $ (25,033) $ 19,130
State - (4,140) 2,569
Puerto Rico and the U.S.
Virgin Islands 679 3,093 2,229
Foreign 9,293 23,835 9,948
Deferred 50,194 (50,243) (4,175)
-------------- ------------- --------------
$ 60,166 $ (52,488) $ 29,701
============== ============= ==============
The components of income (loss) from continuing operations before
income taxes and minority interest are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
United States $ (189,427) $ (276,693) $ 43,378
Puerto Rico and the U.S.
Virgin Islands 4,389 16,993 31,980
Foreign 29,756 77,577 53,964
-------------- ------------- --------------
$ (155,282) $ (182,123) $ 129,322
============== ============= ==============
A reconciliation of the difference between the expected provision
(benefit) for income taxes using the statutory Federal tax rate and IVAX's
actual provision is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Tax using statutory Federal tax rate $ (54,349) $ (63,743) $ 45,263
Effect of state income taxes - (3,908) 1,183
Write-down of cost in excess of net assets of
acquired companies 3,270 20,057 -
Establishment of valuation allowance on
deferred tax assets 114,660 - -
Foreign tax rate differential (5,949) (7,879) (6,809)
Effect of Puerto Rico taxes and tollgate 679 3,876 3,602
Puerto Rico and U.S. possessions tax incentives (1,536) (5,734) (11,193)
Other, net 3,391 4,843 (2,345)
-------------- ------------- --------------
$ 60,166 $ (52,488) $ 29,701
============== ============= ==============
During 1997, IVAX established $114,660 in valuation allowances,
primarily against its domestic deferred tax assets generated from losses
incurred by its domestic operations. As a result, the domestic deferred tax
asset is fully reserved as of December 31, 1997. Management expects that it will
also recognize additional valuation allowances related to any future deferred
tax assets generated from its domestic operations until such time as sustainable
domestic taxable income is achieved.
Deferred taxes arise due to timing 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
36
balances included in "Other current assets," "Other assets" and "Other long-term
liabilities," in the accompanying consolidated balance sheets is as follows:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
Accounts receivable allowances $ 485 $ 42,030
Reserves and accruals 30,401 (1,401)
Differences in capitalization of inventory costs 434 361
Other 3,920 2,572
Valuation allowance (33,903) -
------------- --------------
Amount included in "Other current assets" 1,337 43,562
------------- --------------
Basis differences on fixed assets 8,932 1,297
Depreciation differences on fixed assets 9,566 12,154
Recognition of revenue (410) (4,463)
Carrying value of long-term assets 6,952 11,083
Other 2,865 513
Tax credits 9,891 628
Net operating losses 105,745 57,353
Valuation allowance (119,330) (34,663)
------------- --------------
Amount included in "Other assets" 24,211 43,902
------------- --------------
Carrying value of long-term assets - (2,410)
Other (5,914) (4,008)
------------- --------------
Amount included in "Other long-term liabilities" (5,914) (6,418)
------------- --------------
Net deferred tax asset $ 19,634 $ 81,046
============= ==============
The reduction in the deferred tax asset related to "Accounts receivable
allowances" relates primarily to an election made during 1997 to write-down
trade receivables to their net realizable value for tax purposes, utilizing the
mark-to-market method of accounting. The increase in the deferred tax asset for
"Reserves and accruals" relates to significant reserves and accruals established
in 1997 which are not deductible for tax purposes, including restructuring and
asset write-down reserves, inventory reserves, and research and development cost
sharing reserves associated with the sale of product rights (See Note 3,
Restructuring Costs and Asset Write-Downs, and Note 6, Sale of Product Rights).
Income from Zenith Laboratories, Inc's ("Zenith's") Puerto Rico
manufacturing operations is subject to certain tax exemptions under the
terms of a grant from the Puerto Rico government which expires in 1999. IVAX has
applied for a new grant. The grant reduced tax expense by approximately $575,
$1,837 and $11,171 for the years ended December 31, 1997, 1996 and 1995,
respectively. Under the terms of the grant, Zenith 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 1997, 1996 and 1995, this credit was
approximately $1,536, $5,734 and $11,193, 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 5 years
beginning in 2001.
37
At December 31, 1997, IVAX had $48,993 of net operating loss
carryforwards which relate to losses transferred to IVAX as a result of the
disposition of McGaw. These losses will begin to expire in 2002. The utilization
of these net operating loss carryforwards is subject to limitations of $21,000
per year which are cumulative to the extent not utilized by IVAX. The deferred
tax asset related to the future benefit of these net operating loss
carryforwards has been reduced to zero by a valuation allowance. Approximately
$37,910 of these net operating loss carryforwards relate to McGaw's predecessor
and are subject to a further annual limitation of $3,000 which is cumulative to
the extent not utilized by IVAX.
At December 31, 1997, Zenith had net operating loss carryforwards of
$16,530 which will begin to expire in 2004. The deferred tax asset related to
the future benefit of these net operating loss carryforwards has been reduced to
zero through a valuation allowance. Approximately $3,132 of the net operating
loss carryforwards relate to Zenith's predecessor and are subject to an annual
limitation of $1,700 which is cumulative to the extent not utilized by IVAX.
Since all of these net operating loss carryforwards relate to the exercise of
certain stock options, any future benefits recognized from the reduction of the
valuation allowances related to these net operating loss carryforwards will
increase paid in capital.
In addition to the Zenith and McGaw net operating loss carryforwards,
at December 31, 1997 and 1996, IVAX had consolidated net operating loss
carryforwards of $202,250 and $69,795, respectively, which will begin to expire
in 2012. The deferred tax asset related to the future benefit of these net
operating loss carryforwards has been reduced to zero by a valuation allowance
at December 31, 1997.
At December 31, 1997, IVAX had consolidated tax credit carryforwards of
$9,891. The tax credits are comprised of foreign tax credits of $3,070, which
begin to expire in 1999, $1,021 of research and development credits, which begin
to expire in 2008, and $5,800 of minimum tax credits, which never expire.
Realization of the net deferred tax asset of $19,634, which relates
to foreign operations, is dependent upon generating sufficient future
foreign taxable income. Although realization is not assured, management believes
it is more likely than not that the remaining additional net deferred tax asset
will be realized based upon estimated future taxable income of IVAX's foreign
operations and, accordingly, no valuation allowances for this asset were deemed
necessary at December 31, 1997. Management's estimates of future taxable 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.
United States taxes have not been provided on undistributed earnings of
foreign subsidiaries, as such earnings are being retained indefinitely by such
subsidiaries for reinvestment. The distribution of these earnings would first
reduce the domestic valuation allowance before resulting in additional United
States taxes.
Minority interest included in the accompanying consolidated statements
of operations is net of a provision for income taxes of $2,228, $3,116 and
$3,044 for the years ended December 31, 1997, 1996 and 1995, respectively.
38
(11) 401(K) PLANS:
IVAX's employees within the United States, the United States Virgin
Islands and Puerto Rico are eligible to participate in 401(k) retirement plans,
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, 1997, 1996 and 1995 were $2,025, $3,272 and $3,125, respectively, a
portion of which was made in IVAX common stock.
(12) SHAREHOLDERS' EQUITY:
STOCK OPTION PLANS - IVAX administers and has stock options outstanding
under IVAX's 1997 Employee Stock Option Plan ("1997 Plan"), IVAX's 1994 Stock
Option Plan ("1994 Plan"), IVAX's 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 4,000,000 shares of IVAX common stock. The 1994
Plan permits the issuance of options to employees, non-employee directors and
consultants to purchase up to 7,000,000 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
term of such options shall not exceed ten years.
The following table presents additional information concerning the
activity in the stock option plans (number of shares in thousands):
1997 1996 1995
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
----------- -------------- ---------- -------------- ---------- --------------
Balance at beginning of year 10,102 $ 22.50 10,198 $ 20.51 12,307 $ 17.37
Granted 2,487 10.67 2,621 26.07 2,247 22.56
Exercised (42) 3.59 (1,881) 16.93 (2,975) 7.86
Terminated (2,490) 21.61 (836) 21.90 (1,381) 24.03
-------- -------- --------
Balance at end of year 10,057 19.87 10,102 22.50 10,198 20.51
======== ======== ========
Exercisable at December 31, 6,220 $ 20.62 4,454 $ 21.51 4,012 $ 19.83
39
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
.48 - 9.99 1,189 6.9 $ 7.98 320 $ 7.35
10.00 - 19.99 2,141 4.2 14.17 1,131 15.85
20.00 - 29.99 6,382 3.6 22.76 4,557 22.15
30.00 - 36.38 345 3.9 32.76 212 33.34
------ -----
.48 - 36.38 10,057 4.1 19.87 6,220 20.62
====== =====
In December 1997, IVAX instituted a stock option exchange program in
which it offered holders of certain outstanding out-of-the-money 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 3,000,000 stock options
with exercise prices ranging from $9.88 to $34.88 were exchanged for
approximately 2,100,000 stock options with an exercise price of $8.33.
IVAX's pro forma net loss, pro forma net loss 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,
-----------------------------------
1997 1996
--------------- ----------------
Pro forma net loss $ (241,452) $ (167,993)
Pro forma net loss
per common share $ (1.99) $ (1.39)
Pro forma weighted average fair
value of options granted $ 7.20 $ 10.04
Expected life (years) 4.8 5.5
Risk-free interest rate 5.51% - 6.75% 5.41% - 6.79%
Expected volatility 28% 28%
Dividend yield 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.
WARRANTS - At December 31, 1994, IVAX had warrants outstanding for the
purchase of up to 337,500 shares of common stock at an exercise price of $5.00
per share. These warrants were exercised in January 1995 resulting in proceeds
of $1,688. No warrants were issued or exercised during the years ended December
31, 1996 and 1997.
CONVERTIBLE DEBT - At December 31, 1997 and 1996, IVAX had outstanding
$91,025 of 6 1/2% Convertible Subordinated Notes due 2001 (See Note 9, Debt).
The notes are convertible at the option of
40
the holders into 2,866,929 shares of IVAX common stock at a conversion rate of
$31.75 per share. During 1995, the outstanding $1,500 of 9.0% Convertible
Subordinated Debentures due 1995 were converted by the debenture holders into a
total of 286,371 shares of IVAX common stock at conversion rates ranging from
$5.20 to $5.31 per share.
DIVIDENDS - IVAX did not pay dividends during the year ended December
31, 1997. During the years ended December 31, 1996 and 1995, IVAX paid cash
dividends of $.05 and $.08 per share with respect to its common stock, totaling
approximately $6,057 and $9,347, respectively.
(13) GEOGRAPHIC INFORMATION:
Information about IVAX's domestic and foreign operations as of and for
the three years ended December 31, 1997 is set forth in the table below.
Identifiable assets by country include assets directly identifiable with those
operations.
UNITED UNITED CZECH
GEOGRAPHIC AREAS: STATES KINGDOM REPUBLIC OTHER TOTAL
---------- ---------- --------- ---------- ----------
Net revenues 1997 $ 199,208 $ 225,313 $ 22,595 $ 154,994 $ 602,110
1996 292,285 232,273 27,343 110,686 662,587
1995 510,595 174,735 26,901 76,757 788,988
Income (loss) from
operations 1997 (223,842) 17,715 21,800 (15,374) (199,701)
1996 (259,430) 63,111 27,834 (5,391) (173,876)
1995 63,661 32,910 21,955 (124) 118,402
Identifiable assets 1997 339,422 248,777 84,791 79,926 752,916
1996 478,136 300,026 86,203 70,954 935,319
1995 540,900 220,491 61,655 48,509 871,555
Identifiable assets are reconciled below to "Total assets" as presented in the
accompanying consolidated balance sheets:
DECEMBER 31,
---------------------------------
1997 1996
------------- --------------
Identifiable assets $ 752,916 $ 935,319
Net assets of discontinued operations 37,820 398,329
------------- --------------
Total assets $ 790,736 $ 1,333,648
============= ==============
No single customer accounted for 10% or more of IVAX's consolidated net
revenues for any of the three years ended December 31, 1997.
(14) COMMITMENTS AND CONTINGENCIES:
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, 1997 totaled
approximately $5,022, $5,540 and $7,817, respectively. The future minimum lease
payments under noncancellable capital leases and their related assets recorded
at December 31, 1997 and 1996 were not
41
material. The future minimum lease payments under noncancellable operating
leases with initial or remaining terms of one year or more at December 31, 1997,
were as follows:
OPERATING
LEASES
-------------
1998 $ 4,605
1999 2,554
2000 1,752
2001 1,395
2002 989
Thereafter 8,524
-------------
Total minimum lease payments $ 19,819
=============
LEGAL PROCEEDINGS - In April 1995, Zenith 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/Registered
trademark/, a product of Eli Lilly and Company ("Lilly"). In April 1995, Lilly
filed a lawsuit against Zenith and others in federal court alleging that
Biochimica Opos S.p.A. ("Opos"), Zenith's cefaclor raw material supplier,
manufactured cefaclor raw material in a manner which infringed two process
patents owned by Lilly, and that Zenith and the other defendants knowingly and
willfully infringed and induced Opos to infringe the patents by importing the
raw material into the United States. The lawsuit seeks to enjoin Zenith 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 Opos, and seeks an unspecified amount of monetary damages and the
destruction of all cefaclor raw material manufactured by Opos and imported into
the United States. In August 1995, the Court denied Lilly's motion for
preliminary injunction which sought to prevent Zenith from selling cefaclor
until the merits of Lilly's allegations could be determined at trial. In May
1996, the United States Court of Appeals for the Federal Circuit affirmed the
district court's denial of Lilly's motion for preliminary injunction. In
February 1997, Lilly filed an amended complaint which alleges the infringement
of an additional patent. Zenith ceased selling cefaclor in January 1997, when it
announced a recall in the United States of cefaclor as a result of a recall by
Opos of the raw material used to manufacture the product.
In April 1997, Lilly filed a complaint in federal court against various
defendants, including Zenith. With respect to Zenith, the complaint asserts
claims for violation of the Lanham Act, unfair competition under New Jersey
state law, common law unfair competition and unjust enrichment. The claims
asserted against the other defendants are essentially the same as those asserted
against Zenith, and additional claims are also asserted against the other
defendants. All of the asserted claims arise out of what Lilly contends were
fraudulent misrepresentations to Lilly and the FDA by Opos regarding the methods
utilized by Opos to manufacture bulk cefaclor and the location of the
manufacturing facility of such cefaclor. According to Lilly, through these
alleged misrepresentations, Opos fraudulently obtained approval from the FDA to
market bulk cefaclor in the United States. Lilly alleges that Zenith, in
marketing and selling retail dosage units of cefaclor manufactured from Opos'
bulk cefaclor, used false and misleading descriptions and representations
regarding Zenith's cefaclor product. The relief sought by Lilly against Zenith,
jointly and severally with the other defendants, is an accounting to Lilly for
any and all profits derived by Zenith from the sale of cefaclor and an award of
damages to Lilly. Lilly further seeks an award of treble damages and litigation
costs, including attorneys' fees and interest. Zenith filed a motion to dismiss
the action in August 1997, which motion remains pending.
42
In June 1994, the former chairman and chief executive officer of McGaw
individually filed a complaint against IVAX and its chairman, alleging violation
of federal securities laws as well as certain additional state law claims
arising out of the acquisition of McGaw by IVAX. The complaint seeks up to
$21,000 in compensatory damages (and up to $48,000 in rescissionary damages upon
tender of IVAX shares held by the plaintiff), as well as punitive damages,
litigation costs and attorneys' fees. Although the lawsuit was initially
consolidated for all purposes with a class action suit alleging the same claims,
in August 1995, the Court entered an order allowing the former McGaw chairman to
opt out of the class action and to proceed under his separate complaint. In
January 1998, the parties entered into a settlement agreement pursuant to which
they settled the lawsuit in its entirety in exchange for the payment by the
defendants and their insurers of $1,750. IVAX's portion of the settlement
obligation, which is not significant, was appropriately accrued at December 31,
1997. Pursuant to the settlement agreement, the lawsuit was dismissed with
prejudice on January 30, 1998.
In July 1994, an action was filed in federal court against IVAX in
which plaintiffs, shareholders of McGaw at the time of its acquisition by IVAX,
alleged that IVAX violated Sections 11 and 12(2) of the Securities Act, as well
as certain state securities laws, and that it breached certain provisions of the
merger agreement and IVAX's bylaws, by issuing to plaintiffs shares of IVAX
common stock subject to the restrictions imposed by Rule 145 promulgated under
the Securities Act and Accounting Series Release 135. The plaintiffs claim that,
as a result of the restrictions imposed on the certificates issued to them, they
suffered damages from the loss of value of their shares, and seek damages of
$11,000, plus expenses and attorneys' fees. In June 1995, the Court entered an
order denying plaintiffs' motion for summary judgment with respect to the claims
alleging that IVAX breached certain provisions of the merger agreement and
IVAX's bylaws and granted IVAX's motion to dismiss such counts. The Court denied
IVAX's motion to dismiss the counts relating to alleged violation of Sections 11
and 12(2) of the Securities Act and alleged violations of certain state
securities laws, as well as its motion to transfer venue. In October 1995, the
Court entered an order granting the plaintiffs' motion to amend their complaint
to assert new causes of action under the Uniform Commercial Code and granting
the plaintiffs' motion for reconsideration of the dismissal of the counts
alleging breach of IVAX's bylaws, and ordered that such counts be reinstated.
During April and May 1997, the parties filed cross motions for summary
judgment, which motions remain pending.
In November 1996, individuals purporting to be shareholders of IVAX
filed a class action complaint against IVAX and certain of its current or former
officers or directors in federal court which consolidates, amends and
supplements a number of similar complaints filed earlier in 1996. The plaintiffs
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 consolidated amended
complaint alleges violations of federal securities laws and also asserts a claim
for negligent misrepresentation. The complaint generally asserts that IVAX made
untrue statements of material fact and 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 and
that its financial statements were not prepared in accordance with generally
accepted accounting principles. These allegations are centered around claims
that IVAX failed to disclose that it offered its customers shelf stock
adjustments and failed to establish reserves for such adjustments. In general,
the complaint seeks an unspecified amount of compensatory damages, pre-judgment
interest, litigation costs and attorneys' fees. In January 1997, the IVAX
defendants filed a motion to dismiss the action, which motion remains pending.
In March 1997, individuals purporting to be shareholders of IVAX filed
a class action complaint against IVAX, its chairman and its former chief
financial officer in federal court. The plaintiffs seek to act as
representatives of a class consisting of all persons who purchased IVAX common
stock or call
43
options during the period from September 30, 1996 through November 11, 1996 and
who were allegedly damaged thereby. The complaint alleges violations of Section
10(b) of the Securities Exchange Act of 1934 and negligent misrepresentation.
The complaint alleges that defendants made untrue statements of material fact
and omitted to state material facts necessary to make statements made not
misleading in a September 30, 1996 press release regarding IVAX's forecasted
earnings for the third quarter of 1996. The complaint seeks unspecified
compensatory damages, pre-judgment interest, attorneys' fees and litigation
costs.
In April 1997, individuals purporting to be shareholders of IVAX filed
a class action complaint against IVAX, its chairman and its former chief
financial officer in federal court. The plaintiffs seek to act as
representatives of a class consisting of all persons who purchased IVAX common
stock or call options during the period from August 2, 1996 through November 11,
1996, inclusive. The complaint alleges claims for violation of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 and for negligent
misrepresentation. The complaint alleges, among other things, that during the
class period defendants made untrue statements of material fact and omitted to
state material facts necessary to make statements made not misleading in its
statements to the public, including in a September 30, 1996 press release
regarding IVAX's forecasted earnings for the third quarter of 1996. The
complaint seeks unspecified compensatory damages, interest, attorneys' fees,
costs of suit and unspecified other and further relief from the court.
With respect to the cases filed in March 1997 and April 1997, in June
1997, the court entered an order dismissing the second action without prejudice
and ordered the plaintiffs in both actions to file an amended complaint
incorporating the allegations in both actions under a single case. The amended
complaint was filed in July 1997, and plaintiffs therein seek to act as
representatives of a class consisting of all persons who purchased IVAX common
stock or call options during the period from August 2, 1996 through November 11,
1996, inclusive. In July 1997, the IVAX defendants filed a motion to dismiss the
action, which motion remains pending.
In March 1995, Baxter International Inc. and Baxter HealthCare Corp.
(collectively, "Baxter") filed an action against McGaw in federal court. The
plaintiffs alleged that McGaw's SafeLine/Trademark/ Needle Free System infringes
three United States patents owned by Baxter. After a trial, the jury found in
favor of McGaw, determining that each of the claims of the asserted patents was
either invalid or was not infringed by McGaw. In addition, the judge found that
two of Baxter's patents are unenforceable because of inequitable conduct.
Judgment was entered in favor of McGaw in March 1996, and Baxter's appeal is
presently pending in the United States Court of Appeals for the Federal Circuit.
In connection with IVAX's sale of McGaw in June 1997, IVAX agreed to continue to
conduct the defense of this action at its expense and to hold the purchaser of
McGaw harmless against any judgment rendered or settlement entered into with
respect to this action. Any such judgment or settlement will have the effect of
limiting the amount of contingent payments IVAX may receive under the agreement
governing the sale of McGaw (See Note 5, Divestitures).
In February 1993, Smith & Nephew, Inc., a Delaware corporation ("S&N")
filed an action against IVAX and Solopak, Inc., a Delaware corporation and
wholly-owned subsidiary of IVAX ("Subsidiary") in Illinois state court. S&N
alleged that IVAX breached an Asset Purchase Agreement (the "Agreement"), dated
February 28, 1992, among IVAX, the Subsidiary and S&N, pursuant to which, among
other things, S&N agreed to sell to this Subsidiary substantially all of the
assets of Smith & Nephew Solopak, a division of S&N (the "Division"), for $19
million in cash, by failing to close when all conditions precedent to the
closing were satisfied. S&N further alleged that in November 1992, it sold the
Division to another party for $13.5 million. S&N is seeking damages of $5.5
million, the difference between the
44
$19 million purchase price specified in the Agreement and the eventual sale
price, plus attorneys' fees and costs. S&N claimed additional unspecified
damages resulting from IVAX's alleged interference with S&N's employees during
the due diligence process. IVAX counterclaimed against S&N for breach of the
Agreement and is seeking as damages the expenses incurred in connection with the
failed acquisition plus attorneys' fees and costs. The case is presently set for
trial in July 1998.
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's
financial position and results of operations. IVAX's 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. While it
is not feasible to predict or determine the outcome 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's financial position or results of operations.
45
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following tables summarize selected quarterly data of IVAX for the
years ended December 31, 1997 and 1996:
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
1997
Net revenues $ 166,898 $ 173,809 $ 126,357 $ 135,046 $ 602,110
Gross profit 48,870 45,708 3,889 15,837 114,304
Income (loss) from continuing
operations (1) (11,092) (52,824) (78,754) (76,864) (219,534)
Income (loss) from discontinued
operations 3,153 7,447 (11,380) (7,921) (8,701)
Net income (loss) (7,939) (47,514) (90,134) (87,667) (233,254)
Basic and diluted earnings (loss)
per common share:
Continuing operations (.09) (.43) (.65) (.63) (1.81)
Discontinued operations .02 .06 (.09) (.07) (.07)
Net earnings (loss) (.07) (.39) (.74) (.72) (1.92)
Cash dividends per share - - - - -
1996
Net revenues $ 215,810 $ 151,627 $ 101,641 $ 193,509 $ 662,587
Gross profit 95,482 28,503 (24,305) 62,289 161,969
Income (loss) from continuing
operations (2) 34,487 (23,304) (137,728) (8,444) (134,989)
Income (loss) from discontinued
operations (3) 1,409 9,373 (40,941) 6,469 (23,690)
Net income (loss) 35,895 (16,003) (178,669) (1,975) (160,752)
Basic and diluted earnings (loss)
per common share:
Continuing operations .29 (.19) (1.13) (.07) (1.12)
Discontinued operations .01 .08 (.34) .05 (.19)
Net earnings (loss) .30 (.13) (1.47) (.02) (1.33)
Cash dividends per share - .05 - - .05
<FN>
(1) The third and fourth quarter of 1997 includes restructuring costs of $4,359
and $9,915, respectively. The second and fourth quarter of 1997 includes
asset write-downs of $20,500 and $3,314, respectively.
(2) The third quarter of 1996 includes restructuring costs and asset
write-downs of $5,324 and $64,549, respectively. The fourth quarter of 1996
includes a reduction to the asset write-downs of $800.
(3) The third quarter of 1996 includes asset write-downs of $48,442.
</FN>
46
DIRECTORS AND OFFICERS
IVAX BOARD OF
DIRECTORS
Phillip Frost, M.D.
CHAIRMAN & CHIEF EXECUTIVE
OFFICER, IVAX CORPORATION
Isaac Kaye
DEPUTY CHIEF EXECUTIVE
OFFICER, IVAX CORPORATION
Jack Fishman, Ph.D.
DIRECTOR OF RESEARCH,
STRANG CANCER RESEARCH LABORATORY
Jane Hsiao, Ph.D.
VICE CHAIRMAN - TECHNICAL
AFFAIRS AND CHIEF TECHNICAL OFFICER, IVAX CORPORATION
Mark Andrews
VICE CHAIRMAN,
LOUIS DREYFUS NATURAL
GAS CORP.
Ernst Biekert, Ph.D.
PROFESSOR OF CHEMISTRY,
UNIVERSITY OF HEIDELBERG
Neil W. Flanzraich, Esq.
SHAREHOLDER,
HELLER, EHRMAN, WHITE &
MCAULIFFE
IVAX OFFICERS
Phillip Frost, M.D.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
David R. Bethune
PRESIDENT AND CHIEF
OPERATING OFFICER
Isaac Kaye
DEPUTY CHIEF EXECUTIVE
OFFICER AND CHIEF EXECUTIVE
OFFICER OF NORTON
HEALTHCARE, LIMITED
Jane Hsiao, Ph.D.
VICE CHAIRMAN - TECHNICAL
AFFAIRS AND CHIEF TECHNICAL
OFFICER AND CHAIRMAN, CHIEF
EXECUTIVE OFFICER AND
PRESIDENT OF DVM
PHARMACEUTICALS, INC.
Thomas E. Beier
SENIOR VICE PRESIDENT -
FINANCE AND CHIEF FINANCIAL
OFFICER
Samuel Broder, M.D.
SENIOR VICE PRESIDENT -
RESEARCH & DEVELOPMENT
AND CHIEF SCIENTIFIC OFFICER
Rafick G. Henein, Ph.D.
SENIOR VICE PRESIDENT AND
PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF ZENITH
GOLDLINE PHARMACEUTICALS,
INC.
James M. Millsap
SENIOR VICE PRESIDENT -
CORPORATE DEVELOPMENT AND
CHIEF EXECUTIVE OFFICER OF
JOHNSON PRODUCTS CO., INC.
Armando A. Tabernilla
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY
Jeffrey S. Bauer, Ph. D.
VICE PRESIDENT - GLOBAL
PROCUREMENT - ACTIVE
PHARMACEUTICAL MATERIALS
William S. Hisey
VICE PRESIDENT - BUSINESS
DEVELOPMENT, LICENSING AND
ACQUISITIONS
Michael Metzkes
VICE PRESIDENT - ACCOUNTING
AND CORPORATE CONTROLLER
Richard D. Radabaugh
VICE PRESIDENT - COMPLIANCE
John S. Shaub
VICE PRESIDENT - TAXATION
Rao Uppaluri
VICE PRESIDENT - STRATEGIC
PLANNING
Donald C. Wagner
VICE PRESIDENT - HUMAN
RESOURCES
Jordan Siegel
TREASURER
Jeffrey F. Eisenberg
ASSISTANT SECRETARY
47
COMMON STOCK AND INVESTOR INFORMATION
CORPORATE HEADQUARTERS -- IVAX Corporation, 4400 Biscayne Boulevard, Miami,
Florida 33137. Telephone: 305-575-6000.
INDEPENDENT AUDITORS -- Arthur Andersen LLP, One Biscayne Tower, Suite 1470,
Miami, Florida 33131.
COMMON STOCK INFORMATION -- IVAX common stock is listed on the American Stock
Exchange under the symbol "IVX." As of the close of business on March 20, 1998,
there were approximately 5,626 holders of record of IVAX common stock. The
following table sets forth the high and low closing prices of IVAX common stock
as reported on the composite tape of the American Stock Exchange and cash
dividends paid by IVAX for each quarter indicated:
1996
QUARTER HIGH LOW DIVIDEND
------- ---- --- --------
First $30.00 $25.38 $--
Second 31.00 14.75 .05
Third 16.63 12.75 --
Fourth 18.50 9.81 --
1997
QUARTER HIGH LOW DIVIDEND
------- ---- --- --------
First $13.50 $ 9.63 $--
Second 11.75 6.50 --
Third 12.63 8.75 --
Fourth 11.13 6.63 --
The declaration and payment of dividends is made at the discretion of IVAX's
Board of Directors.
SHAREHOLDER INQUIRIES -- Shareholders, analysts, investors, and others seeking
company information should contact:
Investor Relations
IVAX Corporation
4400 Biscayne Boulevard
Miami, Florida 33137
Toll Free: 800-980-IVAX
Electronic Mail: investorinfo@ivax.com
SHAREHOLDER SERVICE -- Shareholders desiring to change the name, address, or
ownership of stock, report lost certificates, or consolidate accounts should
contact the Transfer Agent & Registrar:
ChaseMellon Shareholder Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
Toll Free: 800-756-3353
SEC FORM 10-K -- Shareholders may obtain a copy of IVAX's 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission by writing to
Investor Relations at IVAX's corporate headquarters.
QUARTERLY FINANCIAL RESULTS -- In order to provide quarterly financial and other
information to our shareholders in a more timely and cost-effective manner, we
have discontinued producing our traditional quarterly report. Instead, we make
press releases containing that information available to shareholders who request
them. If you wish to receive these releases as they become available, please
send your name and address to Investor Relations at IVAX's corporate
headquarters. IVAX press releases are available by facsimile by dialing
800-758-5804, ext. 457725, and on the Internet at http://www.prnewswire.com.
The following are trademarks of IVAX or its subsidiaries: Elmiron/Registered
trademark/ and Paxene/Registered trademark/.
EXCEPT FOR THE HISTORICAL MATTERS CONTAINED HEREIN, STATEMENTS MADE IN THIS
REPORT ARE FORWARD LOOKING AND ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS
OF THE SECURITIES LITIGATION REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT
FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT MAY AFFECT
IVAX'S BUSINESS AND PROSPECTS, INCLUDING ECONOMIC, COMPETITIVE, GOVERNMENTAL,
TECHNOLOGICAL, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND IN IVAX'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
48