FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 1-09623
IVAX CORPORATION
FLORIDA 16-1003559
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 3313
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 575-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
117,030,621 SHARES OF COMMON STOCK, $.10 PAR VALUE, OUTSTANDING
AS OF OCTOBER 30, 1998.
IVAX CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 22
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 234,979 $ 199,235
Accounts receivable, net 86,289 104,994
Inventories 146,012 145,716
Net assets of discontinued operations -- 37,820
Other current assets 35,754 22,939
--------- ---------
Total current assets 503,034 510,704
Property, plant and equipment, net 196,499 193,741
Intangible assets, net 58,861 39,458
Other assets 33,287 46,833
--------- ---------
Total assets $ 791,681 $ 790,736
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 2,175 $ 4,025
Current portion of long-term debt 993 7,858
Accounts payable 41,715 42,578
Accrued income taxes payable 5,512 9,126
Accrued expenses and other current liabilities 152,783 170,379
--------- ---------
Total current liabilities 203,178 233,966
Long-term debt, net of current portion 89,391 94,193
Other long-term liabilities 19,109 12,600
Minority interest 17,845 14,938
Shareholders' equity:
Common stock, $.10 par value, authorized 250,000 shares,
issued and outstanding 117,768 shares (121,518 in 1997) 11,777 12,152
Capital in excess of par value 482,599 515,234
Retained deficit (26,890) (72,294)
Cumulative translation adjustment and other (5,328) (20,053)
--------- ---------
Total shareholders' equity 462,158 435,039
--------- ---------
Total liabilities and shareholders' equity $ 791,681 $ 790,736
========= =========
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
2
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
NET REVENUES $ 162,241 $ 126,357 $ 469,960 $ 467,064
COST OF SALES 101,110 122,468 298,826 368,597
--------- --------- --------- ---------
Gross profit 61,131 3,889 171,134 98,467
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling 19,606 24,172 59,236 74,251
General and administrative 22,544 27,492 63,449 80,506
Research and development 12,786 12,939 39,882 38,852
Amortization of intangible assets 980 948 2,554 2,899
Restructuring costs and asset write-downs 12,865 4,359 13,561 24,859
Merger expenses -- -- -- 2,343
--------- --------- --------- ---------
Total operating expenses 68,781 69,910 178,682 223,710
--------- --------- --------- ---------
Loss from operations (7,650) (66,021) (7,548) (125,243)
OTHER INCOME (EXPENSE):
Interest income 3,590 1,573 8,575 3,447
Interest expense (1,808) (1,336) (5,347) (12,256)
Other income (expense), net 13,414 44,295 17,689 50,881
--------- --------- --------- ---------
Total other income (expense), net 15,196 44,532 20,917 42,072
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interest 7,546 (21,489) 13,369 (83,171)
PROVISION FOR INCOME TAXES 604 56,560 5,631 55,913
--------- --------- --------- ---------
Income (loss) from continuing operations
before minority interest 6,942 (78,049) 7,738 (139,084)
MINORITY INTEREST 546 (705) (334) (3,586)
--------- --------- --------- ---------
Income (loss) from continuing operations 7,488 (78,754) 7,404 (142,670)
DISCONTINUED OPERATIONS, NET OF TAXES 40,733 (11,380) 40,733 (780)
--------- --------- --------- ---------
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle 48,221 (90,134) 48,137 (143,450)
EXTRAORDINARY ITEMS - Gains (losses) on
extinguishment of debt, net of taxes 315 -- 315 (2,137)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes -- -- (3,048) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 48,536 $ (90,134) $ 45,404 $(145,587)
========= ========= ========= =========
(Continued)
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands, except per share data) 1998 1997 1998 1997
----------- ----------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE:
Continuing operations $ .06 $ (.65) $ .06 $ (1.17)
Discontinued operations .34 (.09) .34 (.01)
Extraordinary items .01 -- .01 (.02)
Cumulative effect of a change in accounting priciples -- -- (.03) --
----------- ----------- ----------- -----------
Net earnings (loss) $ .41 $ (.74) $ .38 $ (1.20)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 118,974 121,491 119,923 121,489
=========== =========== =========== ===========
Diluted 119,254 121,491 120,039 121,489
=========== =========== =========== ===========
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
IVAX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
(In thousands) --------- ---------
Cash flows from operating activities:
Net income (loss) $ 45,404 $(145,587)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Restructuring costs and asset write-downs 13,561 24,859
Depreciation and amortization 23,575 25,677
Deferred tax provision 1,731 48,823
Provision for allowances for doubtful accounts 5,669 4,917
Gain on the sale of product rights (15,000) (43,224)
(Gains) losses on disposal of assets 1,368 (243)
(Gains) losses on extinguishment of debt (315) 2,137
Cumulative effect of a change in accounting principle 3,048 --
Minority interest 334 3,586
(Income) loss from discontinued operations (40,733) 780
Changes in assets and liabilities:
Decrease in accounts receivable 16,522 60,045
Decrease in inventories 4,602 40,204
(Increase) decrease in other current assets (13,440) 42,426
(Increase) decrease in other assets 3,874 (831)
Decrease in accounts payable, accrued expenses
and other current liabilities (24,364) (15,735)
Increase in other long-term liabilities 819 1,094
Other, net (431) (818)
Net cash provided by discontinued operations 5,580 16,513
--------- ---------
Net cash provided by operating activities 31,804 64,623
--------- ---------
Cash flows from investing activities:
Proceeds from divestitures 87,885 361,105
Capital expenditures (35,138) (25,915)
Proceeds from sale of assets 17,086 3,753
Acquisitions of patents, trademarks, licenses
and other intangibles (19,524) (1,572)
Acquisitions of businesses and other -- (10,500)
Net investing activities of discontinued operations (202) (13,846)
--------- ---------
Net cash provided by investing activities 50,107 313,025
--------- ---------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 750 47,203
Payments on long-term debt and loans payable (14,243) (387,874)
Issuance of common stock 1,491 149
Repurchase of common stock (34,501) --
Net financing activities of discontinued operations 11 (92)
--------- ---------
Net cash used for financing activities (46,492) (340,614)
--------- ---------
Effect of exchange rate changes on cash 325 (699)
--------- ---------
Net increase in cash and cash equivalents 35,744 36,335
Cash and cash equivalents at the beginning of the year 199,235 80,806
--------- ---------
Cash and cash equivalents at the end of the period $ 234,979 $ 117,141
========= =========
Supplemental disclosures:
Interest payments $ 3,592 $ 14,148
========= =========
Income tax payments (refunds) $ 14,793 $ (46,935)
========= =========
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL:
In management's opinion, the accompanying unaudited condensed
consolidated financial statements of IVAX Corporation and subsidiaries ("IVAX")
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of IVAX as of September 30,
1998, and the results of its operations for the three and nine months ended
September 30, 1998 and 1997. The results of operations and cash flows for the
nine months ended September 30, 1998 are not necessarily indicative of the
results of operations or cash flows which may be reported for the remainder of
1998.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes to consolidated financial statements included
in IVAX's Annual Report on Form 10-K for the year ended December 31, 1997.
The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the notes to consolidated financial
statements included in IVAX's Annual Report on Form 10-K for the year ended
December 31, 1997, except for the change in accounting principle discussed in
Note 11, Recently Issued Accounting Standards.
Certain amounts presented in the condensed consolidated financial
statements for prior periods have been reclassified to conform to the current
period's presentation.
(2) 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 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, EARNINGS PER SHARE, which
was adopted by IVAX in 1997.
For the three and nine months ended September 30, 1997, there was no
difference between basic and diluted loss per share as all potential common
stock was antidilutive. A reconciliation from the basic to diluted net earnings
per share computation for the three and nine months ended September 30, 1998 is
as follows:
6
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands, except per share data) 1998 1998
-------- --------
Net income $ 48,536 $ 45,404
======== ========
Basic weighted average number of shares outstanding 118,974 119,923
Effect of dilutive securities - stock options 280 116
-------- --------
Diluted weighted average number of shares outstanding 119,254 120,039
======== ========
Diluted earnings per share $ .41 $ .38
======== ========
Total potential common stock at September 30, 1998 includes outstanding
options to purchase 9,629,923 shares of common stock and 6 1/2% Convertible
Subordinated Notes due November 2001 which are convertible at the option of the
holders into 2,718,898 shares of common stock at a conversion rate of $31.75 per
share.
(3) RESTRUCTURING COSTS AND ASSET WRITE-DOWNS:
During 1998, IVAX continued its ongoing efforts to reduce costs and enhance
operating efficiency by initiating further restructuring programs at its United
Kingdom pharmaceutical operations. IVAX recorded a pre-tax charge of $.7 million
in the first quarter of 1998, comprised primarily of $.5 million for severance
and other employee termination benefits and $.2 million for the write-down of
leasehold improvements associated with the consolidation of certain packaging
operations in the United Kingdom. IVAX recorded a pre-tax charge of $12.9
million in the third quarter of 1998, comprised of $3.2 million for severance
and other employee termination benefits, $4.3 million associated with lease
commitments, and $5.4 million in asset write-downs resulting from management's
initiatives to further consolidate facilities of IVAX's United Kingdom
operations and management's reevaluation of the carrying value of certain
long-lived assets as a result of such consolidation. This restructuring plan
will eliminate 381 positions from the workforce throughout all functions. The
consolidation process is anticipated to be completed by the end of 1999.
Management anticipates that it will continue to seek opportunities to
improve efficiency and operations. Accordingly, additional restructuring costs
may be recorded in future periods as such opportunities are identified.
(4) DIVESTITURES:
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.
Effective July 14, 1998, IVAX completed the sale of its personal care
products business for $85.0 million (subject to certain post-closing
adjustments). At closing, IVAX received $35.0 million in cash and a $50.0
million secured note due November 30, 1998. On August 27, 1998, IVAX sold the
$50.0 million note, without recourse, for $48.5 million in cash. The gain on the
sale of the personal care products division was classified as part of
discontinued operations for the periods presented. See Note 5, Discontinued
Operations.
7
(5) 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 condensed consolidated statements of operations.
Discontinued operations, net of taxes, for the nine months ended
September 30, 1998 includes the results of operations of the personal care
products business (through its sale in July 1998) and the vacuum pump fluids
segment of the specialty chemicals business (through its sale in February 1998).
The personal care products business, which generated net revenues of $42.6
million in 1998 through the date of sale, had break-even operations during 1998.
The third quarter of 1998 included a net gain on the divestiture of the personal
care products business of $40.7 million. Losses incurred on the sale and
operations of the vacuum pump fluids segment were charged against previously
established reserves. See Note 4, Divestitures.
Losses from discontinued operations of $11.4 million and $.8 million
for the three and nine months ended September 30, 1997, respectively, included
the results of operations of the intravenous products business (through its sale
effective May 1997), the specialty chemicals business (of which a significant
portion of the assets were sold in the third quarter of 1997) and the personal
care products business. The personal care products business incurred losses from
operations in the third quarter of 1997 due to additional provisions for
inventory excess and obsolescence reserves and accounts receivable return
reserves. The second quarter of 1997 included a net gain on the divestiture of
the intravenous products business and the third quarter of 1997 included a net
gain on the sale of a significant portion of the assets of the specialty
chemicals business. See Note 5, Divestitures, in IVAX's Annual Report on Form
10-K for the year ended December 31, 1997.
IVAX has completed the divestiture of its businesses classified as
discontinued operations.
(6) INCOME TAXES:
The provision for income taxes is based on the consolidated United
States entities' and individual foreign companies' estimated tax rates for the
applicable year. IVAX utilizes the 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
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.
The provision for income taxes from continuing operations consists of
the following:
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Current:
United States $ -- $ (174) $ -- $ --
Foreign, including Puerto Rico
and U.S. Virgin Islands (179) 1,929 3,900 7,090
Deferred 783 54,805 1,731 48,823
-------- -------- -------- --------
Provision for income taxes $ 604 $ 56,560 $ 5,631 $ 55,913
======== ======== ======== ========
8
As of September 30, 1998, IVAX established $115.0 million 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 was fully reserved as of September 30, 1998. Management expects that
IVAX will continue to maintain valuation allowances related to any future
deferred tax assets associated with its domestic operations until such time as
sustainable domestic taxable income is achieved.
As of September 30, 1998, a foreign net deferred tax asset aggregating
$17.7 million is included in "Other current assets," "Other assets" and "Other
long-term liabilities" in the accompanying condensed consolidated balance sheet.
Realization of the foreign net deferred tax 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 foreign net deferred tax
asset will be realized.
(7) DEBT:
During the third quarter of 1998, IVAX repurchased a total of $4.7
million face value of its 6 1/2% Convertible Subordinated Notes due November
2001. An extraordinary gain of $.3 million was recorded relating to the
repurchase.
(8) SHAREHOLDERS' EQUITY:
In December 1997, IVAX's Board of Directors approved a share repurchase
program authorizing IVAX to repurchase up to 5,000,000 shares
of IVAX common stock. Through September 30, 1998, IVAX repurchased 3,970,000
shares of common stock at a total cost, including commissions, of $34.5 million.
Under Florida law, repurchased shares constitute authorized but unissued shares.
(9) COMPREHENSIVE INCOME:
In the first quarter of 1998, IVAX adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which 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 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. Comprehensive income is the total of
net income and all other non-owner changes in equity. IVAX has elected to
disclose comprehensive income in the consolidated statement of shareholders'
equity in its annual report and within its notes to condensed consolidated
financial statements for interim reporting.
The components of IVAX's comprehensive income (loss) are as follows:
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands) 1998 1997 1998 1997
--------- --------- --------- ---------
Net income (loss) $ 48,536 $ (90,134) $ 45,404 $(145,587)
Unrealized gains (losses) on marketable
securities, net of taxes 72 882 49 (1,217)
Foreign currency translation adjustments 9,438 (3,350) 14,676 (21,278)
--------- --------- --------- ---------
Comprehensive income (loss) $ 58,046 $ (92,602) $ 60,129 $(168,082)
========= ========= ========= =========
9
(10) CONTINGENCIES:
With respect to the case styled ALAN M. HARRIS, YITZCHOK WOLPIN AND
FAUSTO POMBAR V. IVAX CORPORATION, PHILLIP FROST AND MICHAEL W. FIPPS,
previously reported in IVAX's Annual Report on Form 10-K for the year ended
December 31, 1997, on May 29, 1998, Plaintiffs filed a Notice of Appeal of the
District Court's dismissal of the action, which was previously reported in
IVAX's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998.
With respect to the case styled ELI LILLY AND COMPANY V. ROUSSEL CORP.,
ET AL., previously reported in IVAX's Annual Report on Form 10-K for the year
ended December 31, 1997, on June 30, 1998, the United States District Court
dismissed the action without prejudice. On September 4, 1998, plaintiffs filed
an amended complaint, and on November 6, 1998, IVAX filed a motion to dismiss
the amended complaint, which motion remains pending.
With respect to the case styled BAXTER INTERNATIONAL INC. AND BAXTER
HEALTHCARE CORP. V. MCGAW, INC., previously reported in IVAX's Annual Report on
Form 10-K for the year ended December 31, 1997, on July 1, 1998, the United
States Court of Appeals for the Federal Circuit affirmed the verdict in favor of
McGaw, Inc.
With respect to the case styled SMITH & NEPHEW, INC. V. IVAX
CORPORATION AND SOLOPAK, INC., previously reported in IVAX's Annual Report on
Form 10-K for the year ended December 31, 1997, on July 17, 1998, the District
Court granted IVAX's Motion for Summary Judgment.
With respect to the case styled DAVID MALIN, ET AL. V. IVAX
CORPORATION, PHILLIP FROST, JACK FISHMAN, MICHAEL W. FIPPS, AND JOHN H. KLEIN,
previously reported in IVAX's Annual Report on Form 10-K for the year ended
December 31, 1997, on August 18, 1998, the United States District Court
dismissed the action without prejudice. On September 30, 1998, plaintiffs filed
an amended complaint, and on November 9, 1998, IVAX filed a motion to dismiss
the amended complaint, which motion remains pending.
The developments discussed above did not have a material effect on
IVAX's financial position or results of operations.
(11) RECENTLY ISSUED ACCOUNTING STANDARDS:
IVAX is required to adopt SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, in the first quarter of 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management believes that the adoption of SFAS No. 133 will not
have a material impact on IVAX's consolidated financial statements.
SOP 98-5, REPORTING ON THE COST OF START-UP ACTIVITIES, provides
guidance on the accounting for start-up costs. It requires that costs of
start-up activities, as well as organizational costs, be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998; however, IVAX has elected early adoption. The initial
application has been reported by IVAX as a cumulative effect of a change in
accounting principle, reflecting a write-off of start-up costs of $3.0 million,
previously capitalized and included in "Other assets" in the
10
accompanying condensed consolidated balance sheet. The initial application is
shown effective January 1, 1998, in accordance with the provisions of SOP 98-5.
(12) SUBSEQUENT EVENTS:
From October 1, 1998 through November 11, 1998, IVAX repurchased 851,700
shares of IVAX common stock at a total cost, including commissions, of $7.3
million. Cumulatively, IVAX has repurchased 4,821,700 shares of IVAX common
stock at a total cost of $41.8 million under the share repurchase program
described in Note 8, Shareholders' Equity.
Subsequent to September 30, 1998, IVAX repurchased $11.1 million face
value of its 6 1/2% Convertible Subordinated Notes due November 2001.
11
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements, the related notes to consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations included in IVAX's Annual Report on Form
10-K for the year ended December 31, 1997 and the condensed consolidated
financial statements and the related notes to condensed consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q. Except for
historical information contained herein, the matters discussed below are forward
looking statements made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Such statements involve risks and uncertainties,
including but not limited to economic, competitive, governmental and
technological factors affecting IVAX'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 ("SEC"). 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.
In May 1998, IVAX announced a series of possible actions to enhance the
performance of its business units and increase shareholder value. Such actions
included a possible name change, the exploration of the feasibility of an
initial public offering of IVAX's United Kingdom subsidiary, Norton Healthcare
Limited ("Norton Healthcare"), and the possible creation of a new business unit
to consist of IVAX's activities in oncology and its United States generic
pharmaceutical operations. IVAX has determined that a public offering of Norton
Healthcare is not in the best interest of IVAX shareholders at this time. In
addition, IVAX has determined to use the name "IVX BioScience, Inc.", in
selected contexts, to reflect its focus on proprietary pharmaceuticals.
Certain prior period amounts presented herein have been reclassified to
conform to the current period's presentation.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
IVAX reported income from continuing operations of $7.4 million for the
nine months ended September 30, 1998, compared to a loss from continuing
operations of $142.7 million for the nine months ended September 30, 1997. Net
income for the nine months ended September 30, 1998 was $45.4 million, compared
to a net loss of $145.6 million for the same period of the prior year. The nine
months ended September 30, 1998 and 1997 included a $.3 million net
extraordinary gain and a $2.1 million net extraordinary loss, respectively,
relating to the extinguishment of debt. See Note 7, Debt, in the notes to
condensed consolidated financial statements and Note 9, Debt, in IVAX's Annual
Report on Form 10-K for the year ended December 31, 1997 for further discussion.
Results for the nine months ended September 30, 1998 also included a $3.0
million charge resulting from the write-off of start-up costs previously
capitalized, reflected as a cumulative effect of a change in accounting
principle. See Note 11, Recently Issued Accounting Standards, in the notes to
condensed consolidated financial statements.
12
Earnings per share from continuing operations was $.06 for the nine
months ended September 30, 1998, compared to a loss per share from continuing
operations of $1.17 for the nine months ended September 30, 1997. Net income per
share was $.38 for the first nine months of 1998, compared to a net loss per
share of $1.20 for the same period of the prior year. The net extraordinary gain
recorded in the first nine months of 1998 and the net extraordinary loss
recorded in the first nine months of 1997 relating to the early extinguishment
of debt resulted in a $.01 gain and $.02 loss per share, respectively. The
cumulative effect of a change in accounting principle in 1998 resulted in a $.03
loss per share.
NET REVENUES AND GROSS PROFIT
Net revenues for the first nine months of 1998 totaled $470.0 million,
an increase of $2.9 million compared to the same period of the prior year. The
$2.9 million increase is comprised of an increase of $36.1 million in net
revenues of IVAX's domestic operations, partially offset by a decrease of $33.2
million in net revenues of IVAX's international operations.
Domestic net revenues totaled $222.9 million for the first nine months
of 1998, compared to $186.8 million for the same period of 1997. The $36.1
million, or 19.3%, increase in domestic net revenues was primarily attributable
to lower sales returns and allowances, net revenues generated by certain new
generic pharmaceutical products manufactured by IVAX and introduced into the
market during the past twelve months, and $12.0 million recognized from the
settlement of litigation with Abbott Laboratories ("Abbott") concerning the
marketing of terazosin hydrochloride, the generic equivalent of Abbott's
Hytrin(R). Under the settlement, IVAX expects to recognize $6.0 million per
quarter until the earlier of February 2000 or the market introduction of a
generic version of terazosin hydrochloride by anyone other than IVAX. This
increase was partially offset by lower prices of certain generic pharmaceutical
products and lower net revenues due to the sale of the rights to Elmiron(R) and
certain other urology products in the United States and Canada to ALZA
Corporation ("ALZA") during September of 1997.
During the first nine months of 1998 and 1997, IVAX's United States
generic pharmaceutical operations recorded provisions for sales returns and
allowances which reduced gross sales by $89.5 million and $157.2 million,
respectively. At September 30, 1998 and December 31, 1997, reserves for sales
returns and allowances totaled $115.6 million and $105.4 million, respectively,
and are included in accounts receivable, net and accrued expenses and other
current liabilities in the condensed consolidated balance sheets.
IVAX's international operations generated net revenues of $247.1
million in the first nine months of 1998, compared to $280.3 million for the
same period of the prior year. The $33.2 million, or 11.8%, decrease in
international net revenues was primarily due to decreased sales at IVAX's United
Kingdom and Czech Republic operations. The decrease in sales at IVAX's United
Kingdom operations is primarily due to the following: the discontinuance of
certain contract manufacturing arrangements (which was done to provide capacity
to manufacture certain higher margin products for the United States market for
which IVAX is awaiting receipt of regulatory approval); lower net revenues
resulting from a license agreement entered into in the prior period relating to
its breath operated inhaler device; and price declines for branded and generic
products. This decrease was partially offset by net revenues attributable to a
license agreement related to IVAX's dry powder inhaler device entered into in
the third quarter of 1998. The decrease in sales at IVAX's Czech Republic
operations is primarily due to lower sales of raw materials primarily resulting
from the loss
13
of market share, the unfavorable impact of foreign currency fluctuations and, to
a lesser extent, a depressed local pharmaceutical market.
Gross profit for the first nine months of 1998 increased $72.6 million,
or 73.8%, from the same period of the prior year. Gross profit was $171.1
million (36.4% of net revenues) for the first nine months of 1998, compared to
$98.5 million (21.1% of net revenues) for the first nine months of 1997. The
increase in gross profit percentage is primarily due to lower sales returns and
allowances, and to a lesser extent, lower manufacturing costs, lower inventory
provisions, the impact of the 1998 launch of a high margin generic
pharmaceutical product and revenues attributable to the Abbott settlement at
IVAX's United States generic pharmaceutical operations.
OPERATING EXPENSES
Selling expenses totaled $59.2 million (12.6% of net revenues) for the
first nine months of 1998, compared to $74.2 million (15.9% of net revenues) for
the first nine months of 1997. The decrease of $15.0 million was primarily
attributable to reduced sales force and promotional costs of IVAX's United
States proprietary pharmaceutical operations as a result of the sale of the
rights to Elmiron(R) and certain other urology products in the United States and
Canada to ALZA during September of 1997. The implementation of previously
announced restructuring plans also resulted in reduced selling expenses at
IVAX's domestic generic pharmaceutical operations due to reductions in sales
personnel and promotional costs and at IVAX's United Kingdom operations due to
lower warehousing overhead.
General and administrative expenses totaled $63.4 million (13.5% of net
revenues) for the first nine months of 1998, compared to $80.5 million (17.2% of
net revenues) for the first nine months of 1997, a decrease of $17.1 million.
The decrease is primarily attributable to lower costs, primarily associated with
reduced headcount, at IVAX's corporate headquarters, its domestic generic
pharmaceutical operations and its United Kingdom operations as a result of the
implementation of previously announced restructuring plans.
Research and development expenses for the first nine months of 1998
increased $1.0 million, or 2.7%, compared to the first nine months of 1997, to a
total of $39.9 million (8.5% 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, and strategic marketing decisions.
During the second quarter of 1997, management reevaluated the carrying
value of certain long-lived assets. The reevaluation was performed, primarily,
in conjunction with initiatives to further consolidate facilities of IVAX's
domestic generic pharmaceutical operations in an effort to improve its
efficiency. As a result of these initiatives, a $20.5 million asset write-down
was recognized which primarily represented an initial estimate of the minimum
level of charges associated with expected losses on facility disposals. In
addition, during the third quarter of 1997, IVAX continued its ongoing effort to
reduce costs and enhance operating efficiency by initiating further
restructuring programs at its corporate headquarters and domestic generic
pharmaceutical operations. The 1997 third quarter restructuring programs
included an approximate 30% work force reduction at IVAX's corporate
headquarters and further reductions of sales and marketing personnel at IVAX's
domestic generic pharmaceutical operations. IVAX recorded a restructuring charge
of $4.4 million (pre-and after-tax) in the third quarter of 1997, comprised
primarily of $1.3 million for severance and other employee termination benefits
14
associated with the work force reductions and $2.2 million for certain costs
associated primarily with manufacturing facilities held for sale in connection
with the 1996 restructuring programs.
During 1998, IVAX continued its ongoing efforts to reduce costs and enhance
operating efficiency by initiating further restructuring programs at its United
Kingdom pharmaceutical operations. During the first quarter of 1998, IVAX
recorded a pre-tax charge of $.7 million comprised of $.5 million for severance
and other employee termination benefits and $.2 million for the write-down of
leasehold improvements associated with the consolidation of certain packaging
operations in the United Kingdom. During the third quarter of 1998, IVAX
recorded a pre-tax charge of $12.9 million, comprised of $3.2 million for
severance and other employee termination benefits, $4.3 million associated with
lease commitments, and $5.4 million in asset write-downs resulting from
management's reevaluation of the carrying value of certain long-lived assets
primarily in conjunction with initiatives to further consolidate facilities of
IVAX's United Kingdom operations. This restructuring plan will eliminate 381
positions from the workforce throughout all functions. The consolidation process
is anticipated to be completed by the end of 1999 and is expected to generate
approximately $12.0 million in annual pre-tax cost savings.
The $2.3 million of merger expenses incurred for the nine months ended
September 30, 1997 were primarily related to a proposed merger with Bergen
Brunswig Corporation, which was terminated in March 1997.
OTHER INCOME (EXPENSE)
Interest income increased $5.1 million for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997.
Higher levels of cash on hand due to proceeds received from the divestiture of
certain businesses classified as discontinued operations and the sale of certain
product rights during 1997 accounted for the increase in interest income. See
Note 4, Divestitures, in the notes to condensed consolidated financial
statements and Note 5, Divestitures, and Note 6, Sale of Product Rights, in
IVAX's Annual Report on Form 10-K for the year ended December 31, 1997 for
further discussion.
Interest expense decreased $6.9 million for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997,
primarily due to the repayment of IVAX's revolving credit facility during the
second quarter of 1997.
Other income (expense), net, was $17.7 million for the nine months
ended September 30, 1998, compared to $50.9 million for the nine months ended
September 30, 1997. In the 1997 third quarter, a $43.2 million pre-tax gain was
recognized on the sale of the rights of Elmiron(R) and three other urology
products in the United States and Canada to ALZA. See Note 6, Sale of Product
Rights, in IVAX's Annual Report on Form 10-K for the year ended December 31,
1997 for further discussion. At the time of the sale, a reserve of $15.0 million
was established for IVAX's obligations under a research and development cost
sharing arrangement with ALZA related to the sale. On July 24, 1998, IVAX and
ALZA terminated the cost sharing arrangement and, as a result of this
termination, the reserve was reversed during the third quarter of 1998,
reflecting an adjustment to increase the previously recognized gain on the sale
of those product rights.
15
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
IVAX reported income from continuing operations of $7.5 million for the
three months ended September 30, 1998, compared to a loss from continuing
operations of $78.8 million for the same period in 1997. Net income for the
three months ended September 30, 1998 was $48.5 million, compared to a net loss
of $90.1 million for the same period in 1997. The period ended September 30,
1998 included a $.3 million net extraordinary gain relating to the
extinguishment of debt.
Earnings per share from continuing operations was $.06 for the three
months ended September 30, 1998, compared to a loss per share from continuing
operations of $.65 for the three months ended September 30, 1997. Net earnings
per share was $.41 for the three months ended September 30, 1998, compared to a
net loss per share of $.74 for the same period in the prior year. The 1998 third
quarter net extraordinary gain relating to the extinguishment of debt resulted
in a $.01 gain per share.
NET REVENUES AND GROSS PROFIT
Net revenues for the three months ended September 30, 1998 totaled
$162.2 million, an increase of $35.9 million, or 28.4%, compared to the same
period of the prior year. The $35.9 million increase is the result of an
increase of $38.4 million in net revenues from IVAX's domestic operations,
partially offset by a decrease of $2.5 million in net revenues from IVAX's
international operations.
Domestic net revenues totaled $76.3 million for the three months ended
September 30, 1998, compared to $37.9 million for the same period of the prior
year. The $38.4 million increase was primarily attributable to lower sales
returns and allowances, net revenues generated by certain new generic
pharmaceutical products manufactured by IVAX and introduced into the market
during the past twelve months and $6.0 million recognized from the settlement of
litigation with Abbott. This increase was partially offset by lower prices and
decreased volume of certain generic pharmaceutical products and lower net
revenues due to the sale of the rights to Elmiron(R) and certain other urology
products in the United States and Canada to ALZA.
IVAX's international operations generated net revenues of $85.9 million
for the three months ended September 30, 1998, compared to $88.4 million for the
same period of the prior year. The $2.5 million decrease in international net
revenues was primarily due to decreased sales at IVAX's United Kingdom and Czech
Republic operations. The decrease in sales at IVAX's United Kingdom operations
is primarily due to the following: the discontinuance of certain contract
manufacturing arrangements (which was done to provide capacity to manufacture
certain higher margin products for the United States market for which IVAX is
awaiting receipt of regulatory approval); lower net revenues resulting from a
license agreement entered into in the prior period relating to its breath
operated inhaler device; and price declines for branded and generic products.
This decrease was partially offset by net revenues attributable to a license
agreement related to IVAX's dry powder inhaler device entered into in the third
quarter of 1998. The decrease in sales at IVAX's Czech Republic operations is
primarily due to lower sales of raw materials primarily resulting from the loss
of market share and lower export sales mainly to Russia, partially offset by the
favorable impact of foreign currency fluctuations.
Gross profit for the three months ended September 30, 1998 increased
$57.2 million compared to the same period in 1997. Gross profit was $61.1
million (37.7% of net revenues) for the 1998 period, compared to $3.9 million
(3.1% of net revenues) for the 1997 period. The improvement in
16
gross profit percentage was primarily the result of lower sales returns and
allowances at IVAX's United States generic pharmaceutical operations.
OPERATING EXPENSES
Selling expenses totaled $19.6 million (12.1% of net revenues) for the
three months ended September 30, 1998, a decrease of $4.6 million, from $24.2
million (19.1% of net revenues) for the same period of 1997. The decrease was
primarily attributable to reduced sales force and promotional costs of IVAX's
United States proprietary pharmaceutical operations as a result of the sale of
the rights to Elmiron(R) and certain other urology products in the United States
and Canada to ALZA during the third quarter of 1997. The implementation of
previously announced restructuring plans also resulted in reduced selling
expenses at IVAX's domestic generic pharmaceutical operations due to reductions
in sales personnel.
General and administrative expenses totaled $22.5 million (13.9% of net
revenues) for the three months ended September 30, 1998, compared to $27.5
million (21.8% of net revenues) for the same period of 1997, a decrease of $5.0
million. The decrease is primarily attributable to lower costs, primarily
associated with reduced headcount, at IVAX's corporate headquarters, its
domestic generic pharmaceutical operations and its United Kingdom operations as
a result of the implementation of previously announced restructuring plans.
Research and development expenses for the three months ended September
30, 1998 were $12.8 million (7.9% of net revenues), comparable to the same
period of the prior year.
Refer to the "Results of Operations - Nine months ended September 30,
1998 compared to the nine months ended September 30, 1997" for a discussion of
the restructuring charges and asset write-downs recognized during the three
months ended September 30, 1997 and 1998.
OTHER INCOME (EXPENSE)
Interest income increased $2.0 million for the three months ended
September 30, 1998, as compared to the three months ended September 30, 1997,
due to higher levels of cash on hand.
Refer to the "Results of Operations - Nine months ended September 30,
1998, compared to nine months ended September 30, 1997" for a discussion of the
major components in other income (expense), net.
DISCONTINUED OPERATIONS
Discontinued operations, net of taxes for the nine months ended
September 30, 1998 includes the results of operations of the personal care
products business (through its sale in July 1998) and the vacuum pump fluids
segment of the specialty chemicals business (through its sale in February 1998).
The personal care products business had break-even operations for the three and
nine months ended September 30, 1998. The third quarter of 1998 includes a net
gain on the divestiture of the personal care products business of $40.7 million.
Losses incurred on the sale and operations of the vacuum pump fluids segment
were charged against previously established reserves.
Losses from discontinued operations of $11.4 million and $.8 million
for the three and nine months ended September 30, 1997, respectively, included
the results of operations of the intravenous
17
products business (through its sale effective May 1997), the specialty chemicals
business (of which a significant portion of the assets were sold in the third
quarter of 1997) and the personal care products business. The personal care
products business incurred losses from operations in the third quarter of 1997
due to additional provisions for inventory excess and obsolescence reserves and
accounts receivable return reserves. The second quarter of 1997 included a net
gain on the divestiture of the intravenous products business and the third
quarter of 1997 included a net gain on the sale of a significant portion of the
assets of the specialty chemicals business.
IVAX has completed the divestiture of its businesses classified as
discontinued operations. See Note 5, Divestitures, in IVAX's Annual Report on
Form 10-K for the year ended December 31, 1997 and Note 4, Divestitures, in the
notes to condensed consolidated financial statements for further discussion.
CURRENCY FLUCTUATIONS
For the three and nine months ended September 30, 1998, approximately
56% of IVAX's net revenues were attributable to operations which principally
generated revenues in currencies other than the United States dollar, compared
to approximately 74% and 65% for the three and nine months ended September 30,
1997, respectively. Fluctuations in the value of foreign currencies relative to
the United States dollar affect the reported results of operations for IVAX. If
the United States dollar weakens relative to the foreign currency, the earnings
generated in the foreign currency will, in effect, increase when converted into
United States dollars and vice versa. As a result of exchange rate differences,
net revenues increased by $2.0 million for the three months ended September 30,
1998 and decreased $2.6 million for the nine months ended September 30, 1998, as
compared to the same periods of the prior year.
INCOME TAXES
IVAX recognized a $5.6 million tax provision for the nine months ended
September 30, 1998, which related to foreign operations. The tax provision
related to domestic operations was completely offset by the reversal of
valuation allowances. As of September 30, 1998, IVAX had established $115.0
million in valuation allowances and the domestic deferred tax asset was fully
reserved. Management expects that IVAX will continue to maintain valuation
allowances related to any future deferred tax assets associated with its
domestic operations until such time as sustainable domestic taxable income is
achieved.
As of September 30, 1998, IVAX had a foreign net deferred tax asset
aggregating $17.7 million. Realization of the foreign net deferred tax 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 foreign net deferred tax asset will be realized. Management's estimates of
future taxable income are subject to revision due to, among other things,
regulatory and competitive factors affecting the pharmaceutical industry. Such
factors are further discussed in management's discussion and analysis of
financial condition and results of operations included in IVAX's Annual Report
on Form 10-K for the year ended December 31, 1997.
YEAR 2000 UPDATE
IVAX believes that its Year 2000 project is proceeding on schedule. The
project is addressing the issue of certain computer programs and embedded chips
being unable to distinguish between the years 1900 and 2000. The project
addresses risks related to information technology ("IT") systems, such as
18
computer equipment and software, as well as non-IT systems, such as
communication systems, alarm and security systems, manufacturing and
distribution equipment and control systems, and laboratory testing and
environmental control equipment and systems.
STATUS
IVAX initiated its Year 2000 project in 1997 and engaged an independent
consulting company to assist in coordinating its Year 2000 project. The initial
inventory, assessment and prioritization and planning phases were completed by
January 1998. IVAX believes that it is still early in the remediation and
testing phase for both IT and non-IT systems. Utilizing internal and external
resources to complete the remediation and testing of internal systems, IVAX
anticipates that such efforts will be completed by mid-1999. IVAX has determined
that a portion of its operating systems and equipment require modification or
replacement to ensure that they will be Year 2000 compliant and has accelerated
the implementation of new IT systems at two subsidiaries due to the Year 2000
issue. Implementation of the new IT systems is expected to mediate the majority
of the internal Year 2000 IT issues at these subsidiaries. None of IVAX's other
IT projects have been materially delayed or impacted due to the implementation
of the Year 2000 Project.
IVAX has commenced efforts to determine the extent to which it may be
impacted by Year 2000 issues of third parties, including suppliers, customers,
service providers and certain agencies and regulatory organizations. Contact
with major third parties has been initiated and follow-up activities are planned
where responses have not been received or risks have been identified. IVAX
estimates that the process of identifying and evaluating third party risks is
50% complete.
COSTS
The estimated total cost of the Year 2000 project is $15 million. As of
September 30, 1998, IVAX had incurred costs of approximately $5 million
related to this project, including the cost to implement the new IT systems. The
project is being funded by cash on hand and from internally generated funds,
which IVAX expects to be adequate to complete the project.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect IVAX's results
of operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third parties, IVAX is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
IVAX's results of operations, liquidity or financial condition. The Year 2000
project is expected to significantly reduce IVAX's level of uncertainty about
Year 2000 problems, including the Year 2000 compliance and readiness of its
material third parties. IVAX believes that completion of the project as
scheduled will reduce the possibility of significant interruptions of normal
operations. A contingency plan has not been developed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. IVAX currently plans to complete such analysis and develop
and implement any necessary contingency plans by December 31, 1999.
The costs of IVAX's Year 2000 project and the dates on which IVAX
believes it will complete the various phases of this project are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources,
19
third-party remediation plans and other factors. There can be no assurance that
these estimates will prove to be accurate, and actual results could differ
materially from those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer code and embedded technology, the
performance of new systems and equipment, the reduction of productivity pending
completion of employee training and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, IVAX's working capital, excluding net assets of
discontinued operations, was $299.9 million, compared to $238.9 million at
December 31, 1997. Cash and cash equivalents totaled $235.0 million at September
30, 1998, as compared to $199.2 million at December 31, 1997 and $117.1 million
at September 30, 1997.
Net cash of $31.8 million was provided by operating activities during
the first nine months of 1998, compared to $64.6 million during the same period
of the prior year. The decrease in cash provided by operating activities, as
compared to the first nine months of 1997, was primarily the result of IVAX
receiving a $52.5 million refund of federal income taxes paid in prior years
during the second quarter of 1997 as well as reductions in accounts receivable
and inventory during the first nine months of 1997 mainly resulting from
increased cash collections, lower net revenues and improved inventory management
at IVAX's United States generic pharmaceutical operations. The 1998 net cash
provided by operating activities reflects improved operating results adjusted
for non-cash items, partially offset by a decrease in accounts payable, accrued
expenses and other current liabilities.
Net cash of $50.1 million was provided by investing activities during
the first nine months of 1998, as compared to $313.0 million during the same
period of the prior year. The decrease was primarily attributable to $320.0
million in cash proceeds received for the sale of IVAX's intravenous products
business in the second quarter of 1997. During the third quarter of 1997, IVAX
completed the sale of a significant portion of the assets of the specialty
chemicals business in three separate transactions for which IVAX received an
aggregate of $41.1 million in cash. In February 1998, IVAX sold its vacuum pump
fluids business, the only remaining segment of its specialty chemicals business,
for $3.9 million. In July 1998, IVAX completed the sale of its personal care
products business for $85.0 million (subject to certain post-closing
adjustments). At closing, IVAX received $35.0 million in cash and a $50.0
million secured note, which was subsequently sold without recourse for $48.5
million in cash. See Note 4, Divestitures, in the notes to condensed
consolidated financial statements. During the second quarter of 1998, IVAX sold
its Kirkland, Canada pharmaceutical manufacturing facility (acquired in the
first quarter of 1997) and its Syosset, New York pharmaceutical manufacturing
facility for a total of $13.3 million (subject to certain post-closing
adjustments).
During the first nine months of 1998, IVAX paid $12.4 million to NaPro
BioTherapeutics, Inc. ("NaPro") as partial consideration for a license to
NaPro's pending patents for a paclitaxel formulation in the United States,
Europe and certain other world markets. In connection with the license, IVAX and
NaPro terminated their paclitaxel development and marketing agreement. During
the third quarter of 1998, IVAX purchased Immunex's Abbreviated New Drug
Application for paclitaxel, the first filed with the U.S. Food and Drug
Administration.
Net cash of $46.5 million was used for financing activities during the
first nine months of 1998, compared to $340.6 million used during the same
period of the prior year. In June 1997, IVAX paid off its revolving credit
facility. During the first nine months of 1998, IVAX repurchased common
20
stock for $34.5 million. See Note 8, Shareholders' Equity, and Note 12,
Subsequent Events, in the notes to condensed consolidated financial statements.
IVAX plans to spend substantial amounts of capital in 1998 to continue
the research and development of pharmaceutical products. Total research and
development costs for the first nine months of 1998 were $39.9 million. Although
research and development expenditures are expected to be between $50.0 million
and $60.0 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 $50.0 million and $55.0 million in 1998 to
improve and expand its pharmaceutical and other related facilities, of which
$35.1 million has been spent during the first nine months of 1998.
IVAX's principal sources of short term liquidity are existing cash and
internally generated funds from operations. IVAX believes these sources 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, pharmaceutical products currently under
development and pharmaceutical products to be licensed from third parties. No
assurance can be given that IVAX will license existing products or products
under development from third parties, that IVAX will successfully complete the
development of such products or 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, IVAX's 6 1/2% Convertible Subordinated Notes
due 2001 ("the 6 1/2% Notes") are scheduled to mature in November 2001. As of
September 30, 1998, there was approximately $86.3 million face value of
the 6 1/2% Notes outstanding. 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.
21
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
With respect to the case styled ALAN M. HARRIS, YITZCHOK WOLPIN AND
FAUSTO POMBAR V. IVAX CORPORATION, PHILLIP FROST AND MICHAEL W. FIPPS,
previously reported in IVAX's Annual Report on Form 10-K for the year ended
December 31, 1997, on May 29, 1998, Plaintiffs filed a Notice of Appeal of the
District Court's dismissal of the action, which was previously reported in
IVAX's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998.
With respect to the case styled ELI LILLY AND COMPANY V. ROUSSEL CORP.,
ET AL., previously reported in IVAX's Annual Report on Form 10-K for the year
ended December 31, 1997, on June 30, 1998, the United States District Court
dismissed the action without prejudice. On September 4, 1998, plaintiffs filed
an amended complaint, and on November 6, 1998, IVAX filed a motion to dismiss
the amended complaint, which motion remains pending.
With respect to the case styled BAXTER INTERNATIONAL INC. AND BAXTER
HEALTHCARE CORP. V. MCGAW, INC., previously reported in IVAX's Annual Report on
Form 10-K for the year ended December 31, 1997, on July 1, 1998, the United
States Court of Appeals for the Federal Circuit affirmed the verdict in favor of
McGaw, Inc.
With respect to the case styled SMITH & NEPHEW, INC. V. IVAX
CORPORATION AND SOLOPAK, INC., previously reported in IVAX's Annual Report on
Form 10-K for the year ended December 31, 1997, on July 17, 1998, the District
Court granted IVAX's Motion for Summary Judgment.
With respect to the case styled DAVID MALIN, ET AL. V. IVAX
CORPORATION, PHILLIP FROST, JACK FISHMAN, MICHAEL W. FIPPS, AND JOHN H. KLEIN,
previously reported in IVAX's Annual Report on Form 10-K for the year ended
December 31, 1997, on August 18, 1998, the United States District Court
dismissed the action without prejudice. On September 30, 1998, plaintiffs filed
an amended complaint, and on November 9, 1998, IVAX filed a motion to dismiss
the amended complaint, which motion remains pending.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement, dated as of May 26, 1998 Filed herewith
between IVAX Corporation and Neil W. Flanzraich
27 Financial Data Schedule Filed herewith.
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed by the registrant during the three
months ended September 30, 1998.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IVAX CORPORATION
Date: November 13, 1998 By: /s/ THOMAS BEIER
------------------ -------------------------
Thomas Beier
Senior Vice President-Finance
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Employment Agreement, dated as of May 26, 1998 between IVAX
Corporation and Neil W. Flanzraich
27 Financial Data Schedule