Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number 0-31475
ANDRX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-1013859
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
4955 ORANGE DRIVE
DAVIE, FLORIDA 33314
(Address of principal executive offices) (Zip Code)
(954) 584-0300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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:
[X] YES [ ] NO
The approximate number of shares outstanding of the issuer's common
stock as of August 14, 2002 is 70,935,000:
1
ANDRX CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
Conversion of Tracking Stock
From September 7, 2000, through May 17, 2002 Andrx Corporation
completed a plan of merger and reorganization (the "Reorganization") whereby it
acquired the outstanding equity of its Cybear Inc. subsidiary that it did not
own, reincorporated in Delaware and created two classes of common stock:
- - Andrx Group Common Stock ("Andrx common stock") to track the
performance of Andrx Group ("Andrx Group"), which included Andrx
Corporation and its subsidiaries, other than its ownership of Cybear
Group ("Cybear Group"); and
- - Cybear Group Common Stock ("Cybear common stock") to track the
performance of Cybear Group.
Cybear Group included (i) Cybear Inc. and its subsidiaries, (ii)
certain potential future Internet businesses of Andrx Corporation, (iii) certain
operating assets of AHT Corporation ("AHT"), and (iv) effective April 2, 2001,
Mediconsult.com, Inc. and its subsidiaries ("Mediconsult").
During the first quarter of 2002, Andrx Corporation exercised the
rights in its Certificate of Incorporation to convert all of the outstanding
shares of Cybear common stock into shares of Andrx common stock effective May
17, 2002. On May 17, 2002, each outstanding share of Cybear common stock was
converted into 0.00964 of a share of Andrx common stock (the "Conversion") which
resulted in the issuance of approximately 65,000 shares of Andrx common stock.
As a result of the Conversion, Andrx currently only has one class of common
stock outstanding with the class including all of the businesses of Andrx
Corporation and its subsidiaries. Accordingly, for periods subsequent to the
Conversion Andrx Corporation will not report separate financial information for
the Cybear common stock and Andrx common stock and will only report consolidated
financial statements for Andrx Corporation.
Increase in Allowance for Doubtful Accounts
As the Company announced in our August 12, 2002 press release, Andrx
management learned recently that an employee had made numerous improper entries
that affected its customer balances and their aging in its accounts receivable
records from 1999 to 2002 and, accordingly, the adequacy of the Company's
allowance for doubtful accounts receivable. The Company has been investigating
the impact and the severity of these entries on its consolidated financial
position and results of operations for the current and prior periods affected.
Based on its initial findings, the Company announced on August 12,
2002, that the Company's net accounts receivable as of June 30, 2002 might have
been overstated by as much as $15.0 million. After further investigation and
analysis, including discussions with certain customers regarding past due
amounts, management has now determined that the Company's net accounts
receivable as of June 30, 2002 was overstated, and the related provision for
doubtful accounts (included in Selling, general and administrative expenses)
from 1999 through 2002 was understated, by an aggregate of $5.4 million, of
which $342,000 related to the quarter ended June 30, 2002 and $5.1 million
related to the periods ended prior to April 1, 2002. After consideration of all
of the facts and circumstances, the Company has recognized the full amount of
the misstatement in the second quarter of 2002.
The $5.1 million charge represents less than 3% (2.79%) of revenues for
the second quarter of 2002, 9.28% of loss before income tax benefit, and $0.05
per diluted share of Andrx common stock outstanding ("EPS"). The Company has
concluded that the amounts of the misstatement were not material to any prior
period.
The amounts attributable to prior periods and their effect on those
periods are as follows: (i) $764,000 attributable to the 2002 first quarter
represents 0.41% of revenues, 9.76% of income before income taxes, and $0.007 in
EPS for Andrx Group for that period; (ii) $3.8 million attributable to the year
ended December 31, 2001 represents 0.51% of revenues, 5.50% of income before
income taxes, and $0.03 in EPS for Andrx Group for that period; (iv) $1.3
million attributable to the year ended December 31, 2000 represents 0.25% of
revenues, 1.30% of income before taxes, and $0.01 in EPS for Andrx Group for
that period; and (v) $749,000 credit attributable to the year ended December 31,
1999 represents 0.16% of revenues, 0.50% of income before income taxes and less
than $0.01 in EPS for that period.
The Company also reviewed various qualitative factors with respect to
any prior period, including those set forth in the SEC Staff Accounting Bulletin
No. 99, "Materiality" and concluded that in none of these periods would
correction of the misstatement (i) affect operating trends, (ii) change a loss
to income or income to a loss, (iii) affect the Company's compliance with
regulatory requirements, (iv) affect the Company's compliance with loan
covenants or other agreements (as the Company does not have any), or (v) affect
management compensation.
As used in this Andrx Corporation Form 10-Q, the words "Andrx
Corporation" or the "Company" refer to Andrx Corporation and all of its
subsidiaries taken as a whole. "Management" and "board of directors" refer to
the management and board of directors of Andrx Corporation. "Andrx" refers to
Andrx Corporation and all of its subsidiaries including Cybear Inc. following
the Conversion, and to the Andrx Group prior to the Conversion. "Cybear" refers
to Cybear Inc. and its subsidiaries prior to the Conversion.
Holders of Andrx common stock are subject to all the risks and
uncertainties of Andrx Corporation detailed herein or detailed from time to time
in Andrx Corporation's filings with the U.S. Securities and Exchange Commission
("SEC").
This Andrx Corporation Form 10-Q contains trademarks held by Andrx
Corporation and those of third parties.
2
FORWARD-LOOKING STATEMENTS
Andrx Corporation cautions readers that certain important factors may
affect the Company's actual results and could cause such results to differ
materially from any forward-looking statements which may be deemed to have been
made in this report or which are otherwise made by or on behalf of the Company.
For this purpose, any statements contained in this report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"to", "expect", "believe", "anticipate", "intend", "plan", "could", "would",
"estimate", or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties, including, but not limited to the outcome of litigation, the
timing of future product launches, government regulation, competition, and the
results of the accounts receivable investigation described herein. Andrx
Corporation is also subject to other risks detailed herein or detailed from time
to time in Andrx Corporation's other SEC filings.
3
ANDRX CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ANDRX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets - 5
as of June 30, 2002 (Unaudited) and December 31, 2001
Unaudited Consolidated Statements of Operations - 6
for the three and six months ended June 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows - 7
for the six months ended June 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements 8-26
Item 2. Management's Discussion and Analysis of 27-51
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 52
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 6. Exhibits and Reports on Form 8-K 53
SIGNATURES 54
4
ANDRX CORPORATION AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 89,579 $ 62,311
Investments available-for-sale, at market value 124,053 183,113
Accounts receivable, net 98,169 129,900
Inventories 189,860 163,348
Deferred income tax assets, net 59,235 30,745
Prepaid and other current assets, net 17,756 13,656
--------- ---------
Total current assets 578,652 583,073
Property, plant and equipment, net 177,562 139,898
Goodwill, net 34,348 32,669
Other intangible assets, net 25,330 28,305
Other assets 6,797 5,269
--------- ---------
Total assets $ 822,689 $789,214
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 57,661 $ 68,861
Accrued and other liabilities 133,350 67,377
--------- ---------
Total current liabilities 191,011 136,238
Other liabilities 5,212 5,082
--------- ---------
Total liabilities 196,223 141,320
--------- ---------
Commitments and contingencies (Note 13)
Stockholders' equity
Convertible preferred stock; $0.001 par value, 1,000,000 shares
authorized; none issued and outstanding -- --
Common stocks:
Andrx Group common stock; $0.001 par value, 100,000,000 shares
authorized; 70,781,000 and 70,484,000 issued and outstanding
as of June 30, 2002 and December 31, 2001, respectively 71 70
Cybear Group common stock; $0.001 par value, 12,500,000 shares
authorized; none issued and outstanding as of June 30, 2002;
6,743,000 issued and outstanding as of December 31, 2001 -- 7
Additional paid-in capital 481,468 471,035
Restricted stock unit grant (4,462) --
Retained earnings 149,034 176,381
Accumulated other comprehensive income, net of income taxes 355 401
--------- ---------
Total stockholders' equity 626,466 647,894
--------- ---------
Total liabilities and stockholders' equity $ 822,689 $789,214
========= ========
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
5
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Distributed products $ 123,140 $ 107,676 $ 251,650 $ 215,632
Andrx products 55,770 65,476 110,306 110,230
Other 3,270 7,711 5,008 12,343
------------ ------------ ------------ ------------
Total revenues 182,180 180,863 366,964 338,205
------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 131,526 104,897 259,508 199,489
Selling, general and administrative 46,459 35,916 87,744 64,359
Research and development 11,420 14,564 21,342 28,888
Litigation settlements (Note 13) 60,000 -- 60,000 --
Goodwill write-off at Cybear -- 1,982 -- 1,982
------------ ------------ ------------ ------------
Total operating expenses 249,405 157,359 428,594 294,718
------------ ------------ ------------ ------------
Income (loss) from operations (67,225) 23,504 (61,630) 43,487
Other income
Interest income, net 1,527 3,064 3,113 6,577
Equity in earnings of joint ventures 943 307 1,588 270
Gain on sale of Histex product line 4,514 -- 4,514 --
------------ ------------ ------------ ------------
Income (loss) before income taxes (60,241) 26,875 (52,415) 50,334
Income tax expense (benefit) (28,907) 11,154 (25,594) 20,010
------------ ------------ ------------ ------------
Net income (loss) $ (31,334) $ 15,721 $ (26,821) $ 30,324
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE (Note 3)
ANDRX COMMON STOCK:
Net income (loss) allocated to Andrx
(includes Cybear subsequent to
the May 17, 2002 Conversion) $ (29,272) $ 24,201 $ (20,877) $ 43,370
Premium on Conversion of Cybear common stock (526) -- (526) --
------------ ------------ ------------ ------------
Total net income (loss) allocated to Andrx $ (29,798) $ 24,201 $ (21,403) $ 43,370
============ ============ ============ ============
Net income (loss) per share of Andrx common stock:
Basic $ (0.42) $ 0.35 $ (0.30) $ 0.62
============ ============ ============ ============
Diluted $ (0.42) $ 0.34 $ (0.30) $ 0.60
============ ============ ============ ============
Weighted average shares of Andrx common
stock outstanding:
Basic 70,699,000 69,873,000 70,625,000 69,735,000
============ ============ ============ ============
Diluted 70,699,000 72,150,000 70,625,000 72,030,000
============ ============ ============ ============
CYBEAR COMMON STOCK:
Net loss allocated to Cybear
(through the May 17, 2002 Conversion) $ (2,062) $ (8,480) $ (5,944) $ (13,046)
Premium on Conversion of Cybear common stock 526 -- 526 --
------------ ------------ ------------ ------------
Total net loss allocated to Cybear $ (1,536) $ (8,480) $ (5,418) $ (13,046)
============ ============ ============ ============
Basic and diluted net loss per share of
Cybear common stock $ (0.23) $ (1.39) $ (0.80) $ (2.63)
============ ============ ============ ============
Basic and diluted weighted average shares of
Cybear common stock outstanding 6,743,000 6,105,000 6,743,000 4,959,000
============ ============ ============ ============
The accompanying notes to unaudited consolidated financial statements are an
integral part of these unaudited consolidated statements.
6
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
-------- ---------
Cash flows from operating activities
Net income (loss) $(26,821) $ 30,324
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,352 9,486
Goodwill write-off at Cybear -- 1,982
Undistributed equity in earnings of joint ventures (1,588) (270)
Income tax benefits on exercises of Andrx stock options 2,534 10,128
Gain on sale of Histex product line (4,514) --
Compensation expense on restricted stock grant 38 --
Changes in operating assets and liabilities:
Accounts receivable, net 31,764 (11,852)
Inventories (27,971) (3,974)
Prepaid and other assets, net (32,544) (509)
Accounts payable and accrued and other liabilities 57,663 (9,752)
-------- ---------
Net cash provided by operating activities 8,913 25,563
-------- ---------
Cash flows from investing activities
Maturities of investments available-for-sale, net 59,014 20,548
Purchases of property, plant and equipment (44,953) (35,500)
Proceeds from sale of Histex product line 1,425 --
Acquisition of CTEX Pharmaceuticals, Inc., net of cash acquired -- (11,135)
Loans to former CTEX Pharmaceuticals, Inc. shareholders -- (3,697)
Acquisition of Entex brand product line -- (14,795)
Acquisition of certain assets of Armstrong Pharmaceuticals -- (18,218)
Acquisition of and advances to Mediconsult.com, Inc. -- (3,242)
AHT Corporation note receivable and investment -- 234
-------- ---------
Net cash provided by (used in) investing activities 15,486 (65,805)
-------- ---------
Cash flows from financing activity
Proceeds from issuances of shares of Andrx common stock
under the employee stock purchase plan and from exercises
of Andrx stock options 2,869 4,536
-------- ---------
Net increase (decrease) in cash and cash equivalents 27,268 (35,706)
Cash and cash equivalents, beginning of period 62,311 115,609
-------- ---------
Cash and cash equivalents, end of period $ 89,579 $ 79,903
======== =========
Supplemental disclosure of cash paid during the period for:
Income taxes $ 816 $ 5,200
======== =========
Supplemental disclosures of non-cash investing activities:
Acquisition of CTEX Pharmaceuticals, Inc.
Market value of Andrx common stock issued $ 18,166
=========
Fair value of net liabilities assumed $ 537
=========
Acquisition of Mediconsult.com, Inc.
Market value of Cybear common stock issued $ 4,765
=========
Fair value of net liabilities assumed $ 5,295
=========
The accompanying notes to unaudited consolidated financial statements are an
integral part of these unaudited consolidated statements.
7
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
1. GENERAL
The accompanying unaudited consolidated financial statements for each
period include the consolidated balance sheets, statements of operations and
cash flows of Andrx Corporation and subsidiaries. All significant intercompany
items and transactions have been eliminated in consolidation. In the opinion of
management, the accompanying unaudited consolidated financial statements have
been prepared by Andrx Corporation pursuant to the rules and regulations of the
SEC. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to the SEC rules and
regulations. However, management believes that the disclosures contained herein
are adequate to make the information presented not misleading. In the opinion of
management, the unaudited consolidated financial statements reflect all material
adjustments (which include normal recurring adjustments) necessary to present
fairly the Company's unaudited financial position, results of operations and
cash flows. The unaudited results of operations for the three and six months
ended June 30, 2002, and cash flows for the six months ended June 30, 2002, are
not necessarily indicative of the results of operations or cash flows that may
be expected for the remainder of 2002. The unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in Andrx Corporation's Annual
Report on Form 10-K for the year ended December 31, 2001, as amended, and its
quarterly report on Form 10-Q for the quarter ended March 31, 2002. The December
31, 2001, consolidated balance sheet was extracted from the December 31, 2001
audited consolidated balance sheet.
As the Company announced in our August 12, 2002 press release, Andrx
management learned recently that an employee had made numerous improper entries
that affected its customer balances and their aging in its accounts receivable
records from 1999 to 2002 and, accordingly, the adequacy of the Company's
allowance for doubtful accounts receivable. The Company has been investigating
the impact and the severity of these entries on its consolidated financial
position and results of operations for the current and prior periods affected.
Based on its initial findings, the Company announced on August 12,
2002, that the Company's net accounts receivable as of June 30, 2002 might have
been overstated by as much as $15,000. After further investigation and analysis,
including discussions with certain customers regarding past due amounts,
management has now determined that the Company's net accounts receivable as of
June 30, 2002 was overstated, and the related provision for doubtful accounts
(included in Selling, general and administrative expenses) from 1999 through
2002 was understated, by an aggregate of $5,431, of which $342 related to the
quarter ended June 30, 2002 and $5,089 related to the periods ended prior to
April 1, 2002. After consideration of all of the facts and circumstances, the
Company has recognized the full amount of the misstatement in the second quarter
of 2002.
The $5,089 charge represents less than 3% (2.79%) of revenues for the
second quarter of 2002, 9.28% of loss before income tax benefit, and $0.05 per
diluted share of Andrx common stock outstanding ("EPS"). The Company has
concluded that the amounts of the misstatement were not material to any prior
period.
The amounts attributable to prior periods and their effect on those
periods are as follows: (i) $764 attributable to the 2002 first quarter
represents 0.41% of revenues, 9.76% of income before income taxes, and $0.007 in
EPS for Andrx Group for that period; (ii) $3,792 attributable to the year ended
December 31, 2001 represents 0.51% of revenues, 5.50% of income before income
taxes, and $0.03 in EPS for Andrx Group for that period; (iv) $1,282
attributable to the year ended December 31, 2000 represents 0.25% of revenues,
1.30% of income before taxes, and $0.01 in EPS for Andrx Group for that period;
and (v) $749 credit attributable to the year ended December 31, 1999 represents
0.16% of revenues, 0.50% of income before income taxes and less than $0.01 in
EPS for that period.
The Company also reviewed various qualitative factors with respect to
any prior period, including those set forth in the SEC Staff Accounting Bulletin
No. 99, "Materiality" and concluded that in none of these periods would
correction of the misstatement (i) affect operating trends, (ii) change a loss
to income or income to a loss, (iii) affect the Company's compliance with
regulatory requirements, (iv) affect the Company's compliance with loan
covenants or other agreements (as the Company does not have any), or (v) affect
management compensation.
On July 31, 2001, the Company implemented a one-for-four reverse stock
split of Cybear common stock whereby each four shares of existing Cybear common
stock were exchanged for one share of new Cybear common stock. All share and per
share amounts of Cybear common stock included herein gave effect to the
one-for-four reverse stock split for Cybear common stock.
Certain prior year amounts have been reclassified to conform to the
current period presentation.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". This pronouncement addresses financial accounting and
reporting for goodwill and other intangible assets. With the adoption of SFAS
No. 142, goodwill and certain other intangible assets are no longer subject to
amortization. Instead, goodwill will be subject to at least an annual assessment
for impairment in value by applying a fair-value based test. Any applicable
impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Any impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as a
cumulative effect of a change in accounting principle. The Company has completed
its goodwill impairment test as required under the provisions of SFAS No. 142.
Adoption of SFAS No. 142 in 2002 resulted in the discontinuance of the Company
recording approximately $3,200 of annual goodwill amortization in future
periods. The impairment test also indicated the Company's goodwill is not
impaired.
8
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
The following table shows the impact of the adoption of SFAS No. 142 as if the
change had been retroactively applied to the prior periods, as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2001 2001
---------- ----------
Reported net income $ 15,721 $ 30,324
Goodwill amortization, net of tax 1,168 2,299
---------- ----------
Adjusted net income $ 16,889 $ 32,623
========== ==========
ANDRX COMMON STOCK:
Reported net income allocated to Andrx $ 24,201 $ 43,370
Goodwill amortization, net of tax 496 957
---------- ----------
Adjusted net income allocated to Andrx $ 24,697 $ 44,327
========== ==========
Basic earnings per share:
Reported net income allocated to Andrx $ 0.35 $ 0.62
Goodwill amortization, net of tax -- 0.02
---------- ----------
Adjusted net income allocated to Andrx $ 0.35 $ 0.64
========== ==========
Diluted earnings per share:
Reported net income allocated to Andrx $ 0.34 $ 0.60
Goodwill amortization, net of tax -- 0.02
---------- ----------
Adjusted net income allocated to Andrx $ 0.34 $ 0.62
========== ==========
CYBEAR COMMON STOCK:
Reported net loss allocated to Cybear
(through the May 17, 2002 Conversion) $ (8,480) $ (13,046)
Goodwill amortization 672 1,342
Adjusted net loss allocated to Cybear ---------- ----------
(through the May 17, 2002 Conversion) $ (7,808) $ (11,704)
========== ==========
Basic and dilutive net loss per share:
Reported net loss allocated to Cybear $ (1.39) $ (2.63)
Goodwill amortization 0.11 0.27
---------- ----------
Adjusted net loss allocated to Cybear $ (1.28) $ (2.36)
========== ==========
9
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a segment
of a business (as previously defined in that opinion). SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. Adoption of the provisions of SFAS No. 144 in 2002 did not have any
impact on the consolidated financial statements of the Company.
In November 2001, the Emerging Issues Tasks Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer (including
a Reseller of the Vendor's Products)." This pronouncement addresses the
accounting for consideration given by a vendor to a customer (including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller). This pronouncement is effective for annual or interim
periods beginning after December 15, 2001. Adoption of the provisions of EITF
01-09 did not have any impact on the consolidated financial statements of the
Company as its Company's accounting policy was consistent with the provisions of
EITF 01-09.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This pronouncement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company believes the adoption of SFAS No. 143 in 2003 will not have a material
impact on the consolidated financial statements of the Company.
2. CORPORATE STRUCTURE
On September 7, 2000, Andrx Corporation completed a reorganization
whereby it acquired the outstanding equity of its Cybear Inc. subsidiary that it
did not own, reincorporated in Delaware, and created two new classes of common
stock: (i) Andrx common stock to track the performance of the Andrx Group, which
includes Andrx Corporation and subsidiaries, other than its ownership of the
Cybear Group and (ii) Cybear common stock to track the performance of the Cybear
Group (the "Reorganization"). The Cybear Group included (i) Cybear Inc. and its
subsidiaries, (ii) certain potential future Internet businesses of Andrx
Corporation, (iii) certain operating assets of AHT, and (iv) effective April 2,
2001, Mediconsult. In connection with the Reorganization, Andrx shareholders
exchanged each share of Andrx common stock (pre-Reorganization) held for one
share of Andrx common stock and .0372 shares of Cybear common stock (reflects
the effect of the July 31, 2001 one-for-four reverse stock split) and Cybear
stockholders, other than Andrx, exchanged each share of Cybear common stock
(pre-Reorganization) held for one share of Cybear common stock.
10
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
On May 17, 2002 each outstanding share of Cybear common stock was
converted into 0.00964 of a share of Andrx common stock which resulted in the
issuance of approximately 65,000 shares of Andrx common stock. The Conversion
ratio included a 25% premium on the value of Cybear common stock, as provided by
the terms of Andrx Corporation's Certificate of Incorporation. As a result of
the Conversion, Cybear business operations have been integrated into certain
other operating segments of Andrx Corporation. Subsequent to the Conversion,
Andrx only has one class of common stock outstanding with the class including
all of the businesses of Andrx Corporation and its subsidiaries.
Subsequent to the Reorganization and through May 17, 2002, Andrx
Corporation's unaudited condensed consolidated financial statements included
consolidated operating results, and for each class of common stock also included
(i) an allocation of net income (loss), (ii) related basic and diluted earnings
(loss) per share and (iii) basic and diluted shares outstanding. The unaudited
consolidated financial statements from the Reorganization on September 7, 2000
through the Conversion on May 17, 2002 do not reflect consolidated basic and
diluted earnings per share since there was no underlying equity security related
to the consolidated financial results.
For periods subsequent to the Conversion, Andrx Corporation (i) will
only report earnings (loss) per share for Andrx common stock which includes all
of the former Cybear Group's operating results from the effective date of the
Conversion, (ii) will no longer report separate earnings (loss) per share for
the former Cybear common stock, and (iii) will not provide supplemental group
financial statements for Andrx Group and Cybear Group as was previously
presented.
3. EARNINGS (LOSS) PER SHARE
As a result of the Reorganization and prior to the May 17, 2002
Conversion, Andrx's operating results for the period from April 1, 2002 through
May 17, 2002 and January 1, 2002 through May 17, 2002 and for the three and six
months ended June 30, 2001 have been allocated to each class of common stock.
Subsequent to the May 17, 2002 Conversion, operating results and basic and
diluted net income (loss) per share of Andrx common stock included the operating
results of Cybear.
ANDRX
The shares used in computing basic net income (loss) per share of Andrx
common stock are based on the weighted average shares of Andrx common stock
outstanding for the three and six months ended June 30, 2002 and 2001. For the
three and six month periods ended June 30, 2002, all common stock equivalents
were excluded from the diluted share computation as the Company reported a net
loss and, accordingly, such common stock equivalents were anti-dilutive. The
three and six month periods ended June 30, 2002 also excluded the effect of the
unamortized restricted stock units granted to the Company's Chief Executive
Officer which are also anti-dilutive (see Note 5). The diluted basis for the
2001 periods considered the weighted average shares of common stock outstanding
for common stock including dilutive common stock equivalents. For the 2002
periods, Cybear common stock options were converted into Andrx common stock
options and were included in the Andrx anti-dilutive options outstanding. All
anti-dilutive potential common shares were excluded in computing diluted
earnings per share for the three and six months ended June 30, 2002.
11
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
The Conversion resulted in the issuance of approximately 65,000 shares
of Andrx common stock and included a 25% premium on the value of Cybear common
stock, as provided by the terms of Andrx Corporation's Certificate of
Incorporation. While the premium paid to holders of Cybear common stock for the
2002 periods was not included in the Andrx or Cybear operating results, the
premium associated therewith increased the total net loss allocated to holders
of Andrx common stock by $526 in computing Andrx's net loss per share and
reduced the total net loss allocated to holders of Cybear common stock by $526
in computing Cybear's net loss per share and was reflected as a charge to
retained earnings and a credit to additional paid-in capital in the Unaudited
Consolidated Balance Sheet.
A reconciliation of the denominators of basic and diluted earnings
(loss) per share of Andrx common stock is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic weighted average shares of
common stock outstanding 70,699,000 69,873,000 70,625,000 69,735,000
Effect of dilutive items:
Stock options -- 2,277,000 -- 2,295,000
---------- ---------- ---------- ----------
Diluted weighted average shares
of common stock outstanding 70,699,000 72,150,000 70,625,000 72,030,000
========== ========== ========== ==========
Anti-dilutive potential common shares
excluded from diluted weighted average
shares outstanding 3,623,000 1,233,000 3,460,000 1,201,000
========== ========== ========== ==========
CYBEAR
The shares used in computing net loss per share of Cybear common stock
were based on the weighted average shares of Cybear common stock outstanding for
the period from April 1, 2002 through May 17, 2002; January 1, 2002 through May
17, 2002 and for the three and six month periods ended June 30, 2001,
respectively. As Cybear generated a net loss for the aforementioned periods, all
potential Cybear shares were excluded from the Cybear calculation of diluted
shares since the effects were anti-dilutive. All share and per share amounts of
Cybear common stock gave effect to the July 31, 2001, one-for-four reverse stock
split.
12
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
4. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Raw materials $ 51,820 $ 42,326
Work in process 32,301 16,212
Finished goods 105,739 104,810
----------- -----------
$ 189,860 $ 163,348
=========== ===========
As of June 30, 2002 and December 31, 2001, the Company had
approximately $59,200 and $33,900, respectively, in raw materials, work in
process and finished goods inventories relating to products that had either not
been approved by the U.S. Food and Drug Administration ("FDA") or which have not
yet been launched. Included in the June 30, 2002 inventory of products not
approved by the FDA or launched was approximately $13,100 relating to Altocor
which the Company began shipping in July 2002.
5. RESTRICTED STOCK UNIT GRANT
On May 18, 2002, the Company entered into an employment agreement with
the current Chief Executive Officer. Under the terms of the employment
agreement, among other things, the Company made a restricted stock unit grant to
the Chief Executive Officer of 100,000 units of common stock, with each unit
representing the right to acquire one share of Andrx common stock, valued at
$4,500, or $45.00 per share, the closing price of Andrx common stock on the day
preceding the execution of the employment agreement. The restricted stock unit
grant vests 25% on each of June 3, 2009, 2010, 2011 and 2012, but is subject to
accelerated pro rata vesting upon termination of employment, as defined in the
employment agreement. The value of $4,500 will be amortized on a straight-line
basis over the service period of ten years and will be included in Selling,
general and administrative expenses in the Company's Consolidated Statements of
Operations.
6. UNCONSOLIDATED JOINT VENTURES
As of June 30, 2002 and December 31, 2001, the Company's investment in
unconsolidated joint ventures was $3,496 and $1,907, respectively, and was
included in Other assets in the accompanying Unaudited Consolidated Balance
Sheets.
Condensed financial information of the unconsolidated joint ventures is
not presented as they are not material to the consolidated financial statements
of the Company.
13
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
7. INCOME TAXES
For the three and six months ended June 30, 2002, the Company recorded
an income tax benefit of $28,907 and $25,594, or 48% and 49%, respectively, of
loss before income taxes. Such tax benefit for the three and six month periods
ended June 30, 2002 included $21,658 and $18,345 or a 36% and 35% benefit,
respectively, of loss before income taxes and also included the reversal of
$7,249 valuation allowance on deferred tax assets relating to certain net
operating loss carryforwards. For the three and six months ended June 30, 2001,
the Company provided $11,154 and $20,010, respectively, for income taxes, or 42%
and 40%, respectively, of income before income taxes. The Company provided for
income taxes in excess of the expected annual effective federal statutory rate
of 35% primarily due to the effect of state income taxes and amortization of
intangible assets which was not deductible for tax purposes.
The following table indicated the activity in the valuation allowance on
deferred income tax assets:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
---------------- -----------------
Beginning balance $(7,249) $(7,249)
Utilized 7,249 --
------- -------
Ending balance $ -- $(7,249)
======= =======
In connection with the Reorganization, Cybear and the other members of
the Andrx Corporation consolidated group entered into, among other things, a
federal and state tax sharing agreement. Andrx Corporation utilized the separate
return method of accounting for purposes of allocating federal and state
consolidated income tax liabilities among the consolidated group members. Under
the terms of the tax sharing agreement, as amended, a member of the group will
be allocated its income tax benefits and expenses in the year generated. Except
to the extent a member cannot utilize its income tax benefits in the year
generated, that member will not be compensated in that year by other members of
the Andrx Corporation consolidated group for utilization of those benefits.
Instead, if and when a member leaves the group, Andrx Corporation may elect to
reimburse that member for any unreimbursed income tax benefits utilized. That
reimbursement will take the form of a capital investment by Andrx Corporation,
for which it will receive stock. In the case of any "tracking stock" members,
such as Cybear prior to the Conversion, the stock received by Andrx Corporation
shall be in the form of Cybear common stock. In addition, if any member of the
group causes another member to become subject to state income tax in a state
where it would otherwise not be taxed on a separate company basis, the member
causing the income tax liability shall be fully responsible for the state income
tax of the other member. Subsequent to the Reorganization, any income tax
benefits that Cybear was unable to utilize on a separate company basis were
allocated to Andrx.
14
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
In October 2000, Andrx and Cybear signed a supplement to the tax
sharing agreement, whereby Cybear will be reimbursed by Andrx Corporation for
specific tax benefits utilized by Andrx Corporation in connection with an
election Cybear made on its 2000 and 1999 separate federal corporate tax returns
to amortize certain product development expenses over a period of ten years.
Such reimbursements from Andrx are accounted for by Cybear as a capital
contribution. Through May 17, 2002, Andrx paid Cybear $379 related to this
supplement to the tax sharing agreement.
8. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) were as
follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) $(31,334) $ 15,721 $(26,821) $ 30,324
-------- -------- -------- --------
Investments available-for-sale
Unrealized gain (loss), net 213 (643) (74) 607
Income taxes (79) 237 28 (225)
-------- -------- -------- --------
134 (406) (46) 382
-------- -------- -------- --------
Comprehensive income (loss) $(31,200) $ 15,315 $(26,867) $ 30,706
======== ======== ======== ========
15
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
9. SALE OF HISTEX PRODUCT LINE
On June 28, 2002, the Company sold the trademarks, licenses and
permits, marketing materials, packaging supplies, product and sample inventories
including reformulations related to the Histex cough and cold line of products.
In addition, in connection with the sale, the buyer assumed liabilities related
to all Histex products. In consideration, the Company received $1,425 in cash
and is entitled to receive $375 in cash in three equal quarterly installments of
$125 payable on October 1, 2002, January 1, 2003 and April 1, 2003.
Additionally, among other things, the Company is entitled to receive quarterly
royalty payments on net sales of the Histex products for five years. This
transaction resulted in a pre-tax net gain of $4,514 recorded in other income in
the Company's Unaudited Consolidated Statement of Operations. The gain resulted
mainly from the extinguishment of net liabilities. In accordance with Staff
Accounting Bulletin Topic 5-E "Accounting for Divestiture of a Subsidiary or
Other Business Operation," as of June 30, 2002, the buyer was considered thinly
capitalized and, accordingly, the gain included in other income is the $1,425
the Company received in cash and the extinguishment of the net liabilities to
the extent that the related estimated potential liabilities had actually been
fully assumed by the buyer, supported by, among other things, $2,000 placed in
escrow by the buyer and a guarantee by a significant customer to not return
purchased Histex products. As the Company receives the additional $375 in
payments from the buyer and the remaining estimated potential liabilities become
extinguished, the Company will record such amounts to other income.
10. SALE OF INTERNET ASSETS AND ALLIANCE
On August 5, 2002, Andrx entered into an agreement with Aventis S.A.'s
("Aventis") business unit, MyDocOnline, to sell Andrx's Dr. Chart and @RX
applications and license Andrx's patents for Internet transmission of
prescriptions. Aventis also entered into a two-year marketing agreement with
Andrx's Physicians' Online(TM) web portal. As part of these transactions, Andrx
expects to receive approximately $6,000 over the next two years. The $6,000 will
be recognized as Other revenues, as service is rendered over the next two years.
11. BUSINESS SEGMENTS
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's operating
segments are managed separately because of the fundamental difference in their
operations or in the uniqueness of their product(s). As a result of the
Conversion, Cybear's Internet business operations were integrated into other
operating segments of Andrx Corporation and became a part of the distributed
products segment or brand products segment for financial reporting purposes.
Accordingly, for segment reporting purposes, the Company has reclassified its
former Internet segment operations for all prior periods presented herein to
conform with the current period presentation.
16
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
The Company currently operates in the following business segments:
Distributed Products
The Company distributes generic pharmaceuticals manufactured by third
parties primarily through its in-house telemarketing staff primarily to
independent pharmacies, non-warehousing chains and physician offices. The
distributed products segment's operating results exclude participation in the
distribution of Andrx bioequivalent products, which are included in the
bioequivalent product segment. As a result of the Conversion, Cybear's
Cybearclub LC joint venture with Andrx, formerly included in the Internet
segment, is now included in the distributed products business segment.
Bioequivalent Products
The Company researches and develops, manufactures and sells
bioequivalent versions of selected controlled-release brand name pharmaceuticals
as well as bioequivalent versions of specialty, niche or immediate release
pharmaceutical products utilizing its proprietary drug delivery technologies.
Additionally, the bioequivalent products segment includes the contract
manufacturing activities for other pharmaceutical companies under contract
manufacturing arrangements. The bioequivalent products segment also includes
the equity in earnings of consolidated joint ventures.
Brand Products
The Company applies proprietary drug delivery technologies to the
research and development of brand name controlled-release formulations of
existing chemical entities. The brand products segment also includes (i) fees
generated under an agreement with Geneva Pharmaceuticals ("Geneva"), a member of
the Novartis Pharmaceutical Group, for specified brand products (which was
terminated in October 2001), (ii) payments to Geneva in connection with the
termination of such agreement, and the reacquisition of Geneva's marketing
rights for two brand products under development by Andrx (iii) sales of products
from CTEX which Andrx acquired on January 23, 2001, which included Histex
through June 28, 2002, (iv) gain on sale of Histex product line in June 2002,
(v) starting in July 2001, sales of the Entex brand product line of cough and
cold products which the Company purchased from an affiliate of the Elan
Corporation, plc and (vi) starting in November 2001, sales of the hydrocodone
pain products licensed from Mallinckrodt, a Tyco healthcare company, under the
new trade name Anexsia. As a result of the Conversion, except for the Cybearclub
LLC joint venture, the former Internet segment operations are now included in
the brand products' segment.
Corporate and Other
Corporate and other consists of corporate headquarters, including
general and administrative expenses, which include legal costs associated with
antitrust matters, the litigation settlements charge, interest income and income
taxes.
The Company evaluates the performance of the segments after all
intercompany sales are eliminated. The allocation of income taxes is not
evaluated at the segment level.
17
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
The following table represents financial information by current business
segments:
AS OF AND FOR THE THREE MONTHS ENDED
JUNE 30, 2002
------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
---------- ------------- --------- ---------- ------------
Revenues $123,140 $ 50,661 $ 8,379 $ -- $ 182,180
Income (loss) from operations 2,527 11,228 (12,981) (67,999) (67,225)
Equity in earnings of joint ventures -- 943 -- -- 943
Interest income, net -- -- -- 1,527 1,527
Gain on sale of Histex product line -- -- 4,514 -- 4,514
Depreciation and amortization 619 2,963 1,625 18 5,225
Capital expenditures 5,161 23,637 281 311 29,390
Total assets, end of period 267,492 231,826 78,374 244,997 822,689
AS OF AND FOR THE THREE MONTHS ENDED
JUNE 30, 2001
------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
---------- ------------- --------- ---------- ------------
Revenues $107,676 $ 62,289 $ 10,898 $ -- $ 180,863
Income (loss) from operations 7,488 35,072 (11,875) (7,181) 23,504
Equity in earnings of joint ventures -- 307 -- -- 307
Interest income, net -- -- -- 3,064 3,064
Depreciation and amortization 699 840 4,037 20 5,596
Capital expenditures 836 15,195 39 18 16,088
Total assets, end of period 181,542 182,213 84,863 290,897 739,515
SIX MONTHS ENDED
JUNE 30, 2002
------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
---------- ------------- --------- ---------- ------------
Revenues $251,650 $100,492 $ 14,822 $ -- $ 366,964
Income (loss) from operations 13,192 31,170 (30,513) (75,479) (61,630)
Equity in earnings of joint ventures -- 1,588 -- -- 1,588
Interest income, net -- -- -- 3,113 3,113
Gain on sale of Histex product line -- -- 4,514 -- 4,514
Depreciation and amortization 1,248 5,633 3,435 36 10,352
Capital expenditures 6,584 37,223 632 514 44,953
SIX MONTHS ENDED
JUNE 30, 2001
------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
---------- ------------- --------- ---------- ------------
Revenues $215,632 $102,116 $ 20,457 $ -- $ 338,205
Income (loss) from operations 18,082 56,971 (20,682) (10,884) 43,487
Equity in earnings of joint ventures -- 270 -- -- 270
Interest income, net -- -- -- 6,577 6,577
Depreciation and amortization 1,454 2,378 5,614 40 9,486
Capital expenditures 1,398 33,982 95 25 35,500
18
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
12. SUPPLEMENTAL GROUP FINANCIAL STATEMENTS
Following are the separate supplemental unaudited consolidated
financial statements for Cybear Group through the May 17, 2002 Conversion:
CYBEAR GROUP
(representing Cybear Inc. and its subsidiaries)
UNAUDITED CONSOLIDATED BALANCE SHEETS
MAY 17, DECEMBER 31,
2002 2001
------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 47 $ 1,234
Accounts receivable, net 1,102 1,203
Prepaid and other current assets, net 334 717
------- -------
Total current assets 1,483 3,154
Equipment, net 1,666 2,294
Goodwill, net 367 324
Other intangible assets, net 10,492 11,280
Other assets 14 35
------- -------
Total assets $14,022 $17,087
======= =======
LIABILITIES AND CYBEAR GROUP EQUITY
Current liabilities
Accounts payable $ 962 $ 1,435
Accounts payable to Andrx Group 273 179
Accrued expenses 4,198 3,508
Other liabilities 1,130 1,060
------- -------
Total current liabilities 6,563 6,182
Note payable to Andrx Group 4,153 2,001
Other liabilities 1,874 1,654
------- -------
Total liabilities 12,590 9,837
Commitments and contingencies
Cybear Group equity 1,432 7,250
------- -------
Total liabilities and Cybear Group equity $14,022 $17,087
======= =======
19
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands)
CYBEAR GROUP
(representing Cybear Inc. and its subsidiaries)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
FOR THE PERIOD FROM FROM JANUARY 1,
APRIL 1, 2002 THREE MONTHS 2002 SIX MONTHS ENDED
THROUGH MAY 17, ENDED JUNE 30, THROUGH MAY 17, JUNE 30,
2002 2001 (1) 2002 2001 (1)
------------------- -------------- --------------- ----------------
Revenues
Cybearclub LC Internet product sales $ 608 $ 1,098 $ 1,846 $ 2,023
Portal services 356 866 1,093 866
Application services 182 258 329 634
Website development, hosting and other
services 7 115 18 263
Subscription services -- 142 -- 276
------- -------- ------- --------
Total revenues 1,153 2,479 3,286 4,062
------- -------- ------- --------
Operating expenses
Cost of goods sold 556 1,028 1,698 1,899
Network operations and operations support 457 2,095 1,409 3,143
Product development 343 1,357 1,223 2,786
Selling, general and administrative 1,399 1,788 3,351 3,270
Depreciation and amortization 437 2,804 1,499 4,335
Goodwill write-off -- 1,982 -- 1,982
------- -------- ------- --------
Total operating expenses 3,192 11,054 9,180 17,415
------- -------- ------- --------
Loss from operations (2,039) (8,575) (5,894) (13,353)
Interest income (expense), net (23) 95 (50) 307
------- -------- ------- --------
Net loss $(2,062) $ (8,480) $(5,944) $(13,046)
======= ======== ======= ========
(1) Certain prior period amounts have been reclassified to conform to the
current period presentation
20
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands)
CYBEAR GROUP
(representing Cybear Inc. and its subsidiaries)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
FROM JANUARY 1, SIX MONTHS
2002 THROUGH ENDED JUNE 30,
MAY 17, 2002 2001
-------------- --------------
Cash flows from operating activities
Net loss $(5,944) $(13,046)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,499 4,336
Goodwill write-off -- 1,982
Changes in operating assets and liabilities:
Accounts receivable, net 134 (449)
Prepaid and other assets, net 81 246
Accounts payable and accrued and other liabilities 904 (2,006)
------- --------
Net cash used in operating activities (3,326) (8,937)
------- --------
Cash flows from investing activities
Maturities of investments available-for-sale, net -- 9,112
Purchases of equipment (139) (65)
Acquisition of and advances to Mediconsult.com, Inc. -- (3,242)
AHT Corporation note receivable and investment -- 234
------- --------
Net cash provided by (used in) investing activities (139) 6,039
------- --------
Cash flows from financing activities
Advances from Andrx on line of credit 2,152 --
Payments from Andrx for utilization of certain tax benefits 126 --
------- --------
Net cash provided by financing activities 2,278 --
------- --------
Net decrease in cash and cash equivalents (1,187) (2,898)
Cash and cash equivalents, beginning of period 1,234 4,478
------- --------
Cash and cash equivalents, end of period $ 47 $ 1,580
======= ========
Supplemental disclosure of non-cash investing activities:
Acquisition of Mediconsult.com, Inc.
Market value of Cybear common stock issued $ 4,765
========
Fair value of net liabilities assumed $ 5,295
========
21
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
RELATED INTERGROUP TRANSACTIONS
(through the May 17, 2002 Conversion)
Intergroup Eliminations
Transactions between the groups are eliminated in consolidation.
Cybearclub LC
In August 1999, Cybear commenced the Cybearclub LC joint venture
("Cybearclub") with Andrx intended to distribute healthcare products to
physicians' offices through the Internet. Capital contributions to,
distributions from and net income or loss generated by Cybearclub was allocated
in proportion to Cybear Group's and Andrx Group's interests in the joint
venture. Such interests were 55% to Cybear Group and 45% to Andrx Group.
Cybearclub was managed by and under the direction of a management committee
comprised of five members. Three members were appointed by Cybear Group and two
members were appointed by Andrx Group. Based on its majority ownership and
majority representation on the management committee of Cybearclub, Cybear Group
controlled Cybearclub. Accordingly, Cybear Group consolidated the accounts of
Cybearclub, and Andrx Group utilized the equity method of accounting for its
investment in Cybearclub. Following the Conversion, the operations of Cybearclub
have been integrated into Andrx's distributed products operations.
As part of its operations, Andrx Group purchases products from outside
vendors and distributes them to pharmacies and physicians it generally contacts
through telemarketers. In connection with Cybearclub, Andrx Group sold some of
those products to Cybearclub at cost and charged Cybearclub for certain
fulfillment and back office operations such as purchasing, warehousing and
distribution, as well as customer service and telemarketing activities. As
negotiated by the parties, such services were charged at a rate of 6% of gross
sales for all periods presented. For the periods from April 1, 2002 through May
17, 2002; January 1, 2002 through May 17, 2002, Andrx Group charged Cybearclub
$37 and $112, respectively; and for the three and six months ended June 30, 2001
Andrx Group charged Cybearclub $67 and $124, respectively, for the services it
provided.
Cybearclub operations resulted in net income of $17 and $49 for the
periods from April 1, 2002 through May 17, 2002 and January 1, 2002 through May
17, 2002, respectively, for which Cybear Group recorded Andrx Group minority
interest expense of $8 and $22, for the periods from April 1, 2002 through May
17, 2002 and January 1, 2002 through May 17, 2002, respectively. Cybearclub
generated net income of $65 for the three months ended June 30, 2001, and a net
loss of $18 for the six months ended June 30, 2001 for which Cybear Group
recorded Andrx Group minority interest expense of $29 and minority interest
income of $8, respectively.
22
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share, per share amounts and percentages)
Intergroup Revenue
For the three and six months ended June 30, 2001, included in website
development, hosting and other services is $23 of revenues generated by Cybear
Group from Andrx Group for online survey services of doctors. No intergroup
revenues were generated from the period from January 1, 2002 through May 17,
2002.
Management Services
Through the date of the Conversion, Cybear Group and Andrx Group had a
corporate services agreement whereby Andrx Group provided Cybear Group with
various management services. For the periods from April 1, 2002 through May 17,
2002; January 1, 2002 through May 17, 2002 and the three and six months ended
June 30, 2001, Cybear Group incurred amounts for these services based upon
mutually agreed upon allocation methods. Costs for such services were $15 and
$45 for the periods from April 1, 2002 through May 17, 2002 and January 1, 2002
through May 17, 2002, respectively, and $30 and $60 for the three and six months
ended June 30, 2001.
Intergroup Accounts Payable
Accounts payable to Andrx Group in Cybear Group's Unaudited
Consolidated Balance Sheets represents amounts payable to Andrx Group for the
purchase of the products sold by Cybear Group and services provided by Andrx
Group.
Intergroup Note
Note payable to Andrx Group in Cybear Group's Unaudited Consolidated
Balance Sheets, represents amounts under an unsecured revolving line of credit
between Andrx Group and Cybear Group, entered into in March 2001, and expiring
on March 31, 2004. In April 2002, the agreement was amended to eliminate the
amount of time between draws. As of May 17, 2002, and December 31, 2001, the
note payable to Andrx Group was $4,153 and $2,001, respectively, with an
interest rate of prime plus 1%. Cybear Group was required to maintain certain
covenants, as defined in the agreement, as amended. As of May 17, 2002, Cybear
Group was in compliance with all of the covenants of this agreement. For the
periods from April 1, 2002 through May 17, 2002 and January 1, 2002 through May
17, 2002, interest expense of $24 and $52, respectively, was accrued on the
loan.
Tax Sharing Agreement
Andrx and Cybear entered into a tax sharing agreement, as supplemented,
in connection with the Reorganization. Through May 17, 2002, Andrx Group paid
Cybear $379 related to this supplement to the tax sharing agreement (see Note
7).
23
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
13. LITIGATION AND CONTINGENCIES
The following information updates the litigation and contingencies
disclosure from the disclosure contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended, and Form 10-Q for the
quarterly period ended March 31, 2002. Such information contained therein should
be read in conjunction with the following for a complete discussion of
litigation and contingencies.
Andrx and Aventis have entered into a binding settlement with the
direct purchaser class of plaintiffs in the Cardizem(R) CD antitrust class
lawsuits involving the Stipulation and Agreement they entered into in 1997
("1997 Stipulation") that are pending for consolidated pre-trial proceedings in
the U.S. District Court for the Eastern District of Michigan. The binding
settlement, which is subject to final Court review and approval, calls for a
cash payment by Andrx and Aventis to this group in an undisclosed amount. In
anticipation of potentially reaching settlements with all plaintiffs in the
related litigations, Andrx's results for the three and six months ended June 30,
2002 included an estimated litigation settlements charge of $60,000, which is
included in Accrued and other liabilities in the Company's Unaudited
Consolidated Balance Sheet at June 30, 2002. Such contingency became estimable
in the second quarter of 2002 as a result of the mediation discussions with the
plaintiffs in the litigations and the settlement referred to above. Andrx
intends to vigorously litigate any of these cases that cannot be settled on a
reasonable basis.
Andrx and Biovail Corporation ("Biovail") have entered into an
agreement settling with prejudice (i) Biovail's claims against Andrx in the U.S.
District Court for the District of Columbia for alleged antitrust violations
relating to the 1997 Stipulation, (ii) Andrx's claims against Biovail in the
U.S. District Court for the Southern District of Florida for, among other
things, a declaratory judgment that Andrx had not breached any of the rights
Biovail acquired as assignee of 1999 stipulation between Aventis and Andrx in
settlement of the Cardizem CD patent infringement suit, and (iii) the parties'
respective claims against each other in the consolidated litigation pending in
the U.S. District Court for the Southern District of Florida relating to Andrx's
generic version of Tiazac(R). Though this settlement involved no cash
payments, Andrx has agreed to pay to Biovail a royalty based on net sales of
Andrx's bioequivalent version of Tiazac.
The taking of evidence and post-trial submissions by the parties in the
consolidated trial in the U.S. District Court for the Southern District of New
York involving Andrx's Abbreviated New Drug Application ("ANDA") for a
bioequivalent version of Prilosec have been completed.
24
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
On August 8, 2002, the U.S. District Court for the District of New
Jersey, entered an order granting Andrx's Motion for Summary Judgment with
respect to US Patent No. 4,659,716 ("716 Patent"). The Court ruled that claims 1
and 3 of the 716 Patent were invalid. Schering-Plough Corporation ("Schering")
has filed a notice of its intent to appeal the decision. The 716 Patent was the
only patent for which Schering sued Andrx with respect to Andrx's Claritin D-12
and Claritin Reditabs products. Schering and Andrx had previously entered into a
stipulation whereby the parties agreed to be bound by the Court's decision in
the Claritin D-24 litigation as it related to the 716 Patent. However, with
respect to the Claritin D-24 litigation, Schering also sued Andrx for infringing
US Patent No. 5,314,697 ("697 Patent"). With respect to the 697 Patent, fact
discovery has been completed, but no trial date has yet been scheduled. Andrx
filed a Paragraph III certification for US Patent No. 4,282,233 ("233 Patent")
with respect to all of its Claritin products. The 233 Patent does not expire
until December 19, 2002.
The lawsuit brought by Organon, Inc. and Akzo Nobel N.V. against Andrx
in the U.S. District Court for the Southern District of Florida involving
Andrx's ANDA for a generic version of Remeron has been transferred by the
Judicial Panel on Multi-District Litigation to the U.S. District Court for the
District of New Jersey for consolidated pretrial proceedings.
The lawsuit against Andrx involving the Lemelson Medical Education and
Research Foundation Limited Partnership ("Lemelson") patents, pending in the
U.S. District Court for the District of Arizona, has been stayed pending
conclusion of the Symbol Technologies, Inc., et al. v. Lemelson litigation
pending in the U.S. District Court for the District of Nevada.
The class action lawsuit purportedly related to the average wholesale
pricing of pharmaceutical products under the Arizona Consumer Fraud Act,
previously pending in the Arizona state court, has been voluntarily withdrawn
and dismissed with prejudice.
25
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except for share and per share amounts)
In August 2002, several putative securities fraud class action lawsuits
were filed against Andrx and certain of its current officers and directors and a
former officer/director of Andrx in the U. S. District Court for the Southern
District of Florida, for alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In the
complaints to date received by Andrx, each plaintiff purports to bring the suit
on behalf of all purchasers of Andrx common stock between February 10, 2000 and
August 12, 2002 inclusive. The complaints allege that, during the time period in
question, Andrx, among other things, (1) made material misrepresentations to the
market, thereby artificially inflating the price of Andrx's stock, and (2)
issued financial statements that materially overstated Andrx's revenues, income
and earnings. Specifically, during the class period, Andrx allegedly (1) engaged
in improper accounting practices that had the effect of materially overstating
its reported earnings and understating its losses, (2) issued financial
statements that were not prepared in accordance with GAAP and therefore were
materially false and misleading, and (3) lacked proper accounting controls and
revenue recognition practices at its subsidiaries which allowed its employees to
commit accounting improprieties for more than a period of three years. According
to the complaints, plaintiff and other members of the putative class, in
reliance on the integrity of the market, paid artificially inflated prices for
Andrx's common stock, thereby suffering substantial damages. Andrx is unable to
determine the ultimate outcome of this matter.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Andrx commercializes controlled-release oral pharmaceuticals using its
proprietary drug delivery technologies. Andrx has nine proprietary
controlled-release drug delivery technologies that are patented for certain
applications or for which it has filed for patent protection for certain
applications. Andrx uses its proprietary drug delivery technologies and
formulation skills to develop:
- - bioequivalent versions of selected controlled-release brand name
pharmaceuticals; and
- - brand name controlled-release formulations of existing
immediate-release or controlled-release drugs where it believes that
the application of Andrx's drug delivery technologies may improve the
efficacy or other characteristics of those products.
Andrx is also developing bioequivalent versions of specialty, niche and
immediate-release pharmaceutical products.
Andrx currently manufactures and sells bioequivalent versions of
Cardizem CD, Dilacor XR(R), Ventolin(R), Glucophage(R) and K-Dur(R).
Andrx also sells and markets brand products which it has acquired or licensed
from third parties, the CTEX products (including Histex through June 28, 2002),
the Entex cough and cold lines and the Anexsia pain product line.
Through its distribution operations, Andrx primarily sells
bioequivalent drugs manufactured by third parties to independent pharmacies,
pharmacy chains which do not maintain their own central warehousing facilities,
pharmacy buying groups and physicians' offices. These operations are also used
for the marketing of Andrx's and its collaborative partners' products.
During the first quarter of 2002, Andrx determined that its Cybear
Group business unit could not survive as a stand alone profit center tracked by
a separate class of common stock. Therefore, Andrx Corporation exercised the
rights in its Certificate of Incorporation to convert all of the outstanding
shares of Cybear common stock into shares of Andrx common stock effective May
17, 2002. Cybear common stock was issued in a September 2000 reorganization to
track the performance of Cybear Group, which represented the Internet businesses
of Andrx Corporation. On May 17, 2002, each outstanding share of Cybear common
stock was converted into 0.00964 of a share of Andrx common stock which resulted
in the issuance of approximately 65,000 shares of Andrx common stock. The
Conversion ratio included a 25% premium on the value of Cybear common stock, as
provided by the terms of Andrx Corporation's Certificate of Incorporation.
27
Following the Conversion, Andrx only has one class of common stock
outstanding, and such classes include all of the businesses of Andrx Corporation
and its subsidiaries. The Conversion ratio was based upon the relative market
values of the Andrx common stock and Cybear common stock averaged over the
period from February 22, 2002 through March 21, 2002. The Conversion ratio
included a 25% premium on the value of the Cybear common stock, as required by
the terms of Andrx Corporation's Certificate of Incorporation, which was
approved by the Andrx and Cybear stockholders. While the premium paid to the
holders of Cybear common stock for the three and six month periods in 2002 was
not included in the Andrx or Cybear operating results, the premium associated
therewith increased the total net loss allocated to holders of Andrx common
stock by $526,000 in computing Andrx's net loss per share and reduced the total
net loss allocated to holders of Cybear common stock by $526,000 in computing
Cybear Group's net loss per share and was reflected as a charge to retained
earnings and a credit to additional paid-in capital in the Unaudited
Consolidated Balance Sheet.
Through the date of the Conversion on May 17, 2002, Andrx Corporation
continued to allocate net income (loss) to each class of common stock. For
periods subsequent to the Conversion, Andrx Corporation (i) will only report
earnings (loss) per share for Andrx common stock which includes all of the
former Cybear Group's operating results from the effective date of the
Conversion (ii) will no longer report separate earnings (loss) per share for the
former Cybear common stock, and (iii) will not provide supplemental group
financial statements for Andrx Group and Cybear Group as presented during the
two-class structure.
As the Company announced in our August 12, 2002 press release, Andrx
management learned recently that an employee had made numerous improper entries
that affected its customer balances and their aging in its accounts receivable
records from 1999 to 2002 and, accordingly, the adequacy of the Company's
allowance for doubtful accounts receivable. The Company has been investigating
the impact and the severity of these entries on its consolidated financial
position and results of operations for the current and prior periods affected.
Based on its initial findings, the Company announced on August 12,
2002, that the Company's net accounts receivable as of June 30, 2002 might have
been overstated by as much as $15.0 million. After further investigation and
analysis, including discussions with certain customers regarding past due
amounts, management has now determined that the Company's net accounts
receivable as of June 30, 2002 was overstated, and the related provision for
doubtful accounts (included in Selling, general and administrative expenses)
from 1999 through 2002 was understated, by an aggregate of $5.4 million, of
which $342,000 related to the quarter ended June 30, 2002 and $5.1 million
related to the periods ended prior to April 1, 2002. After consideration of all
of the facts and circumstances, the Company has recognized the full amount of
the misstatement in the second quarter of 2002.
The $5.1 million charge represents less than 3% (2.79%) of revenues for
the second quarter of 2002, 9.28% of loss before income tax benefit, and $0.05
per diluted share of Andrx common stock outstanding ("EPS"). The Company has
concluded that the amounts of the misstatement were not material to any prior
period.
The amounts attributable to prior periods and their effect on those
periods are as follows: (i) $764,000 attributable to the 2002 first quarter
represents 0.41% of revenues, 9.76% of income before income taxes, and $0.007 in
EPS for Andrx Group for that period; (ii) $3.8 million attributable to the year
ended December 31, 2001 represents 0.51% of revenues, 5.50% of income before
income taxes, and $0.03 in EPS for Andrx Group for that period; (iv) $1.3
million attributable to the year ended December 31, 2000 represents 0.25% of
revenues, 1.30% of income before taxes, and $0.01 in EPS for Andrx Group for
that period; and (v) $749,000 credit attributable to the year ended December 31,
1999 represents 0.16% of revenues, 0.50% of income before income taxes and less
than $0.01 in EPS for that period.
The Company also reviewed various qualitative factors with respect to
any prior period, including those set forth in the SEC Staff Accounting Bulletin
No. 99, "Materiality" and concluded that in none of these periods would
correction of the misstatement (i) affect operating trends, (ii) change a loss
to income or income to a loss, (iii) affect the Company's compliance with
regulatory requirements, (iv) affect the Company's compliance with loan
covenants or other agreements (as the Company does not have any), or (v) affect
management compensation.
28
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 ("2002 Quarter"), as Compared to the
Three Months Ended June 30, 2001 ("2001 Quarter")
For the 2002 Quarter, the Company generated a net loss of $31.3
million, as compared to net income of $15.7 million for the 2001 Quarter. For
the 2002 Quarter, total net loss of $29.8 million, or $0.42 net loss per diluted
share, was allocated to Andrx common stock and $1.5 million of net loss, or
$0.23 total net loss per diluted share, was allocated to the Cybear common
stock, which stock was converted into Andrx common stock on May 17, 2002. For
the 2002 Quarter, the premium associated with the May 17, 2002 Conversion
increased the total net loss allocated to holders of Andrx common stock by
$526,000 and reduced the total net loss allocated to holders of Cybear common
stock by $526,000. For the 2001 Quarter, total net income of $24.2 million, or
$0.34 net income per diluted share, was allocated to Andrx common stock and $8.5
million of total net loss, or $1.39 net loss per diluted share, was allocated to
the Cybear common stock.
REVENUES
Total revenues increased to $182.2 million for the 2002 Quarter, as
compared to $180.9 million for the 2001 Quarter.
Net sales from distributed products increased by 14.4% to $123.1
million for the 2002 Quarter, as compared to $107.7 million for the 2001
Quarter. The increase in sales from distributed products reflected Andrx's
participation in the distribution of generic products launched by other
pharmaceutical companies and an increase in sales to existing and new customers,
offset in part by overall price declines, as is common with generic products.
Net sales for distributed products for the 2002 Quarter decreased to $123.1
million from $128.5 million for the first quarter of 2002 largely due to the
January 2002 expiration of marketing exclusivity for generic Prozac. At the end
of that exclusivity period, numerous generic manufacturers entered the market,
resulting in a price decline in excess of 90%.
Net sales of Andrx products decreased by 14.8% to $55.8 million for the
2002 Quarter, as compared to $65.5 million for the 2001 Quarter. In the 2002
Quarter, net sales of Andrx products consisted of $48.4 million of Andrx
bioequivalent products and $7.4 million of Andrx brand products, as compared to
$59.7 million of Andrx bioequivalent products and $5.8 million of Andrx brand
products for the 2001 Quarter.
29
For the 2002 Quarter, net sales of Andrx bioequivalent products of
$48.4 million included sales of the Company's bioequivalent versions of Cardizem
CD, Dilacor XR, Ventolin metered dose inhalers, Glucophage and starting in April
2002 K-Dur, as compared to $59.7 million in net sales of Andrx bioequivalent
products in the 2001 Quarter. The decrease in net sales of Andrx bioequivalent
products, for the 2002 Quarter as compared to the 2001 Quarter, resulted
primarily from a significant decline in net sales of Andrx's bioequivalent
version of Ventolin, a continuing sequential decline in net sales of Andrx's
bioequivalent version of Cardizem CD, partially offset by net sales of Andrx's
bioequivalent version of Glucophage, which was launched in January 2002. The
decline in net sales of Andrx's bioequivalent version of Ventolin began in the
fourth quarter of 2001 following a marked increase in competition which has
continued, if not intensified, into the 2002 third quarter. Andrx's
bioequivalent version of Cardizem CD continues to generate significant current
levels of net sales and gross profits and materially contributes to Andrx's
overall current level of profitability. Although Andrx launched its
bioequivalent version of K-Dur during the 2002 Quarter, Andrx was the fourth
entrant into the market and, accordingly, sales of Andrx's bioequivalent version
of K-Dur were not a significant contributor to Andrx's results of operations.
For the 2002 Quarter, net sales of Andrx brand products were $7.4
million, as compared to $5.8 million in the 2001 Quarter. Net sales of Andrx
brand products in the 2002 Quarter include sales generated from the Histex and
Entex (cough and cold), Embrex (prenatal vitamins) and Anexsia (pain) product
lines. Sales of Andrx brand products in future periods will include net sales of
Altocor which was approved by the FDA in late June 2002, shipped into the
distribution channel beginning in early July 2002 and promoted to physicians
starting in late July 2002. In June 2002, Andrx sold the Histex product line.
The Company generated $3.3 million of other revenues in the 2002
Quarter, as compared to $7.7 million in the 2001 Quarter. Other revenues for the
2002 Quarter primarily represented revenues from contract manufacturing at
Andrx's Massachusetts facility and also included revenues generated by Andrx's
Internet operations, primarily the Physicians Online web portal. This decline in
other revenues was a result of a decrease in contract manufacturing services for
Alpharma USPD, Inc. ("Alpharma"). In March 2002, Alpharma recalled certain of
the Epinephrine Mist products manufactured by Andrx's facility. Andrx is
currently investigating this matter. Other revenues for the 2001 Quarter
included $3.0 million per quarter from Geneva Pharmaceuticals, Inc., ("Geneva")
a member of the Novartis Group of then recurring license fees from an agreement
which was terminated in October 2001.
GROSS PROFIT/GROSS MARGIN
In the 2002 Quarter, total revenues generated total gross profit of
$50.7 million with a total gross margin of 27.8%, as compared to total gross
profit of $76.0 million with a total gross margin of 42.0% in the 2001 Quarter.
In the 2002 Quarter, net sales of distributed products generated $22.9
million of gross profit with a gross margin of 18.6%, as compared to $19.6
million of gross profit with a gross margin of 18.2% for the 2001 Quarter. On a
sequential basis, gross profits for the 2002 Quarter were $22.9 million, as
compared to $23.3 million in the first quarter of 2002, while gross margins
increased from 18.1% to 18.6% from the first quarter of 2002, compared to the
2002 Quarter. Such levels of gross margin are at the higher end of the
historical range. Historically, gross margins on sales of distributed products
range between 14% - 21%, but generally range from 16%-17%.
30
In the 2002 Quarter, net sales of Andrx products generated $27.4
million of gross profit with a gross margin of 49.2%, compared to $50.7 million
of gross profit with a gross margin of 77.5% for the 2001 Quarter.
In the 2002 Quarter, within Andrx products, Andrx's bioequivalent
products generated $23.6 million of gross profit with a gross margin of 48.9%,
as compared to $46.7 million of gross profit with a gross margin of 78.3% in the
2001 Quarter. The decrease in gross profit was largely the result of the
decrease in net sales, primarily Andrx's bioequivalent version of Ventolin,
during the 2002 Quarter, and product mix changes including a continuing
sequential decline in net sales and gross margins for Andrx's bioequivalent
version of Cardizem CD. As of June 30, 2002, the Company had $59.2 million in
raw materials, work in process and finished goods inventories of products yet to
be approved or launched. Included in the June 30, 2002 inventory was
approximately $13.1 million of inventory relating to Altocor which the Company
began shipping in July 2002. In the 2002 Quarter, Andrx recorded a provision
through cost of goods sold of $2.1 million related to inventory for products not
yet launched. Such provision is primarily due to the aging of the inventory as a
result of the delay in FDA product approvals. As a result of the expansion of
manufacturing facilities in anticipation of new product launches and delays in
the launches of Andrx's bioequivalent versions of Prilosec, Tiazac, Naprelan and
Wellbutrin SR/Zyban through the 2002 Quarter, the Company incurred costs of
approximately $1.1 million, included in cost of goods sold in the 2002 Quarter,
relating to unabsorbed manufacturing costs at its Andrx Park manufacturing
facility in Florida. At its Andrx Park facility, Andrx commenced its
manufacturing operations in phases, with phase III commencing in September 2001,
and with phase IV operations anticipated to commence in the fourth quarter of
2002. As a result, Andrx has experienced and will continue to experience
inefficiencies and excess manufacturing capacities in certain areas. Such
inefficiencies and excess capacities in certain areas were contributing factors
to decreased gross margins in the 2002 Quarter. Such manufacturing costs will be
absorbed in the future as the Company increases production levels related to
launches of Andrx products into the marketplace. In connection with the increase
in competition for Andrx's bioequivalent version of Ventolin through the 2002
Quarter, the Company experienced a decrease in net sales and lower gross
margins, as well as a related decrease in production levels. The Company
incurred costs of approximately $2.5 million, included in cost of goods sold in
the 2002 Quarter, relating to unabsorbed manufacturing costs at its
manufacturing facility in Massachusetts where the Company principally
manufactures its bioequivalent version of Ventolin. The Company is taking
measures to reduce certain levels of these unabsorbed manufacturing costs. If
there is an increase in market demand for Ventolin and the Company increases
production levels to manufacture additional quantities of its bioequivalent
product to match that increase in market demand, some current excess capacity
may be utilized. Additionally, in the future, the Company may be able to
increase efficiency at its Massachusetts facility by manufacturing other
inhalation products, which are currently under development.
In the 2002 Quarter, within Andrx products, Andrx's brand products
generated $3.8 million of gross profit with a gross margin of 50.9%, as compared
to $4.0 million of gross profit with a gross margin of 69.3% in the 2001
Quarter. The decrease in gross margin included, among other things, the Company
recording an additional inventory allowance through costs of goods sold of
$764,000 related to aging issues on currently sold brand products. Cost of goods
sold in the 2002 Quarter includes royalties accrued on the net sales generated
from the Anexsia pain product line and the Entex cough and cold line, as well as
amortization of the product rights for the CTEX, Entex and Anexsia products.
Cost of goods sold also included operating costs for Andrx's contract
manufacturing business including a provision of $871,000 in the 2002 Quarter
related to inventories manufactured at Andrx's Massachusetts facility for
Alpharma with which Andrx is currently involved in a dispute.
31
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
SG&A expenses were $46.5 million, or 25.5% of total revenues for the
2002 Quarter, as compared to $35.9 million, or 19.9% of total revenues for the
2001 Quarter. SG&A expenses included expenses related to the administration,
marketing, selling and warehousing of distributed and Andrx products, the
establishment of brand sales and marketing efforts, royalties to the Company's
former Co-Chairman and Chief Scientific Officer related to sales of the
Company's bioequivalent version of Cardizem CD, as well as corporate overhead
and legal costs with respect to patent infringement matters related to the
Company's ANDA filings and antitrust matters. The increase in SG&A expenses in
the 2002 Quarter, as compared to the 2001 Quarter, was primarily due to the
expansion of the brand product sales, the building of the brand sales and
marketing infrastructure, including the CTEX sales force, changes in the product
mix, pre-launch promotional and sales training costs related to Altocor, an
increase in legal costs with respect to patent infringement and antitrust
matters and an increase in the allowance for doubtful accounts receivable. See
page 28 for the discussion of the accounts receivable investigation. Operating
expenses, except cost of goods sold and goodwill write-off related to Andrx's
Internet operations, are classified as SG&A for all periods presented. The
Company is considering increasing the number of sales representatives from 280
as of June 30, 2002 to 500 within 12 to 18 months of the Altocor launch.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $11.4 million, or 20.5% of Andrx products sales in
the 2002 Quarter, as compared to $14.6 million, or 22.2% of Andrx products sales
in the 2001 Quarter. R&D expenses reflected the Company's continued
commercialization efforts in its bioequivalent (ANDA) and brand name (NDA)
development programs. In the 2002 Quarter, the Company submitted four ANDA
filings with the FDA, bringing its total to 28 ANDAs pending at the FDA. The
Company anticipates filing an NDA for Metformin XT and filing at least six ANDAs
during the balance of 2002.
The Company made a Paragraph IV certification in connection with its
ANDA filed for its bioequivalent version of Depakote. As previously disclosed,
the Office of Generic Drugs ("OGD") determined that the ANDA filed by Andrx for
its bioequivalent version of Depakote cannot be approved because, in the opinion
of OGD, the active ingredient in Andrx's proposed product is not identical to
the active ingredient in the reference listed drug. Andrx had previously
requested a written explanation of FDA's determination and on July 18, 2002,
received FDA's explanation of its rationale for its conclusion. Andrx has not
yet determined whether, among other things, it will appeal the decision of OGD
or abandon altogether its effort to make a bioequivalent version of Depakote.
32
LITIGATION SETTLEMENTS
Andrx and Aventis entered into a binding settlement with the direct
purchaser class of plaintiffs in the Cardizem CD antitrust litigation that is
pending for multidistrict proceedings in the United States District Court for
the Eastern District of Michigan. The binding settlement, which is subject to
final Court review and approval, calls for a cash payment by Andrx and Aventis
to this group in an undisclosed amount. In anticipation of potentially reaching
settlements with all plaintiffs in the related litigations, Andrx's results for
the 2002 Quarter include an estimated litigation settlements charge of $60
million which is included in Accrued and other liabilities in the Company's
Unaudited Consolidated Balance Sheet at June 30, 2002. Such contingency became
estimable in the second quarter of 2002 as a result of the mediation discussions
with the plaintiffs in the litigations and the settlement referred to above.
Andrx intends to vigorously litigate any of these cases that cannot be settled
on a reasonable basis.
CYBEAR GOODWILL WRITE-OFF
The 2001 Quarter includes a $2.0 million charge associated with the
impairment of the then remaining goodwill related to the acquisition by Cybear
of Telegraph Consulting Corporation ("Telegraph") in 1999.
INTEREST INCOME, NET
The Company generated interest income, net of $1.5 million in the 2002
Quarter, as compared to $3.1 million in the 2001 Quarter. The decrease in
interest income, net is the result of the lower average level of cash, cash
equivalents and investments available-for-sale maintained during the 2002
Quarter and lower interest rates, compared to the 2001 Quarter. The Company
invests in taxable and tax-free investment-grade interest bearing securities.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company generated $943,000 of equity in earnings of its joint
ventures in the 2002 Quarter, compared to $307,000 in the 2001 Quarter. For the
2002 Quarter, equity in earnings of its joint ventures was the result of sales
of the ANCIRC Pharmaceuticals ("ANCIRC"), (Andrx's 50/50 joint venture with
Watson Pharmaceuticals, Inc.), bioequivalent versions of Oruvail(R) and
Trental(R) and sales of the bioequivalent version of Pepcid(R) launched by
CARAN (Andrx's 50/50 joint venture with Carlsbad Technology, Inc.), offset by
operating expenses of the joint ventures. For the 2001 Quarter, equity in
earnings of its joint ventures reflected sales of ANCIRC's bioequivalent version
of Trental and CARAN's bioequivalent version of Pepcid reduced by operating
expenses of the joint ventures.
GAIN ON SALE OF HISTEX PRODUCT LINE
On June 28, 2002, the Company sold the trademarks, licenses and
permits, marketing materials, packaging supplies, product and sample inventories
including reformulations related to the Histex cough and cold line of products.
In addition, in connection with the sale, the buyer assumed liabilities related
to all Histex products. In consideration, the Company received $1.4 million in
cash and is entitled to receive $375,000 in cash in three equal quarterly
installments of $125,000 payable on October 1, 2002, January 1, 2003 and April
1, 2003. Additionally, among other things, the Company is entitled to receive
quarterly royalty payments on net sales of the Histex products for five years.
This transaction resulted in a pre-tax net gain of $4.5 million recorded in
other income in the Company's Unaudited Consolidated Statement of Operations.
The gain resulted mainly from the extinguishment of net liabilities. In
accordance with Staff Accounting Bulletin Topic 5-E "Accounting for Divestiture
of a Subsidiary or Other Business Operation," as of June 30, 2002, the buyer was
considered thinly capitalized and accordingly, the gain included in other income
is the $1.4 million the Company received in cash and the extinguishment of the
net liabilities to the extent that the related estimated potential liabilities
had actually been fully assumed by the buyer, supported by, among other things,
$2.0 million placed in escrow by the buyer and a guarantee by a significant
customer to not return purchased Histex products. As the Company receives the
additional $375,000 in payments from the buyer and the remaining estimated
potential liabilities become extinguished, the Company will record such amounts
to other income.
33
INCOME TAX EXPENSE (BENEFIT)
For the 2002 Quarter, the Company recorded an income tax benefit of
$28.9 million, or 48% of loss before income taxes. Such tax benefit included a
$21.7 million tax benefit relating to the 2002 Quarter loss, or 36% of loss
before income taxes, and also included the reversal of a $7.2 million valuation
allowance on deferred tax assets relating to certain net operating loss
carryforwards. For the 2001 Quarter, the Company provided $11.2 million for
income taxes, or 42% of income before income taxes. For the 2001 Quarter, the
Company provided for income taxes in excess of the expected annual effective
federal statutory rate of 35%, primarily due to the effect of state income taxes
and amortization of intangible assets which is not deductible for tax purposes.
WEIGHTED AVERAGE SHARES OUTSTANDING
The basic and diluted weighted average shares of Andrx common stock
outstanding was 70.7 million in the 2002 Quarter, as compared to 69.9 million
and 72.2 million, respectively, in the 2001 Quarter. For the 2002 Quarter, all
potential shares were excluded from the diluted share computation as the Company
reported a net loss and, accordingly, such potential common shares were
anti-dilutive. The 2002 Quarter also excludes the unamortized restricted stock
units granted to the Company's Chief Executive Officer, which are also
anti-dilutive. The increase in the basic weighted average number of shares of
Andrx common stock outstanding in the 2002 Quarter, as compared to the 2001
Quarter, was attributable to exercises of stock options, issuances of shares
under the Company's employee stock purchase plan which commenced January 1,
2002, and approximately 65,000 shares of Andrx common stock pursuant to the
Conversion.
The basic and diluted weighted average number of shares of Cybear
common stock was 6.7 million for the period from April 1, 2002 to May 17, 2002
and 6.1 million for the 2001 Quarter. All common stock equivalents were excluded
from the diluted share computation as Cybear was allocated a net loss, and
accordingly, such stock equivalents were anti-dilutive. After May 17, 2002, no
Cybear common stock was outstanding as a result of its Conversion to Andrx
common stock. The basic and diluted weighted average number of shares of Cybear
common stock included herein gave effect to the July 2001 one-for-four reverse
stock split of Cybear common stock.
34
RESULTS OF OPERATIONS
Six Months Ended June 30, 2002 ("2002 Period") as Compared to
Six Months Ended June 30, 2001 ("2001 Period")
For the 2002 Period, the Company generated a net loss of $26.8 million,
as compared to net income of $30.3 million for the 2001 Period. For the 2002
Period, net loss of $21.4 million, or $0.30 net loss per diluted share, was
allocated to Andrx common stock, and $5.4 million of total net loss, or $0.80
net loss per diluted share, was allocated to the Cybear common stock, which
stock was converted into Andrx common stock on May 17, 2002. For the 2002
Period, the premium associated with the May 17, 2002 Conversion increased the
total net loss allocated to holders of Andrx common stock by $526,000 and
reduced the total net loss allocated to holders of Cybear common stock by
$526,000 and was reflected as a charge to retained earnings and a credit to
additional paid-in capital in the Unaudited Consolidated Balance Sheet. For the
2001 Period, net income of $43.4 million, or $0.60 total net income per diluted
share, was allocated to Andrx common stock, and $13.0 million of net loss, or
$2.63 net loss per diluted share, was allocated to Cybear common stock.
REVENUES
Total revenues increased by 8.5% to $367.0 million for the 2002 Period,
as compared to $338.2 million for the 2001 Period.
Net sales from distributed products increased by 16.7% to $251.7
million for the 2002 Period, as compared to $215.6 million for the 2001 Period.
The increase in sales from distributed products reflected Andrx's participation
in the distribution of generic products launched by other pharmaceutical
companies and an increase in sales to existing and new customers, offset in part
by overall price declines, as is common with generic products.
Net sales of Andrx products were $110.3 million for the 2002 Period, as
compared to $110.2 million for the 2001 Period. In the 2002 Period, net sales of
Andrx products consisted of $97.3 million of Andrx bioequivalent products and
$13.0 million of Andrx brand products, as compared to $99.3 million of Andrx
bioequivalent products and $10.9 million of Andrx brand products for the 2001
Period.
For the 2002 Period, net sales of Andrx bioequivalent products of $97.3
million included sales of the Company's bioequivalent versions of Cardizem CD,
Dilacor XR, Ventolin metered dose inhalers, Glucophage and, starting in April
2002, K-Dur; as compared to $99.3 million in net sales of Andrx bioequivalent
products in the 2001 Period. The decrease in net sales of Andrx bioequivalent
products, for the 2002 Period as compared to the 2001 Period, resulted primarily
from a significant decline in net sales of Andrx's bioequivalent version of
Ventolin, a continuing sequential decline in net sales of Andrx's bioequivalent
version of Cardizem CD, partially offset by net sales of Andrx's bioequivalent
version of Glucophage, which was launched in January 2002. The decline in net
sales of Andrx's bioequivalent version of Ventolin began in the fourth quarter
of 2001 following a marked increase in competition which has continued, if not
intensified, into the 2002 third quarter. Andrx's bioequivalent version of
Cardizem CD continues to generate significant current levels of net sales and
gross profits and materially contributes to Andrx's overall current level of
profitability. Although Andrx launched its bioequivalent version of K-Dur during
the 2002 Period, Andrx was the fourth entrant into the market and, accordingly,
sales of Andrx's bioequivalent version of K-Dur were not a significant
contributor to Andrx's results of operations.
35
For the 2002 Period, net sales of Andrx brand products were $13.0
million, as compared to $10.9 million in the 2001 Period. Net sales of Andrx
brand products in the 2002 Period include sales generated from the Histex and
Entex (cough and cold), Embrex (prenatal vitamins) and Anexsia (pain) product
lines. Sales of Andrx brand products in future periods will include sales of
Altocor which was approved by the FDA in late June 2002, shipped into the
distribution channel beginning in early July 2002 and promoted to physicians
starting late July 2002. In June 2002, Andrx sold the Histex product line.
The Company generated $5.0 million of other revenues in the 2002
Period, as compared to $12.3 million in the 2001 Period. Other revenues for the
2002 Period primarily represented revenues from contract manufacturing at
Andrx's Massachusetts facility and also included revenues generated by Andrx's
Internet operations, primarily the Physicians Online web portal. This decline in
other revenues was a result of a decrease in contract manufacturing services for
Alpharma. In March 2002, Alpharma recalled certain of the Epinephrine Mist
products manufactured in Andrx's Massachusetts facility. Andrx is currently
investigating this matter. Other revenues for the 2001 Period, included $3.0
million per quarter from Geneva of then recurring license fees from an agreement
which was terminated in October 2001.
GROSS PROFIT/GROSS MARGIN
In the 2002 Period, total revenues generated total gross profit of
$107.5 million with a total gross margin of 29.3%, as compared to total gross
profit of $138.7 million with a total gross margin of 41.0% in the 2001 Period.
In the 2002 Period, net sales of distributed products generated $46.2
million of gross profit with a gross margin of 18.4%, as compared to $42.1
million of gross profit with a gross margin of 19.5% for the 2001 Period. Such
levels of gross margin are at the higher end of the historical range.
Historically, gross margins on sales of distributed products range between 14% -
21%, but generally range from 16% - 17%.
In the 2002 Period, net sales of Andrx products generated $59.8 million
of gross profit with a gross margin of 54.2%, compared to $86.4 million of gross
profit with a gross margin of 78.4% for the 2001 Period.
36
In the 2002 Period, within Andrx products, Andrx's bioequivalent
products generated $53.0 million of gross profit with a gross margin of 54.5%,
as compared to $78.4 million of gross profit with a gross margin of 78.9% in the
2001 Period. The decrease in gross profit was largely the result of the decrease
in net sales; primarily of Andrx's bioequivalent version of Ventolin, during the
2002 Period; and product mix changes including a continuing sequential decline
in net sales and gross margins from Andrx's bioequivalent version of Cardizem
CD. As of June 30, 2002, the Company had $59.2 million in raw materials, work in
process and finished goods inventories of products yet to be approved or
launched. Included in the June 30, 2002 inventory was approximately $13.1
million of inventory relating to Altocor which the Company began shipping in
July 2002. In the 2002 Period, Andrx recorded a provision through cost of goods
sold of $2.1 million related to inventory for products not yet launched. Such
provision is primarily due to the aging of the inventory as a result of the
delay in FDA product approvals. As a result of the expansion of manufacturing
facilities in anticipation of new product launches and delays in the launches of
Andrx's bioequivalent versions of Prilosec, Tiazac, Naprelan and Wellbutrin
SR/Zyban, through the 2002 Period, the Company incurred costs of approximately
$3.1 million, included in cost of goods sold in the 2002 Period, relating to
unabsorbed manufacturing costs at its Andrx Park manufacturing facility in
Florida. At its Andrx Park facility, Andrx commenced its manufacturing
operations in phases, with phase III commencing in September 2001, and with
phase IV operations anticipated to commence in the fourth quarter of 2002. As a
result, Andrx has experienced and will continue to experience inefficiencies and
excess manufacturing capacities in certain areas. Such inefficiencies and excess
capacities in certain areas were contributing factors to decreased gross margins
in the 2002 Periods. Such manufacturing costs will be absorbed in the future as
the Company increases production levels related to launches of Andrx products
into the marketplace. Similarly, in connection with the increase in competition
for Andrx's bioequivalent version of Ventolin through the 2002 Period, the
Company experienced a decrease in net sales and lower gross margins, as well as
a related decrease in production levels. The Company incurred costs of
approximately $4.4 million, included in cost of goods sold in the 2002 Period,
relating to unabsorbed manufacturing costs at its manufacturing facility in
Massachusetts. The Company is taking measures to reduce certain levels of these
unabsorbed manufacturing costs. If there is an increase in market demand for
Ventolin and the Company increases production levels to manufacture additional
quantities of its bioequivalent product to match that increase in market demand,
some current excess capacity may be utilized. Additionally, in the future, the
Company may be able to increase efficiency at its Massachusetts facility by
manufacturing other inhalation products, which are currently under development.
In the 2002 Period, within Andrx products, Andrx's brand products
generated $6.8 million of gross profit with a gross margin of 52.3%, as compared
to $8.0 million of gross profit with a gross margin of 73.7% in the 2001 Period.
The decrease in gross margin included, among other things, the Company recording
an additional inventory allowance through costs of goods sold of approximately
$1.5 million related to aging issues on currently sold brand products. Cost of
goods sold in the 2002 Period also includes royalties accrued on the net sales
generated from the Anexsia pain product line and the Entex cough and cold line,
as well as amortization of the product rights for the CTEX, Entex and Anexsia
products.
Cost of goods sold also included operating costs for Andrx's contract
manufacturing business including a provision of $871,000 in the 2002 Period
related to inventories manufactured at Andrx's Massachusetts facility for
Alpharma with whom Andrx is currently involved in a dispute.
37
SG&A EXPENSES
SG&A expenses were $87.7 million, or 23.9% of total revenues for the
2002 Period, as compared to $64.4 million, or 19.0% of total revenues for the
2001 Period. SG&A expenses included expenses related to the administration,
marketing, selling and warehousing of distributed and Andrx products, the
establishment of brand sales and marketing efforts, royalties to the Company's
former Co-Chairman and Chief Scientific Officer related to sales of the
Company's bioequivalent version of Cardizem CD, as well as corporate overhead
and legal costs with respect to patent infringement matters related to the
Company's ANDA filings and antitrust matters. The increase in SG&A expenses in
the 2002 Period, as compared to the 2001 Period, was primarily due to the
expansion of the brand product sales, the building of the brand sales and
marketing infrastructure, including the CTEX sales force, changes in the product
mix, pre-launch promotional and sales training costs related to Altocor, an
increase in legal costs with respect to patent infringement and antitrust
matters and an increase in the allowance for doubtful accounts receivable. See
page 28 for the discussion of the accounts receivable investigation. Operating
expenses, except cost of goods sold and goodwill write-off related to Andrx's
Internet operations, are classified as SG&A for all periods presented. The
Company is considering increasing the number of sales representatives from 280
as of June 30, 2002 to 500 within 12 to 18 months of the Altocor launch.
R&D EXPENSES
R&D expenses were $21.3 million, or 19.3% of Andrx products sales in
the 2002 Period, as compared to $28.9 million, or 26.2% of Andrx products sales
in the 2001 Period. R&D expenses reflects the Company's continued
commercialization efforts in its bioequivalent (ANDA) and brand name (NDA)
development programs. In the 2002 Period, the Company submitted four ANDA
filings with the FDA, bringing its total to 28 ANDAs pending at the FDA. The
Company anticipates filing an NDA for Metformin XT and filing at least six ANDAs
during the balance of 2002.
The Company made a Paragraph IV certification in connection with its
ANDA filed for its bioequivalent version of Depakote. As previously disclosed,
the OGD determined that the ANDA filed by Andrx for its bioequivalent version of
Depakote cannot be approved because, in the opinion of OGD, the active
ingredient in Andrx's proposed product is not identical to the active ingredient
in the reference listed drug. Andrx had previously requested a written
explanation of FDA's determination and on July 18, 2002, received FDA's
explanation of its rationale for its conclusion. Andrx has not yet determined
whether, among other things, it will appeal the decision of OGD or abandon
altogether its effort to make a bioequivalent version of Depakote.
38
LITIGATION SETTLEMENTS
Andrx and Aventis entered into a binding settlement with the direct
purchaser class of plaintiffs in the Cardizem CD antitrust litigation that is
pending for multidistrict proceedings in the United States District Court for
the Eastern District of Michigan. The binding settlement, which is subject to
final Court review and approval, calls for a cash payment by Andrx and Aventis
to this group in an undisclosed amount. In anticipation of potentially reaching
settlements with all plaintiffs in the related litigations, Andrx's results for
the 2002 Period include an estimated litigation settlements charge of $60
million which is included in Accrued and other liabilities in the Company's
Unaudited Consolidated Balance Sheet at June 30, 2002. Andrx intends to
vigorously litigate any of these cases that cannot be settled on a reasonable
basis.
CYBEAR GOODWILL WRITE-OFF
The 2001 Period includes a $2.0 million charge associated with the
impairment of the then remaining goodwill related to the acquisition by Cybear
of Telegraph in 1999.
INTEREST INCOME, NET
The Company generated interest income, net of $3.1 million in the 2002
Period, as compared to $6.6 million in the 2001 Period. The decrease in interest
income, net is the result of the lower average level of cash, cash equivalents
and investments available-for-sale maintained during the 2002 Period and lower
interest rates, compared to the 2001 Period. The Company invests in taxable and
tax-free investment-grade interest bearing securities.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company generated $1.6 million of equity in earnings of its joint
ventures in the 2002 Period, compared to $270,000 in the 2001 Period. For the
2002 Period, equity in earnings of its joint ventures was the result of sales of
the ANCIRC bioequivalent versions of Oruvail and Trental and sales of the
bioequivalent version of Pepcid launched by CARAN, offset by operating expenses
of the joint ventures. For the 2001 Period, equity in earnings of its joint
ventures reflect sales of ANCIRC's bioequivalent version of Trental and CARAN's
bioequivalent version of Pepcid, reduced by the operating expenses of the joint
ventures.
GAIN ON SALE OF HISTEX PRODUCT LINE
On June 28, 2002, the Company sold the trademarks, licenses and
permits, marketing materials, packaging supplies, product and sample inventories
including reformulations related to the Histex cough and cold line of products.
In addition, in connection with the sale, the buyer assumed liabilities related
to all Histex products. In consideration, the Company received $1.4 million in
cash and is entitled to receive $375,000 in cash in three equal quarterly
installments of $125,000 payable on October 1, 2002, January 1, 2003 and April
1, 2003. Additionally, among other things, the Company is entitled to receive
quarterly royalty payments on net sales of the Histex products for five years.
This transaction resulted in a pre-tax net gain of $4.5 million recorded in
other income in the Company's Unaudited Consolidated Statement of Operations.
The gain resulted mainly from the extinguishment of net liabilities. In
accordance with Staff Accounting Bulletin Topic 5-E "Accounting for Divestiture
of a Subsidiary or Other Business Operation," as of June 30, 2002, the buyer was
considered thinly capitalized and accordingly, the gain included in other income
is the $1.4 million the Company received in cash and the extinguishment of the
net liabilities to the extent that the related estimated potential liabilities
had actually been fully assumed by the buyer, supported by, among other things,
$2.0 million placed in escrow by the buyer and a guarantee by a significant
customer to not return purchased Histex products. As the Company receives the
additional $375,000 in payments from the buyer and the remaining estimated
potential liabilities become extinguished, the Company will record such amounts
to other income.
39
INCOME TAX EXPENSE (BENEFIT)
For the 2002 Period, the Company reported an income tax benefit of
$25.6 million, or 49% of loss before income taxes. Such tax benefit included a
$18.4 million tax benefit relating to the 2002 Period loss, or 35% before income
taxes, and also included the reversal of a $7.2 million valuation allowance
deferred tax assets relating to certain net operating loss carryforwards. For
the 2001 Period, the Company provided $20.0 million for income taxes, or 40% of
income before income taxes. For the 2001 Period, the Company provided for income
taxes in excess of the expected annual effective federal statutory rate of 35%,
primarily due to the effect of state income taxes and amortization of intangible
assets which are not deductible for tax purposes.
WEIGHTED AVERAGE SHARES OUTSTANDING
The basic and diluted weighted average shares of Andrx common stock
outstanding was 70.6 million in the 2002 Period, as compared to 69.7 million and
72.0 million, respectively, in the 2001 Period. For the 2002 Period, all
potential common shares were excluded from the diluted share computation as the
Company reported a net loss and, accordingly, such potential common shares were
anti-dilutive. The 2002 Period also excluded the unamortized restricted common
shares granted to the Company's Chief Executive Officer, which are also
anti-dilutive. The increase in the basic weighted average number of shares of
Andrx common stock outstanding in the 2002 Period, as compared to the 2001
Period, was attributable to exercises of stock options, issuances of shares
under the Company's employee stock purchase plan which commenced January 1,
2002, and approximately 65,000 shares of Andrx common stock issued upon
Conversion of Cybear common stock to Andrx common stock on May 17, 2002.
The basic and diluted weighted average number of shares of Cybear
common stock was 6.7 million for the period from January 1, 2002 to May 17, 2002
and 5.0 million for the 2001 Period. All common stock equivalents were excluded
from the diluted share computation as Cybear was allocated a net loss, and
accordingly, such stock equivalents were anti-dilutive. After May 17, 2002, no
Cybear common stock was outstanding as a result of its Conversion to Andrx
common stock. The basic and diluted weighted average number of shares of Cybear
common stock included herein gave effect to the July 2001 one-for-four reverse
stock split of Cybear common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had $213.6 million in cash, cash
equivalents and investments available-for-sale, and $387.6 million of
consolidated working capital.
OPERATING ACTIVITIES
Net cash provided by operating activities was $8.9 million in the 2002
Period, as compared to $25.6 million in the 2001 Period.
40
In the 2002 Period, net cash provided by operating activities of $8.9
million included net loss of $26.8 million; income tax benefits related to
exercises of stock options of $2.5 million; a decrease in accounts receivable,
net of $31.8 million and increases in accounts payable and accrued and other
liabilities of $57.7 million; offset by increases in inventories of $28.0
million and prepaids and other assets, net of $32.5 million. In addition, the
2002 Period also includes depreciation and amortization of $10.4 million, offset
by undistributed equity in earnings of joint ventures of $1.6 million and a gain
on sale of Histex product line of $4.5 million.
In the 2001 Period, net cash provided by operating activities of $25.6
million included net income of $30.3 million; income tax benefits related to
exercises of stock options of $10.1 million; offset by increases in accounts
receivables, net of $11.9 million; inventories of $4.0 million; prepaid and
other assets, net of $509,000, and decreases in accounts payable and accrued and
other liabilities of $9.8 million. In addition, the 2001 Period also includes
depreciation and amortization of $9.5 million, write-off of Telegraph goodwill
of $2.0 million, offset by undistributed equity in earnings of joint ventures of
$270,000.
INVESTING ACTIVITIES
Net cash provided by investing activities was $15.5 million in the 2002
Period, as compared to net cash used in investing activities of $65.8 million in
the 2001 Period.
In the 2002 Period, net cash provided by investing activities of $15.5
million consisted of $59.0 million in maturities of investments
available-for-sale and $1.4 million in proceeds from the sale of the Histex
product line, offset by $45.0 million of purchases of property, plant and
equipment.
In the 2001 Period, net cash used in investing activities of $65.8
million consisted primarily of $35.5 million in purchases of property, plant and
equipment, $11.1 million in the acquisition of CTEX net of cash acquired, $3.7
million in loans to former CTEX shareholders, $14.8 million in the acquisition
of the Entex brand product line, $18.2 million in the acquisition of certain
assets of Armstrong, and $3.2 million in acquisition of and advances to
Mediconsult, offset by $20.5 million in maturities of investments
available-for-sale.
FINANCING ACTIVITIES
Net cash provided by financing activities was $2.9 million in the 2002
Period, as compared to $4.5 million in the 2001 Period, which consisted of
proceeds from issuances of shares of Andrx common stock from exercises of Andrx
stock options, and in the 2002 Period, also included proceeds from issuances of
shares of Andrx common stock under the employee stock purchase plan.
41
FUTURE COMMITMENTS
Andrx anticipates that its cash requirements will continue to increase
due to the completion of construction of its research and development,
manufacturing and corporate facilities, including the acquisition of related
equipment. In the second half of 2002, Andrx will be completing construction on
its expansion of its research and development and manufacturing facilities
including the related equipment. Andrx is also evaluating, among other things,
additional expansions of its manufacturing capabilities for amounts of at
least $40 million. In the second half of 2002, Andrx intends to occupy an
additional distribution facility in Ohio, which will require the purchase of
additional distribution inventories to initially stock this facility. Andrx
also, from time to time, considers purchasing additional facilities for
expansion. The Company will also be building up inventories of some of its
currently unapproved and yet to be launched products. Additionally, Andrx is
continuing its implementation of the JD Edwards software package and related
hardware. The Company may also fund the litigation settlements. Andrx
Corporation may need additional funding and may seek additional funding through
private debt financing in order to meet its cash needs.
OUTLOOK
The Company anticipates that it will continue to face a number of
difficult operating issues in the second half of 2002 which may adversely affect
near term earnings. While the Company is awaiting satisfactory resolution of the
patent and/or FDA issues, which have delayed the launches of its bioequivalent
versions of Prilosec, Wellbutrin SR/Zyban, Tiazac and Naprelan, it continues to
increase its spending in the areas of R&D, scale-up activities, and brand SG&A,
while it continues to work toward the launch of those products and the
development of its brand business.
Distributed Products
During the 2002 Quarter, the Company generated $123.1 million in net
sales of distributed products. The Company's pharmaceutical distribution
operation generally has a history of consistent quarterly sequential growth as a
result of, among other things, the Company's penetration of the market servicing
independent pharmacies, pharmacy chains which do not maintain their own central
warehousing facilities, pharmacy buying groups and, to a lesser extent,
physician offices. The Company believes that it will be able to continue to
expand in this market, both in terms of per store volume and customer locations,
particularly following the opening of its Ohio distribution center in the second
half of 2002.
Nevertheless, the ability of the Company to provide consistent
sequential quarterly growth will be affected in the future, in large part, by
the Company's participation in the launch of new products by other generic
manufacturers. As such, the Company's growth in its pharmaceutical distribution
operation is related to the overall growth in the generic industry and the
launch of significant new products. As new and existing products encounter
competition, sales prices of such products typically decline.
The Company's distribution operation will participate in the launch of
Andrx's bioequivalent products. For external reporting purposes, however, this
segment's financial results do not include its participation in the distribution
of Andrx bioequivalent products. Such sales are classified as Andrx product
sales in the Company's Unaudited Consolidated Statements of Operations.
42
Andrx Bioequivalent Products
During the 2002 Quarter, the Company generated net sales of $48.3
million from its bioequivalent products (including sales by the Company's
distribution operations of Andrx's bioequivalent products). The Company's
bioequivalent products generated gross profits of $23.6 million and a gross
margin of 48.9%. Growth in the bioequivalent product business will come from the
launch of significant new products, as sales of Andrx's current bioequivalent
products are expected to remain relatively stable or decrease.
The bioequivalent pharmaceutical industry is highly competitive and
selling prices are often subject to significant and rapid declines from
competition among existing or new bioequivalent manufacturers entering the
market. Since the launch of Andrx's bioequivalent version of Cardizem CD in 1999
with 180-days of marketing exclusivity, there have only been two additional
bioequivalent manufacturers of this product. As a result, although continuing to
experience a sequential decline in net sales, Andrx's bioequivalent version of
Cardizem CD continues to generate significant net sales and gross profits and
materially contributes to Andrx's overall current level of profitability.
The Company believes that its bioequivalent controlled-release products
will face more modest competition than other bioequivalent products due to the
limited number of competitors having the scientific and legal expertise and
financial resources required to develop and bring these products to market. To a
lesser extent, the Company also believes that its specialty or niche
bioequivalent products will also face less competition than bioequivalent
products generally. The Company believes that these competitive barriers,
combined with the synergistic value derived from the Company's pharmaceutical
distribution operation, will better enable it to compete in the highly
competitive bioequivalent product marketplace.
Currently, Andrx's overall level of profitability remains dependant on
a relatively small number of products. If these products and particularly
Andrx's bioequivalent version of Cardizem CD were to experience a significant
decrease in net sales from increased competition from existing and/or new
competitors with accompanying price reductions and/or reduced market shares,
Andrx's operating results would be materially adversely affected. In the 2002
Quarter, continued increased competition, which resulted in reduced market share
for the Company's bioequivalent version of Ventolin, adversely affected the
Company's quarterly financial results and sales of Ventolin are not expected to
increase. The competition in the Ventolin market has intensified in the third
quarter of 2002.
43
Though the timing remains uncertain, the Company remains optimistic
that it will be able to introduce bioequivalent versions of Tiazac, Wellbutrin
SR/Zyban, Naprelan and potentially Prilosec during the latter part of the second
half of the year. Product introductions in 2002 may also include other generic
products, which Andrx has pending at the FDA. These product launches are
dependent on a number of factors, certain ones of which are outside the
Company's control, including, among other things, receipt of final FDA marketing
approval, new Orange Book patent listings and related patent infringement
litigation, the expiration of others' exclusivity rights, a perceived or
predicted favorable resolution to any pending or potential patent litigation,
and the successful scale-up and manufacture of such products. The net sales and
gross profits to be generated by these new products will also be affected by the
degree of competition the Company's products encounter, particularly after the
expiration of any 180-day exclusivity period that the Company anticipates, the
rate of generic substitution for the Company's bioequivalent products, the
extent managed care organizations and others are able to convert patient usage
of the Company's bioequivalent products (especially omeprazole) from other
branded products in the same therapeutic class, and the Company's ability to
manufacture sufficient quantities of its products to meet demand. Factors
affecting the Company's ability to meet that demand include the timing of its
product launches, particularly in instances where the Company's product will
fill all or a substantial part of the generic marketplace, the presence or
absence and degree of competition, both during and after any period of
exclusivity the Company's product(s) may receive, additional demand that may
come from the conversion of other products in the same therapeutic class, and
the cumulative demand for Andrx products.
Andrx Brand Products
The Company began to ship Altocor, its first internally developed brand
product early in July 2002 and started the promotion to physicians in late July
2002. Altocor will compete in the statin market, which had approximately $12
billion in U.S. sales in 2001. The Company expects to ship approximately $10
million (estimated sales value) of Altocor as initial stocking.
With Altocor's launch, the Company entered a highly competitive market
against brand pharmaceutical manufacturers having significantly larger and more
experienced sales forces and greater financial resources dedicated to
advertising and promotion. Net sales for Altocor will be subject to significant
accounting estimates for, among other things, the ability of the Company's sales
force and its Physicians' Online ("POL") Internet web portal to promote to
physicians, and other marketing initiatives to generate product demand and pull
product through the distribution channel, and the Company's ability to estimate
returns. The Company's estimate of returns will be based on, among other things,
terms offered to customers and an estimate of expected prescription levels.
Other marketing initiatives include the implementation of a coupon redemption
program in the third quarter of 2002. Such sales incentives will be recorded as
an allowance against net sales in the Consolidated Statement of Operations. The
sales recorded will be based on the expected pull-through of the product in the
distribution channel, net of among other things, coupon utilization. Consistent
with industry practice, the Company may offer allowances on initial purchases
and generally provide for a right of return or exchange. Low prescription levels
of Altocor are anticipated during the third quarter of 2002, therefore, the
Company does not expect to realize significant net sales of Altocor in its
Statement of Operations and, in the fourth quarter of 2002, the Company expects
to record modest net sales of Altocor. Sales, marketing, advertising and
promotional costs will exceed gross profits from net sales of Altocor until a
profitable sales level is achieved.
44
In connection with existing brand products, net sales in 2002 will be
recognized to the extent that they are reasonably pulled through the
distribution channel. Additionally, net sales from Andrx brand products that
relate to cough and cold products, are subject to seasonality. Moreover, since
the Company expects to dedicate its sales force's efforts to Altocor, net sales
of other Andrx brand products could be adversely affected in future periods.
Andrx sold its Histex product line in June 2002.
Other Revenues
In March 2002, Alpharma, for whom Andrx performs contract
manufacturing, notified the Company that certain of the Epinephine Mist products
manufactured in Andrx's Massachusetts facility were recalled by Alpharma. Andrx
is currently investigating this matter. Additionally, the contract manufacturing
of Nasacort for Aventis increased in the 2002 Period but is expected to decrease
in future periods. Other revenues also include revenues generated by Andrx's
Internet operations, primarily the POL web portal. For the 2001 Periods, other
revenues include the then recurring license fees from Geneva from an agreement
which was terminated in October 2001.
Cost of Goods Sold
In anticipation of 2002 bioequivalent product launches, the Company
continues to expand its manufacturing facilities. As certain launches were
delayed, the Company incurred unabsorbed manufacturing costs at its Florida
manufacturing facilities which are included in cost of goods sold. At its Andrx
Park facility in Florida, Andrx commenced its manufacturing operations in
phases, with phase III commencing in September 2001, and with phase IV
operations anticipated to commence in the fourth quarter of 2002. As a result,
Andrx has experienced and will continue to experience inefficiencies and excess
manufacturing capacities in certain areas. Such inefficiencies and excess
capacities in certain areas were contributing factors to decreased gross margins
in the 2002 Quarter. It is anticipated that these manufacturing costs will be
absorbed in the future as additional products are manufactured and launched. In
addition, as a result of the increased competition for the Company's
bioequivalent version of Ventolin which continued during the 2002 Quarter and
intensified in the 2002 third quarter, the Company experienced a decline in
sales and gross margins and a decrease in production levels for this product in
the 2002 Quarter. As a result, the Company incurred unabsorbed manufacturing
costs at its Massachusetts manufacturing facility, which are similarly included
in cost of goods sold. The Company is taking measures to reduce certain levels
of these manufacturing costs and to improve efficiency of this facility and in
the future may manufacture other inhalation products that are currently under
development.
45
SG&A Expenses
The Company's SG&A expenses are related to the level of sales and the
sales product mix which includes distributed products, Andrx bioequivalent
products and Andrx brand products. The Company anticipates that its SG&A
expenses will be significantly greater in 2002 than in 2001. That increase is
primarily the result of anticipated bioequivalent product launches in 2002,
additional operating expenses related to Andrx's Ohio distribution facility, the
existence of a brand sales force throughout 2002, increases in insurance
premiums, increases in legal costs with respect to patent infringement and
antitrust matters, expenses related to the promotion of Altocor and future
increases in the allowance for doubtful accounts receivable. See page 28 for
the discussion of the accounts receivable investigation. SG&A includes the
Company's Internet operating expenses primarily related to its Physicians'
Online web portal operation. The Company expects that the Internet businesses,
tracked by the former Cybear common stock, will generate approximately $5
million in net losses from the May 17, 2002 Conversion through December 31,
2002. The Company will continue to assess its Internet operations in an effort
to further streamline and consolidate its operations and potentially divest
assets. On July 31, 2002, Andrx entered into an agreement with Aventis' business
unit, MyDocOnline, to sell Andrx's Dr. Chart and @RX applications and license
Andrx's patents for Internet transmission of prescriptions. Aventis also entered
into a two-year marketing agreement with Andrx's POL web portal. As part of
these transactions, Andrx expects to receive approximately $6.0 million over the
next two years.
The Company's brand sales effort commenced in January 2001 with the
acquisition of approximately 90 sales representatives through the CTEX
acquisition. As of June 30, 2002 the Company had approximately 280 sales
representatives. The Company is also considering increasing the number of sales
representatives up to 500 within 12 to 18 months after the Altocor launch.
Altocor promotional expenses, which are expensed as incurred, will be
periodically evaluated throughout 2002 following consideration of, among other
things, the launch of the Company's bioequivalent versions of Wellbutrin SR,
Zyban and Prilosec and any co-promotional arrangements for Altocor. The
Company's sales force and planned promotional budget for 2002 are likely to be
significantly less than those of its competitors.
R&D Expenses
Andrx anticipates that R&D expenses for 2002 will be approximately $55
million, as a result of continued spending in bioequivalent drug development
(ANDA) and brand product development (NDA). Thus, R&D expenses for the 2002
Quarter of $11.4 million, or $21.3 million for the 2002 Period, are relatively
low, and higher R&D expenses are anticipated in the future quarters of 2002.
Andrx currently expects that its 2002 R&D expenses will be allocated
approximately 55% to bioequivalent products and 45% to brand products. R&D
expenses will be periodically evaluated throughout 2002 following consideration
of, among other things, the launch of the Company's bioequivalent versions of
Wellbutrin SR, Zyban and Prilosec. If these launches were to occur, 2002 R&D
expenses may be increased accordingly. In the 2002 Quarter, Andrx submitted four
ANDA filings with the FDA, bringing its total to 28 ANDAs pending at the FDA.
The Company anticipates filing an NDA for Metformin XT and filing at least six
ANDAs during the balance of 2002.
46
Income Taxes
The Company expects to record income tax expense (benefit) at 35% of
net income (loss) before income taxes for 2002, excluding the 2002 Quarter
reversal of the $7.2 million valuation allowance on deferred tax assets relating
to net operating loss carryforwards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Unaudited Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates including but not limited to those related to (i) the allowance for
doubtful accounts receivable, (ii) allowance for inventories, (iii) sales
allowances, (iv) useful life or impairment of goodwill and other intangibles,
(v) deferred tax asset valuation allowances and (vi) litigation settlements
accrual. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
Unaudited Consolidated Financial Statements.
47
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts receivable for
estimated losses resulting from the inability of its customers to make required
payments. As of June 30, 2002, the Company had $111.5 million in accounts
receivables offset by an allowance for doubtful accounts of $13.3 million.
Accounts receivable generated from the Company's distribution operations, are
principally due from independent pharmacies, pharmacy chains, pharmacy buying
groups and physicians' offices. Accounts receivable generated from the Company's
bioequivalent and brand product sales are principally due from a limited number
of large warehousing pharmacy chains, wholesalers and large managed care
customers. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Management specifically
analyzes accounts receivable, historical bad debts, customer concentrations,
customer credit-worthiness, percentage of accounts receivable by aging category
and changes in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The Company also performs ongoing credit
evaluations of its customers. If the financial conditions of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an increase to the allowance may be required. Also, should actual
collections of accounts receivable be different than the Company's estimates
included in the determination of its allowance, the allowance will be increased
or decreased through charges or credits to the Consolidated Statements of
Operations in the period in which they become known. Such changes could be
significant.
ALLOWANCE FOR INVENTORIES
As of June 30, 2002, the Company had $189.9 million in inventories.
Inventories of pharmaceutical products consist primarily of finished goods held
for distribution, and raw materials, work in process and finished goods of Andrx
bioequivalent and brand products. As of June 30, 2002, the Company had
approximately $59.2 million in raw materials, work in process and finished goods
inventories relating to products that have either not been approved by the FDA
or have not yet been launched. Included in the June 30, 2002 inventory of
products not approved by the FDA or launched, was $13.1 million relating to
Altocor which the Company began shipping in early July 2002. Inventories were
stated at the lower of cost (first-in, first-out) or market. Cost of inventories
held for distribution was based on purchase price, net of vendor discounts,
rebates and other allowances, but excluded shipping, warehousing and
distribution costs which were expensed as incurred as selling, general and
administrative expenses in the Statements of Operations. In evaluating whether
inventory was stated at the lower of cost or market, management considered such
factors as the amount of inventory on hand and in the distribution channel,
estimated time required to sell such inventory, remaining shelf life and current
and expected market conditions, including levels of competition. As appropriate,
provisions were made to reduce inventories to their net realizable value. If
conditions change in future periods, additional allowances may be required.
SALES ALLOWANCES
Sales allowances for estimated returns, chargebacks and other sales
allowances are established by the Company concurrently with the recognition of
revenue. The provisions are established based upon consideration of a variety of
factors, including but not limited to, actual return and historical experience
by product type, the number and timing of competitive products approved for
sale, both historical and projected, the market for the product, estimated
customer inventory levels by product and current and projected economic
conditions, levels of competition and price declines. Actual product returns,
chargebacks and other sales allowances incurred are, however, dependent upon
future events. The Company continually monitors the factors that influence sales
allowances and makes adjustments to these provisions when management believes
that actual product returns, chargebacks and other sales allowances may differ
from established allowances. If conditions change in future periods, additional
allowances may be required.
48
In the pharmaceutical industry, the practice is generally to grant
customers the right to return or exchange purchased goods. In the generic
pharmaceutical industry, this practice has resulted in generic manufacturers
issuing inventories credits (also known as shelf-stock adjustments) to customers
based on the customers' existing inventories following decreases in the market
price of the related generic pharmaceutical products. Due to the competitive
nature of the generic pharmaceutical industry, prices to customers are subject
to frequent and significant price declines from existing and new competitors.
The determination to grant a credit to a customer following a price decrease is
generally at the discretion of the Company, and generally not pursuant to
contractual arrangements with customers. Accordingly, the Company makes
significant accounting estimates, which include estimates of price declines and
quantities shipped but still on customers' shelves before the products pull
through the distribution channel. The Company accrues an estimate for the sales
allowances in the same period the sale is recognized and continually reviews
such estimates. If conditions change in future periods, additional allowances
may be required.
In connection with brand products, the Company's significant accounting
estimates for sales allowances are dependent on the Company's ability to promote
to physicians, create demand for products, pull products through the
distribution channel and estimate returns, future levels of prescriptions for
its products and the inventory levels in the distribution channel. It is a
common practice in the pharmaceutical industry for brand manufacturers to offer
customers buy-in allowances on initial purchases prior to promotion activities
by the manufacturer. All purchases by customers are generally subject to the
right of return or exchange as a result of there being a limited number of large
customers. Accordingly, the Company is required to make significant accounting
estimates related to such sales allowances, concurrently with the recognition of
revenues, and continually reviews such estimates. The Company's policy is to
recognize net sales to the extent it can reasonably estimate returns and
products expected to be pulled through the distribution channel. The ability to
make such estimates is more difficult when there is a high level of product in
the distribution channel. If conditions change in future periods, additional
allowances may be required.
USEFUL LIFE AND/OR IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES
Under the purchase method of accounting for acquisitions, goodwill
represents the excess of purchase price over the fair value of the net assets
acquired. As of June 30, 2002, the Company had $34.3 million of goodwill, net in
the Unaudited Consolidated Balance Sheet. Such goodwill was comprised of $7.7
million for Valmed Pharmaceuticals, Inc., $367,000 for Mediconsult.com, Inc. and
$26.3 million for CTEX. With the adoption of SFAS No. 142 in 2002, goodwill is
subject to at least an annual assessment for impairment in value by applying a
fair-value based test. Any applicable impairment loss is the amount, if any, by
which the implied fair value of goodwill is less than the carrying value.
Other intangible assets consisted of brand product rights purchased
from other pharmaceutical companies or acquired through the allocation of
purchase price upon the acquisition of another entity, which are being amortized
over periods ranging from three to ten years. Other intangible assets also
consisted of Cybear's physicians' network and trademarks, and patents relating
to Cybear's electronic prescription process, which are being amortized over
periods ranging from five to fourteen years. As of June 30, 2002, the Company
had $25.3 million of other intangible assets, net in the Unaudited Consolidated
Balance Sheets which consisted primarily of $8.9 million of intangibles related
to POL and $15.1 million of intangibles related to product rights on the Entex
and Anexsia brand product line. Management established the amortization period
based on an estimate of the period the assets would generate positive cash flow.
Amortization was provided using the straight-line method over the estimated
useful life. Intangible assets were reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable. If conditions change in future periods, additional allowances
may be required.
49
DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE
The Company recorded a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. During the
2002 Quarter, the Company recorded the reversal of a $7.2 million valuation
allowance on deferred tax assets relating to certain net operating loss
carryforwards. Should the Company determine it would not be able to realize all
or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset by recording a valuation allowance would be charged to
operating results in the period such determination was made.
LITIGATION SETTLEMENTS ACCRUAL
Andrx and Aventis entered into a binding settlement with the direct
purchaser class of plaintiffs in the Cardizem CD antitrust litigation that is
pending for multidistrict proceedings in the United States District Court for
the Eastern District of Michigan. The binding settlement, which is subject to
final Court review and approval, calls for a cash payment by Andrx and Aventis
to this group in an undisclosed amount. As a result of the mediation which
occurred in the 2002 Quarter, Andrx anticipated potentially reaching settlements
with all of the plaintiffs in the related litigations. Consequently, the Company
recorded an estimated litigation settlements charge of $60 million which is
included in Accrued and other liabilities in the Company's Unaudited
Consolidated Balance Sheet at June 30, 2002. The $60 million litigation
settlements accrual is an estimate based upon management's judgement including
representations received from outside counsel. Such estimate will be reviewed
periodically. Such contingency became estimable in the second quarter of 2002 as
a result of the mediation discussions with the plaintiffs in the litigations and
the settlement referred to above. Andrx intends to vigorously litigate any of
these cases that cannot be settled on a reasonable basis. If conditions change
in the future periods, the Company may need to increase or decrease its
litigation settlements accrual.
RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This pronouncement addresses financial accounting and
reporting for goodwill and other intangible assets. With the adoption of SFAS
No. 142, goodwill and certain other intangible assets are no longer subject to
amortization. Instead, goodwill will be subject to at least an annual assessment
for impairment in value by applying a fair-value based test. Any applicable
impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Any impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as a
cumulative effect of a change in accounting principle. The Company has completed
its impairment test as required under the provisions of SFAS No. 142. Adoption
of SFAS No. 142 in 2002 resulted in the discontinuance of the Company recording
approximately $3.2 million of annual goodwill amortization in future periods.
The impairment test also indicated the Company's goodwill is not impaired.
50
Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that opinion). SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with early application encouraged. Adoption of the
provisions of SFAS No. 144 in 2002 did not have any impact on the unaudited
consolidated financial statements of the Company.
Consideration by a Vendor to a Customer
In November 2001, the Emerging Issues Tasks Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer (including
a Reseller of the Vendor's Products)."This pronouncement addresses the
accounting for consideration given by a vendor to a customer (including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller). This pronouncement is effective for annual or interim
periods beginning after December 15, 2001. Adoption of the provisions of EITF
01-09 did not have any material impact on the consolidated financial statements
of the Company as its accounting policy was consistent with the provisions of
EITF 01-09.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This pronouncement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company believes the adoption of SFAS No. 143 in 2003 will not have a material
impact on the consolidated financial statements of the Company.
51
ANDRX CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 12 to the "Notes to Unaudited Consolidated Financial
Statements of Andrx Corporation" included in Part 1 Item 1 of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 5 to "Notes to Unaudited Consolidated Financial Statements of
Andrx Corporation" included in Part 1, Item 1 to this report. The restricted
stock unit grant was issued without registration pursuant to the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On July 19, 2002, Andrx Corporation held its annual meeting of
stockholders.
(b) Not applicable.
(c) At the annual meeting, the following matters were voted upon
by Andrx Corporation stockholders:
1. Election of Directors
The following table sets forth the name of each nominee and the voting
with respect to each nominee for director.
Nominee For Withhold Authority
------- ---------- ------------------
Richard J. Lane 52,085,381 7,102,851
Tamara A. Baum 57,797,955 1,390,277
Lawrence J. DuBow 58,177,401 1,010,831
10. Ratification of the appointment of Ernst & Young LLP as Andrx
Corporation's Independent Certified Public Accountants for the year
ending December 31, 2002.
With respect to the foregoing matter, 58,016,817 shares of Andrx common
stock were voted in favor, 1,141,900 shares of Andrx common stock voted against
and 29,516 shares of Andrx common stock voted abstained. There were no broker
non-votes of Andrx common stock.
52
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.66 Employment Agreement between the Registrant and Richard J. Lane,
Chief Executive Officer*
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
* Management compensation plan or arrangement.
(b) Reports on Form 8-K.
On May 20, 2002, Andrx Corporation filed a current report on Form 8-K
to announce that as previously disclosed, effective May 17, 2002, it had
converted all of the outstanding shares of its Cybear common stock into shares
of Andrx common stock in accordance with the terms of the Andrx Corporation
Certificate of Incorporation.
On June 19, 2002, Andrx Corporation filed a current report on Form 8-K
to announce that its Board of Directors decided to no longer engage Arthur
Andersen LLP as Andrx's independent accountants and, subject to ratification by
Andrx's stockholders, engaged Ernst & Young LLP to serve as Andrx's independent
public accountants for 2002.
On August 13, 2002, Andrx Corporation filed a current report on Form
8-K to announce that it had discovered that one of its employees at the
subsidiary level appeared to have altered certain accounts receivable balances
and agings pertaining to its pharmaceutical and distribution operations, thereby
potentially affecting Andrx's allowance for doubtful accounts.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 2002 By: /s/ Richard J. Lane
-------------------------------------------
Richard J. Lane
Chief Executive Officer
(Principal Executive Officer)
Date: August 19, 2002 By: /s/ Angelo C. Malahias
----------------------------------
Angelo C. Malahias
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
54