-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FPIkWz3Jw2JcsfljSgznu9rrzZwRd/HJJgHaeisT15zEZGX/CACq3jvhI03LKtRs LGGGIY8XUU/+1k3MRRU0IQ== 0000950144-99-003700.txt : 19990402 0000950144-99-003700.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003700 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVAX CORP /DE CENTRAL INDEX KEY: 0000772197 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 161003559 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09623 FILM NUMBER: 99580901 BUSINESS ADDRESS: STREET 1: 4400 BISCAYNE BLVD CITY: MIAMI STATE: FL ZIP: 33137 BUSINESS PHONE: 3055902200 MAIL ADDRESS: STREET 1: 4400 BISCAYNE BOULEVARD CITY: MIAMI STATE: FL ZIP: 33137 FORMER COMPANY: FORMER CONFORMED NAME: IVAX CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IVACO INDUSTRIES INC DATE OF NAME CHANGE: 19871213 FORMER COMPANY: FORMER CONFORMED NAME: INLAND VACUUM INDUSTRIES INC DATE OF NAME CHANGE: 19870611 10-K 1 IVAX CORP FORM 10-K FOR 12/31/1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-09623 IVAX CORPORATION INCORPORATED UNDER THE LAWS OF THE I.R.S. EMPLOYER IDENTIFICATION NUMBER STATE OF FLORIDA 16-1003559 4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33137 305-575-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT Name of each exchange Title of each class on which registered - ---------------------------- ------------------------- COMMON STOCK, PAR VALUE $.10 AMERICAN STOCK EXCHANGE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 19, 1999, there were 110,943,474 shares of Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on March 19, 1999, was approximately $1.2 billion. DOCUMENTS INCORPORATED BY REFERENCE: Parts I, II and IV: Portions of registrant's 1998 Annual Report to Shareholders. Part III: Portions of registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders. 2 IVAX CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business................................................................................ 1 Item 2. Properties.............................................................................. 15 Item 3. Legal Proceedings....................................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders..................................... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 21 Item 6. Selected Financial Data................................................................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 21 Item 8. Financial Statements and Supplementary Data............................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 21 PART III Item 10. Directors and Executive Officers of the Registrant...................................... 21 Item 11. Executive Compensation.................................................................. 22 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 22 Item 13. Certain Relationships and Related Transactions.......................................... 22 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K......................... 22
3 PART I ITEM 1. BUSINESS GENERAL IVAX Corporation is a holding company with subsidiaries engaged in the research, development, manufacture and marketing of branded and generic pharmaceuticals in the United States and international markets. IVAX was incorporated in Florida in 1993, as successor to a Delaware corporation formed in 1985. Its principal executive offices are located at 4400 Biscayne Boulevard, Miami, Florida 33137 and its telephone number is (305) 575-6000. All references to "IVAX" in this Form 10-K mean IVAX Corporation and/or its subsidiaries unless the context otherwise requires. FOCUS AND STRATEGY In connection with the restructuring programs described below, IVAX determined to focus its business primarily in two areas: proprietary pharmaceuticals with an emphasis on oncology and respiratory products, and generic pharmaceuticals, especially specialty generics. IVAX intends to leverage its expertise and talent in each of these areas. In the oncology area, IVAX will continue its efforts to bring its proprietary drug Paxene(R) to market and to license from others oncology compounds that will complement Paxene(R). In the respiratory area, IVAX intends to capitalize and expand on its expertise in inhalation devices and in developing respiratory products with propellants that do not contain chlorofluorocarbons ("CFCs"). In the generic drug area, IVAX is seeking to improve its worldwide generic drug business by supplementing its generic product portfolio through the development and introduction of specialty generic products that, because of one or more unique characteristics, are likely to encounter less intensive competition. Such products include those which are difficult to formulate or manufacture, which involve regulatory challenges or potential patent challenges, or for which limited raw material suppliers exist. IVAX believes that by emphasizing the development of such products, it can mitigate the pricing pressure on other generic drugs and thereby realize better margins from the sale of generic drugs. PHARMACEUTICALS IVAX's pharmaceutical business historically has grown through the development and acquisition of brand name, generic and over-the-counter pharmaceutical products, the license of technology and products from third parties, and the acquisition of other businesses. IVAX markets several brand-name pharmaceutical products and a wide variety of generic and over-the-counter pharmaceutical products primarily in the United States and the United Kingdom. IVAX also maintains direct operations in Argentina, the Czech Republic, Hong Kong, Ireland, Germany, Poland, Russia, the Slovak Republic, and Uruguay, and markets its products through distributors or joint ventures in other foreign markets. BRAND-NAME PRODUCTS In September 1997, IVAX sold the United States and Canadian marketing rights to its proprietary drug Elmiron(R), an innovative drug used for the treatment of interstitial cystitis, and the urological medications Bicitra(R), Polycitra(R), Polycitra-K Crystals(R), Polycitra-LC(TM), Neutra-Phos(R), and Neutra-Phos-K(TM), to ALZA Corporation ("ALZA"). IVAX retained the rights to these products 4 outside of the United States and Canada. IVAX received $75.0 million in up-front payments from ALZA and subsequently received milestone payments based on the achievement of specified sales levels of Elmiron(R) in 1998, as well as royalties from ALZA on sales of the products in 1998. IVAX may receive additional milestone payments based on the achievement of specified sales levels of Elmiron(R) during the next four years, as well as additional royalties from ALZA based on sales of the products. No assurance can be given that IVAX will receive additional milestone payments or royalties from ALZA. IVAX markets a number of brand-name products treating a variety of conditions, primarily through its Baker Norton division in the United Kingdom and Ireland. These products are marketed by IVAX's direct sales force to physicians, pharmacies, hospitals, managed health care organizations and government agencies, and are sold primarily to wholesalers, retail pharmacies, distributors, hospitals and physicians. In the aggregate, the Baker Norton division of IVAX's United Kingdom business had 1998 net revenues of approximately $91.3 million, or 14.3% of IVAX's 1998 consolidated net revenues. IVAX has substantial expertise in the development, manufacture and marketing of respiratory drugs in metered-dose inhaler ("MDI") formulations. IVAX holds patents on a breath-activated MDI which is designed to overcome the difficulty many persons experience with conventional MDIs in attempting to coordinate their inhalation with the emission of the medication. IVAX's device, called Easi-Breathe(TM), emits the medication automatically in one step upon inhalation, minimizing coordination problems and better ensuring that the medication is delivered to the lungs. IVAX markets its Easi-Breathe(TM) breath-activated inhaler through its Baker Norton division. In December 1996, IVAX licensed the Easi-Breathe(TM) device to Glaxo Wellcome PLC for use with Glaxo Wellcome's range of inhaled compounds (including, among others, beclomethasone and salbutamol) mixed with CFC or hydrofluoroalkane ("HFA") propellants. The license generally grants Glaxo Wellcome the exclusive right to use the Easi-Breathe(TM) device for these compounds on a worldwide basis. IVAX retained all rights to market all other compounds, branded or generic, in its Easi-Breathe(TM) inhaler. The license term remains effective at least for the duration of the Easi-Breathe(TM) patents, which expire in the year 2011. IVAX will receive fixed payments as well as annual volume and revenue-related royalties under the license agreement. No assurance can be given regarding the amount of volume and revenue-related royalties that IVAX will receive under the license agreement. GENERIC PRODUCTS Generic drugs are therapeutically equivalent to their brand-name counterparts, but are generally sold at lower prices as alternatives to the brand-name products. After giving effect to the restatement described below in "Disposition of Non-Core Businesses," approximately 65%, 49% and 62% of IVAX's consolidated net revenues for the years ended December 31, 1998, 1997 and 1996, respectively, were attributable to worldwide sales of generic prescription and over-the-counter drugs and vitamin supplements. In the United States, IVAX manufactures and markets under the "Zenith Goldline" and "Goldline" trade names approximately 58 generic prescription drugs in capsule or tablet forms in an aggregate of approximately 121 dosage strengths. IVAX distributes in the United States (but does not manufacture) approximately 484 additional generic prescription and over-the-counter drugs and vitamin supplements, in various dosage forms and dosage strengths, encompassing approximately 628 2 5 package sizes. IVAX's domestic generic drug distribution network encompasses most classes of the pharmaceutical market, including wholesalers, retail drug chains, retail pharmacies, hospital groups, nursing home providers and government agencies. Approximately 61% of IVAX's 1998 United States generic pharmaceutical sales were made to the top five customers of that business. None of these customers individually represents 10% or more of IVAX's consolidated net revenues. The loss of any of these customers would have an adverse effect on IVAX's business and results of operations (see "Competition"). In the United Kingdom, IVAX is the largest manufacturer and distributor of generic pharmaceuticals. IVAX markets under the "Norton" trade name approximately 127 generic prescription and over-the-counter drugs, about half of which IVAX manufactures, in various dosage forms and dosage strengths, constituting an aggregate of approximately 263 products. Such products are marketed to wholesalers, retail pharmacies, hospitals, physicians and government agencies. In addition, IVAX manufactures and markets primarily in the United Kingdom various "blow-fill-seal" pharmaceutical products, such as contact lens solutions, unit-dose eye drops, solutions for injection or irrigation, and unit-dose vials for nebulization to treat respiratory disorders. IVAX also contract manufactures pharmaceutical products in the United Kingdom and Ireland for other companies. In 1994, IVAX acquired a 60% interest in Galena a.s. ("Galena"), one of the oldest and most established pharmaceutical companies based in the Czech Republic. Through open market purchases made in 1995 and 1996, IVAX increased its ownership interest in Galena to 74%. Galena develops, manufactures and markets a variety of pharmaceutical, dermatological and veterinary products, as well as active ingredients and herbal extracts used in the manufacture of pharmaceuticals, including cyclosporin and ergot alkaloids. Galena sells its pharmaceutical, dermatological and veterinary products primarily in Central and Eastern European countries, including Russia. It sells active ingredients and herbal extracts in many countries around the world. As part of the 1994 acquisition, IVAX contributed to Galena rights to manufacture and market certain products and products under development in certain countries. Galena had 1998 net revenues, including intercompany sales, of $50.0 million. In 1996, IVAX acquired Elvetium S.A. (Argentina) and Alet Laboratorios S.A.E.C.I. y E., both headquartered in Buenos Aires and engaged in the business of manufacturing and marketing pharmaceuticals in Argentina, and Elvetium S.A. (Uruguay), headquartered in Montevideo and engaged in the business of manufacturing and marketing pharmaceuticals in Uruguay. These companies had combined 1998 net revenues of $34.8 million. IVAX is a 50% partner in two Chinese joint ventures, one with Beijing JiAi Pharmaceuticals Technology Development Company of the Pharmaceuticals Research and Development Centre, China, named Beijing JiAi Pharmaceuticals Limited Liability Company, which manufactures and markets inhalation products for respiratory ailments, and the other with Kunming Pharmaceutical Factory, named Kunming Baker Norton Pharmaceutical Co., Ltd., which manufactures and markets a variety of pharmaceutical products. These joint ventures had combined 1998 net revenues of $16.8 million. 3 6 OTHER BUSINESSES VETERINARY PRODUCTS IVAX formulates, packages and distributes under the "DVM Pharmaceuticals" trade name various veterinary products in the United States, primarily neutraceutical and dermatological products for small companion animals. These products are marketed through IVAX's direct sales force and a national network of veterinary product distributors primarily to small animal practitioners. IVAX's veterinary products business had net revenues of $16.1 million, $17.0 million and $15.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. DIAGNOSTICS IVAX's diagnostics group develops, manufactures and markets diagnostic reagents and instrumentation. IVAX manufactures and markets a line of enzyme immunoassays ("EIAs") which are used to detect the presence of infectious and autoimmune diseases, and a line of autoimmune antigens, reagents and other related products. IVAX also manufactures and markets EIA instrumentation that allows the diagnostic group's EIA products to be run in an automated system format. The diagnostic group's products are marketed to clinical reference laboratories, hospital laboratories, research institutions and other commercial entities in the United States through IVAX's direct sales force. IVAX also markets these products, as well as diagnostic products manufactured by others, in Italy through a direct sales force to public hospitals and private medical laboratories. Sales of IVAX's diagnostic products are also made through independent distributors in various other foreign markets. IVAX's diagnostics group had net revenues of $9.6 million, $8.1 million and $14.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT For the years ended December 31, 1998, 1997 and 1996, IVAX spent $48.6 million, $53.4 million and $51.7 million, respectively, for company-sponsored research and development activities. In 1998, approximately 96% of such amount was dedicated to pharmaceutical research and development. From time to time, IVAX may supplement its research and development efforts by entering into research and development agreements, joint ventures and other collaborative arrangements with other companies to defray the cost of product development. IVAX intends to pursue a balanced strategy of developing proprietary pharmaceutical products with an emphasis on the oncology and respiratory fields, as well as generic pharmaceutical products with an emphasis on specialty generics (see "General - Focus and Strategy"). Statements in this Form 10-K concerning the timing of regulatory filings and approvals are forward-looking statements which are subject to risks and uncertainties. The length of time necessary to complete clinical trials and from submission of an application for market approval to a final decision by a regulatory authority varies significantly. No assurance can be given 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. Similarly, there can be no assurance that IVAX's competitors will not develop and introduce products that will adversely affect IVAX's business and results of operations. 4 7 PROPRIETARY PHARMACEUTICALS IVAX is committed to the cost-effective development of proprietary pharmaceuticals directed primarily towards indications having relatively large patient populations or for which limited or inadequate treatments are available. IVAX seeks to accelerate product development and introduction by in-licensing compounds, especially after clinical testing has begun, and by developing new dosage forms of existing products or new therapeutic indications for existing products. IVAX intends to emphasize the development of drug products in the oncology and respiratory fields, and has a variety of proprietary pharmaceuticals in varying stages of development. ELMIRON(R). IVAX received its first United States approval to market a proprietary drug in September 1996, when the United States Food and Drug Administration (the "FDA") cleared IVAX's New Drug Application ("NDA") for the marketing of its patented prescription medication Elmiron(R) (pentosan polysulfate sodium). Elmiron(R) is approved in the United States and Canada for the treatment of interstitial cystitis, a chronic, progressive and debilitating urinary bladder disease primarily afflicting women. In September 1997, IVAX sold the marketing rights to Elmiron(R) for all indications, as well as rights to certain other products in the United States and Canada, to ALZA Corporation, but retained such rights outside the United States and Canada. See "Pharmaceuticals - Brand-Name Products" for a more complete description of this transaction. ALZA and IVAX had agreed to share the cost of further Elmiron(R) research, but this cost-sharing arrangement was terminated in July 1998. PAXENE(R). Paxene(R), IVAX's form of the injectable drug paclitaxel, is an unpatented compound which, in clinical trials sponsored by the National Cancer Institute, exhibited promising results in the treatment of ovarian and breast cancer and AIDS-related Kaposi's Sarcoma ("KS"). Bristol-Myers Squibb Company ("Bristol-Myers") currently markets an injectable product containing paclitaxel under the brand name Taxol(R) for the treatment of ovarian and breast cancer and KS. IVAX submitted an NDA for Paxene(R) for the treatment of KS in March 1997, and in December 1997, the FDA determined Paxene(R) to be safe and effective for the treatment of KS, but indicated that Paxene(R) could not be finally approved for this indication until August 4, 2004. The delay in final approval is due to a seven-year market exclusivity period under the Orphan Drug Act granted to Taxol(R), which was approved for KS earlier in 1997. IVAX is exploring alternative strategies to market Paxene(R) for KS in advance of the expiration of Taxol(R)'s exclusivity period. Taxol(R)'s Orphan Drug exclusivity does not apply to NDAs or Abbreviated New Drug Applications ("ANDAs") for the use of paclitaxel to treat indications other than KS and does not apply in any market other than the United States. IVAX filed an ANDA for paclitaxel with the FDA in December 1997. In August 1998, IVAX purchased Immunex Corporation's ANDA for paclitaxel, the first filed with the FDA for paclitaxel injection. IVAX filed an application for regulatory approval of Paxene(R) to treat KS in the European Union in 1997 and, in January 1999, the European Committee for Proprietary Medical Products recommended approval of IVAX's application. IVAX is awaiting formal clearance to market Paxene(R) for KS throughout the European Union. IVAX's subsidiary, Galena, recently received approval to market Paxene(R) for KS in the Czech Republic. IVAX has also applied for approval to market Paxene(R) in other countries. IVAX has also conducted clinical studies of Paxene(R) for other indications, and intends to file an NDA for the use of Paxene(R) to treat one or more of such other indications. 5 8 Bristol-Myers has obtained numerous patents relating to paclitaxel, including patents covering the production of paclitaxel, its administration to patients and its formulation. Even if IVAX's NDA for Paxene(R) or its ANDA for paclitaxel is approved, IVAX will not be able to market paclitaxel if Bristol-Myers successfully enforces such patents against IVAX. In March 1998, Bristol-Myers initiated patent infringement litigation against IVAX and, under the Waxman-Hatch Act, IVAX's paclitaxel ANDA may not be approved by the FDA until the earlier of August 2000 or the date when a court finally determines that certain of Bristol-Myers' patents are either unenforceable or not infringed by IVAX's product (see "Governmental Regulation"). In January 1998, Bristol-Myers initiated patent infringement litigation against Immunex and, under the Waxman-Hatch Act, the IVAX-owned paclitaxel ANDA filed by Immunex may not be approved by the FDA until the earlier of June 2000 or the date when a court finally determines that certain of Bristol-Myers' patents are either unenforceable or not infringed by IVAX's product. ORAL PAXENE(R). Presently, paclitaxel is marketed only in injectable form. IVAX is developing an oral formulation of Paxene(R) that IVAX believes may provide significant advantages over the injectable dosage form in terms of patient convenience and reduced side-effects. IVAX is currently conducting human clinical trials to test the safety and efficacy of oral Paxene(R), and in a single dose proof-of-concept study, IVAX has determined that it is possible to achieve therapeutic levels of paclitaxel via oral administration. It is, however, premature to conclude that the drug is safe and effective when administered orally. INHALATION AEROSOL PRODUCTS. IVAX is continuing to develop the Easi-Breathe(TM) inhaler for use with compounds not subject to the Glaxo Wellcome license (see "Pharmaceuticals - Brand-Name Products"). IVAX markets the asthma drug Cromogen(TM) (sodium cromoglycate) under its own name, and the asthma drugs Ventolin(R) (albuterol) and Becotide(R) (beclomethasone) under Glaxo Wellcome's name, in the Easi-Breathe(TM) inhaler in the United Kingdom and Ireland. Ventolin(R) and Becotide(R) are registered trademarks of Glaxo Wellcome. In light of international agreements calling for the eventual phase-out of CFCs, IVAX is developing inhalation aerosol products which do not contain CFCs. In 1997, IVAX received regulatory approval to market non-CFC beclomethasone in Ireland, in its standard MDI and its Easi-Breathe(TM) inhaler (Glaxo Wellcome has the exclusive right to market this product in the Easi-Breathe(TM) inhaler pursuant to the license agreement discussed above), and in France in its standard MDI, the first such approval for any company anywhere in the world. In 1998, IVAX also applied for approval to market an albuterol non-CFC formulation in various European countries. Also, IVAX has developed a multi-dose dry powder inhaler ("MDPI") which uses no gas propellant and is believed to have superior dosing accuracy than competing models. In 1998, IVAX completed clinical trials in the United Kingdom for budesonide in IVAX's MDPI. IVAX intends to seek approval to market budesonide in the European Union in IVAX's MDPI. 6 9 In developing environmentally friendly, non-CFC containing formulations for MDIs, IVAX and many of its competitors have obtained or licensed patents on formulations containing alternative propellants. There are many existing patents covering the use of hydrofluoroalkane with pharmaceuticals, and successful product development by IVAX may require that IVAX incur substantial expense in seeking to develop formulations that do not infringe competitors' patents, or that IVAX license or invalidate such patents. IVAX successfully invalidated certain relevant United Kingdom and European patents in the United Kingdom during 1997, 1998, and early 1999, but there can be no assurance that it will be successful in defeating the corresponding patents in the United States or other foreign jurisdictions. GENERIC PHARMACEUTICALS IVAX also develops generic pharmaceutical products. During 1998, IVAX received final FDA approval of 5 ANDAs relating to 5 chemical compounds, and approval of 9 Abridged Product License Applications ("APLAs"), the United Kingdom equivalent of an ANDA, from the United Kingdom Medicines Control Agency (the "MCA") relating to 6 chemical compounds. As of March 19, 1999, IVAX had 19 ANDAs relating to 16 chemical compounds pending at the FDA, 13 APLAs relating to 5 chemical compounds pending at the MCA, and one Abbreviated New Drug Submission ("ANDS"), the Canadian equivalent of an ANDA, relating to one chemical compound pending with the Canadian Minister of Health. IVAX is seeking to supplement its portfolio of generic products by emphasizing the development of specialty generics, defined as those products which, because of one or more unique characteristics, are likely to encounter less intensive competition. Such drugs include those which are difficult to formulate or manufacture, which involve regulatory challenges or potential patent challenges, or for which limited raw material suppliers exist. By emphasizing the development of specialty generics, IVAX seeks to introduce generic products that its competitors cannot easily develop and thereby obtain better margins from sales of its generic products. In addition, in evaluating which generic pharmaceutical product development projects to undertake, IVAX considers whether the new product, once developed, will complement other IVAX products in the same therapeutic family, or will otherwise assist in making IVAX's product line more complete. Developing specialty generic pharmaceutical products 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. GOVERNMENTAL REGULATION IVAX's pharmaceutical and diagnostic operations are subject to extensive regulation by governmental authorities in the United States and other countries with respect to the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical and diagnostic products. IVAX devotes significant time, effort and expense to addressing the extensive government regulations applicable to its business, and in general, the trend is towards more stringent regulation. The FDA requires extensive testing of new pharmaceutical products to demonstrate that such products are both safe and effective in treating the indications for which approval is sought. Testing in humans may not be commenced until after an Investigational New Drug exemption is granted by 7 10 the FDA. An NDA must be submitted to the FDA for new drugs that have not been previously approved by the FDA and for new combinations of, and new indications and new delivery methods for, previously approved drugs. Three phases of clinical trials must be successfully completed before an NDA is approved: phase I clinical trials, which involve the administration of the drug to a small number of healthy subjects to determine safety, tolerance, absorption and metabolism characteristics; phase II clinical trials, which involve the administration of the drug to a limited number of patients for a specific disease to determine dose response, efficacy and safety; and phase III clinical trials, which involve the study of the drug to gain confirmatory evidence of efficacy and safety from a wide base of investigators and patients. In the case of a drug that has been previously approved by the FDA, an abbreviated approval process is available. For such drugs an ANDA may be submitted to the FDA for approval. For an ANDA to be approved, among other requirements, the drug must be shown to be bioequivalent to the previously approved drug. The NDA and ANDA approval process generally takes a number of years and involves the expenditure of substantial resources. There can be no assurance that the time and resources devoted to seeking regulatory approval for new products will result in product approvals or earnings. The owner of an approved drug is required to list with the FDA all patents which cover the approved drug and its approved uses. A company filing an ANDA and seeking approval to market a product before expiration of all listed patents must certify that such patents are invalid or will not be infringed by the manufacture, use or sale of the applicant's product, and must notify the patent owner and the owner of the approved drug of its filing. If the approved drug owner sues the ANDA filer for patent infringement within 45 days after it receives such notice, then the FDA will not grant final approval of the ANDA until the earlier of 30 months from the date the approved drug owner receives such notice or the date when a court finally determines that the applicable patents are either invalid or would not be infringed by the applicant's product. As a result, generic drug manufacturers, including IVAX, are often involved in lengthy, expensive patent litigation against brand-name drug companies that have considerably greater resources and that are typically inclined to actively pursue patent litigation in an effort to protect their franchises. IVAX's diagnostic products are considered medical devices, and as such require either a 510(k) premarket notification clearance ("510(k)") or an approved Premarket Approval Application ("PMA") from the FDA prior to marketing. A product qualifies for a 510(k) if it is substantially equivalent to another medical device that was on the market prior to May 28, 1976 and does not now have a PMA or has previously received 510(k) premarket notification clearance and is lawfully on the market. The 510(k) approval process can take several months and may involve the submission of data demonstrating its equivalency to similar products in the market together with other supporting information. An approved PMA application indicates that the FDA has determined that a device has been proven to be safe and effective for its intended use. The PMA process typically can last several years and requires the submission of significant quantities of preclinical and clinical data as well as manufacturing and other information. On an ongoing basis, the FDA reviews the safety and efficacy of marketed pharmaceutical products and products considered medical devices and monitors labeling, advertising and other matters related to the promotion of such products. The FDA also regulates the facilities and procedures used to manufacture pharmaceutical and diagnostic products in the United States or for sale in the United States. Such facilities must be registered with the FDA and all products made in such facilities must be manufactured in accordance with "good manufacturing practices" established by the FDA. Compliance with good manufacturing practices guidelines requires the dedication of 8 11 substantial resources and requires significant costs. The FDA periodically inspects IVAX's manufacturing facilities and procedures to assure compliance. The FDA may cause a recall or withdraw product approvals if regulatory standards are not maintained. FDA approval to manufacture a drug is site-specific. In the event an approved manufacturing facility for a particular drug becomes inoperable, obtaining the required FDA approval to manufacture such drug at a different manufacturing site could result in production delays, which could adversely affect IVAX's business and results of operations. In connection with its activities outside the United States, IVAX is also subject to regulatory requirements governing the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical and diagnostic products, which requirements vary from country to country. Whether or not FDA approval has been obtained for a product, approval of the product by comparable regulatory authorities of foreign countries must be obtained prior to marketing the product in those countries. The approval process may be more or less rigorous from country to country, and the time required for approval may be longer or shorter than that required in the United States. No assurance can be given that clinical studies conducted outside of any country will be accepted by such country, and the approval of any pharmaceutical or diagnostic product in one country does not assure that such product will be approved in another country. The federal and state governments in the United States, as well as many foreign governments, including the United Kingdom, from time to time explore ways to reduce medical care costs through health care reform. These efforts have resulted in, among other things, government policies that encourage the use of generic drugs rather than brand-name drugs to reduce drug reimbursement costs. Virtually every state in the United States has a generic substitution law which permits the dispensing pharmacist to substitute a generic drug for the prescribed brand-name product. The debate to reform the United States' health care system is expected to be protracted and intense. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, IVAX cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical or diagnostic industries or on the business or operating results of IVAX. RAW MATERIALS Raw materials essential to IVAX's business are generally readily available from multiple sources. Certain raw materials and components used in the manufacture of IVAX's products are, however, 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 may result in production delays, higher raw material costs and loss of sales and customers. IVAX obtains a significant portion of its raw materials from foreign suppliers, and its arrangements with such suppliers are subject to, among other things, FDA, customs and other government clearances, duties and regulation by the countries of origin. 9 12 COMPETITION The pharmaceutical industry is highly competitive and includes numerous established pharmaceutical companies, many of which have considerably greater financial, technical, clinical, marketing and other resources and experience than IVAX. The markets in which IVAX competes are undergoing, and are expected to continue to undergo, rapid and significant technological change, and IVAX expects competition to intensify as technological advances are made. IVAX intends to compete in this marketplace by developing or licensing pharmaceutical products that are either patented or proprietary and which are primarily for indications having relatively large patient populations or for which limited or inadequate treatments are available, and, with respect to generic pharmaceuticals, by developing therapeutic equivalents to previously patented products which, because of one or more unique characteristics, are expected to have less intensive competition. There can be no assurance, however, that developments by others will not render IVAX's pharmaceutical products or technologies obsolete or uncompetitive. In addition to product development, other competitive factors in the pharmaceutical industry include product quality and price, customer service, and reputation. Price is a key competitive factor in the generic pharmaceutical business. To compete effectively on the basis of price and remain profitable, a generic drug manufacturer must manufacture its products in a cost-effective manner. As a result of its ongoing cost-control and restructuring programs, IVAX has reduced its manufacturing costs. Revenues and gross profit derived from generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors unique to the generic pharmaceutical industry. As patents for brand-name products and related exclusivity periods mandated by regulatory authorities expire, the first generic manufacturer to receive regulatory approval for generic equivalents of such products is usually able to achieve relatively high market share, revenues and gross profit. As other generic manufacturers receive regulatory approvals, sales volumes, market share and prices typically decline. Accordingly, the level of revenues and gross profit attributable to generic products developed and manufactured by IVAX is dependent, in part, on IVAX's ability to maintain a pipeline of products in development and to develop and rapidly introduce new products, the timing of regulatory approval of such products, the number and timing of regulatory approvals of competing products, and IVAX's ability to manufacture such products efficiently. Because of the regulatory and competitive factors discussed above, IVAX's revenues and results of operations historically have fluctuated from period to period. IVAX expects this fluctuation to continue as long as a significant part of its revenues are generated from sales of generic pharmaceuticals. 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 bioequivalence 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. 10 13 Certain national drug wholesalers have instituted programs designed to provide cost savings to independent retail pharmacies on their purchases of certain generic pharmaceutical products. Pursuant to the programs, retail pharmacies generally agree to purchase their requirements of generic pharmaceutical products from one wholesaler and permit the wholesaler to select the product suppliers. Each wholesaler encourages 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 encourage generic drug suppliers to aggressively bid to be the exclusive supplier of products under the programs. The existence of such programs also results in reduced prices to non-wholesaler customers. As a result of the institution of these programs, the generic drug industry experienced a significant reduction in the prices charged by suppliers for many generic pharmaceutical products during 1996. Price declines continued in 1997 and 1998, but at an increasingly slower rate in each of those years than in the prior year. 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. Other competitive factors affecting IVAX's business include the prevalence and influence of managed care organizations and similar institutions which are able to seek price discounts on pharmaceutical products. As the influence of these entities continues to grow, IVAX may face increased pricing pressure on the products it markets. PATENTS AND TRADEMARKS IVAX seeks to obtain patent protection on its products and products under development where appropriate. IVAX currently owns or is licensed under various United States, United Kingdom and other foreign patents and patent applications covering certain of its products, products under development, product uses and manufacturing processes. Protection for individual products, product uses or manufacturing processes extends for varying periods in accordance with the date of grant and the legal life of the patents in the various countries. The protection afforded, which may also vary from country to country, depends on the type of patent and its scope of coverage. There is no assurance that patents will be issued on pending applications or as to the scope or degree of protection patents will afford IVAX, or that IVAX's patents will be held valid by a court of competent jurisdiction. Although IVAX believes that its patents and licenses are important to its business, no single patent or license is currently material in relation to IVAX's business as a whole. Any litigation regarding IVAX's patents could result in substantial cost to IVAX. IVAX sells certain of its products under trademarks and seeks to obtain protection for its trademarks by registering them in the United States, United Kingdom and other countries where the products are marketed. At present, IVAX does not consider its trademarks, individually or in the aggregate, to be material in relation to its business as a whole. 11 14 IVAX's success also depends on trade secrets which, in some cases, cannot be patented or as to which seeking patents may harm IVAX's competitive position. While IVAX generally requires its employees, advisors and consultants to execute confidentiality agreements prohibiting such persons from disclosing IVAX's trade secrets or using them in a manner harmful to IVAX, there can be no assurance that these agreements will provide adequate protection or that IVAX can meaningfully protect its proprietary interest in unpatented trade secrets. LICENSING IVAX has obtained licenses to technology and compounds for development into new pharmaceutical products from various inventors, universities and the United States government, and will continue to seek new licenses from such parties and others, including pharmaceutical companies. Generally, these licenses grant IVAX the right to complete development efforts initiated by others and to market any resulting products. IVAX generally is required to pay a royalty based on sales of the product. There can be no assurance that any licenses desired by IVAX will be obtainable on commercially reasonable terms or that any licensed patents or proprietary rights will be valid and enforceable. IVAX also grants licenses to other pharmaceutical companies relating to technologies or compounds under development and, in some cases, finished products. Generally, these licenses grant the licensees the right to complete development work of the technology or compound, or obtain regulatory approvals of a product, and thereafter market the product in specified territories. These licenses often involve the payment of an up-front fee and fees upon completion of certain development milestones, and also provide for the payment of royalties based on sales of the product. IVAX often retains the right to supply the product to the licensees. SEASONALITY While certain of IVAX's individual products may have a degree of seasonality, there are no significant seasonal aspects to IVAX's business, except that sales of pharmaceutical products indicated for colds and flu symptoms are higher during the fourth quarter as customers supplement inventories in anticipation of the cold and flu season. In addition, revenues that are contingent upon licensees achieving certain sales targets during the year tend to be higher in the second half of the year. ENVIRONMENT IVAX believes that its operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible accurately to predict the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not presently expected to have, a material adverse effect on IVAX's earnings or competitive position. 12 15 INCREASES IN EFFICIENCY Beginning in the third quarter of 1996 and continuing throughout 1998, IVAX announced and initiated restructuring programs in an effort to enhance operating efficiencies and reduce costs. These objectives were achieved through workforce reductions, facility consolidations and other cost-saving measures throughout the organization. (See "Properties"). During this period, IVAX reduced its worldwide workforce from approximately 8,100 to approximately 3,700 employees, including reductions resulting from the sale of non-core businesses. IVAX also implemented strict controls on capital expenditures and working capital spending. During 1998, a focus of IVAX's restructuring program was the pharmaceutical operations of its Norton Healthcare Limited subsidiary located in the United Kingdom. As in the United States, this program included workforce reductions, facility consolidations and other cost-saving measures. As part of this restructuring, in 1998 IVAX reduced its workforce in the United Kingdom from approximately 1,460 to approximately 1,275, and anticipates that it will further reduce its U.K. workforce to approximately 1,100 by the end of 1999. During 1998, IVAX closed two manufacturing plants in southeast London, England and consolidated its U.K. manufacturing activities at its Waterford, Ireland facility. Its U.K. packaging operations are also being consolidated into its Waterford, Ireland facility from Harlow, England in the first quarter of 1999. All other functions, including research and development, will be consolidated into its new facility located in the Royal Docks area of London. This consolidation process is anticipated to be completed by the end of 1999. DISPOSITION OF NON-CORE BUSINESSES During 1997 and 1998, IVAX divested its intravenous products, specialty chemicals and personal care products businesses, all of which had been classified as discontinued operations since 1997. As a result of its decision to divest these businesses, in 1997 IVAX restated its financial statements to reflect these businesses as discontinued operations. Unless otherwise noted, all of the financial information contained herein reflects this restatement. IVAX completed the sale of the last of these businesses in July 1998. See Note 5, Divestitures, and Note 7, Discontinued Operations, to the Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" incorporated by reference from the Financial Information section of the 1998 Annual Report to Shareholders for additional information. These businesses accounted for approximately 6%, 30% and 43% of IVAX's consolidated net revenues before the restatement described above during the years ended December 31, 1998, 1997 and 1996, respectively. Effective May 30, 1997, IVAX sold McGaw, Inc. ("McGaw"), its intravenous products subsidiary. IVAX's intravenous products business manufactured and marketed a broad line of basic and specialty intravenous solutions, irrigation solutions, intravenous administration sets, infusion pumps and other infusion supplies and equipment, primarily to hospitals and alternate-site health care locations in the United States and, through independent distributors, in various foreign markets. The intravenous products business had net revenues, including intercompany sales, of $140.6 million for the five months ended May 30, 1997 and $343.0 million for the year ended December 31, 1996. 13 16 IVAX's specialty chemicals group manufactured and marketed, primarily in the United States and Canada, several hundred chemical products in three distinct market segments: vacuum pump fluids, textile and denim products, and cleaning products. IVAX's specialty chemicals group had net revenues, including intercompany sales, of $.9 million, $41.6 million and $67.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. 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 approximately $41.1 million in cash. In February 1998, IVAX completed the divestiture of its specialty chemicals business by selling its vacuum pump fluids business for approximately $3.9 million (subject to certain post-closing adjustments). IVAX retained certain real estate assets of the specialty chemicals business which it is seeking to sell. IVAX's personal care products group developed, manufactured and marketed, primarily within the United States, a variety of personal care products, mainly through distributors, stores and mass merchandisers, in three principal areas: hair care products designed primarily for African-American consumers, cosmetic products designed primarily for dark-skinned women, and corrective cosmetics. IVAX's personal care products group had net revenues, including intercompany sales, of $42.6 million for the seven months ended July 31, 1998, and $73.9 million and $80.0 million for the years ended December 31, 1997 and 1996, respectively. Effective July 14, 1998, IVAX sold Johnson Products Co., Inc., its personal care products subsidiary, to Carson Products Company, a wholly-owned subsidiary of Carson, Inc., for approximately $84.7 million (after certain post-closing adjustments). At closing, IVAX received $35 million in cash and a secured note for $50 million, which IVAX subsequently sold, without recourse, for $48.5 million in cash. In a separate transaction, IVAX sold the Flori Roberts(R), Patti LaBelle(TM) and IMAN(R) product lines of Johnson Products Co., Inc. to Color Me Beautiful, Inc. IVAX no longer maintains a personal care products business. EMPLOYEES As of February 28, 1999, IVAX had approximately 3,580 full time employees, of whom approximately 2,175 were engaged in research and development, production and associated support, 720 were engaged in sales, marketing and distribution, and 685 were engaged in finance and general administration. The employees were divided approximately as follows: 840 in domestic pharmaceuticals, 2,550 in international pharmaceuticals, 50 in diagnostics, 55 in veterinary and 85 in corporate. The foregoing information includes approximately 930 employees of Galena. IVAX's recent workforce reductions have negatively impacted employee morale and have created employee recruitment and retention issues that could have a negative impact on IVAX's business and operating results. 14 17 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information contained herein, the matters discussed herein are forward-looking statements made pursuant to the safe harbor provisions of the Private 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 statements made in this report or otherwise made by or on behalf of IVAX. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS Specific financial information with respect to IVAX's foreign and domestic operations is provided in Note 13, Business Segment Information, in the Notes to Consolidated Financial Statements incorporated by reference to the Financial Information section of IVAX's 1998 Annual Report to Shareholders. ITEM 2. PROPERTIES IVAX owns or leases an aggregate of approximately 3.1 million square feet of space in Argentina, Germany, Hong Kong, Ireland, Italy, Peru, Poland, Russia, the Czech Republic, the Slovak Republic, the United Kingdom, the United States and Uruguay, which is used by the pharmaceutical business (90%) and the diagnostics business (2%). The remaining portion (8%) was used by the specialty chemicals business. In connection with the sale of the specialty chemicals business, IVAX retained ownership of its manufacturing facilities in Rock Hill, South Carolina and Marion, Ohio, and is pursuing the sale of these facilities. IVAX operates 13 pharmaceutical manufacturing facilities, two of which are located in each of Waterford, Ireland; Miami, Florida; Cidra, Puerto Rico; and one of which is located in each of Buenos Aires, Argentina; Northvale, New Jersey; St. Croix, US Virgin Islands; Falkenhagen, Germany; Runcorn, England; Opava-Komarov, Czech Republic; and Montevideo, Uruguay. IVAX's diagnostics manufacturing facilities are located in Miami, Florida and Springdale, Arkansas. IVAX owns its Miami, Buenos Aires, Cidra, Montevideo, Opava-Komarov and Falkenhagen manufacturing facilities, and leases its remaining manufacturing facilities. IVAX believes its facilities are in satisfactory condition, are suitable for their intended use and, in the aggregate, have capacities in excess of those necessary to meet IVAX's present needs. In connection with restructuring programs instituted by IVAX in 1996, 1997 and 1998 to, among other things, reduce costs and improve efficiencies in its pharmaceutical operations, IVAX has consolidated certain of its facilities. IVAX consolidated its United States pharmaceutical distribution facilities into a single leased distribution center in Kenton County, Kentucky in 1997; sold its Fort Lauderdale, Florida office, packaging and warehouse facility and its Syosset, New York and Kirkland, Quebec, Canada pharmaceutical manufacturing facilities in 1998; sold its Shreveport, Louisiana pharmaceutical manufacturing facility (which was closed in 1996) in 1998; closed two of its manufacturing facilities in southeast London, England and consolidated its U.K. manufacturing activities at its Waterford, Ireland facility in 1998; consolidated its U.K. packaging operations at its 15 18 Waterford, Ireland facility in the first quarter of 1999; and expects to cease manufacturing at its Northvale, New Jersey pharmaceutical manufacturing facility in 1999. Production from those facilities has been or will be transferred to other IVAX facilities. IVAX maintains sales offices and distribution centers in Argentina, Canada, China, certain CIS countries, the Czech Republic, Italy, Peru, Poland, Russia, Uruguay and various parts of the United States and the United Kingdom, most of which are held pursuant to leases. None of such leases are material to IVAX. A portion of IVAX's pharmaceutical manufacturing capacity and its research and development activities, as well as its corporate headquarters and other critical business functions are located in areas subject to hurricane casualty risk. Although IVAX has certain limited protection afforded by insurance, IVAX's business, earnings and competitive position could be materially adversely affected in the event of a major windstorm. ITEM 3. LEGAL PROCEEDINGS In late April 1995, Zenith Laboratories, Inc., a wholly-owned subsidiary of IVAX ("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(R), a product of Eli Lilly and Company ("Lilly"). On April 27, 1995, Lilly filed a lawsuit against Zenith and others styled ELI LILLY AND COMPANY V. AMERICAN CYANAMID COMPANY, BIOCRAFT LABORATORIES, INC., ZENITH LABORATORIES, INC. AND BIOCHIMICA OPOS S.P.A. in the United States District Court for the Southern District of Indiana, Indianapolis Division. In general, the lawsuit alleges 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. On May 10, 1996, the United States Court of Appeals for the Federal Circuit affirmed the district court's denial of Lilly's motion for preliminary injunction. On February 28, 1997, Lilly filed an amended complaint alleging the infringement of an additional patent, and also filed a motion to add to the lawsuit additional defendants who are not affiliated with IVAX or Zenith. Lilly subsequently filed a second amended complaint but did not revise its allegations regarding Zenith. Zenith has filed a motion for partial summary judgment, which remains pending. Zenith ceased selling cefaclor in January 1997, when it announced a recall in the United States of cefaclor as a result of the recall by Opos of the raw material used to manufacture the product. On April 18, 1997, Lilly filed a complaint in the United States District Court for the District of New Jersey styled ELI LILLY AND COMPANY V. ROUSSEL CORP., ET AL 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. Also named as defendants are Roussel Corporation, Roussel UCLAF Holdings Corporation, Roussel UCLAF S.A., Hoechst Marion Roussel North America, and Biochimica Opos 16 19 S.p.A. (collectively, the "Roussel Defendants"), The Rugby Group, Inc., and Rugby Laboratories, Inc. (collectively, "Rugby"), and American Home Products Corporation and American Cyanamid Company (collectively, the "American Home Defendants"). The claims asserted against the American Home Defendants and Rugby are essentially the same as those asserted against Zenith. Additional claims are asserted against the Roussel Defendants, including fraud, negligent misrepresentation, common law conspiracy, tortious interference with business relations, and violations of both the federal and state Racketeer Influenced and Corrupt Organizations Acts. 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. The claims asserted against Zenith are predicated on Zenith's sale in the United States of retail dosage units of cefaclor manufactured using Opos' bulk cefaclor. 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 American Home Defendants and Rugby, 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, in an unspecified amount, allegedly sustained by Lilly as a result of Zenith's alleged acts of misrepresentation and unfair competition. Lilly further seeks an award of treble damages and litigation costs, including attorneys' fees and interest. Under its unjust enrichment claim, Lilly seeks restitution in an unspecified amount against Zenith, jointly and severally with the other defendants. In June 1997, Zenith filed a motion to dismiss the action, which was granted in June 1998. Plaintiffs filed an amended complaint and, on November 6, 1998, Zenith filed another motion to dismiss, which remains pending. In November 1996, individuals purporting to be shareholders of IVAX filed a class action complaint styled MALIN, ET AL. VS. IVAX CORPORATION AND PHILLIP FROST, ET AL. against IVAX and certain of its current and former officers or directors in the United States District Court for the Southern District of Florida 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 Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 10b-5 promulgated by the Securities and Exchange Commission, and also asserts a claim for negligent misrepresentation. The complaint generally alleges 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 allegations that IVAX failed to disclose that product sales were subject to shelf stock adjustments and failed to establish reserves for such adjustments. In January 1997, the IVAX defendants filed a motion to dismiss the action and, on August 18, 1998, the United States District Court dismissed the action without prejudice. On September 30, 1998, the plaintiffs filed an amended complaint and, on November 9, 1998, IVAX filed a motion to dismiss the action, which motion remains pending. In general, the amended complaint seeks an unspecified amount of compensatory damages, pre-judgment interest, litigation costs and attorney's fees. 17 20 In 1997, two class action complaints were filed by individuals purporting to be shareholders of IVAX Corporation against IVAX, its chairman and its former chief financial officer in federal court. One of these actions was subsequently dismissed without prejudice, and the complaint in the other action, which was amended to incorporate the allegations in both actions, is now pending as ALAN M. HARRIS, YITZCHOK WOLPIN AND FAUSTO POMBAR V. IVAX CORPORATION, PHILLIP FROST AND MICHAEL W. FIPPS. The plaintiffs in that action seek to act as representatives of a class consisting of all persons who purchased IVAX common stock and/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. On March 30, 1998, the court dismissed the complaint with prejudice. An appeal was filed on May 19, 1998 and remains pending. On February 19, 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 (the "Subsidiary"), in the Cook County, Illinois Circuit Court styled SMITH & NEPHEW, INC. VS. IVAX CORPORATION AND SOLOPAK, INC. 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 the Subsidiary substantially all of the assets of Smith & Nephew Solopak, a division of S&N (the "Division"), for $19.0 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 sought damages of $5.5 million, the difference between the $19.0 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. On July 17, 1998, the District Court granted IVAX's motion for summary judgment. S&N is expected to pursue an appeal of this decision. On December 21, 1998, an action purporting to be a class action, styled LOUISIANA WHOLESALE DRUG CO. VS. ABBOTT LABORATORIES, GENEVA PHARMACEUTICALS, INC. AND ZENITH GOLDLINE PHARMACEUTICALS, INC., was filed against Zenith and others in the United States District Court for the Southern District of Florida, alleging a violation of Section 1 of the Sherman Antitrust Act. Plaintiffs purport to represent a class consisting of customers who purchased a certain proprietary drug directly from Abbott Laboratories during the period beginning on October 29, 1998. Plaintiffs allege that, by settling patent-related litigation against Abbott in exchange for quarterly payments, the defendants engaged in an unlawful restraint of trade. The complaint seeks unspecified treble damages and injunctive relief. 18 21 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. 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, the trial court's verdict in favor of McGaw was affirmed by the United States Court of Appeals for the Federal Circuit on July 1, 1998 and the plaintiffs have chosen not to appeal further. With respect to the case styled ABS MB INVESTMENT LIMITED PARTNERSHIP AND ABS MB LTD. VS. IVAX CORPORATION, previously reported in IVAX's Annual Report on Form 10-K for the year ended December 31, 1997, the trial of this case was concluded on December 11, 1998. IVAX obtained a jury verdict in its favor on substantially all of the claims asserted against it, with a directed verdict being entered in favor of one plaintiff on a relatively insignificant claim. On January 22, 1999, the parties entered into a Settlement Agreement pursuant to which the lawsuit was dismissed with prejudice on February 16, 1999. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is a list of the names, ages, positions held and business experience during the past five years of the persons serving as executive officers of IVAX as of March 19, 1999. Officers serve at the discretion of the Board of Directors. There is no family relationship between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. THOMAS E. BEIER. Mr. Beier, age 53, has served as Senior Vice President - Finance and Chief Financial Officer of IVAX since October 1997. From December 1996 to October 1997, he served as Vice President - Finance for IVAX. Prior to joining IVAX, he served as Executive Vice President and Chief Financial Officer of Intercontinental Bank from 1989 until August 1996. NEIL FLANZRAICH. Mr. Flanzraich, age 55, has served as Vice Chairman and President of IVAX since May 1998 and as a director of IVAX since 1997. He was a shareholder and served as Chairman of the Life Sciences Legal Practices Group of Heller Ehrman White & McAuliffe from 1995 to May 1998. From 1981 to 1994, he served in various capacities at Syntex Corporation 19 22 (pharmaceuticals), most recently as its Senior Vice President, General Counsel and a member of the Corporate Executive Committee. From 1994 to 1995, after Syntex Corporation was acquired by Roche Holding Ltd., he served as Senior Vice President and General Counsel of Syntex (U.S.A.) Inc., a Roche subsidiary. He is Chairman of the Board of Directors of North American Vaccine, Inc. (vaccine research and development), and is a director of Whitman Education Group, Inc. (proprietary education), LXR Biotechnology, Inc. (biopharmaceuticals) and Continucare Corporation (integrated health care). PHILLIP FROST, M.D. Dr. Frost, age 62, has served as Chairman of the Board of Directors and Chief Executive Officer of IVAX since 1987. He served as IVAX's President from July 1991 until January 1995. He was the Chairman of the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach, Florida from 1972 to 1990. Dr. Frost was Chairman of the Board of Directors of Key Pharmaceuticals, Inc. from 1972 to 1986. He is Chairman of the Board of Directors of Whitman Education Group, Inc. (proprietary education), Vice Chairman of the Board of Directors of North American Vaccine, Inc. (vaccine research and development), Vice Chairman of the Board of Directors of Continucare Corporation (integrated health care), and a director of Northrop Grumman Corp. (aerospace). He is Vice Chairman of the Board of Trustees of the University of Miami and a member of the Board of Governors of the American Stock Exchange. RAFICK G. HENEIN, PH.D. Dr. Henein, age 58, has served as a Senior Vice President of IVAX and as the President and Chief Executive Officer of Zenith Goldline Pharmaceuticals, Inc., IVAX's principal United States-based generic pharmaceutical subsidiary, since July 1997. He held various positions in the Novopharm Limited organization (pharmaceuticals) since 1988, rising to the position of President and Chief Executive Officer of Novopharm International in 1996. JANE HSIAO, PH.D. Dr. Hsiao, age 51, has served as a director of IVAX and as IVAX's Vice Chairman-Technical Affairs since February 1995, as IVAX's Chief Technical Officer since July 1996, and as Chairman, Chief Executive Officer and President of DVM Pharmaceuticals, Inc., IVAX's veterinary products subsidiary, since March 1998. From 1992 until February 1995, she served as IVAX's Chief Regulatory Officer and Assistant to the Chairman, and as Vice President-Quality Assurance and Compliance of Baker Norton Pharmaceuticals, Inc., IVAX's principal proprietary pharmaceutical subsidiary. From 1987 to 1992, Dr. Hsiao was Vice President-Quality Assurance, Quality Control and Regulatory Affairs of Baker Norton Pharmaceuticals, Inc. ISAAC KAYE. Mr. Kaye, age 69, has served as Deputy Chief Executive Officer and a director of IVAX since 1990, and as Chief Executive Officer of Norton Healthcare Limited, IVAX's principal United Kingdom pharmaceutical subsidiary, since 1990. 20 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS IVAX's common stock is listed on the American Stock Exchange and is traded under the symbol IVX. As of the close of business on March 19, 1999, there were approximately 5,022 holders of record of IVAX common stock. Additional information required by item 5 is provided in Note 15, Quarterly Financial Information, in the Notes to Consolidated Financial Statements incorporated by reference to the Financial Information section of the 1998 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required by item 6 is incorporated by reference to page 1 of the Financial Information section of the 1998 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by item 7 is incorporated by reference to pages 2-17 of the Financial Information section of the 1998 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by item 7A is incorporated by reference to page 17 of the Financial Information section of the 1998 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by item 8 is incorporated by reference to pages 19-47 of the Financial Information section of the 1998 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors required by item 10 is incorporated by reference to IVAX's Proxy Statement for its 1999 Annual Meeting of Shareholders. The information concerning executive officers required by item 10 is contained in the discussion entitled "Executive Officers of the Registrant" in Part I hereof. 21 24 ITEM 11. EXECUTIVE COMPENSATION The information required by item 11 is incorporated by reference to IVAX's Proxy Statement for its 1999 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by item 12 is incorporated by reference to IVAX's Proxy Statement for its 1999 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by item 13 is incorporated by reference to IVAX's Proxy Statement for its 1999 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following consolidated financial statements, related notes and independent auditors' report, from the Financial Information section of the 1998 Annual Report to Shareholders, are incorporated by reference into item 8 of Part II of this report: PAGE IN THE FINANCIAL INFORMATION SECTION OF 1998 ANNUAL REPORT TO SHAREHOLDERS ------------ Report of Independent Certified Public Accountants 18 Consolidated Balance Sheets 19 Consolidated Statements of Operations 20 Consolidated Statements of Shareholders' Equity 22 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements 25 (a)(2) FINANCIAL STATEMENT SCHEDULE The following financial statement schedule of IVAX is filed as a part of this report: Schedule II Valuation and Qualifying Accounts for the three years ended December 31, 1998 22 25 All other schedules have been omitted because the required information is not applicable or the information is included in the consolidated financial statements or the notes thereto. The independent auditors' report with respect to Schedule II is also filed as part of this report. (a)(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING -------- ----------- ---------------- 3.1 Articles of Incorporation. Incorporated by reference to IVAX's Form 8-B dated July 28, 1993. 3.2 Amended and Restated Bylaws. Incorporated by reference to IVAX's Form 10-Q for the quarter ended September 30, 1997. 4.1 Indenture dated November 26, 1991, between Incorporated by reference to IVAX's IVAX Corporation and First Trust National Form 10-K for the year ended Association, as Trustee with respect to IVAX December 31, 1991. Corporation's 6-1/2% Convertible Subordinated Notes due November 15, 2001. 4.2 Form of 6 1/2% Convertible Subordinated Notes due Incorporated by reference to IVAX's November 15, 2001 in Global Form. Form 10-K for the year ended December 31, 1991. 4.3 Rights Agreement, dated December 29, 1997, between Incorporated by reference to IVAX's IVAX Corporation and ChaseMellon Shareholder Form 8-K dated December 19, 1997. Services, L.L.C., with respect to the IVAX Corporation Shareholder Rights Plan. 10.1 IVAX Corporation 1985 Stock Option Plan, as amended.* Incorporated by reference to IVAX's Form 10-K for the year ended December 31, 1997. 10.2 IVAX Corporation 1994 Stock Option Plan, as amended.* Incorporated by reference to IVAX's Form 10-K for the year ended December 31, 1997.
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10.3 Form of Indemnification Agreement for Directors. Incorporated by reference to IVAX's Form 8-B dated July 28, 1993. 10.4 Form of Indemnification Agreement for Officers. Incorporated by reference to IVAX's Form 8-B dated July 28, 1993. 10.5 Agreement Containing Consent Order, dated Incorporated by reference to IVAX's December 6, 1994, between IVAX Corporation and Form 10-K for the year ended the United States Federal Trade Commission. December 31, 1994. 10.6 Employment Agreement, dated November 28, 1997, Incorporated by reference to IVAX's between IVAX Corporation and Phillip Frost, M.D.* Form 10-K for the year ended December 31, 1997. 10.7 Employment Agreement, dated November 28, 1997, Incorporated by reference to IVAX's between IVAX Corporation and Isaac Kaye.* Form 10-K for the year ended December 31, 1997. 10.8 Employment Agreement, dated January 19, 1998, Incorporated by reference to IVAX's between IVAX Corporation and Jane Hsiao, Ph.D.* Form 10-K for the year ended December 31, 1997. 10.9 Employment Agreement, dated July 28, 1997, Incorporated by reference to IVAX's between IVAX Corporation and Rafick G. Henein, Ph.D.* Form 10-Q for the quarter ended June 30, 1997. 10.10 Employment Agreement, dated as of May 26, 1998 between Incorporated by reference to IVAX's IVAX Corporation and Neil Flanzraich.* Form 10-Q for the quarter ended September 30, 1998. 10.11 Form of Employment Agreement (Change in Control) between Filed herewith. IVAX Corporation and certain of its executive officers.* 10.12 Stock Purchase Agreement, dated May 30, 1997, between Incorporated by reference to IVAX's IVAX Corporation and B. Braun of America Inc.** Form 8-K dated June 24, 1997.
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10.13 Purchase Agreement, dated June 16, 1998, by and between Incorporated by reference to IVAX's IVAX Corporation and Carson, Inc.** Form 10-Q for the quarter ended June 30, 1998. 10.14 Credit Agreement, dated as of July 14, 1998, among IVAX Incorporated by reference to IVAX's Corporation, Carson, Inc. and Carson Products Company.** Form 10-Q for the quarter ended June 30, 1998. 13 The Financial Information section of the 1998 Annual Filed herewith. Report to Shareholders. With the exception of those portions of said Annual Report which are specifically incorporated by reference in this report on Form 10-K and filed as an exhibit to this report, said Annual Report is not to be deemed "filed" with the Commission. 21 Subsidiaries of IVAX Corporation. Filed herewith. 23 Consent of Arthur Andersen LLP Filed herewith. 27 Financial Data Schedule Filed herewith.
- ---------------------- * Compensation Plan or Agreement. ** Certain exhibits and schedules to this document have not been filed. The Registrant agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by IVAX during the quarter ended December 31, 1998. 25 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: March 31, 1999 By: /S/ PHILLIP FROST, M.D. ------------------------------------ Phillip Frost, M.D. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE - ---- -------- ---- /s/ PHILLIP FROST, M.D. Chairman of the Board and March 31, 1999 - ---------------------------------------- Chief Executive Officer Phillip Frost, M.D. (Principal Executive Officer) /s/ THOMAS E. BEIER Chief Financial Officer March 31, 1999 - ---------------------------------------- (Principal Financial Officer) Thomas E. Beier /s/ THOMAS E. MCCLARY Vice President - Accounting March 31, 1999 - ---------------------------------------- (Principal Accounting Officer) Thomas E. McClary /s/ MARK ANDREWS Director March 31, 1999 - --------------------------------------- Mark Andrews - --------------------------------------- /s/ ERNST BIEKERT, PH.D. Director March 31, 1999 - --------------------------------------- Ernst Biekert, Ph.D. /s/ CHARLES M. FERNANDEZ Director March 31, 1999 - --------------------------------------- Charles M. Fernandez
26 29
/s/ JACK FISHMAN, PH.D. Director March 31, 1999 - --------------------------------------- Jack Fishman, Ph.D. /s/ NEIL FLANZRAICH Director, President and Vice Chairman March 31, 1999 - --------------------------------------- Neil Flanzraich /s/ JANE HSIAO, PH.D. Director and Vice Chairman- March 31, 1999 - --------------------------------------- Technical Affairs Jane Hsiao, Ph.D. /s/ ISAAC KAYE Director and Deputy Chief March 31, 1999 - --------------------------------------- Executive Officer Isaac Kaye
27 30 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IVAX CORPORATION: We have audited in accordance with generally accepted auditing standards, the financial statements included in IVAX Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 26, 1999 (except with respect to matters discussed in Note 16, as to which the date is March 19, 1999). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The Financial Statement Schedule II listed in Item 14 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Miami, Florida, February 26, 1999. 31 SCHEDULE II IVAX CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1998 (in thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS - --------------------------------
Balance at Charged to Beginning Cost and Net Balance at Description of Year Expenses Deductions Other End of Year ----------- ---------- ---------- ---------- ----- ----------- Year ended December 31, 1996 $11,064 30,737 (20,343) (1,397)(A) $20,061 ======= ======= ======= ======= ======= Year ended December 31, 1997 $20,061 8,973 (8,702) (1,106) $19,226 ======= ======= ======= ======= ======= Year ended December 31, 1998 $19,226 7,650 (4,643) 601 $22,834 ======= ======= ======= ======= =======
- ------------- (A) Includes additions to the accounts receivable allowances as a result of the acquisition of Elvetium. ENVIRONMENTAL AND LITIGATION ACCRUAL RELATED TO DISCONTINUED OPERATIONS - -----------------------------------------------------------------------
Balance at Charged to Beginning Cost and Net Balance at Description of Year Expenses Deductions Other End of Year ----------- ---------- ---------- ---------- ----- ----------- Year ended December 31, 1996 $ -- $ -- ======= ======= ======= ======= ======= Year ended December 31, 1997 $ -- 2,000 $ 2,000 ======= ======= ======= ======= ======= Year ended December 31, 1998 $ 2,000 2,900 (464) $ 4,436 ======= ======= ======= ======= =======
RESTRUCTURING COSTS AND ASSET WRITE-DOWNS - -----------------------------------------
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 1998 restructuring costs and asset write-downs 14,164 6,305 8,740 29,209 Reversals of restructuring costs and asset write-downs charged in prior years (8,804) (442) (7,741) (16,987) Cash payments during 1998 -- (3,538) (3,042) (6,580) Non-cash activity (5,360) (1,098) 936 (5,522) -------- -------- -------- -------- Balance at December 31, 1998 $ -- $ 5,774 $ 8,260 $ 14,034 ======== ======== ======== ========
EX-10.11 2 FORM OF EMPLOYMENT - IVAX & CERTAIN EXEC OFFICERS 1 Exhibit 10.11 EMPLOYMENT AGREEMENT (CHANGE IN CONTROL) This Employment Agreement, dated as of _____, 199_, is entered into between IVAX Corporation, a Florida corporation (the "COMPANY"), and ________ (the "EXECUTIVE"). The Board of Directors of the Company (the "BOARD"), has determined that it is in the best interests of the Company and its shareholders to assure that the company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. In consideration of the foregoing and the mutual promises contained below, the parties agree as set forth below. 1. CERTAIN DEFINITIONS. (a) "EFFECTIVE DATE" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or in anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) "CHANGE OF CONTROL PERIOD" shall mean the period commencing on the date hereof and ending on the third anniversary of such date; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "RENEWAL DATE") the Change of Control Period shall be automatically 2 extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. CHANGE OF CONTROL. For the purpose of this Agreement, a "CHANGE OF CONTROL" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) (a "PERSON") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 40% or more of either (i) the then outstanding shares of common stock of the Company (the "OUTSTANDING COMPANY COMMON STOCK") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "OUTSTANDING COMPANY VOTING SECURITIES"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "INCUMBENT BOARD") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-1l of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 70% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such -2- 3 reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 70% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the -3- 4 period commencing on the Effective Date and ending on the third anniversary of such date (the "EMPLOYMENT PERIOD"). 4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("ANNUAL BASE SALARY"), which shall be paid in equal installments on a monthly or more frequent basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not -4- 5 serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "AFFILIATED COMPANIES" shall include any company controlled by, controlling or under common control with the Company. (ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "ANNUAL BONUS") in cash at least equal to the average annualized (for any fiscal year consisting of less than twelve full months or with respect to which the Executive has been employed by the Company for less than twelve full months) bonus paid or payable, including by reason of any deferral, to the Executive by the Company and its affiliated companies in respect of the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs (the "RECENT AVERAGE BONUS"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) SPECIAL BONUS. In addition to Annual Base Salary and Annual Bonus, if the Executive remains employed with the Company and its affiliated companies through the six month anniversary of the Effective Date, the Company shall pay to the Executive a special bonus (the "SPECIAL BONUS") in recognition of the Executive's services during the crucial six-month transition period following the Change of Control in cash equal to the sum of (A) the Executive's Annual Base Salary and (B) the greater of (1) the Annual Bonus paid or payable, including by reason of any deferral, to the Executive (and annualized for any fiscal year consisting of less than twelve full months or for which the Executive has been employed for less than twelve full months) for the most recently completed fiscal year during the Employment Period, if any, and (2) the Recent Average Bonus (such greater amount shall be hereinafter referred to as the "HIGHEST ANNUAL BONUS"). The Special Bonus shall be paid no later than 30 days following the six-month anniversary of the Effective Date. (iv) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practice, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. -5- 6 (v) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (vi) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (ix) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective -6- 7 Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (x) "PEER EXECUTIVES." For purposes of this Agreement, references to "peer executives of the Company and its affiliated companies" shall refer only to Executives based in the United States. 5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "DISABILITY EFFECTIVE DATE"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "DISABILITY" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) GOOD REASON; WINDOW PERIOD. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason or (ii) during the Window Period by the Executive without any reason. For purposes of this Agreement, the "WINDOW PERIOD" shall mean the 30-day period immediately following the six month anniversary of the Effective Date. For purposes of this Agreement, "GOOD REASON" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting -7- 8 requirements), authority, duties or responsibilities as contemplated by Section 4(a) or any other action by the Company which results in a diminution in such position (including any action which results in a dimunition of status, offices, titles and reporting levels or requirements), authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B); (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c), provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 11(c). For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b). For purposes of this Agreement, a "NOTICE OF TERMINATION" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "DATE OF TERMINATION" means (i) if the Executive's employment is terminated by the company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of -8- 9 Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OR DURING THE WINDOW PERIOD: OTHER THAN FOR CAUSE. DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Highest Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, (3) the Special Bonus, if due to the Executive pursuant to Section 4(b)(iii), to the extent not theretofore paid and (4) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), (3) and (4) shall be hereinafter referred to as the "ACCRUED OBLIGATIONS"); and B. the amount (such amount shall be hereinafter referred to as the "SEVERANCE AMOUNT") equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; provided, however, that if the Special Bonus has not been paid to the Executive, such amount shall be increased by the amount of the Special Bonus; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "CODE")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any agreement, severance plan, policy or arrangement of the Company; and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) if the Executive's employment had -9- 10 not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "WELFARE BENEFIT CONTINUATION"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "OTHER BENEFITS"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount, and (B) the present value (determined as provided in Section 260G(d)(4) of the Code) of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "DEATH BENEFITS"). -10- 11 (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount, and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "DISABILITY BENEFITS"). (d) CAUSE; OTHER THAN FOR GOOD REASON OR DURING THE WINDOW PERIOD. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Sections 6(a)(ii), 6(b) and 6(c), nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. -11- 12 8. FULL SETTLEMENT: RESOLUTION OF DISPUTES. (a) The payment by the Company to the Executive of the amounts required by this Agreement shall serve as a full settlement of any and all claims which the Executive may have against the Company arising out of or in connection with the termination of the Executive's employment by the Company. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any dispute or contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (c) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to -12- 13 any additional payments required under this Section 9) (a "PAYMENT") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then the Executive shall be entitled to receive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "ACCOUNTING FIRM") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing -13- 14 of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the -14- 15 Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force -15- 16 or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: IVAX Corporation 4400 Biscayne Blvd. Miami, Florida 33137 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. From and after the Effective Date, this Agreement shall supersede any prior agreement between the parties with respect to the subject matter hereof. -16- 17 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. IVAX Corporation ---------------------------------- By: Title: ---------------------------------- Executive -17- 18 Schedule 10.11 The Company has entered into identical employment agreements (change in control), a form of which is attached as Exhibit 10.11, with the following executive officers: Thomas E. Beier (Senior Vice President - Finance and Chief Financial Officer) Neil Flanzraich (Vice Chairman and President) Phillip Frost, M.D. (Chairman of the Board and Chief Executive Officer) Rafick G. Henein, Ph.D. (Senior Vice President) Jane Hsiao, Ph.D. (Vice Chairman - Technical Affairs and Chief Technical Officer) Isaac Kaye (Deputy Chief Executive Officer and Chief Executive Officer of Norton Healthcare Limited) -18- EX-13 3 FINANCIALS OF 1998 ANNUAL REPORT 1 EXHIBIT 13 ------------------- IVAX CORPORATION 1998 FINANCIAL INFORMATION ------------------- 2 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 18 1998 Consolidated Financial Statements 19 3
SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------------- --------------- ------------- -------------- -------------- (in thousands, except per share data)(1)(2) OPERATING DATA Net revenues(3) $ 637,923 $ 594,286 $ 658,745 $ 785,949 $ 659,509 Income (loss) from continuing operations(4) 24,617 (219,534) (134,989) 94,319 57,941 Income (loss) from discontinued operations(5) 48,904 (8,701) (23,690) 20,482 31,931 Net income (loss) 71,594 (233,254) (160,752) 114,835 89,049 Basic earnings (loss) per common share: Continuing operations(4) .21 (1.81) (1.12) .81 .51 Discontinued operations(5) .41 (.07) (.19) .18 .28 Net earnings (loss) .60 (1.92) (1.33) .99 .78 Diluted earnings (loss) per common share: Continuing operations(4) .21 (1.81) (1.12) .79 .46 Discontinued operations(5) .41 (.07) (.19) .17 .26 Net earnings (loss) .60 (1.92) (1.33) .96 .71 Weighted average number of common shares outstanding: Basic 119,116 121,496 120,949 116,065 113,565 Diluted 119,264 121,496 120,949 119,539 124,675 Cash dividends per common share $ -- $ -- $ .05 $ .08 $ .06 BALANCE SHEET DATA Working capital(6) $ 269,511 $ 238,918 $ 415,927 $ 354,733 $ 265,656 Total assets 778,015 790,736 1,333,648 1,184,828 946,313 Total long-term debt, net of current portion 77,776 94,193 442,819 210,759 162,305 Shareholders' equity 453,208 435,039 695,128 789,172 634,456 Book value per common share(7) 3.80 3.58 5.72 6.69 5.56
- ---------------------------- (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) Figures have been restated to conform to current classifications. (4) Includes restructuring costs of $6,862, $14,274 and $5,324 and asset write-downs of $5,360, $23,814 and $63,749 in 1998, 1997 and 1996, respectively. (5) Includes $42,583 net gain on the sale of the personal care products division in 1998, $12,623 net gain on the sales of the intravenous products and specialty chemicals business in 1997, and $48,442 of asset write-downs in 1996. (6) Excludes net assets of discontinued operations. (7) Assumes conversion of Zenith Laboratories, Inc.'s cumulative convertible preferred stock in 1994. 1 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the 1998 Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included on pages 25 to 47 of this Financial Information Section. 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 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 intends 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 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. 2 5 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 bioequivalence 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 provisions for estimated returns and inventory credits, as well as other sales returns and allowances established by IVAX. The custom in the pharmaceutical industry is generally to grant customers the right to return purchased goods. In the generic pharmaceutical industry, this custom has resulted in a practice of suppliers issuing inventory credits (also known as shelf-stock adjustments) to customers based on the customers' existing inventory following decreases in the market price of the related generic pharmaceutical product. The determination to grant a credit to a customer following a price decrease is generally at the discretion of IVAX, and generally not pursuant to contractual 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. Provisions for estimated returns and inventory credits are established by IVAX concurrently with the recognition of revenue. The provisions are established in accordance with generally accepted accounting principles based upon consideration of a variety of factors, including actual return and inventory credit experience for products during the past several years by product type, the number and timing of regulatory approvals for the product by competitors of IVAX, both historical and projected, the market for the product, estimated customer inventory levels by product and projected economic conditions. Actual product returns and inventory credits incurred are, however, dependent upon future events, including price competition and the level of customer inventories at the time of any price decreases. IVAX continually monitors the factors that influence the pricing of its products and customer inventory levels and makes adjustments to these provisions when management believes that actual product returns 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. Certain national drug wholesalers have instituted programs designed to provide cost savings to independent retail pharmacies on their purchases of certain generic pharmaceutical products. Pursuant to the programs, retail pharmacies generally agree to purchase their requirements of generic pharmaceutical products from one wholesaler and permit the wholesaler to select the product suppliers. Each wholesaler 3 6 encourages 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 encourage generic drug suppliers to aggressively bid to be the exclusive supplier of products under the programs. The existence of the programs also results 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 decreases continued in 1997 and 1998, but at an increasingly slower rate in each of those years than in the prior year. 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. In the past, 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 and 1998, 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 dispositions and consolidations and other cost saving measures throughout the organization. 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. Certain prior period amounts presented herein have been reclassified to conform to the current period's presentation. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Income from continuing operations was $24.6 million for the year ended December 31, 1998, compared to a loss from continuing operations of $219.5 million for the year ended December 31, 1997. Net income for the year ended December 31, 1998 was $71.6 million, compared to a net loss of $233.3 million for the prior year. The year ended December 31, 1998 and 1997 included a $1.1 million net extraordinary gain and a $2.1 million net extraordinary loss, respectively, relating to the extinguishment of debt. See Note 9, Debt, in the Notes to Consolidated Financial Statements. Results for the year ended December 31, 1998 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. Results for the year ended December 31, 1997 included a $2.9 million charge reflected as a cumulative effect of a change in accounting principle relating to the write-off of business process reengineering costs previously capitalized. See Note 2, Summary of Significant Accounting Policies - Change in Accounting Principle, in the Notes to Consolidated Financial Statements. Earnings per share from continuing operations was $.21 for the year ended December 31, 1998, compared to a loss per share from continuing operations of $1.81 for the prior year. Net income per share was $.60 for the year ended December 31, 1998, compared to a net loss per share of $1.92 for the prior year. Earnings per share from discontinued operations was $.41 for the year ended 4 7 December 31, 1998, compared to a loss from discontinued operations of $.07 for the prior year. The net extraordinary gain recorded in 1998 and the net extraordinary loss recorded in 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 resulted in a $.03 loss per common share in 1998 and a $.02 loss per common share in 1997. NET REVENUES AND GROSS PROFIT Net revenues for the year ended December 31, 1998 totaled $637.9 million, an increase of $43.6 million or 7.3%, from the $594.3 million reported in the prior year. The $43.6 million increase is comprised of an increase of $92.7 million in net revenues of IVAX's domestic operations, offset by a decrease of $49.1 million in net revenues of IVAX's international operations. Domestic net revenues totaled $291.9 million for the year ended December 31, 1998, compared to $199.2 million for 1997. The $92.7 million, or 46.5%, increase in domestic net revenues was primarily attributable to lower sales returns and allowances and $18.0 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, Abbott agreed to pay IVAX $6.0 million per quarter until the earlier of February 2000 or the market introduction of a generic version of terazosin hydrochloride by anyone other than IVAX. Royalties from ALZA Corporation ("ALZA") relating to the 1997 sale of the rights to Elmiron(R) and certain other urological products and increased sales volume of certain generic pharmaceutical products also contributed to the increase. This increase was partially offset by lower prices of certain generic pharmaceutical products and lower net product revenues due to 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. During 1998 and 1997, IVAX's United States generic pharmaceutical operations recorded provisions for sales returns and allowances which reduced gross sales by $112.8 million and $217.9 million, respectively. IVAX's international operations generated net revenues of $346.0 million for the year ended December 31, 1998, compared to $395.1 million for 1997. The $49.1 million, or 12.4%, 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: lower net revenues resulting from a license agreement entered into in the prior period relating to its breath-operated inhaler device; 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); and price declines for 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; and to sales growth and product launches of branded products. 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 to a lesser extent, lower export sales primarily to Russia as a result of unfavorable economic conditions. Gross profit for the year ended December 31, 1998 increased $126.9 million, or 111.0%, from the same period of the prior year. Gross profit was $241.2 million (37.8% of net revenues) for the year ended December 31, 1998, compared to $114.3 million (19.2% of net revenues) for the year ended December 31, 1997. The increase in gross profit percentage is primarily due to lower sales 5 8 returns and allowances, and to a lesser extent, lower manufacturing costs, lower inventory provisions, revenues attributable to the Abbott settlement at IVAX's United States generic pharmaceutical operations and the 1998 impact of the launch of a high margin generic pharmaceutical product. OPERATING EXPENSES Selling expenses totaled $79.5 million (12.5% of net revenues) in 1998, compared to $100.2 million (16.9% of net revenues) in 1997. The decrease of $20.7 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. General and administrative expenses totaled $88.4 million (13.9% of net revenues) in 1998, compared to $116.2 million (19.6% of net revenues) in 1997, a decrease of $27.8 million. The decrease is primarily attributable to lower costs at IVAX's domestic generic pharmaceutical operations, its corporate headquarters, and its United Kingdom operations as a result of the implementation of previously announced restructuring plans, and to a lesser extent, lower depreciation and bad debt expenses at IVAX's United Kingdom and domestic pharmaceutical operations. Research and development expenses in 1998 decreased $4.8 million, or 9%, compared to 1997, to a total of $48.6 million (7.6% 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 1998 and 1997, IVAX recorded restructuring costs and asset write-downs of $12.2 million and $38.1 million, respectively. During 1998, IVAX continued its ongoing efforts to reduce costs and enhance operating efficiency by initiating restructuring programs at its United Kingdom pharmaceutical operations and continuing restructuring of its United States pharmaceutical operations. During 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 360 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. Also, during 1998, IVAX recorded a pre-tax charge of $15.6 million comprised of $2.6 million for severance and other employee termination benefits, $4.4 million for estimated plant closure costs and $8.6 million for asset write-downs resulting from management's decision to cease manufacturing at its Northvale, New Jersey pharmaceutical facility and the reevaluation of the carrying value of certain long-lived assets of IVAX's domestic generic pharmaceutical operations due to facility consolidation and market conditions. The New Jersey restructuring plan will eliminate 165 positions. This restructuring and the continued consolidation of manufacturing is anticipated to generate approximately $3.4 million 6 9 of annual pre-tax cost savings. This impact was offset by the reversal of $17.0 million of previously recorded restructuring reserves, primarily related to two facilities that were sold in 1998, that ultimately were not needed. Pursuant to the restructuring programs, during 1998 IVAX sold its Ft. Lauderdale, Florida office, packaging and warehouse facility and its Syosset, New York pharmaceutical manufacturing facility which were closed in the first quarter of 1998; sold its Kirkland, Quebec, Canada pharmaceutical manufacturing facility; and sold its Shreveport, Louisiana pharmaceutical manufacturing facility which was closed in the fourth quarter of 1996 and closed two of its London, England manufacturing facilities. During 1997, IVAX consolidated its United States pharmaceutical distribution facilities into a single leased distribution center in Kenton County, Kentucky. IVAX also expects to cease manufacturing at its Northvale, New Jersey pharmaceutical facility in 1999. Production from these facilities has been or will be transferred to other IVAX manufacturing facilities. OTHER INCOME (EXPENSE) Interest income increased $6.3 million in 1998, as compared to 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 5, Divestitures, and Note 6, Sale of Product Rights in the Notes to Consolidated Financial Statements. Interest expense decreased $7.8 million in 1998, as compared to 1997, primarily due to the repayment of IVAX's revolving credit facility during the second quarter of 1997. Other income, net, was $20.4 million in 1998, compared to $53.4 million in 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 the Notes to Consolidated Financial Statements 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 of $15.0 million was reversed during the third quarter of 1998, reflecting an adjustment to increase the previously recognized gain on the sale of those product rights. 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. 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 7 10 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 $594.3 million, a decrease of $64.4 million, or 9.8%, from the $658.7 million reported in the prior year. An increase of $28.7 million in net revenues of IVAX's international operations was more than offset by a decrease of $93.1 million in net revenues of IVAX's domestic operations. Domestic net revenues totaled $199.2 million for the year ended December 31, 1997, compared to $292.3 million for 1996. The $93.1 million, or 31.9%, 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. During 1997 and 1996, IVAX's United States generic pharmaceutical operations recorded provisions for sales returns and allowances which reduced gross sales by $217.9 million and $281.1 million, respectively. 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". IVAX's international operations generated net revenues of $395.1 million for the year ended December 31, 1997, compared to $366.4 million for 1996. The $28.7 million, or 7.8%, 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 prior year. Gross profit was $114.3 million (19.2% of net revenues) for the year ended December 31, 1997, compared to $162.0 million (24.6% 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. OPERATING EXPENSES Selling expenses totaled $100.2 million (16.9% of net revenues) in 1997, compared to $98.8 million (15.0% 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 8 11 pharmaceutical operations as a result of fewer product promotions and reductions in sales and marketing personnel. General and administrative expenses totaled $116.2 million (19.6% of net revenues) in 1997, compared to $111.1 million (16.9% 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 3.2% compared to 1996, to a total of $53.4 million (9.0% 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. Also during 1996, IVAX management reevaluated the carrying value of 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, 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 employee positions at IVAX's corporate headquarters and throughout all functions of IVAX's United States generic pharmaceutical operations. In addition, IVAX recorded a charge of $23.8 million (pre- 9 12 and after-tax) to reduce the carrying value of certain assets to their estimated fair market value in conjunction with these initiatives. 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. 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(R) 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. DISCONTINUED OPERATIONS Discontinued operations, net of taxes for 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 specialty chemical business (through its sale in February 1998). The personal care products business had break-even operations during 1998. Income (loss) from discontinued operations totaled $48.9 million, $(8.7) million and $(23.7) million for the years ended December 31, 1998, 1997 and 1996, 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. The year ended December 31, 1997 included a net gain on sales of the intravenous products and specialty chemicals businesses of $12.6 million. The year ended December 31, 1998 included a net gain on the divestiture of the personal care products business of $48.9 million. Losses incurred on the sales and operations of the vacuum pump fluids segment were charged against previously established reserves. IVAX has completed the divestiture of its businesses classified as discontinued operations. See Note 5, Divestitures and Note 7, Discontinued Operations, in the Notes to Consolidated Financial Statements for further information. CURRENCY FLUCTUATIONS For 1998, 1997 and 1996, approximately 54%, 67% and 56%, 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 10 13 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, 1998, no IVAX subsidiaries were domiciled in highly inflationary environments. As a result of exchange rate differences, net revenues decreased by $.2 million in 1998 as compared to 1997, and increased by $1.1 million in 1997 as compared to 1996. INCOME TAXES IVAX's effective tax rate was 29%, (39%) and 29% in 1998, 1997 and 1996, respectively. IVAX's effective tax rate in 1997 was negative primarily 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 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, 1998, 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 valuation allowance discussed above, the domestic deferred tax asset is fully reserved as of December 31, 1998. Management expects that it will continue to maintain 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, 1998, other current assets, other assets, and other long-term liabilities include a $14.6 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, 1998. 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 1998, 1997 and 1996, this credit was approximately $ -0-, $1.5 million, and $5.7 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. 11 14 YEAR 2000 UPDATE IVAX believes that its global 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 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 and remediation and testing phases for both IT and non-IT systems are well underway. 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, excluding the direct costs of internal employees working on the project, is $15.0 million. As of December 31, 1998, IVAX had incurred costs of approximately $6 million related to this project, including the cost to implement the new IT systems. The internal direct costs associated with IVAX employees working on the Year 2000 project cannot be quantified. 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. 12 15 In the first quarter of 1999, IVAX started the process of identifying the most reasonably likely worst-case scenario associated with each of its mission-critical processes, and developing a contingency plan for dealing with each such scenario. IVAX currently plans to complete the identification of such processes and scenarios, develop preliminary contingency plans by June 30, 1999, and then review and test the preliminary plans throughout the remainder of 1999. IVAX anticipates that any necessary contingency plans will be finalized by December 31, 1999. Such plans, however, will not guarantee that no material adverse effects will occur. 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, 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 December 31, 1998, IVAX's working capital, excluding net assets of discontinued operations, totaled $269.5 million, compared to $238.9 million and $415.9 million at December 31, 1997 and 1996, respectively. Cash and cash equivalents were $208.6 million at December 31, 1998, compared to $199.2 million and $80.8 million at December 31, 1997 and 1996, respectively. Net cash provided by operating activities during 1998 was $71.6 million compared to $90.8 million in 1997 and net cash used for operating activities of $13.2 million in 1996. The decrease in cash provided by operating activites during 1998 compared to 1997 and the increase from 1996 to 1997 was primarily the result of IVAX receiving a $52.5 million refund of federal income taxes paid in prior years during 1997, as well as reductions in accounts receivable and inventory in 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 primarily reflects improved operating results adjusted for non-cash items. Net cash of $27.7 million was provided by investing activities in 1998, compared to $372.7 million in 1997 and net cash used for investing activities of $86.9 million in 1996. The decrease in 1998 as compared to 1997 and the increase in 1997 as compared to 1996 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. On February 28, 1998, IVAX sold its vacuum pump fluids business, the only remaining segment of its specialty chemicals business, for $3.9 million. Effective July 14, 1998, IVAX completed the sale of its personal care products business for $84.7 million (after 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. 13 16 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(TM) drug delivery system. The Duplex(TM) 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. On September 18, 1997, IVAX sold the United States and Canadian marketing rights to its proprietary drug Elmiron(R) and three additional urology products to ALZA Corporation ("ALZA"). IVAX retained the rights to these products outside of the United States and Canada. IVAX received $75 million in up-front payments in 1997 and royalty and milestone payments based on the achievement of specified sales levels of Elmiron(R) in 1998. IVAX may receive additional royalty and milestone payments from ALZA based on sales of the products during the next few years. 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. Cash utilized for capital expenditures was $64.6 million in 1998 compared to $45.7 million and $50.0 million in 1997 and 1996, respectively. The decrease from 1997 as compared to 1996 was due to spending constraints imposed by IVAX's revolving credit facility and, after termination of the facility, further constraints imposed by management. During 1998, $29.1 million of costs were incurred to complete a new headquarters at IVAX's United Kingdom pharmaceutical operations allowing consolidation into one location. During the second quarter of 1998, IVAX sold its Kirkland, Quebec, Canada pharmaceutical manufacturing facility (acquired in the first quarter of 1997) and its Syosset, New York pharmaceutical manufacturing facility for a total of $13.3 million (subject to certain post-closing adjustments). During the fourth quarter of 1998 IVAX sold its Ft. Lauderdale, Florida office, packaging and warehouse facility for a total of $5.8 million. During 1998, IVAX paid $14.6 million to NaPro BioTherapeutics, Inc. ("NaPro") as consideration for a license to NaPro's pending patents for a paclitaxel formulation in the United States, Europe and certain other world markets. In connection with the license, IVAX and NaPro terminated their paclitaxel development and marketing agreement. During the third quarter of 1998, IVAX purchased Immunex's Abbreviated New Drug Application for paclitaxel, the first filed with the U.S. Food and Drug Administration. 14 17 During the first quarter of 1997, IVAX purchased a pharmaceutical manufacturing facility in Kirkland, Quebec, Canada for $10.5 million. During 1996 IVAX purchased additional shares of Galena, a.s. for cash of $12.4 million increasing its ownership interest from 62% to approximately 74%. Net cash of $88.2 million was used for financing activities in 1998, compared to net cash used for financing activities of $344.9 million in 1997 and net cash provided by financing activities of $165.4 million in 1996, respectively, primarily reflecting the payoff of IVAX's revolving credit facility in June 1997. On May 14, 1996, IVAX entered into a revolving credit agreement with a bank syndicate which permitted borrowings of up to $425.0 million. 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 then 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. In July 1998, IVAX's Board of Directors authorized the repurchase of $20 million face value of its 6 1/2% Convertible Subordinated Notes. In December 1998, IVAX's Board of Directors renewed its authorization to purchase up to $20 million face value of the Notes, which includes the amount remaining unpurchased from the July authorization. During 1998, IVAX repurchased a total of $16.0 million face value of its 6 1/2% Convertible Subordinated Notes due November 2001. An extraordinary gain of $1.1 million was recorded relating to the repurchase. In the first quarter of 1998, IVAX retired $6.7 million of industrial revenue bonds that were due 2008. Also during 1998, IVAX's international subsidiaries repaid $7.0 million of bank debt. Proceeds from the exercise of stock options totaled $3.0 million in 1998 compared to $.2 million in 1997 and $31.8 million in 1996. During 1996, IVAX issued 1.5 million shares of its common stock to acquire Elvetium. See Note 4, Mergers and Acquisitions, in the Notes to Consolidated Financial Statements for further information concerning these acquisitions. During the first half of 1996, IVAX paid total cash dividends of $6.1 million, or $.05 per share, on its common stock. No cash dividends were paid during 1997 and 1998. 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. In December 1998, IVAX's Board of Directors approved an increase of 7.5 million shares, for a total of 12.5 million shares of IVAX 15 18 common stock that may be repurchased. Through December 31, 1998, IVAX repurchased 7.1 million shares of common stock at a total cost, including commissions, of $65.9 million. 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. IVAX plans to spend substantial amounts of capital in 1999 to continue the research and development of pharmaceutical products. Although research and development expenditures are expected to be between $55 million and $65 million during 1999, 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 $45 million and $50 million in 1999 to improve and expand its pharmaceutical and other related facilities. IVAX's principal sources of short term liquidity are existing cash and internally generated funds, which IVAX believes will be sufficient to meet its operating needs and anticipated capital expenditures over the short term. For the long term, IVAX intends to utilize principally internally generated funds, which are anticipated to be derived primarily from the sale of existing pharmaceutical products and pharmaceutical products currently under development. There can be no assurance that IVAX will successfully complete 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. RISK OF PRODUCT LIABILITY CLAIMS Testing, manufacturing and marketing pharmaceutical products subjects IVAX to the risk of product liability claims. IVAX is a defendant in a number of product liability cases, none of which IVAX believes will have a material adverse effect on IVAX's business, financial condition or results of operations. IVAX believes that it maintains an adequate amount of product liability insurance, but there can be no assurance that its insurance will cover all existing and future claims or that IVAX will be able to maintain existing coverage or obtain additional coverage at reasonable rates. There can be no assurance that claims arising under any pending or future product liability cases, whether or not covered by insurance, will not have a material adverse effect on IVAX's business, financial condition or results of operations. 16 19 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". EURO On January 1, 1999, certain member countries of the European Union established a new common currency, the euro. Also on January 1, 1999, the participating countries fixed the rate of exchange between their existing legacy currencies and the euro. The new euro currency will eventually replace the legacy currencies currently in use in each of the participating countries. Euro bills and coins will not be issued until January 1, 2002. Companies operating within the participating countries may, at their discretion, choose to operate in either legacy currencies or the euro until January 1, 2002. The Company expects its affected subsidiaries to continue to operate in their respective legacy currencies for at least two years. The Company can, however, accommodate transactions for customers and suppliers operating in either legacy currency or euros. The Company believes that the creation of the euro will not significantly change its market risk with respect to foreign exchange. Having a common European currency may result in certain changes to competitive practices, product pricing and marketing strategies. Although we are unable to quantify these effects, if any, management at this time does not believe the creation of the euro will have a material effect on the Company. 17 20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IVAX CORPORATION: We have audited the accompanying consolidated balance sheets of IVAX Corporation, a Florida corporation, and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Miami, Florida, February 26, 1999 (except with respect to matters discussed in Note 16, as to which the date is March 19, 1999) 18 21 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
DECEMBER 31, --------------------------------- 1998 1997 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 208,593 $ 199,235 Accounts receivable, net of allowances for doubtful accounts of $22,834 ($19,226 in 1997) 109,732 104,994 Inventories 135,324 145,716 Net assets of discontinued operations -- 37,820 Other current assets 33,143 22,939 ------------- -------------- Total current assets 486,792 510,704 Property, plant and equipment, net 210,228 193,741 Intangible assets, net 56,150 39,458 Other assets 24,845 46,833 ------------- -------------- Total assets $ 778,015 $ 790,736 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable $ 1,229 $ 4,025 Current portion of long-term debt 890 7,858 Accounts payable 48,614 42,578 Accrued income taxes payable 5,082 9,126 Accrued expenses and other current liabilities 161,466 170,379 ------------- -------------- Total current liabilities 217,281 233,966 Long-term debt, net of current portion 77,776 94,193 Other long-term liabilities 12,617 12,600 Minority interest 17,133 14,938 Shareholders' equity: Common stock, $.10 par value, authorized 250,000 shares, issued and outstanding 114,835 shares (121,518 in 1997) 11,484 12,152 Capital in excess of par value 453,293 515,234 Accumulated deficit (700) (72,294) Accumulated other comprehensive loss (10,869) (20,053) ------------- -------------- Total shareholders' equity 453,208 435,039 ------------- -------------- Total liabilities and shareholders' equity $ 778,015 $ 790,736 ============= ==============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS. 19 22 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- NET REVENUES $ 637,923 $ 594,286 $ 658,745 COST OF SALES 396,752 479,982 496,776 ------------- ------------- ------------- Gross profit 241,171 114,304 161,969 ------------- ------------- ------------- OPERATING EXPENSES: Selling 79,508 100,220 98,770 General and administrative 88,434 116,185 111,122 Research and development 48,615 53,409 51,729 Amortization of intangible assets 3,673 3,760 4,594 Restructuring costs and asset write-downs 12,222 38,088 69,073 Merger expenses -- 2,343 557 ------------- ------------- ------------- Total operating expenses 232,452 314,005 335,845 ------------- ------------- ------------- Income (loss) from operations 8,719 (199,701) (173,876) OTHER INCOME (EXPENSE): Interest income 11,972 5,738 1,126 Interest expense (6,857) (14,685) (15,996) Other income, net 20,427 53,366 6,623 ------------- ------------- ------------- Total other income (expense) 25,542 44,419 (8,247) ------------- ------------- -------------- Income (loss) from continuing operations before income taxes and minority interest 34,261 (155,282) (182,123) PROVISION (BENEFIT) FOR INCOME TAXES 10,047 60,166 (52,488) ------------- ------------- -------------- Income (loss) from continuing operations before minority interest 24,214 (215,448) (129,635) MINORITY INTEREST 403 (4,086) (5,354) ------------- ------------- ------------- Income (loss) from continuing operations 24,617 (219,534) (134,989) DISCONTINUED OPERATIONS, NET OF TAXES 48,904 (8,701) (23,690) ------------- ------------- -------------- Income (loss) before extraordinary item and cumulative effect of a change in accounting principle 73,521 (228,235) (158,679) EXTRAORDINARY ITEM: Gains (losses) on extinguishment of debt, net of a tax benefit of $1,382 in 1996 1,121 (2,137) (2,073) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, net of a tax benefit of $1,295 in 1997 (3,048) (2,882) -- ------------- ------------- ------------- NET INCOME (LOSS) $ 71,594 $ (233,254) $ (160,752) ============= ============= ==============
(Continued) THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 20 23 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Continued)
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing operations $ .21 $ (1.81) $ (1.12) Discontinued operations .41 (.07) (.19) Extraordinary items .01 (.02) (.02) Cumulative effect of a change in accounting principle (.03) (.02) -- ------------- ------------ -------------- Net earnings (loss) $ .60 $ (1.92) $ (1.33) ============== ============ ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 119,116 121,496 120,949 ============== ============= ============== Diluted 119,264 121,496 120,949 ============== ============= ==============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 21 24 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
COMMON STOCK RETAINED ACCUMULATED --------------------- CAPITAL IN EARNINGS OTHER NUMBER EXCESS OF (ACCUMULATED COMPREHENSIVE OF SHARES AMOUNT PAR VALUE DEFICIT) INCOME (LOSS) TOTAL --------- ------ ----------- ----------- -------------- ---------- BALANCE, January 1, 1996 118,026 $ 11,803 $ 461,603 $ 322,117 $ (6,351) $ 789,172 Comprehensive loss: Net loss -- -- -- (160,752) -- (160,752) Translation adjustment -- -- -- -- 12,840 12,840 Unrealized net gain on available-for-sale equity securities -- -- -- -- 461 461 Comprehensive Loss (147,451) 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 Cash dividends paid -- -- -- (6,057) -- (6,057) --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1996 121,476 12,148 515,070 160,960 6,950 695,128 Comprehensive loss: Net loss -- -- -- (233,254) -- (233,254) Translation adjustment -- -- -- -- (20,773) (20,773) Unrealized net loss on available-for-sale equity securities -- -- -- -- (6,230) (6,230) Comprehensive loss (260,257) 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 --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1997 121,518 12,152 515,234 (72,294) (20,053) 435,039 Comprehensive income: Net income -- -- -- 71,594 -- 71,594 Translation adjustment -- -- -- -- 8,225 8,225 Unrealized net gain on available-for-sale equity securities -- -- -- -- 959 959 Comprehensive income 80,778 Issuances of common stock: Exercise of stock options 397 40 2,918 -- -- 2,958 Repurchase of common stock (7,080) (708) (65,223) -- -- (65,931) Value of stock options issued to non-employees -- -- 364 -- -- 364 --------- --------- --------- --------- --------- --------- BALANCE, December 31, 1998 114,835 $ 11,484 $ 453,293 $ (700) $ (10,869) $ 453,208 ========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 22 25 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ 71,594 $ (233,254) $ (160,752) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Restructuring costs and asset write-downs 12,222 38,088 69,073 Depreciation and amortization 32,552 38,462 32,371 Deferred tax provision (benefit) 3,623 50,194 (50,243) Provision for allowances for doubtful accounts 7,650 8,973 30,737 Minority interest (403) 4,086 5,354 Gain on sale of product rights (15,000) (43,224) -- Losses (gains) on disposal of assets, net 844 2,861 (3,969) Losses (gains) on extinguishment of debt (1,121) 2,137 1,640 Cumulative effect of a change in accounting principle 3,048 4,177 -- Loss (income) from discontinued operations (48,904) 8,701 23,690 Changes in assets and liabilities: Decrease (increase) in accounts receivable (9,586) 75,783 80,184 Decrease (increase) in inventories 13,699 50,294 (28,947) Decrease (increase) in other current assets (10,567) 51,583 (21,918) Decrease (increase) in other assets 8,000 (5,603) (4,230) Increase (decrease) in accounts payable, accrued expenses and other current liabilities (2,867) 21,954 (1,579) Increase (decrease) in other long-term liabilities 907 (292) 2,864 Other, net 891 (998) (1,753) Net cash provided by operating activities of discontinued operations 5,028 16,876 14,277 --------- ----------- ---------- Net cash provided by (used for) operating activities 71,610 90,798 (13,201) --------- ----------- ---------- Cash flows from investing activities: Proceeds from divestitures 87,885 361,105 -- Proceeds from sale of product rights -- 75,000 -- Capital expenditures (64,622) (45,741) (49,982) Proceeds from sales of assets 22,159 8,757 9,470 Acquisitions of patents, trademarks, licenses and other intangibles (17,543) (1,710) (1,848) Acquisitions of businesses and facilities, net of cash acquired -- (10,500) (12,006) Net investing activities of discontinued operations (202) (14,186) (32,579) --------- ----------- ---------- Net cash provided by (used for) investing activities 27,677 372,725 (86,945) --------- ----------- ---------- Cash flows from financing activities: Borrowings on long-term debt and loans payable 3,895 47,989 600,371 Payments on long-term debt and loans payable (29,152) (392,914) (373,293) Issuance of common stock 2,958 152 31,839 Cash dividends paid -- -- (6,057) Repurchases of common stock (65,931) -- -- Net financing activities of discontinued operations 10 (92) (87,473) --------- ----------- ---------- Net cash (used for) provided by financing activities (88,220) (344,865) 165,387 --------- ----------- ---------- Effect of exchange rate changes on cash (1,709) (229) 845 --------- ----------- ---------- Net increase in cash and cash equivalents 9,358 118,429 66,086 Cash and cash equivalents at the beginning of the year 199,235 80,806 14,720 --------- ----------- ---------- Cash and cash equivalents at the end of the year $ 208,593 $ 199,235 $ 80,806 ========== =========== ==========
(Continued) THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 23 26 IVAX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Continued)
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- Supplemental disclosures: Interest paid $ 6,628 $ 21,313 $ 21,172 ============== ============= ============== Income tax payments (refunds) $ 16,196 $ (42,683) $ 12,870 ============== ============== ==============
Supplemental schedule of non-cash investing and financing activities: Information with respect to IVAX's 1996 acquisition which was accounted for under the purchase method of accounting is summarized as follows: 1996 -------------- Fair value of assets acquired $ -- Liabilities assumed -- -------------- -- Reduction of minority interest (5,219) -------------- 5,219 ============== Purchase price: Cash (including related acquisition costs) 12,362 -------------- Cost in excess of net assets of acquired companies $ 7,143 ============== During the year ended December 31, 1996, contributions to the 401(k) retirement plan resulted in the issuance of 78 shares of IVAX common stock totaling $2,086. THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 24 27 IVAX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Financial amounts in thousands, except per share data) (1) ORGANIZATION: IVAX Corporation is a holding company with subsidiaries engaged primarily in the research, development, manufacture and marketing of branded and generic 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. IVAX's future revenues and profitability are largely dependent upon its ability to continue to develop, obtain approval for, efficiently manufacture and market commercially-viable pharmaceutical products. Revenues and profits derived from generic pharmaceuticals, which presently constitute IVAX's principal business, 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, 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. (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. 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. 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. 25 28 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, --------------------------------- 1998 1997 ------------- -------------- Raw materials $ 47,528 $ 49,227 Work-in-process 27,878 25,386 Finished goods 59,918 71,103 ------------- -------------- $ 135,324 $ 145,716 ============= ============== PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at cost less accumulated depreciation and amortization and consist of the following: DECEMBER 31, --------------------------------- 1998 1997 ------------- -------------- Land $ 9,816 $ 10,932 Buildings and improvements 148,182 116,978 Machinery and equipment 154,141 152,396 Furniture and computer equipment 51,691 55,881 ------------- -------------- 363,830 336,187 Less: Accumulated depreciation and amortization 153,602 142,446 ------------- -------------- $ 210,228 $ 193,741 ============= ============== 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. INTANGIBLE ASSETS - Intangible assets are carried at cost less accumulated amortization and consist of the following:
DECEMBER 31, --------------------------------- 1998 1997 ------------- -------------- Cost in excess of net assets of acquired companies $ 15,492 $ 15,343 Patents, trademarks, licenses and other intangibles 61,946 41,226 ------------- -------------- 77,438 56,569 Less: Accumulated amortization 21,288 17,111 ------------- -------------- $ 56,150 $ 39,458 ============= ==============
26 29 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 4-25 years). During 1998, IVAX paid $14,565, consisting of $12,448 in cash and $2,117 investment in common stock and a note receivable, for a patent license for a paclitaxel formulation in the United States, Europe and certain other world markets and also acquired an Abbreviated New Drug Application for paclitaxel. 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). 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 "Accumulated Other Comprehensive Income (Loss)" 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 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 $22,499 at December 31, 1998, which mature January 1999 through September 1999, and $2,870 at December 31, 1997, which matured in January 1998 through May 1998. In addition, IVAX has intercompany balances that are denominated in foreign currencies. A portion of these balances are hedged, from time to time, using foreign exchange forward contracts, and 27 30 gains and losses on these contracts are included in the consolidated statements of operations as they arise. For the year ended December 31, 1998, IVAX recorded a foreign exchange gain of $2,639. There were no material intercompany foreign exchange gains or losses in 1997 and 1996. IVAX Corporation, the parent company, itself did not hold foreign exchange forward contracts at December 31, 1998 and 1997. 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 $131,273, $228,634 and $291,382 in the years ended December 31, 1998, 1997 and 1996, respectively. The reserve balances related to these provisions and included in "Accounts receivable, net of allowances for doubtful accounts" and "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheets are $44,997 and $73,343, respectively, at December 31, 1998, and $53,702 and $56,514, respectively, at December 31, 1997. The custom in the pharmaceutical industry is generally to grant customers the right to return purchased goods. In the generic pharmaceutical industry, this custom has resulted in a practice of suppliers issuing inventory credits (also known as shelf-stock adjustments) to customers based on the customers' existing inventory following decreases in the market price of the related generic pharmaceutical product. The determination to grant a credit to a customer following a price decrease is generally at the discretion of IVAX, and generally not pursuant to contractual arrangements with customers. Provisions for estimated returns and inventory credits are established by IVAX concurrently with the recognition of revenue. The provisions are established in accordance with generally accepted accounting principles based upon consideration of a variety of factors, including actual return and inventory credit experience for products during the past several years by product type, the number and timing of regulatory approvals for the product by competitors of IVAX, both historical and projected, the market for the product, estimated customer inventory levels by product and projected economic conditions. Actual product returns and inventory credits incurred are, however, dependent upon future events, including price competition and the level of customer inventories at the time of any price declines. IVAX continually monitors the factors that influence the pricing of its products and customer inventory levels and makes adjustments to these provisions when management believes that actual product returns and inventory credits may differ from established reserves. 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. See Note 10, Income Taxes. 28 31 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. 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 denominator of the basic and diluted earnings per share computation for income from continuing operations is as follows for the year ended December 31, 1998 (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- Basic weighted average number of shares outstanding 119,116 121,496 120,949 Effect of dilutive securities - stock options 148 -- -- -------------- ------------- -------------- Diluted weighted average number of shares outstanding 119,264 121,496 120,949 ============== ============= ============== Not included in the calculation of diluted earnings per share because their impact is antidilutive: Stock options outstanding 4,635 10,057 10,102 Warrants 2,364 2,867 2,867
CHANGE IN ACCOUNTING PRINCIPLE - Emerging Issues Task Force ("EITF") Abstract No. 97-3 requires 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. 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. 29 32 SOP 98-5, Reporting on the Cost of Start-Up Activities, requires that costs of start-up activities, as well as organizational costs, be expensed as incurred. 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 $3,048, or $.03 per share, previously capitalized and included in "Other assets" in the accompanying consolidated balance sheet as of December 31, 1997. The initial application is shown effective January 1, 1998, in accordance with the provisions of SOP 98-5. 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. (3) RESTRUCTURING COSTS AND ASSET WRITE-DOWNS: 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 $13,174 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 $7,850 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. Also during 1996, IVAX management reevaluated the carrying value of 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 $55,899 to reduce the carrying value of goodwill related to those operations. See Note 7, Discontinued Operations, for a discussion of asset write-downs of the specialty chemicals business. 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 program. 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. In addition, IVAX recorded a charge of $23,814 to reduce the carrying value of certain assets to their estimated fair market value in conjunction with these initiatives. 30 33 During 1998, IVAX continued its ongoing efforts to reduce costs and enhance operating efficiency by initiating restructuring programs at its United Kingdom pharmaceutical operations and continuing restructuring of its United States pharmaceutical operations. During the first quarter of 1998, IVAX recorded a pre-tax charge of $696 comprised of $481 for severance and other employee termination benefits and $215 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 $12,866, comprised of $3,167 for severance and other employee termination benefits, $4,308 associated with lease commitments, and $5,391 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 360 positions from the workforce throughout all functions. Also, during 1998, IVAX recorded a pre-tax charge of $15,647 comprised of $2,657 for severance and other employee termination benefits, $4,432 for estimated plant closure costs and $8,558 for asset write-downs resulting from management's decision to cease manufacturing at its Northvale, New Jersey pharmaceutical facility and the reevaluation of the carrying value of certain long-lived assets of IVAX's domestic generic pharmaceutical operations due to facility consolidation and market conditions. The New Jersey restructuring plan will eliminate 165 positions. This restructuring and the continued consolidation of manufacturing is anticipated to generate approximately $3,400 of annual pre-tax cost savings. This impact was offset by the reversal of $16,987 of previously recorded restructuring reserves, primarily related to two facilities that were sold in 1998, that ultimately were not needed. Pursuant to the restructuring programs, during 1998 IVAX sold its Ft. Lauderdale, Florida office, packaging and warehouse facility, its Syosset, New York pharmaceutical manufacturing facility, its Kirkland, Quebec, Canada pharmaceutical manufacturing facility, and its Shreveport, Louisiana pharmaceutical manufacturing facility and closed two of its London, England manufacturing facilities. During 1997, IVAX consolidated its United States pharmaceutical distribution facilities into a single leased distribution center in Kenton County, Kentucky. IVAX also expects to cease manufacturing at its Northvale, New Jersey manufacturing facility in 1999. Production from these facilities has been or will be transferred to other IVAX manufacturing facilities. These restructuring costs and asset write-downs 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. 31 34 The components of the restructuring costs and asset write-downs, spending and other activity, as well as the remaining reserve balances at December 31, 1998, 1997 and 1996, which are included in "Property, plant and equipment, net" and 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 1998 restructuring costs and asset write-downs charged 14,164 6,305 8,740 29,209 Reversal of restructuring costs and asset write-downs charged in prior years (8,804) (442) (7,741) (16,987) Cash payments during 1998 -- (3,538) (3,042) (6,580) Non-cash activity (5,360) (1,098) 936 (5,522) ------------- -------------- ------------- -------------- Balance at December 31, 1998 $ -- $ 5,774 $ 8,260 $ 14,034 ============== ============== ============== ===============
(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. In 1996, IVAX increased its ownership interest in Galena to 74% with additional open market purchases totaling $12,362. (5) DIVESTITURES: Effective May 30, 1997, IVAX sold McGaw 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 the buyer's principal United States operating subsidiary and certain royalties based on sales of McGaw's Duplex(TM) drug delivery system. 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. 32 35 Effective July 14, 1998, IVAX completed the sale of its personal care products business for $84,700 (after certain post-closing adjustments). At closing, IVAX received $35,000 in cash and a $50,000 secured note due November 30, 1998. On August 27, 1998, IVAX sold the $50,000 note, without recourse, for $48,500 in cash. In addition, IVAX received a note for $2,500, as partial consideration from the sale of one of the personal care products subsidiaries. The note is payable at $250 of principal plus interest per quarter. As of December 31, 1998, $2,250 of the gain on sale related to this note was deferred and will be recognized as the note is collected. The gain on sale and results of operations of the intravenous products, specialty chemicals businesses and personal care products business 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 United States and Canadian marketing rights to its proprietary drug Elmiron(R) and three additional urology products 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 in 1997 and royalty and milestone payments based on the achievement of specified sales levels of Elmiron(R) in 1998. Royalty and milestone payment receivables from ALZA included in "Other current assets" in the accompanying consolidated balance sheets totaled $10,005 and $561 at December 31, 1998 and 1997, respectively. IVAX may receive additional royalty and milestone payments from ALZA based on sales of the products during the next few years. Included in "Other income, net" in the accompanying consolidated statements of operations for the year ended December 31, 1997, is a $43,224 gain on the sale 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 sheet as of December 31, 1997, 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. On July 24, 1998, IVAX and ALZA terminated the research and development cost-sharing arrangement and, as a result of the termination, the reserve of $15,000 was reversed during the third quarter of 1998, reflecting an adjustment to increase the previously recognized gain on the sale of those product rights. 33 36 (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, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- INTRAVENOUS PRODUCTS (THROUGH MAY 30, 1997) Net revenues(1) $ -- $ 140,634 $ 343,028 ============== ============= ============== Income from operations before taxes(2) $ -- $ 3,770 $ 13,759 Income tax benefit -- (427) (6,771) -------------- ------------- -------------- Income from operations $ -- $ 4,197 $ 20,530 -------------- ------------- -------------- PERSONAL CARE PRODUCTS (THROUGH JULY 14, 1998) Net revenues (1) $ 42,583 $ 73,870 $ 80,000 ============== ============= ============== Income (loss) from operations before taxes(2) $ -- $ (18,254) $ 6,089 Income tax provision -- 3,283 1,686 -------------- ------------- -------------- Income (loss) from operations $ -- $ (21,537) $ 4,403 -------------- ------------- -------------- SPECIALTY CHEMICALS(3) Net revenues(1) $ 850 $ 41,562 $ 67,857 ============== ============= ============== Loss from operations before taxes(2) $ -- $ (1,749) $ (53,274) Income tax provision (benefit) -- 2,235 (4,651) -------------- ------------- -------------- Loss from operations $ -- $ (3,984) $ (48,623) -------------- ------------- -------------- Sub-total income (loss) from operations $ -- $ (21,324) $ (23,690) -------------- ------------- -------------- DIVESTITURES (SEE NOTE 5) Pre-tax gain on divestitures $ 48,904 $ 44,715 $ -- Income tax provision -- 32,092 -- -------------- ------------- -------------- Net gain on divestitures $ 48,904 $ 12,623 $ -- -------------- ------------- -------------- Total income (loss) from discontinued operations $ 48,904 $ (8,701) $ (23,690) ============== ============= ==============
- ---------------------- (1) Net revenues include intersegment sales of $14, $569 and $2,165 for 1998, 1997 and 1996, respectively. (2) Includes an allocation of interest expense of $(232), $5,799 and $6,556 for 1998, 1997 and 1996, respectively, based on the ratio of net assets of each of the discontinued businesses to IVAX's consolidated total capital. (3) Includes results of operations of a significant portion of the specialty chemical business through its sale during the third quarter of 1997 and the results of operations of the vacuum pump fluids business through its sale in February 1998. 34 37 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. IVAX has completed the divestiture of its businesses classified as discontinued operations. (8) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES: 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, 1998 and 1997, 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 $785 and $3,405, respectively, and are included in "Other assets" in the accompanying consolidated balance sheets. At December 31, 1998 and 1997, net unrealized losses of $4 and $963, respectively, are included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheets. (9) DEBT: Long-term debt consists of the following:
DECEMBER 31, --------------------------------- 1998 1997 ------------- -------------- 6-1/2% Convertible Subordinated Notes due 2001. Interest payable semi-annually. Convertible at the option of the holders into 2,364 and 2,867 shares of common stock at December 31, 1998 and 1997, respectively, at a conversion rate of $31.75 per share. $ 75,066 $ 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). -- 6,700 International subsidiaries' debt 3,551 3,862 Other 49 464 ------------- -------------- Total long-term debt 78,666 102,051 Current portion of long-term debt 890 7,858 ------------- -------------- Long-term portion of long-term debt $ 77,776 $ 94,193 ============= ==============
35 38 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 then 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. In July 1998, IVAX's Board of Directors authorized the repurchase of $20,000 face value of its 6 1/2% Convertible Subordinated Notes. In December 1998, IVAX's Board of Directors renewed its authorization to purchase up to $20,000 face value of the Notes, which includes the amount remaining unpurchased from the July authorization. During 1998, IVAX repurchased a total of $15,959 face value of its 6 1/2% Convertible Subordinated Notes due November 2001. An extraordinary gain of $1,121 was recorded relating to the repurchase. Certain of IVAX's international subsidiaries maintain relationships with foreign banks providing uncommitted borrowings in the aggregate amounts of approximately $6,500 and $7,033 at December 31, 1998 and 1997, respectively. Outstanding borrowings under these lines of credit totaled $1,229 and $4,025 at December 31, 1998 and 1997, 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, --------------------------------- 1998 1997 ------------- -------------- 6 1/2% Convertible Subordinated Notes due 2001 $ 72,063 $ 77,826 Other 3,600 11,026 ------------- -------------- $ 75,663 $ 88,852 ============= ==============
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 $890, $778, $75,722, $638, $638 and $0, respectively. (10) INCOME TAXES: The provision (benefit) for income taxes on continuing operations consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- Current U.S. Federal $ -- $ -- $ (25,033) State -- -- (4,140) Puerto Rico and the U.S. Virgin Islands 509 679 3,093 Foreign 5,915 9,293 23,835 Deferred 3,623 50,194 (50,243) -------------- ------------- -------------- $ 10,047 $ 60,166 $ (52,488) ============== ============= ==============
36 39 The components of income (loss) from continuing operations before income taxes and minority interest are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- United States $ 29,128 $ (189,427) $ (276,693) Puerto Rico and the U.S. Virgin Islands (991) 4,389 16,993 Foreign 6,124 29,756 77,577 -------------- ------------- -------------- $ 34,261 $ (155,282) $ (182,123) ============== ============= ==============
A reconciliation of the difference between the expected provision (benefit) for income taxes using the statutory U.S. Federal tax rate and IVAX's actual provision is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- Tax using statutory U.S. Federal tax rate $ 11,991 $ (54,349) $ (63,743) Effect of state income taxes -- -- (3,908) Write-down of non-deductible cost in excess of net assets of acquired companies 71 3,270 20,057 Establishment/(reduction) of valuation allowance on deferred tax assets (10,575) 114,660 -- Foreign tax rate differential (2,476) (5,949) (7,879) Effect of Puerto Rico taxes and tollgate 509 679 3,876 Puerto Rico and U.S. possessions tax incentives -- (1,536) (5,734) Foreign operating losses 3,523 3,568 3,439 Tax claims and other matters 3,033 Other 3,971 (177) 1,404 -------------- ------------- -------------- $ 10,047 $ 60,166 $ (52,488) ============== ============= ==============
During 1997, IVAX established $114,660 in valuation allowances, primarily against its domestic deferred tax assets generated from losses incurred by its domestic operations. Previously reserved net operating loss carryforwards were utilized to offset domestic taxable income in 1998 and, as a result, the valuation allowance was reduced by $44,975 in 1998. The $44,975 reduction was comprised of a $10,575 decrease related to utilization against domestic continuing operations, a $28,200 decrease due to utilization against domestic discontinued operations, and a $6,200 decrease related to an adjustment to the domestic net operating loss carryforward based on adjustments made to prior tax periods. The domestic deferred tax asset is fully reserved as of December 31, 1997 and 1998. Management expects that it will continue to maintain valuation allowances related to any future deferred tax assets generated from its domestic operations until such time as sustainable domestic taxable income is achieved. 37 40 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 assets (liabilities) included in "Other current assets," "Other assets" and "Other long-term liabilities," in the accompanying consolidated balance sheets is as follows:
DECEMBER 31, --------------------------------- 1998 1997 ------------- -------------- Accounts receivable allowances $ 13,710 $ 485 Reserves and accruals 22,411 30,401 Differences in capitalization of inventory costs 321 434 Other (337) 3,920 Valuation allowance (34,851) (33,903) ------------- -------------- Amount included in "Other current assets" 1,254 1,337 ------------- -------------- Basis differences on fixed assets 9,085 8,932 Depreciation differences on fixed assets 3,731 9,566 Recognition of revenue (708) (410) Carrying value of long-term assets 8,266 6,952 Other 1,991 2,865 Tax credits 10,946 9,891 Net operating losses 55,776 105,745 Valuation allowance (73,407) (119,330) ------------- -------------- Amount included in "Other assets" 15,680 24,211 ------------- -------------- Other (2,314) (5,914) ------------- -------------- Amount included in "Other long-term liabilities" (2,314) (5,914) ------------- -------------- Net deferred tax asset $ 14,620 $ 19,634 ============= ==============
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 was extended during 1998 and now expires in 2017. The grant reduced tax expense by approximately $0, $575, and $1,837 for the years ended December 31, 1998, 1997 and 1996, 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 1998, 1997 and 1996, this credit was approximately $0, $1,536, and $5,734, 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. 38 41 At December 31, 1998, IVAX has a U.S. net operating loss carryforward of $145,846, which is comprised of: BEGIN TO EXPIRE ANNUAL LIMITATION AMOUNT --------------- ----------------- ------ 2002 -- $ 9,000 2003 $3,000 28,910 2006 -- 3,106 2007 -- 6,771 2012 -- 98,059 ----------- $ 145,846 =========== 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, 1998. The $3,106 of net operating loss carryforwards, which will begin to expire in 2006, relate to the exercise of certain stock options, and, as a result, the benefits recognized from the reduction of the valuation allowances related to these net operating loss carryforwards will increase paid in capital. This increase will be recorded once the domestic valuation allowance has been fully utilized. At December 31, 1998, IVAX had consolidated tax credit carryforwards of $10,946. The tax credits are comprised of foreign tax credits of $3,053, which begin to expire in 1999, $1,131 of research and development credits, which begin to expire in 2008, and $6,762 of minimum tax credits, which never expire. Realization of the net deferred tax asset of $14,620, 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, 1998. 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 $996, $2,228, and $3,116 for the years ended December 31, 1998, 1997 and 1996, respectively. 39 42 (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, 1998, 1997 and 1996 were $647, $2,025 and $3,272, respectively, a portion of which was made in IVAX common stock in 1996. (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 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 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):
1998 1997 1996 --------------------------- -------------------------- --------------------------- 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 10,057 $ 19.87 10,102 $ 22.50 10,198 $ 20.51 Granted 5,364 8.75 2,487 10.67 2,621 26.07 Exercised (398) 7.44 (42) 3.59 (1,881) 16.93 Terminated (6,060) 19.16 (2,490) 21.61 (836) 21.90 ---------- ---------- ---------- Balance at end of year 8,963 14.25 10,057 19.87 10,102 22.50 ========== ========== ========== Exercisable at December 31, 4,930 $ 17.43 6,220 $ 20.62 4,454 $ 21.51
40 43 The following table summarizes information about fixed stock options outstanding at December 31, 1998 (number of shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- -------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE - ------------------ ----------- ---------------- -------------- ------------ -------------- 0.00 - 3.64 1 3.6 $ 3.57 1 $ 3.57 3.64 - 7.28 211 5.6 6.81 66 6.68 7.28 - 10.91 4,973 5.3 8.88 1,576 8.50 10.91 - 14.55 293 4.9 12.22 120 12.25 14.55 - 18.19 212 3.1 16.51 211 16.52 18.19 - 21.83 1,902 2.1 20.42 1,808 20.41 21.83 - 25.47 464 3.3 22.94 464 22.94 25.47 - 29.10 752 3.5 26.86 534 26.95 29.10 - 32.74 21 3.1 31.09 16 31.27 32.74 - 36.38 134 2.1 34.88 134 34.88 -------------- --------------- 8,963 4.3 14.25 4,930 17.43 ============== ===============
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 stock options with exercise prices ranging from $9.88 to $34.88 were exchanged for approximately 2,100 stock options with an exercise price of $8.33. IVAX's pro forma net income (loss), pro forma net income (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, ----------------------------------- 1998 1997 --------------- ---------------- Pro forma net income (loss) $ 65,973 $ (241,452) Pro forma net income (loss) per common share $ .55 $ (1.99) Pro forma weighted average fair value of options granted $ 2.29 $ 7.20 Expected life (years) 4.6 4.8 Risk-free interest rate 4.37%-5.65% 5.51%-6.75% Expected volatility 27% 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. 41 44 In December 1997, IVAX's Board of Directors approved a share repurchase program authorizing IVAX to repurchase up to 5,000 shares of IVAX common stock. In December 1998, IVAX's Board of Directors approved an increase of 7,500 shares, to a total of 12,500 shares of IVAX common stock that may be repurchased. Through December 31, 1998, IVAX repurchased 7,080 shares of common stock at a total cost, including commissions, of $65,932. Under Florida law, repurchased shares constitute authorized but unissued shares. CONVERTIBLE DEBT - At December 31, 1998 and 1997, IVAX had outstanding $75,066 and $91,025, respectively of 6 1/2% Convertible Subordinated Notes due 2001 (See Note 9, Debt). The notes are convertible at the option of the holders into 2,364 and 2,867 shares, respectively, of IVAX common stock at a conversion rate of $31.75 per share. DIVIDENDS - IVAX did not pay dividends during the years ended December 31, 1998 and 1997. During the year ended December 31, 1996, IVAX paid a cash dividend of $.05 per share with respect to its common stock, totaling $6,057. (13) BUSINESS SEGMENT INFORMATION: IVAX is a holding company whose subsidiaries operate in the pharmaceutical business and are engaged in the development, manufacture, marketing and sale of pharmaceutical products. Pharmaceutical products include prescription drugs, over-the-counter products and animal health products. See Note 5, Divestitures, and Note 7, Discontinued Operations, for information regarding operations that have been sold. IVAX adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, as of December 31, 1998.
UNITED UNITED CZECH GEOGRAPHIC AREAS: STATES KINGDOM REPUBLIC OTHER TOTAL - ----------------- ------ ------- -------- ------- ------- Net revenues 1998 $ 291,882 $ 203,863 $ 19,076 $ 123,102 $ 637,923 1997 199,208 217,489 22,595 154,994 594,286 1996 292,285 228,431 27,343 110,686 658,745 Long-lived assets 1998 83,007 149,569 25,645 17,324 275,545 1997 84,704 125,040 15,485 30,592 255,821 1996 165,422 103,791 17,301 23,861 310,375
No single customer accounted for 10% or more of IVAX's consolidated net revenues for any of the three years ended December 31, 1998. Other revenues included in net revenues in the accompanying consolidated statements of operations consist of license fees and royalties totaling $56,087 (including $18,000 from the settlement of patent litigation with Abbott Laboratories discussed in Note 14), $11,542 and $31,307 in 1998, 1997 and 1996, respectively. Long-lived assets excludes the long-term net deferred tax asset included in "Other assets" on the accompanying consolidated balance sheets. 42 45 (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, 1998 totaled approximately $5,226, $5,022 and $5,540, respectively. The future minimum lease payments under noncancellable capital leases and their related assets recorded at December 31, 1998 and 1997 were not material. The future minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 1998, were as follows: OPERATING LEASES ------------- 1999 $ 5,131 2000 4,615 2001 3,018 2002 2,022 2003 1,272 Thereafter 4,781 ------------- Total minimum lease payments $ 20,839 ============= 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(R), a product of Eli Lilly and Company ("Lilly"). On April 27, 1995, Lilly filed a lawsuit against Zenith and others in federal court alleging that Zenith's cefaclor raw material supplier, a third party unaffiliated with IVAX, manufactured cefaclor raw material in a manner which infringed two process patents owned by Lilly, and that Zenith and the other defendants knowingly and willfully infringed and induced the supplier to infringe the patents by importing the raw material into the United States. The lawsuit seeks to enjoin 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 such supplier, and seeks an unspecified amount of monetary damages and the destruction of all cefaclor raw material manufactured by the supplier and imported into the United States. In August 1995, the Court denied Lilly's motion for preliminary injunction which sought to prevent Zenith from selling cefaclor until the merits of Lilly's allegations could be determined at trial. On May 10, 1996, the United States Court of Appeals for the Federal Circuit affirmed the district court's denial of Lilly's motion for preliminary injunction. On February 28, 1997, Lilly filed an amended complaint alleging the infringement of an additional patent. Lilly subsequently filed a second amended complaint but did not revise its allegations regarding Zenith. Zenith has filed a motion for partial summary judgment, which remains pending. Zenith ceased selling cefaclor in January 1997, when it announced a recall in the United States of cefaclor as a result of the recall by Zenith's supplier of raw material used to manufacture the product. On April 18, 1997, Lilly initiated another federal court action involving cefaclor 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. Also named as defendants are Roussel Corporation, Roussel UCLAF Holdings Corporation, Roussel UCLAF S.A., Hoechst Marion Roussel North America, and Biochimica Opos S.p.A. (collectively, the "Roussel Defendants"), The Rugby Group, Inc., and Rugby Laboratories, Inc. (collectively, "Rugby"), and American Home Products Corporation and American Cyanamid Company (collectively, the "American Home Defendants"). The claims asserted against the American Home Defendants and Rugby are essentially the same as those asserted against Zenith. Additional claims are asserted against the Roussel Defendants, including fraud, negligent misrepresentation, common law 43 46 conspiracy, tortious interference with business relations, and violations of both the federal and state Racketeer Influenced And Corrupt Organizations Acts. All of the asserted claims arise out of what Lilly contends were fraudulent misrepresentations to Lilly and the Food and Drug Administration ("FDA") by Biochimica Opos S.p.A. ("Opos"), Zenith's supplier of cefaclor raw material, 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 FDA to market bulk cefaclor in the United States. The claims asserted against Zenith are predicated on Zenith's sale in the United States of retail dosage units of cefaclor manufactured using Opos' bulk cefaclor. 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 American Home Defendants and Rugby, 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, in an unspecified amount, allegedly sustained by Lilly as a result of Zenith's alleged acts of misrepresentation and unfair competition. Lilly further seeks an award of treble damages and litigation costs, including attorneys' fees and interest. Under its unjust enrichment claim, Lilly seeks restitution in an unspecified amount against Zenith, jointly and severally with the other defendants. Zenith filed a motion to dismiss in June 1997, which was granted in June 1998. Plaintiffs filed an amended complaint and, in November 1998, Zenith filed another motion to dismiss which remains pending. In November 1996, individuals purporting to be shareholders of IVAX filed a class action complaint against IVAX and certain of its current and 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 product sales were subject to shelf stock adjustments and failed to establish reserves for such adjustments. On August 18, 1998, the court dismissed the action without prejudice and, on September 30, 1998, plaintiffs filed an amended complaint. In general, the amended complaint seeks an unspecified amount of compensatory damages, pre-judgment interest, litigation costs and attorney's fees. On November 9, 1998, IVAX filed a motion to dismiss the amended complaint, which remains pending. In 1997, two class action complaints were filed in federal court by individuals purporting to be shareholders of IVAX Corporation against IVAX, its chairman and its former chief financial officer. The two actions were subsequently consolidated, and the plaintiffs in the consolidated action seek to act as representatives of a class consisting of all persons who purchased IVAX common stock and/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. On March 30, 1998, the court dismissed the complaint with prejudice. An appeal was filed on May 19, 1998 and remains pending. 44 47 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 sought damages of $5.5 million, the difference between the $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. On July 17, 1998, the court granted IVAX's motion for summary judgement. S&N is expected to pursue an appeal of this decision. In December 1998, an action purporting to be a class action was filed in the United States District Court for the Southern District of Florida against Abbott Laboratories, Geneva Pharmaceuticals and Zenith, alleging a violation of Section 1 of the Sherman Antitrust Act. Plaintiffs purport to represent a class consisting of customers who purchased a certain proprietary drug directly from Abbott during the period beginning on October 29, 1998. Plaintiffs allege that, by settling patent-related litigation against Abbott in exchange for quarterly payments, the defendants engaged in an unlawful restraint of trade. The complaint seeks unspecified treble damages and injunctive relief. 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 the financial position or results of operations of IVAX. 45 48 (15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED): The following tables summarize selected quarterly data of IVAX for the years ended December 31, 1998 and 1997:
FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ------ 1998 Net revenues(1) $ 146,277 $ 154,617 $ 158,757 $ 178,272 $ 637,923 Gross profit 49,851 60,152 61,131 70,037 241,171 Income (loss) from continuing operations(2) (3,661) 3,577 7,488 17,213 24,617 Income (loss) from discontinued operations -- -- 40,733 8,171 48,904 Net income (loss)(4) (6,709) 3,577 48,536 26,190 71,594 Basic and diluted earnings (loss) per common share: Continuing operations (.03) .03 .06 .15 0.21 Discontinued operations -- -- .34 .06 0.41 Net earnings (loss)(4) (.06) .03 .41 .22 0.60 Cash dividends per share(5): -- -- -- -- -- Market prices per common share: High $9.50 $10.56 $10.19 $12.56 Low 6.19 8.44 7.38 7.31 1997 Net revenues(1) $ 165,678 $ 171,785 $ 124,393 $ 132,430 $ 594,286 Gross profit 48,870 45,708 3,889 15,837 114,304 Loss from continuing operations(3) (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 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 loss (.07) (.39) (.74) (.72) (1.92) Cash dividends per share(5): -- -- -- -- -- Market prices per common share: High $13.50 $11.75 $12.63 $11.13 Low 9.63 6.50 8.75 6.63
- ------------------ (1) Figures have been restated to conform to current classifications. (2) The first, third, and fourth quarter of 1998 includes restructuring costs and asset write-downs of $696, $12,865, and ($1,339) respectively. 46 49 (3) 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. (4) The first quarter of 1998 was restated in the third quarter to reflect the adoption of SOP98-5, Reporting on the Cost of Start-Up Activities, which resulted in a $3,048 loss from the cumulative effect of a change in accounting principle. (5) The declaration and payment of dividends is made at the discretion of IVAX's Board of Directors. (16) SUBSEQUENT EVENTS: From January 1, 1999 through March 19, 1999, IVAX repurchased 4,236 shares of IVAX common stock at a total cost, including commissions, of $55,266. Cumulatively, IVAX has repurchased 11,316 shares of IVAX common stock at a total cost of $121,197 under the share repurchase program described in Note 12, Shareholders' Equity. On February 26, 1999, IVAX's Board of Directors approved an increase to 8,000 shares of IVAX common stock that may be issued under the 1997 Employee Stock Option Plan described in Note 12, Shareholders' Equity. 47 EX-21 4 SUBSIDIARIES OF IVAX CORP 1 EXHIBIT 21 SUBSIDIARIES OF IVAX CORPORATION(1)
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ ------------------ DOMESTIC Baker Norton Pharmaceuticals, Inc. Florida Baker Norton U.S., Inc. Florida Cummins Properties, Inc. Florida D & N Holding Company Delaware Diamedix Corporation Florida DVM Pharmaceuticals, Inc. Florida Goldcaps, Inc. Florida Goldline Laboratories, Inc. Florida Goldline Properties Florida, Inc. Florida Immunovision, Inc. Florida Ivax D Sub, LLC Delaware IVAX Diagnostics, Inc. Florida IVAX Specialty Chemicals Sub, LLC Delaware IVX BioScience, Inc. Florida IVX Oncology, Inc. Florida N Holding Company Delaware Pet Technology Corp. Florida Pralex Corporation Delaware XAVI Corporation Florida Zenith Goldline Dermatologicals, Inc. Florida Zenith Goldline Golden Glades, Inc. Florida Zenith Goldline Pharmaceuticals, Inc. Florida Zenith Laboratories, Inc. Florida Zenith Laboratories Caribe, Inc. Delaware Zenith Parenterals, Inc. New Jersey
2 SUBSIDIARIES OF IVAX CORPORATION (Continued)
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ ------------------ INTERNATIONAL Alet Laboratorios S.A.E.C.I. y E. Argentina Baker Cummins Inc. Canada Baker Norton Asia, Ltd. Hong Kong Becpharm Limited England Beijing JiAi Pharmaceuticals Limited Liability Company(2) China Delta Biologicals S.r.l. Italy Elvetium S.A. Argentina Elvetium S.A. Uruguay Elvetium Peru S.A. Peru Galena a.s.(3) Czech Republic IVAX Industries Canada, Inc. Canada IVAX Industries UK, Ltd. England IVAX International, B.V. Netherlands Kunming Baker Norton Pharmaceutical Co. Ltd.(2) China Norton Gelkaps Gelatine Kapsel Produktion GmbH Germany Norton Healthcare Limited England Norton Healthcare (Holdings) Limited England Norton Healthcare (1998) Limited England Norton (Waterford) Limited Ireland Norton Poland Sp. z. o. o. Poland Pharmatop Limited England
- ------------------ (1) As of March 19, 1999. All subsidiaries are wholly-owned (directly or indirectly) unless otherwise indicated. (2) Owned 50% by the Company. (3) Owned 74% by the Company. EX-23 5 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report dated February 26, 1999 (except with respect to matters discussed in Note 16, as to which the date is March 19, 1999) incorporated by reference in this Form 10-K, into IVAX's previously filed registration statement on Form S-8 Nos. 333-07811, 33-82756, 33-67090, 33-39186, 33-44042, 33-53944, 33-88914, 33-88912, 33-65133, 333-24593 and 333-42997, Form S-3 No. 33-46173, and Form S-4 Nos. 33-44116 and 33-60847. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Miami, Florida March 31, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IVAX CORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 208,593 0 109,732 0 135,324 486,792 210,228 0 778,015 217,281 77,776 0 0 11,484 441,724 778,015 637,923 637,923 396,752 396,752 0 7,650 6,857 34,261 10,047 24,617 48,904 1,121 (3,048) 71,598 .60 .60 AMOUNT SHOWN IS NET OF ALLOWANCES. AMOUNT SHOWN IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
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