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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 000-31475
ANDRX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 65-1013859
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4955 Orange Drive
Davie, Florida 33314
- --------------------------------- ---------------------------------
(Address of principal (Zip Code)
executive offices)
(954) 584-0300
----------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Andrx Corporation - Andrx Group Common Stock, $0.001 par value
Andrx Corporation - Cybear Group Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ____
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 29, 2001, the aggregate market values of Andrx Group common
stock and the Cybear Group common stock held by non-affiliates (based on the
closing price on such date as reported on the Nasdaq National Market) were $3.2
billion and $6.7 million, respectively. There were 69,763,806 shares of Andrx
Group common stock outstanding and 15,207,250 shares of Cybear Group common
stock outstanding as of March 29, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is
incorporated herein by reference to the proxy statement for the 2001 annual
meeting of stockholders.
FORWARD LOOKING STATEMENTS
Andrx Corporation cautions readers that certain important factors may
affect Andrx Corporation'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 Andrx
Corporation. 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," "intent," "could,"
"would," "estimate," or "continue," or the negative other variations thereof or
comparable terminology are intended to identify forward-looking statements.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties. Andrx Corporation is also subject to other risks detailed herein
or detailed from time to time in Andrx Corporation Securities and Exchange
Commission filings.
PART I
Item 1. Business
Introduction
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:
o Andrx common stock, to track the performance of the Andrx Group,
which includes Andrx Corporation and subsidiaries, other than Cybear Inc., its
subsidiaries and certain potential future Internet businesses of Andrx
Corporation; and
o Cybear common stock, to track the performance of the Cybear Group,
which includes Cybear Inc., its subsidiaries and certain potential future
Internet businesses of Andrx Corporation.
In connection with the reorganization, Andrx shareholders exchanged each share
of common stock held for one share of Andrx common stock and .1489 shares of
Cybear common stock and Cybear stockholders, other than Andrx, exchanged each
share of common stock held for one share of Cybear common stock.
As used in this Andrx Corporation Form 10-K, "Andrx Corporation" or the
"Company" refers to Andrx Corporation and all of its subsidiaries. "Andrx"
refers to Andrx Corporation and all of its subsidiaries other than Cybear Inc.
prior to the September 2000 reorganization and to the Andrx Group after the
reorganization. "Cybear" refers to Cybear Inc. and its subsidiaries prior to the
reorganization and to the Cybear Group following the reorganization.
This Form 10-K contains trademarks held by Andrx Corporation and those
of third parties.
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BUSINESS OF ANDRX
Overview
Andrx formulates and commercializes controlled-release oral
pharmaceuticals using its proprietary drug delivery technologies. Andrx markets
and sells Cartia XT(R) and Diltia XT(R), its generic or bioequivalent versions
of Cardizem(R) CD and Dilacor XR(R).
Andrx has nine proprietary drug delivery technologies that it has
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:
o bioequivalent versions of selected controlled-release brand
name pharmaceuticals; and
o 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.
Controlled-release drug delivery technologies generally provide more
consistent and appropriate drug levels in the bloodstream than immediate-release
dosage forms and may improve drug efficacy and reduce side effects by releasing
drug dosages at specific times and in specific locations in the body. These
technologies also allow for the development of "patient friendly" dosage forms,
which reduce the number of times a drug must be taken, thus improving patient
compliance.
Andrx is also developing bioequivalent versions of specialty or niche
pharmaceutical products.
Through its distribution operations, Andrx primarily sells
bioequivalent drugs manufactured by third parties primarily 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.
In March 2000, Andrx acquired Valmed Pharmaceutical, Inc., a privately
owned distributor of bioequivalent pharmaceuticals based in Grand Island, New
York. The purchase price was $15.2 million in cash including transaction costs,
net of cash acquired. The acquisition was accounted for using the purchase
method of accounting.
In January 2001, Andrx completed the acquisition of CTEX
Pharmaceuticals, Inc., a privately owned pharmaceutical sales and marketing
company based in Canton, Mississippi with approximately 100 sales and marketing
representatives. The purchase price of approximately $29 million consisted of
$11 million in cash and 291,000 shares of Andrx common stock. The acquisition
was accounted for using the purchase method of accounting.
On March 30, 2001, Andrx acquired substantially all of the assets of
Armstrong
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Pharmaceuticals, a division of Celltech Pharmaceuticals Manufacturing, Inc.,
formerly known as Medeva Pharmaceuticals, Inc. based in West Roxbury,
Massachusetts. Armstrong manufactures pharmaceutical aerosols, principally
metered dose inhalers, or MDI, and holds an approved Abbreviated New Drug
Application, or ANDA, for Albuterol MDI. The purchase price was approximately
$18 million cash, subject to adjustments. The acquisition was accounted for
using the purchase method of accounting.
In January 2001, Andrx Corporation entered into an agreement to acquire
Mediconsult.com, Inc., a Delaware corporation, in a stock for stock merger.
Mediconsult is a Tarrytown, New York based company that operates Physicians'
Online, a leading physician Internet portal and eMedEd, an Internet-based
technology for physician education. In the merger Mediconsult shares will be
exchanged for Cybear common stock on the basis of 0.1430 shares of Cybear common
stock for each share of Mediconsult common stock, subject to adjustment.
Mediconsult will become part of Cybear. The acquisition will be accounted for
using the purchase method of accounting. The merger was approved by Mediconsult
stockholders in March 2001 and is expected to close in April 2001, subject to
the satisfaction of certain conditions.
Product Development and Commercialization
Bioequivalent Controlled-Release Pharmaceuticals
Andrx applies its proprietary drug delivery technologies and
formulation skills to develop bioequivalent versions of selected
controlled-release brand name pharmaceuticals. Specifically, Andrx applies its
proprietary processes and formulations to develop a product that will reproduce
the brand product's physiological characteristics but not infringe upon the
patents of the owner of the brand's new drug application, or NDA, or the
patent's innovator. Next, Andrx conducts studies to establish that its product
is bioequivalent to the brand product, and obtains legal advice that its
products will not infringe the innovator's patents or that such patents are
invalid or unenforceable. As required by the Drug Price Competition and Patent
Restoration Act of 1984, known as the Waxman-Hatch Amendments, Andrx then
assembles and submits an ANDA to the FDA for review. As part of this ANDA, Andrx
typically certifies to the U.S. Food and Drug Administration, or FDA, that its
product will not infringe the innovator's patents or that such patents are
invalid or unenforceable. This certification is called a Paragraph IV
certification.
Once Andrx's ANDA is accepted for filing by the FDA, Andrx must also
send notice of a Paragraph IV certification to the NDA owner and patent holder.
The NDA owner or patent holder may then initiate a legal challenge for patent
infringement. If they do so within 45 days of their receipt of notice of Andrx's
Paragraph IV certification, that lawsuit will automatically prevent the FDA from
approving Andrx's ANDA until the earlier of 30 months, expiration of the patent,
or when the infringement case is decided in Andrx's favor. Brand name companies
may obtain additional patents after an ANDA has been filed, but before it has
been approved, which may require the submission of a new Paragraph IV
certification and trigger the notice and waiting period requirements. Thus, the
developer of bioequivalent products may invest a significant amount of time and
expense in the development of these products only to be subject to significant
delay and the uncertain results of patent litigation before its products may be
commercialized.
The Waxman-Hatch Amendments also provide an economic incentive for the
early development of bioequivalent pharmaceuticals. The developer of a
bioequivalent product having the first ANDA containing a Paragraph IV
certification accepted for filing by the FDA is awarded a 180-day period of
marketing exclusivity against other companies that subsequently
3
file ANDAs containing Paragraph IV certifications for the same drug. This
marketing exclusivity begins with the commercial marketing of the product, a
court determination that the relevant patents are invalid, unenforceable or not
infringed or upon the occurrence of certain events. A court decision triggering
the 180-day period can occur either in litigation involving the first Paragraph
IV filer or a subsequent filer. Accordingly, until the first developer's 180-day
period of marketing exclusivity has expired or has been waived, the FDA may not
approve the marketing of another ANDA containing a Paragraph IV certification
for that same product.
Andrx believes this period of marketing exclusivity provides an
opportunity for the successful patent challenger to build its market share, to
recoup the expense of the lawsuit and to realize greater profit margins. In
addition, once that exclusivity period has lapsed, Andrx believes the first
successful developer may more effectively defend its position against future
competition. Andrx's ability to secure the benefit of this exclusivity period,
however, depends on a variety of factors beyond Andrx's control, such as the
relative dates of filing of ANDAs, the speed and results of litigation involving
other ANDA filers and proposed changes in FDA regulations which may, for certain
ANDA filings, decrease the value of the exclusivity period, as described in
"Business-Government Regulation-ANDA Process." Therefore, even if Andrx
qualifies for this market exclusivity for a particular product, Andrx may not be
able to benefit from some or any of the 180-day period.
Andrx has been sued for patent infringement on many of the products for
which Andrx has filed ANDAs.
Andrx has submitted ANDAs for bioequivalent versions of the following
products:
Dilacor XR In October 1997, Andrx received FDA approval and
commenced selling Diltia XT, its bioequivalent
version of Dilacor XR. Dilacor XR is used for the
treatment of hypertension and chronic stable angina
and is currently being marketed by Watson
Pharmaceuticals, Inc. Andrx's marketing exclusivity
expired in April 1998. Total U.S. brand and
bioequivalent sales for Dilacor XR were approximately
$75 million in 2000.
Cardizem CD In July 1998, Andrx received FDA approval to sell its
bioequivalent version of Cardizem CD. Cardizem CD is
used for the treatment of hypertension and chronic
stable angina and was being marketed by
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Aventis S.A., formerly Hoechst Marion Roussel, Inc.,
until January 2000 when Biovail acquired the rights
to Cardizem CD and is now marketing Cardizem CD.
Although approved by the FDA, Andrx did not market
this product due to the then pending patent
infringement litigation against Andrx with respect to
this product. In June 1999, the litigation was
settled and Andrx commenced selling Cartia XT, a
reformulated version of Andrx's bioequivalent version
of Cardizem CD. Andrx's marketing exclusivity expired
on December 19, 1999. Total U.S. brand and
bioequivalent sales for Cardizem CD were
approximately $545 million in 2000.
Prilosec(R) In March 2000, Andrx received tentative FDA approval
of its bioequivalent version of Prilosec. Prilosec is
used for the treatment of ulcers and gastroesophageal
reflux disease and is currently being marketed by
AstraZeneca PLC. Patent infringement litigation was
commenced by AstraZeneca against Andrx with respect
to this product. Andrx believes that it was the first
to have its ANDA for this product accepted for filing
by the FDA and that upon final FDA approval, Andrx's
product should be entitled to the 180-day period of
marketing exclusivity. In January 2001, Andrx entered
into a memorandum of understanding with Genpharm,
Inc. resolving a dispute as to which company's ANDA
was filed first. The memorandum of understanding,
which is still subject to regulatory approval,
provides that Andrx will market whichever of the
products may first be lawfully and prudently
marketed. Through cross licenses the parties will
receive royalties based on the profits derived from
the sale of either or both products according to a
sliding scale. Andrx does not expect to begin
marketing its bioequivalent version of Prilosec
before the expiration of the composition of matter
patent in April 2001, which may be extended for six
months as a reward for pediatric studies. In March
2001, however, AstraZeneca listed four additional
patents as covering Prilosec and, under protest,
Andrx submitted additional Paragraph IV
certifications with respect to those patents. If
AstraZeneca were to file a lawsuit against Andrx with
respect to these newly issued patents, market
approval for Andrx's product may be further delayed.
Total U.S. brand sales for Prilosec were
approximately $3.8 billion in 2000.
Naprelan(R) In March 2000, Andrx received tentative FDA approval
of its ANDA for a bioequivalent version of Naprelan.
Naprelan is used for the treatment of inflammation
and is currently being marketed by Elan Corporation
p1c. Elan commenced patent infringement litigation
against Andrx with respect to this product. This
litigation is continuing. As Andrx was not the first
to have its ANDA for this product accepted for
filing, Andrx cannot market its bioequivalent version
of Naprelan until the 180-day marketing exclusivity
period of the first ANDA filer expires or is waived,
and either its 30-month waiting period expires or the
litigation is concluded in Andrx's favor and the FDA
approves Andrx's ANDA. Total U.S. brand sales for
Naprelan were approximately $40 million in 2000.
Tiazac(R) In October 2000, Andrx received tentative FDA
approval of its ANDA for a bioequivalent version of
Tiazac. Tiazac is used for the treatment of
hypertension and chronic stable angina and is
currently being marketed by Forest Laboratories, Inc.
Biovail Corporation International, the developer of
Tiazac, commenced patent infringement litigation
against Andrx with respect to this product. In March
2000, the United States District Court for the
Southern District of Florida entered an order that
Andrx's product does not infringe the Biovail patent,
and the United States Courts of Appeals for the
Federal Circuit affirmed that determination in
February 2001. However, the FDA's final approval of
this ANDA has been delayed as a result of Biovail's
January 2001 listing of a new additional patent
covering Tiazac. Andrx has challenged the
appropriateness of that patent listing and has
submitted, under protest, an additional Paragraph IV
certification with respect to the recently issued
patent. If Biovail were to file a lawsuit against
Andrx with respect to this newly issued patent,
market approval for Andrx's product may be further
5
delayed. Andrx believes that it was the first to have
its ANDA for this product accepted for filing by the
FDA and that upon final FDA approval Andrx's product
should be entitled to the 180-day period of marketing
exclusivity. Total U.S. brand sales for Tiazac were
approximately $200 million in 2000.
Wellbutrin SR(R) In August 1999, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Wellbutrin
SR. Wellbutrin SR is used to treat depression and is
currently being marketed by Glaxo Wellcome Plc. Glaxo
commenced patent infringement litigation against
Andrx with respect to this product. Andrx believes
that it was the first to have an ANDA for the 150 mg
dosage of this product accepted for filing by the FDA
and that, upon final FDA approval, this dosage form
of Andrx's product should be entitled to 180-day
marketing exclusivity. Andrx does not expect to
market this product until the 30-month waiting period
expires or the litigation is concluded in Andrx's
favor and the FDA approves Andrx's ANDA. Total U.S.
brand sales for Wellbutrin SR were approximately $700
million in 2000.
Zyban(R) In August 1999, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Zyban.
Zyban is prescribed for the cessation of smoking and
is currently being marketed by Glaxo. Glaxo commenced
patent infringement litigation against Andrx with
respect to this product. Andrx believes that it was
the first to have an ANDA for this product accepted
for filing by the FDA and that, upon final FDA
approval, Andrx's product should be entitled to the
180-day period of marketing exclusivity. Andrx does
not expect to market this product until the 30-month
waiting period expires or the litigation is concluded
in Andrx's favor and the FDA approves Andrx's ANDA.
Total U.S. brand sales for Zyban were approximately
$100 million in 2000.
K-Dur(R) In August 1999, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of K-Dur.
K-Dur is a potassium supplement that is currently
being marketed by Key Pharmaceuticals, Inc., a
subsidiary of Schering-Plough Corporation. No patent
infringement suit related to the ANDA for K-Dur has
been filed against Andrx. As Andrx was not the first
to have its ANDA for this product accepted for
filing, Andrx cannot market its bioequivalent version
of K-Dur until the 180-day marketing exclusivity
period of the first ANDA filer expires or is waived
and the FDA approves Andrx's ANDA. Total U.S. brand
sales for K-Dur were approximately $260 million in
2000.
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Claritin D-24(R) In February 2000, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Claritin
D-24. Claritin D-24 is a once-a-day antihistamine for
the treatment of allergies and is currently being
marketed by Schering-Plough. Schering-Plough has
commenced patent infringement litigation against
Andrx with respect to this product. Andrx believes
that it was the first to have an ANDA for this
product accepted for filing by the FDA and that, upon
final FDA approval, this product should be entitled
to the 180-day period of marketing exclusivity. Andrx
does not expect to market this product until the
30-month waiting period expires or the litigation is
concluded in Andrx's favor and the FDA approves the
ANDA. Total U.S. sales of Claritin D-24 were
approximately $400 million in 2000.
Depakote(R) In March 2000, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Depakote.
Depakote is used to treat epilepsy and is currently
being marketed by Abbott Laboratories Inc. Abbott has
commenced patent infringement litigation against
Andrx. As Andrx was not the first to have its ANDA
for this product accepted for filing, Andrx cannot
market its bioequivalent version of Depakote until
the 180-day marketing exclusivity period of the first
ANDA filer expires or is waived and either the
30-month waiting period expires or the litigation is
concluded in Andrx's favor and the FDA approves the
ANDA. Total U.S. sales of Depakote were approximately
$790 million in 2000.
Lodine(R)XL In May 2000, the FDA accepted Andrx's ANDA submission
for a bioequivalent version of Lodine XL. Lodine XL
is used to treat both osteoarthritis and rheumatoid
arthritis and is currently being marketed by American
Home Products Corporation. No patent infringement
litigation has been commenced against Andrx. As Andrx
was not the first to have its ANDA for this product
accepted for filing, Andrx cannot market its
bioequivalent version of Lodine XL until the 180-day
marketing exclusivity period of the first ANDA filer
expires or is waived and Andrx receives FDA approval.
Total U.S. sales of Lodine XL were approximately
$60 million in 2000.
Procardia(R)XL In August 2000, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Procardia
XL. Procardia XL is used to treat hypertension and
chronic stable angina and is currently being marketed
by Pfizer, Inc. A complaint asserting patent
infringement was filed against Andrx, but never
served. During the interim, Andrx entered into a
settlement with both Pfizer and the patent owner
providing for the dismissal of the lawsuit, and the
potential licensing of the patent at issue. As Andrx
was not the first to have its ANDA for this product
accepted for filing, Andrx cannot market its
bioequivalent version of Procardia XL until the
180-day marketing exclusivity period of the first
ANDA filer expires or is waived and Andrx receives
FDA approval. Total U.S. brand and bioequivalent
sales for Procardia XL were approximately $470
million in 2000.
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Claritin Reditabs(R) In September 2000, the FDA accepted Andrx's ANDA
submission for a bioequivalent version of Claritin
Reditabs. Claritin Reditabs is used for the treatment
of allergies and is currently being marketed by
Schering-Plough. Schering-Plough has commenced patent
infringement litigation against Andrx with respect to
this product. As Andrx was not the first to have its
ANDA for this product accepted for filing, Andrx
cannot market its bioequivalent version of Claritin
Reditabs until the 180-day marketing exclusivity
period of the first ANDA filer expires or is waived
and the FDA approves Andrx's ANDA. Total U.S. sales
of Claritin Reditabs were approximately $250 million
in 2000.
Accupril(R) In December 2000, the FDA accepted Andrx's ANDA
submission for a bioequialent version of Accupril.
Accupril is used to treat hypertension and is
currently being marketed by Parke Davis. No patent
infringement litigation has been commenced against
Andrx. As Andrx was not the first to have its ANDA
for this product accepted for filing, Andrx cannot
market its bioequivalent version of Accupril until
the 180-day marketing exclusivity period of the first
ANDA filer expires or is waived and the FDA approves
Andrx's ANDA. Total U.S. sales of Accupril were
approximately $440 million in 2000.
In addition, ANCIRC Pharmaceuticals, the 50/50 joint venture with
Watson Pharmaceuticals, Inc., received FDA approval for bioequivalent versions
of the following products:
Trental(R) In September 1998, ANCIRC received FDA approval to
sell its bioequivalent version of Trental. Trental is
used for the treatment of patients with chronic
occlusion of arteries of the limbs. This product was
formulated by Andrx, is being manufactured by Watson
and is being marketed by Andrx. Total U.S. brand and
bioequivalent sales for Trental were approximately
$62 million in 2000. The ANDA for this product did
not contain a Paragraph IV certification.
Oruvail(R) In March 1999, ANCIRC received FDA approval to sell
its bioequivalent version of Oruvail. Oruvail is
being used for the treatment of patients with
rheumatoid arthritis and osteoarthritis. This product
is to be manufactured and marketed by Andrx and was
launched in April 1999, but was discontinued in June
1999 due to manufacturing problems related to this
product. Andrx is in the process of rectifying these
problems and expect to start producing
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and marketing this product again in 2001. Total U.S.
brand and bioequivalent sales for Oruvail were
approximately $25 million in 2000. The ANDA for this
product did not contain a Paragraph IV certification.
In addition, Andrx or one of its collaborative partners from time to
time, files or may file additional ANDAs that may or may not include Paragraph
IV certifications.
Bioequivalent Product Pipeline
In addition to the products for which ANDAs have been submitted, Andrx
is currently developing approximately 40 additional bioequivalent versions of
brand name drugs. Total U.S. sales for the brand versions of these products were
approximately $8 billion in 2000. Andrx is continually evaluating potential
product candidates, including specialty or niche pharmaceutical products. In
selecting the product candidates, Andrx focuses on pharmaceuticals which it (i)
anticipates will have high sales volume, (ii) for (a) which marketing
exclusivity or patent rights have expired, (b) are near expiration or (c) Andrx
believes will not be infringed by the application of its technologies, and (iii)
are (a) controlled release, (b) otherwise difficult to replicate, or (c) have
other barriers to entry.
Brand Name Controlled-Release Pharmaceuticals
Andrx is developing brand name controlled-release formulations by
applying Andrx's proprietary drug delivery technologies to existing
immediate-release and controlled-release drugs. Andrx believes that the
application of Andrx's drug delivery technologies will improve the
characteristics of these products, for example, by decreasing undesired side
effects or reducing the frequency of administration. In selecting the product
candidates, Andrx focuses on high sales volume pharmaceuticals that will lack
patent protection for the active drug at the time Andrx plans to market the
product. Andrx is continually evaluating potential product candidates for this
program.
In order to facilitate development of these products, Andrx plans to
undertake formulation and development on its own and to use contract research
organizations for clinical studies. These potential products generally require
Andrx to file an Investigational Drug Application, or IND, with the FDA before
commencing clinical trials and a NDA in order to obtain FDA approval. Andrx
believes that the Section 505(b)(2) approval process that Andrx intends to
utilize for these type of brand name controlled-release formulations will be
simpler than that typically associated with most NDAs for new chemical entities
because Andrx's development efforts involve chemical entities which have been
previously approved by the FDA. Andrx may also receive certain marketing
exclusivity rights for a controlled-release product Andrx develops in Andrx's
new drug program. Conversely, marketing exclusivity rights awarded to another
new controlled-release product may delay approval of Andrx's new drug.
The following describes the status of Andrx's brand name
controlled-release products:
Avicor(TM) Andrx's product, Avicor, is a newly developed
extended-release tablet form of lovastatin using one
of Andrx's patented drug delivery technologies to
treat elevated cholesterol or hypercholesterolemia.
Merck & Co., Inc. markets lovastatin
immediate-release oral tablets under the brand name
Mevacor(R). Mevacor immediate-release tablets are
currently marketed in 10 mg, 20 mg and 40 mg
strengths and are administered once a day. The usual
recommended starting dose is 20 mg once a day. The
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recommended dosing range is 10 mg to 80 mg per day in
one or two doses. Mevacor belongs to a class of drugs
known as statins. Statin products had approximately
$7 billion in U.S. sales in 2000, of which Mevacor
sales were approximately $225 million.
Andrx's patent protected tablet formulation also
contains 10 mg, 20 mg, 40 mg or 60 mg doses. In a
Phase II crossover study conducted by Andrx in
patients with elevated cholesterol, Avicor produced a
greater reduction in mean LDL cholesterol than was
produced by an equivalent dose of Mevacor. There was
little or no difference in adverse events between
Avicor and Mevacor. In June 1999, Andrx initiated
Phase III studies of Avicor with over 500 targeted
patients in over 40 centers to further evaluate the
efficacy and safety of Andrx's product. The Phase III
studies were completed in November 2000 and show that
Avicor compares favorably with other currently
marketed products. Andrx filed an NDA in March 2001.
Andrx is also conducting Phase II studies on the use
of Andrx's controlled release formulation of Avicor
for the treatment of Alzheimer's and other diseases.
Andrx has licensed Avicor for sale in certain other
countries.
Metformin XT(TM) Andrx has developed Metformin XT, an
oral extended-release dosage form of metformin using
one of Andrx's patented drug delivery technologies
(SCOT(TM)), to treat non-insulin-dependent diabetes
mellitus, commonly referred to as Type II diabetes.
Bristol Myers Squibb Inc. markets metformin as an
immediate-release tablet under the brand name
Glucophage(R). Andrx's once daily product is intended
to have bioavailability similar to the currently
marketed Glucophage product. Glucophage tablets are
marketed in 500 mg, 850 mg or 1000 mg doses. Although
there is no fixed dosage regimen, it is typically
administered two to three times per day with a
maximum recommended dose of 2,500 mg per day. In
October 2000, Bristol Myers Squibb's NDA for a once a
day metformin product, Glucophage XR, was approved
for marketing. Glucophage XR was granted "new dosage
form" marketing exclusivity for a period of three
years. There were over $1.5 billion of U.S. sales of
glucose-lowering products in 2000 including
Glucophage, Glucotrol XL(R)and Glynase(R). Metformin
use has been associated with gastrointestinal side
effects. These adverse events may be partially
avoided using an extended-release dosage form.
Another advantage of an extended-release dosage form
is a reduction in the frequency of administration,
which Andrx expects to increase patient compliance.
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In January 2000, Andrx successfully completed Phase
II clinical studies and commenced pivotal Phase III
clinical studies in the second quarter of 2000. Andrx
believes that other companies may also be developing
once-a-day dosages of metformin for NDA filings in
the near future. Andrx anticipates filing an NDA by
early 2002. Depending upon how the FDA interprets the
exclusivity covering Glucophage XR, the agency may
not be able to approve Metformin XT until October
2003.
Andrx is also in various early stages of research and development for,
or is otherwise investigating, other potential NDA products. From time to time,
Andrx evaluates entering into collaborative arrangements with other
pharmaceutical companies to assist in or undertake the further research and
development or commercialization of these products or products being considered
for development by those companies.
Brand Sales and Marketing Strategy. Andrx research and is developing
and evaluating various strategies for the sale and marketing of its brand name
controlled-release pharmaceuticals. These strategies include establishing its
own sales organization and related infrastructure to support and manage Andrx's
sales effort, licensing Andrx's brand name products to other pharmaceutical
companies with sales organizations sufficient to support Andrx's products,
entering into co-promotion or contract sales arrangements with respect to the
products, or a combination of the above. If Andrx licenses its products or
enters into co-promotional or contract sales arrangements, Andrx would not incur
the significant upfront expenses associated with building a sales organization,
but Andrx's potential profit margins for the product could be lower. Whichever
strategy or combination of strategies Andrx pursues, Andrx expects that it will
have an established sales organization in place when its current brand name
controlled-release pharmaceuticals are ready to be launched. In January 2001,
Andrx completed the acquisition of CTEX, a pharmaceuticals sales and marketing
company which, at that time, employed approximately 100 sales and marketing
representatives. As of March 2001, CTEX employs approximately 150 sales and
marketing representatives. Andrx is pursuing the acquisition of additional brand
products so that it may continue to build and utilize its sales force, while it
is awaiting the launch of the brand name controlled-release pharmaceuticals it
is developing. Andrx also expects to have the ability to access doctors through
Cybear's online communication system.
Andrx's Proprietary Drug Delivery Technologies
Both Andrx's bioequivalent controlled-release pharmaceuticals and
Andrx's brand name controlled-release pharmaceuticals generally utilize Andrx's
proprietary drug delivery technologies to control the release characteristics of
a variety of orally administered drugs. Controlled-release products are
formulations that release active drug compounds in the body gradually and
predictably over a 12 or 24-hour period and therefore need be taken only once or
twice daily. Controlled-release products typically provide numerous benefits
over immediate release drugs, including:
o greater effectiveness in the treatment of chronic conditions;
o reduced side effects;
11
o greater convenience (only once or twice a day); and
o higher levels of patient compliance due to a simplified dosing
schedule.
Andrx has nine proprietary drug delivery technologies that have been
patented for certain applications or for which Andrx has filed for patent
protection for certain applications. Andrx has been issued or has received
notices of allowances for 28 patents with respect to these technologies. Andrx
originally designed these controlled-release technologies specifically for a
drug that was being formulated.
Andrx's drug delivery technologies utilize a variety of polymers and
other materials to encapsulate or entrap the active drug compound and to release
the drug at varying rates at predetermined locations in the gastrointestinal
tract. In applying an appropriate drug delivery technology to a particular drug
candidate, Andrx considers such factors as:
o the desired release rates of the drug;
o the physio-chemical properties of the drug;
o the physiology of the gastrointestinal tract and the manner in
which the drug will be absorbed during passage through the
gastrointestinal tract; and
o the effect of food on the absorption rate and transit time of
the drug.
The following summarizes Andrx's drug delivery technologies:
Drug Delivery Technology Description
- ------------------------ -----------
Pelletized Pulsatile Delivery PPDS is designed for use with products
System(TM) ("PPDS") that require a pulsed release of the
drug. This technology uses pellets that
are coated with specific polymers and
agents to control the release rate of
the microencapsulated drug. By varying
the proportion and composition of the
polymer mixtures, the release rate of
the drug may be specifically controlled.
Single Composition Osmotic Tablet(TM) SCOT utilizes various osmotic modulating
System ("SCOT") agents as well as polymer coatings to
provide a zero-order release of a drug
(a constant rate of release).
Solubility Modulating Hydrogel(TM) SMHS is designed for products utilizing
System ("SMHS") a hydrogel-based dosage system that
provides for sustained release without
the need to use special coatings or
structures, which add to the cost of
manufacturing. This technology avoids
the "initial burst effect" commonly
observed with other sustained-release
hydrogel formulations.
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Drug Delivery Technology Description
- ------------------------ -----------
Delayed Pulsatile Hydrogel System(TM) DPHS is designed for use with hydrogel
("DPHS") matrix products that are characterized
by an initial zero-order release of drug
followed by a rapid release. This
release profile is achieved by the
blending of selected hydrogel polymers
to achieve a delayed pulse.
Stabilized Pellet Delivery System(TM) SPDS is designed specifically for
("SPDS") unstable drugs, incorporating a pellet
core of drug and protective polymer
outer layer(s).
Granulated Modulating Hydrogel GMHS incorporates hydrogel and binding
System(TM) ("GMHS") polymers with the drug, which is formed
into granules and then pressed into
tablet form.
Pelletized Tablet System(TM) PELTAB utilizes polymer-coated drug
("PELTAB") pellets or drug crystals which are
manufactured into tablets. In order to
provide a controlled release, a water
insoluble polymer is used to coat
discrete drug pellets or crystals, which
then can resist the action of fluids in
the gastrointestinal tract. This
technology incorporates a strong polymer
coating enabling the coated pellets to
be compressed into tablets without
significant breakage.
Porous Tablet System(TM) PORTAB is designed for
("PORTAB") controlled-release dosage forms that
utilize an osmotic core, typically
containing a water soluble drug. The
core includes a water soluble component
and a continuous polymer coating. The
purpose of the soluble agent is to
expand the core and thereby create
microporous channels through which the
drug is released.
Stabilized Tablet Delivery System(TM) STDS employs a dual layer coating
("STDS") technique that avoids the need to use a
coating layer to separate omeprazole
core from the enteric coating layer.
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Collaborative Arrangements
Andrx has entered into the following collaborative arrangements:
ANCIRC
ANCIRC is a 50/50 joint venture between Andrx and Watson
Pharmaceuticals, Inc. for the development, manufacture and sale of up to eight
bioequivalent controlled-release pharmaceuticals, two of which, bioequivalent
versions of Trental and Oruvail, have already been approved by the FDA. Capital
contributions, distributions and net income or losses are allocated equally
between Andrx and Watson. Capital contributions are utilized by ANCIRC to pay
outside vendors, services rendered by Watson or Andrx to ANCIRC, and to purchase
finished goods inventory manufactured by Watson or Andrx on ANCIRC's behalf. In
2000, Andrx and Watson amended the terms of the ANCIRC joint venture agreement
with respect to the six ANDA product candidates that had not yet been submitted
to the FDA. Under the amendment, Andrx is solely responsible for all of the
costs to research and develop, manufacture and sell the remaining six products,
and Watson may receive a royalty on net sales, if any, from the
commercialization of those products. This royalty arrangement applies to Andrx's
ANDA for Procardia XL that was accepted for filing by the FDA in August 2000.
The amendment also provides that Andrx may elect to discontinue its efforts to
develop any of these six products at any time. The 50/50 joint venture
relationship for the two previously approved products, bioequivalent versions of
Trental and Oruvail, is continuing.
CARAN
In August 2000, Andrx entered into CARAN, a 50/50 joint venture with
Carlsbad Technology, Inc. to develop, manufacture and sell three bioequivalent
pharmaceutical products, for which ANDAs have been filed with the FDA. These
products were developed and will be manufactured by Carlsbad and distributed by
Andrx.
Cybearclub
In August 1999, Andrx and Cybear formed Cybearclub, a joint venture
intended to distribute healthcare products to physicians through the Internet.
Fifty-five percent (55%) owned by Cybear and 45% owned by Andrx, Cybearclub
currently generates most of the revenue derived by Cybear. Cybearclub buys
products from Andrx at cost. Andrx charges Cybearclub for certain fulfillment
and back office operations such as purchasing, warehousing and distribution, as
well as customer service and telemarketing activities. Under the agreement
negotiated by Andrx and Cybear, such services were charged originally at 10% and
subsequently amended to 6% of gross sales but could increase if Cybearclub
achieves certain quarterly gross sales levels in the future.
Development and Licensing Agreements
In June 1999, Andrx entered into an agreement with Geneva
Pharmaceuticals, Inc., a member of the Novartis pharmaceutical group. Geneva
agreed to make monthly license payments of $1,000,000 for 40 months to fund the
development costs of certain controlled-release products that Andrx is
developing for submission as NDAs in exchange for exclusive marketing rights to
those products in specified territories. Under this arrangement, one of Andrx's
NDA products has been outlicensed for the U.S. Upon receiving approval from, the
14
FDA or other regulatory agencies, Andrx will receive certain minimum guaranteed
royalties in the first three years from the sale of these products in the
specified territories. In June 2000, the agreement with Geneva was amended to,
among other things, increase the license payments up to $6,000,000 for certain
controlled-release dosage forms of existing products that Andrx is developing
for submission as NDAs. Andrx has committed to continuing to sell Geneva's
bioequivalent products in its distribution operations.
In March 2001, Health Canada, Canada's health regulatory authority,
approved the sale of Andrx's bioequivalent version of Cardizem CD in Canada and
Rhoxalpharma, Inc., Andrx's licensee under a December 1997 agreement, commenced
the sale of this product. Total Canadian brand name and bioequivalent sales for
Diltiazem CD, Canada's equivalent of Cardizem CD, were approximately $60 million
in 2000.
Andrx has entered into additional development and licensing agreements
covering bioequivalent pharmaceuticals with U.S. and foreign pharmaceutical
companies. Pursuant to these agreements, the licensees typically will fund the
cost of product development and will pay Andrx royalties in exchange for a
license to market the products for a specified period in a specified territory.
Andrx also works with other pharmaceutical companies to formulate
controlled-release versions of existing commercialized drugs and drugs they are
developing using Andrx's proprietary drug delivery technologies. In addition to
improving drug efficacy, Andrx believes that its drug delivery technologies can
provide these pharmaceutical companies with the opportunity to enhance the
commercial value of their existing drug products and new drug candidates.
Manufacturing
Andrx presently has a manufacturing facility capable of producing the
projected necessary commercial quantities of Andrx's bioequivalent versions of
Dilacor XR, Cardizem CD, Tiazac, Oruvail, Naprelan and K-Dur. Since Andrx's
existing manufacturing facility will not be suitable for the manufacture of all
of the products that Andrx has developed and intends to research and develop and
manufacture, Andrx is in the process of expanding its manufacturing capabilities
by completing the construction of a new manufacturing facility and converting
portions of Andrx's existing facilities to additional manufacturing operations
and related warehousing space. Following the completion of these projects, Andrx
will have approximately 250,000 square feet for the manufacture and related
warehousing of Andrx's products. If Andrx is unable to complete its construction
and coversion projects in a timely manner, its business could suffer.
Pharmaceutical Distribution Operations
Andrx markets and distributes pharmaceuticals manufactured by third
parties, both through Andrx's Anda, Inc. subsidiary and through Andrx's Valmed
subsidiary, known as VIP, which Andrx acquired in March 2000. Andrx purchases
pharmaceuticals directly from manufacturers and wholesalers and markets them
through Andrx's in-house telemarketing staff primarily to independent
pharmacies, pharmacy chains which do not maintain their own central warehousing
facilities, pharmacy buying groups and physicians offices. Andrx offers
competitive pricing, quality products and responsive customer service, which
Andrx believes are
15
the critical elements to competing effectively in this market. Andrx
telemarketing staff currently has approximately 200 persons and is supplemented
by sales executives who are responsible for national accounts.
Andrx currently utilizes its distribution operations for the marketing
of its' and its collaborative partners' products including Cybearclub. Andrx
plans to use its distribution operations for the marketing of future products.
Andrx's distribution operations allow Andrx to observe and participate directly
in developments and trends in the pharmaceuticals industry.
Andrx purchases bioequivalent products and certain other products for
resale from a number of pharmaceutical manufacturers and wholesalers. Andrx
believes it is not dependent upon any particular supplier and that alternative
sources of supply for most of Andrx's products are available if required.
Competition
The pharmaceutical industry is highly competitive and is affected by
new technologies, new developments, government regulations, healthcare
legislation, availability of financing and other factors. Many of Andrx's
competitors have longer operating histories and greater financial, research and
development, marketing and other resources than Andrx. Andrx expects to be
subject to competition from numerous other entities that currently operate or
intend to operate in the pharmaceutical industry, including companies that are
engaged in the development of controlled-release drug delivery technologies and
products, and other manufacturers that may decide to undertake in-house
development of these products. In Andrx's pharmaceutical distribution business,
Andrx competes with a number of large wholesalers and other distributors of
pharmaceuticals. Andrx cannot assure you that it will be able to compete
successfully with these companies.
Patent Litigation and Proprietary Rights
General
Andrx believes that its future will depend in part on its ability to
obtain patents and trade secret protection, maintain trade secret protection and
operate without infringing the proprietary rights of others. Andrx has been
issued numerous U.S. and foreign patents and notices of allowances relating to
its drug delivery technologies. In addition, Andrx has filed additional U.S.
patent applications and various foreign patent applications relating to Andrx's
drug delivery technologies. Andrx expects to apply for additional U.S. and
foreign patents in the future. The issuance of a patent is not conclusive as to
its validity or as to the enforceable scope of the claims of the patent. Andrx
depends on its patents and trade secrets. Failure by Andrx to protect its patent
rights or infringement by Andrx of the patent or proprietary rights of others
could have a material adverse effect on Andrx's results of operations and
financial position.
Patent Litigation
There has been substantial litigation in the pharmaceutical, biomedical
and biotechnology industries with respect to the manufacture, use and sale of
new products that are the subject of patent rights. Most of the brand name
controlled-release products for which Andrx is researching and developing
bioequivalent versions are covered by one or more patents. Under the
Waxman-Hatch
16
Amendments, when a drug developer files an ANDA for a bioequivalent drug, the
developer must make a certification to the FDA as to whether the developer
believes that any unexpired patent which has been listed with the FDA as
covering the relevant brand-name product will be infringed by the developer's
product or is invalid or unenforceable. If the developer believes that its
product does not infringe the brand product's patents or that any unexpired
patent is invalid or unenforceable, it provides a Paragraph IV certification to
the FDA and a notice to the NDA owner and the patent holder, who may then
challenge the developer's Paragraph IV certification by filing a lawsuit for
patent infringement. If a lawsuit is filed within 45 days from the day the NDA
owner and patent holder received notice of the Paragraph IV certification, the
FDA can review and tentatively approve the ANDA, but cannot make the marketing
approval effective until a judgment in the action has been rendered in favor of
the developer, 30 months have passed from the date the patent holder received
the Paragraph IV certification, or when the patent expires, whichever is sooner.
Brand name pharmaceutical companies may obtain additional patents after an ANDA
has been filed, but before it has been approved, which may require the
submission of a new Paragraph IV certification and trigger additional
notification and waiting period requirements. The outcome of such litigation is
difficult to predict because of the uncertainties inherent in patent litigation.
Numerous such actions have been filed against Andrx. The Dilacor XR
action was dismissed without prejudice; the litigation relating to Andrx's
bioequivalent version of Cardizem CD was dismissed with prejudice; the trial and
appellate courts both found in Andrx's favor in the Tiazac litigation; and the
other actions relating to Andrx's ANDAs for bioequivalent versions of Prilosec,
Wellbutrin SR and Zyban, Naprelan, Depakote, Claritin D-24 and Claritin Reditabs
are pending. Andrx anticipates that additional actions may be filed as Andrx or
its collaborative partners file additional ANDAs containing Paragraph IV
certifications. Patent litigation may also affect NDAs that Andrx files in the
future. Andrx's business could be harmed by the delay in obtaining FDA approval
to market Andrx's products as a result of litigation, the expense of litigation
whether or not Andrx is successful, or an adverse outcome in such litigation.
Cardizem CD Litigation and the Stipulations
In September 1997, Andrx entered into a stipulation with Aventis in
connection with the patent infringement litigation brought against Andrx by
Aventis relating to the sale of Andrx's bioequivalent version of Cardizem CD. In
June 1999, the FDA approved Andrx's sale of a reformulated version of its
bioequivalent version of Cardizem CD, and Andrx entered into a new stipulation
with Aventis, pursuant to which the lawsuit was dismissed with prejudice and
Andrx received the outstanding fees owed to it under the 1997 stipulation.
In January 2001, Biovail acquired the rights to Cardizem CD, including
Aventis' rights under the 1999 stipulation from Aventis. On January 19, 2001,
Andrx received a letter from Biovail's counsel advising Andrx that Andrx's sale
of certain lots of Cartia XT did not meet the safe-harbor dissolution values
specified in the 1999 stipulation, which according to Biovail, constitutes a
breach of the 1999 stipulation and demanding that the nonconforming product be
removed from the market. In response, among other things, in February 2001,
Andrx filed suit against Biovail in the United States District Court for the
Southern District of Florida, alleging breach of contract, violations of the
Lanham Act and Florida's Deceptive and Unfair Practices Act, tortious
interference with business relationship, common law unfair competition, abuse of
17
process and a declaratory judgment that Andrx did not breach the 1999
stipulation and that its ANDA does not infringe any of Biovail's patent rights.
Biovail Antitrust Litigation
In May 1998, Biovail filed a claim against Andrx in the Federal
District Court in the District of Columbia alleging that the 1997 stipulation
violated Sections 1 and 2 of the Sherman-Antitrust Act and seeking a declaratory
judgment as to federal law as well as for alleged violations of state common law
of unfair competition, tortious interference with prospective advantage and
tortious interference with a contract. Biovail sought injunctive relief and
treble the amount of its actual damages in an unspecified amount, plus interest,
with respect to its federal law claims, and actual and punitive damages in
unspecified amounts, plus interest, with respect to its common law claims. In
July 1998, Andrx filed a motion to dismiss Biovail's claims. That motion was
granted with prejudice with respect to the federal antitrust claims on January
6, 2000. Biovail appealed that dismissal to the Court of Appeals and also
requested that the District Court reconsider its determination in light of
certain facts that Biovail failed to provide the court.
On October 26, 2000, the District Court denied Biovail's motion for
reconsideration of the court's January 6, 2000 decision dismissing Biovail's
antitrust counterclaims against Andrx and reconfirmed that dismissal. The court
found that any "potential delay in the marketing of generic versions of Cardizem
was more directly caused by the applicable statutory scheme than by any
agreement between Andrx and HMRI (Aventis' predecessor)," and as such,
"Biovail's allegation that it has been unable to compete in the generic Cardizem
market does not flow from the allegedly unlawful agreement between Andrx and
HMRI." Biovail appealed this denial of reconsideration and, by agreement of the
parties, consolidated Biovail's pending appeal of the original order dismissing
its counterclaims. Oral argument of the consolidated appeal was heard on
February 12, 2001, at the conclusion of which the court reserved decision. See
also "Item 3 - Legal Proceedings" with respect to other litigation relating to
the stipulations.
Purepac Litigation
In March 2000, Andrx received a letter from Purepac Pharmaceuticals
Co., a subsidiary of F.H. Faulding & Co., stating its belief that Cartia XT,
Andrx's bioequivalent version of Cardizem CD, infringed certain claims of a
patent that had been issued in its favor on March 7, 2000. The letter offered to
license that patent to Andrx. On March 7, 2000, Purepac also filed an
infringement suit against Andrx in the U.S. District Court for the Eastern
District of Pennsylvania regarding the same patent. Purepac sought an injunction
enjoining the sale of Cartia XT, damages in an amount no less than a reasonable
royalty, treble damages for willful infringement and other relief. Andrx
answered the Complaint by denying infringement, alleging certain affirmative
defenses and seeking a declaration that Andrx did not infringe and has not
infringed any valid claim of the patent in suit and that the patent is invalid.
On March 2, 2001, Andrx and Purepac settled their dispute.
Prilosec Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Prilosec. Andrx believes that it
was the first to have its ANDA for this product accepted for filing by the FDA
and that once final approval is received Andrx's
18
product should be entitled to the 180-day period of marketing exclusivity. In
May 1998, AstraZeneca filed suit against Andrx in the U.S. District court for
the Southern District of Florida claiming patent infringement because of the
ANDA filed by Andrx for Prilosec. Andrx responded to this claim by denying
infringement, raising various other defenses, filing certain counterclaims
against AstraZeneca and by seeking a declaration that there has been no
infringement and that the patents are invalid. AstraZeneca seeks an injunction
enjoining Andrx from further infringing the subject patents and an order
directing that the effective date of any FDA approval of Andrx' proposed
bioequivalent version of Prilosec be no earlier than the expiration date of its
patents.
A second Paragraph IV certification was later made by Andrx with regard
to a different strength of Prilosec. This resulted in AstraZeneca filing another
suit in the U.S. District Court for the Southern District of Florida. Both of
these suits have been consolidated in the U.S. District Court for the Southern
District of New York, together with three other patent infringement suits
initiated by AstraZeneca involving ANDAs submitted by other companies for
bioequivalent versions of Prilosec.
The U.S. District Court for the Southern District of New York has
issued a scheduling order setting a trial date of May 28, 2001. Andrx is taking
steps to determine when it can proceed to trial and whether the trial will be in
the U.S. District Court for the Southern District of New York on May 28, 2001 or
in the U.S. District Court for the Southern District of Florida. In March 2001,
AstraZeneca listed four new patents in the FDA's Orange Book. Under protest and
with full reservation of its right to challenge the validity of this new
listing, Andrx made a Paragraph IV certification that its bioequivalent version
of Prilosec does not infringe any valid claims of the new patents.
Tiazac Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Tiazac. In October 1998, Biovail
and its related entities, filed suit against Andrx in the U.S. District Court
for the Southern District of Florida claiming patent infringement because of the
ANDA filed by Andrx with the FDA for a bioequivalent version of Tiazac. Andrx
responded to this claim by denying infringement, raising various other defenses,
filing certain counterclaims against Biovail and by seeking a declaration that
there has been no infringement and that the patent is invalid. Biovail sought an
injunction enjoining Andrx from further infringing the subject patent and an
order directing that the effective date of any FDA approval of Andrx's proposed
bioequivalent version of Tiazac be no earlier than the expiration date of the
subject patent. On March 6, 2000, the court entered an order that Andrx's
product does not infringe the Biovail patent. Biovail appealed to the Court of
Appeals for the Federal Circuit. On February 13, 2001, the U.S. Court of Appeals
for the Federal Circuit unanimously affirmed the District Court order that
Andrx's product does not infringe the Biovail patent. In the interim, Biovail
listed a patent it recently acquired from a third party in the FDA's Orange
Book. Andrx believes the listing to be improper and filed suit against Biovail
(and nominally the FDA) in the U.S. District Court for the Southern District of
Florida seeking, among other things, a preliminary and permanent injunction
ordering Biovail to delist the patent from the FDA's Orange Book and enjoining
the FDA from delaying approval of the Andrx bioequivalent version of Tiazac for
any reason relating to the new patent. On March 1, 2001, the court denied
Andrx's motion for a preliminary injunction on the ground that the court does
not have subject matter
19
jurisdiction over the claim brought by Andrx against Biovail under the
provisions of the Waxman-Hatch Amendments. Meanwhile, under protest and with
full reservation of its right to continue to challenge the validity of Biovail's
listing, Andrx made a Paragraph IV certification that its bioequivalent version
of Tiazac does not infringe any valid claims of the new patent.
Naprelan Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Naprelan. In October 1998, Elan
filed suit against Andrx in the U.S. District Court for the Southern District of
Florida claiming patent infringement because of the ANDA filed by Andrx with the
FDA for a bioequivalent version of Naprelan. Andrx responded to this claim by
denying infringement, raising various other defenses, filing certain
counterclaims against Elan and by seeking a declaration that there has been no
infringement and that the patent is invalid. Elan seeks a judgment enjoining
Andrx from further infringing the subject patent and ordering that the effective
date of any FDA approval of Andrx's proposed bioequivalent version of Naprelan
be no earlier than the expiration date of the patent. A trial of this case
commenced on January 30, 2001, and, in terms of oral evidence and receiving
documents into evidence, was completed on February 14, 2001. The parties have
submitted proposed findings of fact and conclusions of law to the court and
expect to make final arguments before the court in early May 2001.
Wellbutrin SR and Zyban Litigation
Andrx made Paragraph IV certifications in connection with the ANDAs
Andrx filed for Andrx's bioequivalent versions of Wellbutrin SR and Zyban. In
September 1999, Glaxo filed suit against Andrx in the U.S. District Court for
the Southern District of Florida claiming patent infringement because of the
ANDAs filed by Andrx with the FDA for bioequivalent versions of Wellbutrin SR
and Zyban. Andrx responded to this claim by denying infringement, raising
various other defenses, filing certain counterclaims against Glaxo and by
seeking a declaration that there has been no infringement and that the patent is
invalid. Glaxo seeks an injunction enjoining Andrx from further infringing the
subject patents and orders directing that the effective date of any FDA approval
of Andrx's proposed bioequivalent versions of Wellbutrin SR and Zyban be no
earlier than the expiration date of the subject patent. The case is currently
scheduled to go to trial on July 2, 2001.
Depakote Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for Andrx's bioequivalent version of Depakote. In March 2000, Abbott
filed suit against Andrx in the United States District Court for the Northern
District Court of Illinois, claiming infringement of two of its patents because
of the ANDA Andrx filed with the FDA for its bioequivalent version of Depakote.
Abbott seeks a judgment enjoining Andrx from further infringing the subject
patents and ordering that the effective date of any FDA approval of Andrx's
proposed bioequivalent version of Depakote be no earlier than the expiration
dates of the two patents in suit. Following Andrx's filing of a motion to
dismiss for lack of jurisdiction, Abbott filed a second action against Andrx for
the same claims in the United States District Court for the Southern District of
Florida as well as a third action against Andrx for the same claims in the
United States District Court for the Eastern District of Virginia. All the
infringement claims
20
filed by Abbott against Andrx were transferred to and consolidated for trial in
the United States District Court for the Southern District of Florida. Andrx
responded to these claims by denying infringement, raising various other
defenses, filing certain counterclaims against Abbott and by seeking a
declaration that there has been no infringement and that the two patents are
invalid. The trial has been specially set to commence on November 2, 2001.
Claritin D-24 Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Claritin D-24. In March 2000,
Schering Plough Corporation filed suit in the U.S. District Court for New Jersey
claiming that Andrx's ANDA product infringed two of its patents. Andrx responded
to these claims by denying infringement, raising various other defenses, filing
certain counterclaims against Schering Plough and by seeking a declaration that
there has been no infringement and that the two patents are invalid. The court
has ordered that all discovery be completed by September 14, 2001.
Claritin Reditabs Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Claritin Reditabs. In January 2001,
Schering Plough filed suit in the U.S. District Court for New Jersey claiming
that Andrx's ANDA product infringed one of its patents. Andrx responded to these
claims by denying infringement, raising various other defenses, filing certain
counterclaims against Schering Plough and by seeking a declaration that there
has been no infringement and that the patent is invalid.
Procardia XL Litigation
Andrx made a Paragraph IV certification in connection with the ANDA
Andrx filed for its bioequivalent version of Procardia XL. In November 2000,
Bayer AG and Pfizer, Inc. filed suit in the U.S. District Court for the Southern
District of Florida claiming that Andrx's ANDA product infringed one of its
patents. Though that suit was never served, in March 2001, Andrx entered into a
settlement agreement with them and the case was dismissed.
While Andrx believes its ANDA products do not infringe the patents that
Andrx has been sued upon or that such patents are invalid and/or unenforceable,
the ultimate resolution of these patent litigation matters is not known and
there is no assurance Andrx's position will ultimately prevail.
Government Regulation
Drug manufacturers are required to obtain FDA approval before marketing
their new drug product candidates. This approval process is often costly and
time consuming and Andrx cannot assure you that any drug application will timely
be approved by the FDA or any other health authority, if at all.
ANDA Process. FDA approval is required before a bioequivalent version
of a previously approved drug or a new dosage form of an existing drug can be
marketed. Approval for such products generally is sought using an ANDA. Complete
clinical studies are not required in support of an ANDA, although typically
bioavailability and bioequivalence studies must be
21
conducted. Bioavailability indicates the rate and extent of absorption and
levels of concentration of a drug product in the blood stream. Bioequivalence
compares the bioavailability of one drug product with another, and when
established, indicates that the rate and extent of absorption and levels of
concentration of a generic drug in the body are substantially equivalent to the
previously approved drug. An ANDA may be submitted for a drug on the basis that
it is the equivalent to a previously approved drug or, in the case of a new
dosage form, is suitable for use for the indications specified.
Under the Waxman-Hatch Amendments, the developer of a bioequivalent
drug which is the first to have its ANDA accepted for filing by the FDA and
includes a Paragraph IV certification is awarded a 180-day period of marketing
exclusivity. This means that the FDA may not approve another ANDA containing a
Paragraph IV certification for that product until the first developer's 180-day
period of marketing exclusivity has expired or has been waived. This marketing
exclusivity period begins with the commercial marketing of the product or a
court determination that the relevant patents are invalid, unenforceable or not
infringed. A court decision triggering the 180-day period can occur either in
litigation involving the first Paragraph IV filer or a subsequent filer.
Until recently, the FDA has interpreted the reference to a court
decision to mean a court decision which is final and non-appealable. This
interpretation was challenged in litigation in which the courts disagreed with
the FDA's interpretation. Prompted in part by those decisions, the FDA issued
guidelines in March 2000 in which it announced a change in its prospective
interpretation of the law governing ANDAs and the publication of the guidelines.
The new guidelines state that the FDA now will view a court decision to be the
first court decision which finds a patent at issue to be invalid, unenforceable
or not infringed. The FDA stated that when a lower court renders such a
decision, the FDA may approve an ANDA as of the date of that decision and the
180-day exclusivity period will commence on that date, unless the marketing of
the product has already commenced. If the lower court decision finds a patent to
be infringed, but the decision is reversed on appeal, the FDA may approve the
ANDA on the date a judgment is entered that the patent is invalid, unenforceable
or not infringed. The FDA stated that neither a stay or a reversal of a district
court decision finding the patent invalid, unenforceable or not infringed will
have an effect on the approval of an ANDA or on the beginning, or continued
running, of the exclusivity period.
The FDA's new interpretation of the statute may substantially decrease
the value of the 180-day exclusivity period. A patent holder whose patent is
found invalid, unenforceable or not infringed in a lower court-decision may seek
to reverse such a ruling on appeal. Under the new FDA interpretation, however,
even if such an appeal is taken, the bioequivalent product's 180-day exclusivity
period would start to run at the time the lower court rendered its decision. The
developer of the bioequivalent product would thus be faced with the prospect of
beginning marketing of its product despite the pending appeal and lack of final
resolution of the litigated issue or delaying marketing at a time when the
180-day exclusivity period had started. A decision to delay marketing of the
product following a lower court decision which is subject to an appeal would
mean that the developer of the product would have fewer than 180 days, and
possibly no days, in which to be the exclusive marketer of that bioequivalent
product. Andrx is unable to predict what impact, if any, the FDA's new
guidelines may have on its business or financial results.
22
As stated above, if an NDA or patent owner commences a patent
infringement lawsuit against the ANDA applicant within 45 days of the date it
receives that applicant's Paragraph IV certification notice, the filing of that
lawsuit will prevent the FDA from approving that ANDA until the earlier of 30
months, expiration of the patent, or when the infringement case is decided in
favor of the developer. A recent tactic employed by brand companies to delay the
availability of generic alternatives has been to list newly issued patents in
the FDA's Orange Book as "covering" their products, thereby requiring the ANDA
applicant to make yet another Paragraph IV certification, with the purpose,
Andrx believes, of commencing additional patent litigation to obtain additional
30 month "stays" of FDA approval. During the first quarter of 2001, this tactic
was employed against Andrx by both Biovail, in connection with Tiazac, and by
AstraZeneca, in connection with Prilosec. Andrx and other manufacturers of
bioequivalent pharmaceuticals have filed, and will likely continue to file,
lawsuits and take other actions to enjoin or prohibit the listing of certain of
these patents or to preclude the imposition of additional 30 month "stays" of
FDA approval for these newly issue patents, but it is unclear as to how and
whether the courts, FDA or Congress will ultimately change this practice.
NDA Process. A NDA is a filing submitted to the FDA to obtain approval
of a drug that is not eligible for an ANDA and must contain complete
pre-clinical and clinical safety and efficacy data or a reference to such data.
Before clinical testing can begin, stringent government requirements for
pre-clinical data must be satisfied. The pre-clinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for
the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. The process of completing clinical trials for a
new drug may take several years and requires the expenditure of substantial
resources. Preparing a NDA involves considerable data collection, verification,
analysis and expense, and Andrx cannot guarantee that the FDA or any other
health authority will approve any of Andrx's products on a timely basis, if at
all. The approval process is affected by a number of factors, primarily the
risks and benefits demonstrated in clinical trials, the severity of the disease
and the availability of alternative treatments. The FDA or other health
authorities may deny a NDA if the regulatory criteria are not satisfied, or may
require additional testing or information before that NDA is approved.
Patent certification procedures, and corresponding potential for delay
in the FDA approval process, apply to certain NDAs in which a company relies
upon data or information that is publicly available, but to which the company
does not have a right of reference.
Andrx believes that the FDA's abbreviated ANDA procedures will apply to
Andrx's bioequivalent versions of controlled-release drugs. Andrx cannot assure
you that its bioequivalence studies and other data will result in FDA approval
to market its drug products. Certain ANDA procedures for bioequivalent
controlled-release drugs and other products are presently the subject of
petitions filed by brand name drug manufacturers, which seek changes from the
FDA in the approval process for bioequivalent drugs. Andrx cannot predict at
this time whether the FDA will make any changes to the ANDA procedures as a
result of such petitions, ongoing rulemakings, or litigation or the effect that
such changes may have on Andrx. Any changes in FDA regulations or policies may
make ANDA approvals more difficult and, thus, may have a material adverse effect
on Andrx's business.
23
Patent certification requirements for various drugs could also result
in significant delays in obtaining FDA approval if patent infringement
litigation is initiated by the holder or holders of the brand name patents.
Delays in obtaining FDA approval of ANDAs and certain NDAs can also result from
a marketing exclusivity period and/or an extension of patent terms. If some of
Andrx's drugs do not qualify for ANDA procedures, as will be the case with
certain of Andrx's controlled-release formulations, the FDA approval process may
require time consuming and expensive clinical studies and NDA filings.
The FDA also regulates the development, manufacture, distribution,
labeling and promotion of prescription drugs. It requires that certain records
be kept and reports be made, mandates registration of drug manufacturers and
their products and has the authority to inspect manufacturing facilities for
compliance with cGMP standards. As a distributor of bioequivalent
pharmaceuticals manufactured by third parties, Andrx is subject to state
licensure and other requirements pertaining to the wholesale distribution of
prescription drugs. Andrx could be materially adversely affected by any failure
to comply with licensing and other requirements. Other requirements exist for
controlled drugs, such as narcotics, which are regulated by the DEA. In
addition, Andrx's facilities are subject to compliance with federal, state and
local laws regarding environmental protection and the regulation of hazardous
materials.
Finally, the FDA has the authority to withdraw approvals of previously
approved drugs for cause, to request recalls of products, to debar companies and
individuals from future regulatory submissions and, through action in court, to
seize products, institute criminal prosecution or close manufacturing plants in
response to violations. The DEA has similar authority. Andrx could be materially
adversely affected by any such FDA, DEA or comparable state regulatory agencies'
actions.
Product Liability Insurance
The design, development and manufacture of Andrx's products or the
products Andrx distributes involves a risk of product liability claims. Andrx
has obtained product liability insurance that covers substantially all products
marketed by Andrx's drug distribution operations, in bioequivalence and other
studies for Andrx's controlled-release product candidates and for the products
Andrx intends to commercialize. Andrx believe that its product liability
insurance is adequate for its current operations, but may seek to increase
Andrx's coverage prior to the commercial introduction of Andrx's product
candidates. Andrx cannot give assurance that the coverage limits of its
insurance will be sufficient to cover potential claims. Product liability
insurance is expensive and difficult to obtain and may not be available in the
future on acceptable terms or in sufficient amounts, if available at all. Andrx
could be harmed by a successful claim against Andrx in excess of Andrx's
insurance coverage.
24
BUSINESS OF CYBEAR
Overview
Cybear is an information technology company that is seeking to use the
Internet to improve the efficiency of clinical, administrative and
communications tasks in the healthcare industry. Cybear is an Internet service
provider, or ISP, and an application service provider, or ASP. Cybear can use
its own secure private network to provide customers access to the Internet.
Cybear believes that access to physicians and their office staff is
critical to achieving acceptance of the Internet as a technology and
communications tool by the healthcare industry. Accordingly, Cybear has been
devoting significant resources to building its physician user base. Through its
planned acquisition of the Physicians' Online website in connection with the
pending acquisition of Mediconsult.com. Inc., Cybear expects to expand its
registered user base tenfold to over 215,000 physicians. This represents almost
1/3 of the practicing physicians in the U.S. Physicians' Online is one of the
most active physician websites in the country with over one million visits and
eight million page views per month.
In order to encourage use of the Internet by healthcare professionals
and continue growth of its user base, Cybear is offering various value-added
Internet healthcare applications and services through its portals, as well as
more traditional Internet applications. Cybear's first two applications are
dr.cybear, a connectivity and content product introduced in March 1999 and
rx.cybear, a pharmacist portal application, which enables online transmission of
prescription refill data. Cybear intends to continue to enhance these products
by adding additional functionality, such as online communication of laboratory
results in dr.cybear and online transmission of new prescription information
through both dr.cybear and rx.cybear. Cybear will also seek to use its secure
Internet connectivity capabilities to create online medical communities and
offer educational programs.
From its base of applications, Cybear will also seek to use its
proprietary reporting technology in the areas of online communication of
laboratory order entry and laboratory results reporting and its proprietary
patented technology for prescription information transfer to provide additional
Internet applications that are designed to improve clinical efficiency while
reducing administrative complexity. In addition, Cybear plans to enhance its
25
portfolio of Internet applications through the establishment of strategic
relationships with partners in various areas of healthcare including radiology,
transcription, e-detailing and sampling.
By establishing a sizeable physician user base and by exploiting its
proprietary technology, Cybear believes that it has the potential to generate
revenue from multiple sources and ultimately profitability. Revenues are
currently expected to take the form of licensing and maintenance fees for
Cybear's proprietary technology, transaction fees associated with its Internet
applications, sponsorship, subscription and advertising fees generated from
providing third parties such as pharmaceutical companies with direct access to
Cybear's user base and e-commerce revenue. However, given the rapidly evolving
nature of the online healthcare industry, there can be no assurance that
Cybear's business strategy will result in the generation of significant revenues
and profits or that it will not need to be significantly changed in response to
developments in the online healthcare industry.
In August 1999, Andrx and Cybear formed Cybearclub, a joint venture 55%
owned by Cybear intended to distribute healthcare products to physicians through
the Internet. Through December 31, 2000, Cybear generated most of its revenue
through Cybearclub.
In March 2000, Cybear entered into a software license agreement and a
development service agreement with AHT Corporation whereby, among other things,
Cybear obtained non-exclusive licenses to two AHT software applications and
agreed to develop a software application for AHT. In connection with these
agreements, Cybear loaned $4 million to AHT in exchange for a one-year secured
convertible promissory note, bearing interest at the rate of 10% which was
wholly or partially convertible, at Cybear's option, into not more than
1,913,550 shares of AHT common stock at a conversion price of the lower of $4.34
per share or 80% of the average market price of the AHT common stock for the 30
trading days immediately preceding the conversion date. Cybear was granted a
perpetual license to the software applications, including the source code to the
software applications, if AHT defaulted on its obligations under the AHT Note.
Cybear recorded the AHT note at its cost. In addition, AHT granted Cybear a five
year warrant to purchase 300,000 shares of its common stock at a price of $4.34
per share.
In September 2000, AHT filed for bankruptcy protection. In November
2000, Cybear and AHT entered into an acquisition agreement, which was approved
by the U.S. Bankruptcy Court, whereby Cybear acquired certain of AHT's operating
assets, including AHT's patents, licenses, trademarks and contracts. Under the
terms of the acquisition agreement, an independent valuation was used to
determine the value of the assets acquired by Cybear and the amount of Cybear's
deficiency claim against AHT. The deficiency claim attached as a first senior
lien against all of AHT's remaining assets, including the proceeds, if any, from
the litigation AHT commenced against BioShield Technologies, Inc. and certain of
its officers and directors in connection with the alleged breach of their
announced merger agreement.
In January, 2001, Andrx Corporation entered an agreement to acquire
Mediconsult.com, Inc., a Delaware corporation, in a stock for stock merger.
Mediconsult is a Tarrytown, New York based company which operates Physicians'
Online, a leading physician Internet portal and eMedEd, an Internet-based
technology for physician education. In the merger, Mediconsult shares will be
exchanged for Cybear common stock on the basis of 0.1430 shares of Cybear common
stock for
26
each share of Mediconsult common stock, subject to adjustment.
Mediconsult will become part of Cybear. The acquisition will be accounted for
using the purchase method of accounting. The merger was approved by Mediconsult
stockholders in March 2001 and is expected to close in April 2001, subject to
the satisfaction of certain conditions.
Healthcare Communications and Information Technology Issues
Participants in the healthcare industry are highly dependent upon
information. Information is generated by multiple sources, must be acted on at
various times by a variety of participants and forms the basis of quality care
and adequate reimbursement for services. With both the continued penetration of
managed care and reductions in government reimbursement, the need for accurate,
rapid and interactive information continues to increase. At the same time,
demand for real-time accurate clinical and administrative information among
healthcare network providers has increased.
Notwithstanding the recognized need for improved business-to-business
communication, Cybear management believes that the healthcare industry has, to
date, underinvested in information technology. The exchange of complex
information currently depends on the inefficiencies inherent in mail, telephone
and fax communications. It is not unusual for patients to experience delays in
obtaining authorizations, in gaining access to specialists or in having
diagnostic or therapeutic procedures performed because of inefficient manual
methods of sharing information. Physicians find it increasingly difficult to
monitor the thousands of different medications covered by insurers, so
pharmacists interrupt patient care with requests to change or substitute
medications. It is common practice for physicians and their office staff to
telephonically verify a patient's eligibility and other items necessary to
render care. Manual methods of coding for healthcare reimbursement claims are
prone to human error. These inefficiencies are a daily part of the healthcare
industry and reduce the profitability of healthcare providers and provider
organizations.
The desired linkage of existing computer systems used by participants
in the healthcare industry has been hindered by a variety of factors, including
the sheer number of industry participants, the complexity of healthcare
transactions, the high cost of technology, limitations of existing information
systems and the incompatibility of the many existing operating platforms.
Cybear believes that the Internet is a transformational communications
technology that will be best suited to handle complex communications between
healthcare providers and payers. The Internet's open architecture, universal
accessibility and acceptance makes it a powerful communications medium
overcoming many of the limitations of legacy healthcare information access and
technology systems. Additionally, Cybear believes the Internet has already
gained wide acceptance in the healthcare community as an information access and
gathering tool by both payers and providers, with a majority of U.S. physicians
claiming to access the Internet regularly. Consequently, the deployment of
various applications, content and tools will more readily be accepted by
physicians, other providers and their office staffs.
The Cybear Solution
Cybear has developed its products and applications to meet the need to
improve the accuracy and efficiency of communications among physicians and the
participants in the healthcare industry. Among physicians and other participants
in the healthcare industry, Cybear's Internet-based applications and services
are designed to improve the efficiency of day-to-day clinical, administrative
and
27
communication tasks of the various participants in the healthcare industry,
including physicians, hospitals, networks, pharmacists and payers that must
interact to successfully manage patient care.
Access to Cybear's websites is restricted to registered users.
Registered users must enter passwords to obtain access, and the passwords are
programmed to provide general access to product content and applications and
tiered-restricted access to member specific network communications. Cybear's
Internet-based technology platform allows for efficient installation,
maintenance and customization using the user's existing computer system. Like
other ISP's, Cybear uses existing phone lines and the telecommunications
infrastructure. Registered users may also access Cybear's websites through other
ISPs.
Cybear's Strategy
Cybear's strategy to become an Internet-based platform linking
physicians with other participants in the healthcare industry is based upon
several elements, including:
o Building a Physician User Base -- Cybear believes that access
to physicians and their office staff is critical to achieving
acceptance of the Internet as a technology and communications
tool by the healthcare industry. Accordingly, Cybear has been
devoting significant resources to building its physician user
base. Through its planned acquisition of the Physicians'
Online website in connection with the pending acquisition of
Mediconsult, Cybear expects to expand its registered user base
tenfold to over 215,000 physicians. This represents almost 1/3
of the practicing physicians in the U.S. Physicians' Online is
one of the most active physician websites in the country with
over one million visits and eight million page views per
month.
o Using Connectivity to Retain Users -- Cybear believes that its
ability to link its physician users with other participants in
the healthcare industry will encourage use of its web portals
and further strengthen its user base.
o Using Physician User Base to Obtain Additional Industry Users
-- By developing a physician-centered user base, Cybear
believes that it will attract non-physician users such as
pharmacies, hospitals, national and regional laboratories, or
IPA's, who will use its applications to communicate and
transact business with and market products and services to
physician users.
o Using In-House Application Development Capabilities -- Cybear
has an in-house application development team allowing Cybear
to develop and enhance the functionality of its applications.
o Multiple Revenue Sources -- Cybear intends to generate
revenues from multiple sources, including licensing and
maintenance fees for its proprietary technology, transaction
fees, sponsorship, subscriptions and advertising fees for
allowing direct access to its user base and e-commerce
revenue.
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Products
Cybear's Technology Platform
Cybear's Internet-based technology platform for its products includes
an ISP that is available to serve only its users. This provides improved
security and reliability of their Internet access. Cybear utilizes Java, Cold
Fusion, HTML, C, C++, ASP and VB language-based programming to design its user
applications, and a network operations center with full system backups to
provide reliability to its user base, all with the capacity to meet its users'
growing needs.
Common Features of Cybear's Products
Each of Cybear's products shares the following common features tailored
to meet the needs of the targeted user:
- ----------------------------------- ----------------------------------------------------------------------------------
Component Features
- ----------------------------------- ----------------------------------------------------------------------------------
Internet Service Provider o Automatic configuration of the user's computer
o Customizable front-end image that may include the name and service mark of
the user or the user's network
o On-demand customer support
o Access to Cybear's products as well as full general purpose Internet access
for use by its users
- ----------------------------------- ----------------------------------------------------------------------------------
Communications Services o E-mail, private network capabilities and web hosting services
o Tiered multiple user groups for password secure restricted access network
communications with others in the relevant healthcare delivery system, with
the ability to control access to information as desired
o User group menus comprising larger groups or organizations defined by a
common interest or situation
- ----------------------------------- ----------------------------------------------------------------------------------
Content and Applications o A portal entry point notifying users of new information and product updates
relevant to the particular user group
o A template for users to design their own web site, search engine/directory
to find information on the Internet, and online newsletter publisher, each
customizable to the needs of the user, and web site access and the ability
to track the number of visitors to a web site
o Software application tools to streamline day-to-day healthcare
administrative and operational tasks
o Lifestyle information geared for the e-commerce needs of healthcare
professionals
o Hyperlinks to Cybear partners
- ----------------------------------- ----------------------------------------------------------------------------------
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dr.cybear
dr.cybear includes a broad range of practice management tools to assist
physicians and their office staff. dr.cybear is designed to manage
communications between physicians and the various other segments of the
healthcare industry that interact with them. Cybear launched dr.cybear in March
1999.
The following highlights the dr.cybear practice, office and physician
tools:
o Practice tools include applications that focus on such areas as managed
care applications, care management, practice management and coding
management. These applications are designed to aid the physician or
their staff in a variety of everyday administrative tasks, such as
checking patients insurance status, satisfaction evaluations, coding
and compliance updates.
o Office tool include applications in the area of e-commerce,
infrastructure support and other administrative services. These are
designed to assist in streamling purchasing, office administrative
tasks and providing online training services.
o Physician tools include applications that provide continuing education,
credentialing capabilities, prescription management information, along
with a variety of additional medical content. These applications are
designed to assist the physician in such tasks as tracking medication
covered by different insurance carriers, keeping physicians updated on
continuing medical education and allowing physicians to maintain
current profiles regarding education, licensure hospital priveleges,
etc.
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Cybear intends to enhance dr.cybear by adding additional features
including:
o Laboratory order entry and communication of laboratory
results. This service will enable physicians to order and view
the results of diagnostic tests from participating clinical
laboratories.
o Medical messaging services which may include discharge
summaries and nursing notes from hospitals, prescription and
laboratory information, transcription information, as well as
other pertinent patient medical records to allow physicians
"real time" access to such information.
rx.cybear
rx.cybear targets community pharmacies, a segment of the healthcare
delivery sector that is experiencing increased pressures to reduce and control
operational costs. Cybear launched this product in February 2001 to a limited
number of pharmacies.
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rx.cybear offers the following applications:
o Ability to modify and change drug therapies during the refill
process.
o Electronic integration of the Patient/Physician/Pharmacy for
Rx refills and renewals.
o Calculators that assist with managing the profitability of the
store, labor budgets, delivery costs, contract profitability,
profit and loss, and price increases.
o Ability to look up formulary tables online by insurance
carrier to verify customer questions prior to adjudication or
filling the prescriptions.
rx.cybear is being enhanced to offer the following additional
applications:
o The ability for a pharmacy to receive a new prescription
electronically through the portal, directly from the
physician's office.
o Access to numerous journals, regulatory information, formulary
listings and clinical study summaries.
o The ability to monitor patient refill patterns and encourage
customers to refill on time to positively impact outcomes.
Marketing and Sales
Cybear sells its product and services primarily through an in-house
sales team. This team is complemented by senior management in approaching other
segments of the healthcare community, including the pharmaceutical, laboratory,
hospital, medical device and supplies and other ancillary service providers.
Cybear's marketing efforts focus on developing certain revenue bases:
e-commerce, Cybearclub transaction revenues, licensing and maintenance fees,
sponsorship fees, advertising fees and subscription revenues. Cybear believes
that providing useful, easy to use and well supported products and services such
as Intranets, lab ordering and results software, on-line practice management
tools such as eligibility, referrals and authorizations, claims processing,
prescription formulary, pharmacy messaging and practice websites and additional
products including ISP services, co-location and hosting, group purchasing for
vaccines, injectibles, office supplies and medical supplies, will build its user
base, and that building its user base will allow Cybear to generate additional
sources of revenue and achieve profitability.
Cybearclub
In August 1999, Andrx and Cybear formed Cybearclub, a joint venture 55%
owned by Cybear intended to distribute healthcare products to physicians through
the Internet. Cybearclub is managed by a committee consisting of three Cybear
employees and two Andrx employees. Cybear generated most of its revenue through
Cybearclub during 2000. Pursuant to the joint venture, Andrx sells
32
products to Cybearclub at cost and charges Cybearclub for certain fulfillment
and back office operations such as purchasing, warehousing and distribution, as
well as customer service and telemarketing activities. Such services were
charged originally at 10% and subsequently amended to 6% of gross sales. This
rate could increase if Cybearclub achieves certain quarterly gross sales levels
in the future.
Cybearclub offers medical and other products to physicians through its
website. It is intended that the current product offerings be expanded to
include products offered by other suppliers.
Andrx telemarketers and Cybear employees are utilized to induce and
train physicians to use the website to order the products offered on the
website. From time to time, Cybear technical support employees may assist
physician offices in completing their Internet orders or assist them with
technical difficulties that they may be encountering.
Prior to October 8, 2000, orders were entered on the Internet by Cybear
employees as well as physician offices and revenues derived from such orders
were recognized by Cybearclub. The joint venture agreement was amended to
provide that subsequent to October 8, 2000, only revenues derived from orders
entered over the Internet by physician offices are recognized as Cybearclub
revenues.
Customer Service and Support
Cybear believes that effective customer service is essential to
attracting and retaining users and is acutely sensitive to the demands for
person-to-person responsiveness of the healthcare community. Cybear provides
ongoing telephone support in both technical computer hardware and healthcare
applications matters. This support is provided through its customer service and
help desk which are accessible by a toll-free call and are available from 8:00
a.m. to 8:00 p.m. eastern standard time, Monday through Friday, with after hours
support available via pager. Personnel are trained to both resolve technical
problems and answer inquiries on product usage.
Network Operations Center
Cybear's network operations center was designed to fully integrate
redundancy and scalability. Cybear has installed redundant power supplies, each
with its own power cable, into every major switch or router in its system so as
to ensure that a disruption in the power supply or a disconnected power cable
does not incapacitate the network. Cybear can increase its capacity, speed and
fault tolerance without affecting or stopping existing services simply by
connecting additional equipment into its network. Cybear uses the latest in
firewalls running dual design in the event one should fail. Cybear's external
connectivity is designed to be as redundant and self repairing as its internal
network. Cybear has connectivity, split across several routes and high-speed
segments known as T3 lines, to several major telecommunication infrastructure
providers, including BellSouth, Uunet, and Netrus, to provide connections with
the Internet. If any one or more of the providers or routers becomes
unavailable, the infrastructure itself will re-route traffic as necessary to
continue functioning without interruption.
Every network segment is split among redundant switches, and each
switch also is attached to the backbone through redundant connections, resulting
in an efficient self-healing network that can sense and repair itself as the
need arises. Cybear's host routers and network segments, both internal and
external, are monitored 365 days a year through several systems, on and offsite,
in order to maintain site integrity. The network operations center is located in
Boca Raton, Florida.
Competition
Cybear's competitors include online services or websites targeted to
healthcare, general purpose ISPs, publishers and distributors of offline media,
healthcare information companies and large data processing and information
companies. Many of these competitors have substantial installed customer bases
in the healthcare industry and the ability to fund significant product
development and acquisition efforts. Cybear believes that the principal
competitive factors in its
33
market include knowledge of user needs and client service, system quality and
product features, price and the effectiveness of marketing and sales efforts.
To be competitive, Cybear must incorporate leading technologies,
enhance its existing services and content, develop new technologies that address
the increasingly sophisticated and various needs of healthcare professionals and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis.
Many of Cybear's current and potential competitors have greater
financial, technical and marketing resources to devote to the development,
promotion and sale of their services; longer operating histories; greater name
recognition; and larger user bases than Cybear and, therefore, may have a
greater ability to attract users. Many of these competitors may be able to
respond more quickly than Cybear to new or emerging technologies in the Internet
and the personal communications market and changes in Internet user requirements
and to devote greater resources than Cybear to the development, promotion and
sale of their services. In addition, Cybear does not have contractual rights to
prevent its business partners from entering into competing businesses or
directly competing with it.
Government Regulation and Healthcare Reform
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare organizations. Cybear's products are designed to function within
the structure of the healthcare financing and reimbursement system currently
being used in the United States. During the past several years, the healthcare
industry has been subject to an increase in governmental regulation of, among
other things, reimbursement rates.
Proposals to reform the U.S. healthcare system have been and will
continue to be considered by the U.S. Congress. These programs may contain
proposals to increase governmental involvement in healthcare and otherwise
change the operating environment for Cybear's potential customers. Healthcare
organizations may react to these proposals and the uncertainty surrounding those
proposals by curtailing or deferring investments, including those for Cybear's
products. On the other hand, changes in the regulatory environment have in the
past increased and may continue to increase the needs of healthcare or
organizations for cost-effective information management and thereby enhance the
marketability of Cybear's products and services. Cybear cannot predict with any
certainty what impact, if any, such proposals or healthcare reforms might have
on Cybear's results of operations, financial condition and business.
Cybear's products and services are not directly subject to governmental
regulations, although the proposed user base is subject to extensive and
frequently changing federal and state laws and regulations. However, with regard
to healthcare issues on the Internet, the Health Insurance Portability and
Accountability Act of 1996, mandates the use of standard transactions, standard
identifiers, security and other provisions by the year 2002. It will be
necessary for Cybear's platform and for the applications that it provides to be
in compliance with the proposed regulations. Congress is also likely to consider
legislation that would establish uniform, comprehensive federal rules about an
individual's right to access his own or someone else's medical information. This
legislation would likely define what is to be considered "protected
34
health information" and outline steps to ensure the confidentiality of this
information. The proposed Health Information Modernization and Security Act
would provide for establishing standards and requirements for the electronic
transmission of health information.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as online content, user privacy,
pricing and characteristics and quality of products and services. For example,
although it was held unconstitutional, the Communications Decency Act of 1996
prohibited the transmission over the Internet of certain types of information
and content. In addition, several telecommunications carriers are seeking to
have telecommunications over the Internet regulated by the FCC in the same
manner as other telecommunications services. Because the growing popularity and
use of the Internet has burdened the existing telecommunications infrastructure
in many areas, local exchange carriers have petitioned the FCC to regulate ISPs
in a manner similar to long distance telephone carriers and to impose access
fees on the ISPs.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. Cybear cannot guarantee
that the United States will not adopt legislation purporting to protect such
privacy. Any such legislation could affect the way in which Cybear is allowed to
conduct its business, especially those aspects that involve the collection or
use of personal information, and could have a material adverse effect on
Cybear's business, financial condition and operating results. Moreover, it may
take years to determine the extent to which existing laws governing issues such
as property ownership, libel, negligence and personal privacy are applicable to
the Internet.
With regard to copyright infringement liability, Congress enacted the
Online Copyright Infringement Liability Limitation Act as part of the Digital
Millennium Copyright Act which limits the copyright liability of ISPs for
certain transmissions through their systems. Through this law, an ISP can avoid
liability for copyright infringement with respect to the ISP's transmitting,
routing, linking, and storing materials through its service if the materials are
transmitted or stored by or at the direction of a person other than the ISP
through an automatic process without selection of the materials by the ISP, the
ISP does not select the recipients of the materials except as an automatic
response to the request of another person, the materials are not accessible by
unanticipated recipients, and the materials are transmitted without modification
of content.
The ISP must not have actual knowledge or information making it
apparent that materials on its system infringe, and must have procedures in
place to deal with allegations of infringement, including a designated person to
receive notifications of claimed infringement, a commitment to remove allegedly
infringing material from the service upon receipt of credible notifications and
notification of the subscriber whose material is removed from the service.
While this law provides some protection, it will not apply in all
aspects where Cybear could face liability for copyright infringement as a result
of materials available on its ISP because Cybear may create or modify certain of
these materials, and therefore be outside of the safe harbor provided by law.
35
The tax treatment of the Internet and e-commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by certain foreign governments that could impose taxes on the sale of
goods and services and certain other Internet activities. A recently-passed law
places a temporary moratorium on certain types of taxation on Internet commerce.
Cybear cannot predict the effect of current attempts at taxing or regulating
commerce over the Internet. Any legislation that substantially impairs the
growth of e-commerce could have a material adverse effect on Cybear's business,
financial condition and operating results.
Intellectual Property
Cybear seeks to protect its proprietary information through
nondisclosure agreements with its employees. Cybear's policy is to have
employees enter into nondisclosure agreements containing provisions prohibiting
the disclosure of confidential information to anyone outside Cybear, requiring
disclosure to Cybear of any new ideas, developments, discoveries or inventions
conceived during employment, and requiring assignment to Cybear of proprietary
rights to such matters that are related to Cybear's business.
Cybear also relies on a combination of trade secrets, copyright and
trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems and products and knowledge bases.
Cybear believes that because of the rapid pace of technological change in the
Electronic Data Interface industry, trade secret and copyright protection are
less significant than factors such as the knowledge, ability, experience and
integrity of Cybear's employees, frequent product enhancements and the
timeliness and quality of support services.
Cybear has a federal service mark registration for "Cybear" and asserts
various other trademarks and servicemarks. Cybear has also registered the domain
names "dr.cybear.com," "rx.cybear.com," and "Cybear.com," among others. Cybear
currently holds two patents relating to electronic prescription processing and
has recently entered into two license agreements with respect to these patents.
Cybear believes certain third parties are infringing on these patents and
intends to enforce its rights with respect to these patents, although there can
be no assurance that it will be successful in doing so. Moreover, any
infringement or misappropriation by third parties of Cybear's intellectual
property rights could disadvantage Cybear in its efforts to retain and attract
new customers in a highly competitive market and could cause Cybear to lose
revenues or incur substantial litigation expense.
Although Cybear believes that its products do not infringe on the
intellectual property rights of others, the Company cannot assure you that such
a claim will not be asserted against Cybear in the future. If asserted, such a
claim could cause Cybear to lose revenues or incur substantial litigation
expense.
Personnel
As of December 31, 2000, Andrx Corporation had 970 employees, of whom
31 were involved in corporate administration, 475 were involved in Andrx's
distribution operations and 132 were involved in Cybear's Internet business. The
remaining 332 employees were involved in research, pharmaceutical development
and manufacturing, including over 150 scientists, over 80 of whom hold Ph.D.,
masters or medical degrees.
Executive Officers
Scott Lodin joined Andrx in January 1994 and is its Executive Vice
President, General Counsel and Secretary. Mr. Lodin was also the Secretary and a
director of Cybear. Prior to joining Andrx, Mr. Lodin was Special Counsel to
Hughes, Hubbard & Reed and a predecessor firm in Miami, Florida, where he
practiced primarily in the areas of corporate and commercial law.
Angelo C. Malahias joined Andrx as its Vice President and Chief
Financial Officer in January 1996. Mr. Malahias was also a director of Cybear.
From January 1995 to January 1996, Mr. Malahias was Vice President and Chief
Financial Officer of Circa Pharmaceuticals, Inc., where he also served as
Corporate Controller from July 1994 to January 1995. From 1983 to July 1994 he
was employed by KPMG LLP.
36
Item 2. Properties
Andrx
Andrx purchased a 15-acre tract of land in Davie, Florida on which it
built approximately 200,000 square feet of office, warehouse and manufacturing
space. As of December 31, 2000, 60% of the building, or 120,000 square feet, had
been completed and is occupied. An additional 10,000 square feet was completed
and occupied as of the end of January 2001. The remainder of the building is
expected to be completed and occupied by May 2001.
Adjacent to this space, Andrx leases approximately 97,000 square feet.
This space, consisting of two buildings, formerly housed Andrx's executive
offices and used for other uses, but now serves as a quality control laboratory,
pilot and commercial-scale manufacturing facility, offices, warehousing and
shipping facilities. The buildings are occupied pursuant to leases expiring May
31, 2003, at a current total annual rent of approximately $800,000. Each of the
leases affords Andrx five-year renewal options, and requires Andrx to pay
certain increases in common area costs.
In April 1999, Andrx entered into a one-year lease for an additional
18,000 square feet of warehouse space, at an annual rent of approximately
$200,000. This lease has been renewed for an additional year and Andrx intends
to renew this lease for an additional six months, as Andrx intends to continue
to use this facility until the new building has been completed and is available
for its intended use.
In March 2001, Andrx entered into two 5-year leases for an additional
34,750 square feet of space, in total, at an initial annual rent of
approximately $324,000. Located adjacent to its manufacturing facilities, Andrx
intends to use this space as warehousing facilities.
Andrx leases an approximately 152,000 square foot facility in Weston,
Florida, for its distribution operations and a portion of Andrx's executive
offices. This lease has a ten-year term expiring in 2009, with two five-year
renewal options, at an initial annual rental of approximately $1.4 million.
Andrx also entered into a lease for another approximately 129,000 square foot
facility in Weston, Florida, which Andrx intends to use for offices, warehousing
and manufacturing, distribution operations, research and product development of
generic versions of specialty or niche pharmaceutical products and other uses.
This lease has a 16-year term, with two five-year renewal options, at an initial
annual rental of approximately $540,000. Andrx expects to occupy Phase I of the
facility consisting of approximately 40,000 square feet in July 2001 and Phase
II of the facility consisting of approximately 89,000 square feet in July 2002.
Andrx also leases a 2,900 square foot facility in Hackensack, New
Jersey, for its clinical development operations. This lease has a five-year
lease expiring August 2003 at an annual rental of approximately $70,000.
Andrx leases approximately 4,700 square feet in a facility in Ft.
Lauderdale, Florida, for additional administrative personnel related to its
research and development activities. This lease has a five-year term expiring in
2005, with two five-year renewal options, at an initial annual rental of
approximately $480,000.
37
Andrx acquired an 11,000 square foot facility in Grand Island, New
York, which is utilized for VIP's distribution operations.
In July 2000, Andrx entered into a three-year lease for a 9,000 square
foot facility in Weston, Florida, for its sales, warehousing, and distribution
operations of its nutraceuticals, herbal, Restorex, vitamin and other
consumerproduct lines. This lease has a three-year term, at an initial annual
rental of approximately $173,000.
In connection with the acquisition of CTEX in January 2001, Andrx
leases a 30,000 square foot facility in Canton, Mississippi, which houses CTEX's
sales and administrative offices and warehousing facilities. This lease has a
five-year term expiring in 2005, at an initial annual rental of approximately
$15,000.
In connection with the acquisition of Armstrong, Andrx assumed a lease
for a 6,000 square foot storage facility in Westwood, Massasschusetts with an
annual rental of approximately $216,000 which expires in December 2002. Andrx
also assumed a lease for a 39,000 square foot manufacturing facility in West
Roxbury, Massasschusetts with an annual rental of approximately $148,000 which
expires in December 2002 with a renewal option until March 2007.
Cybear
Cybear currently leases 38,600 square feet in Boca Raton, Florida
housing its corporate headquarters and network systems. The lease provides for
annual rental of $700,000, excluding taxes, insurance, utilities and common area
maintenance charges. The lease expires on March 31, 2007.
In connection with Cybear's acquisition of certain of AHT's operating
assets in November 2000, Andrx leases approximately 8,000 square feet in a
facility in Ft. Washington, Pennsylvania which houses software license and
development operations. This lease has a five-year term expiring in 2002, at an
annual rental of approximately $136,000.
Item 3. Legal Proceedings
Andrx
See "Item 1. Business - Andrx - Patent Litigation and Proprietary
Rights" for a description of the patent litigation Andrx is currently involved
with.
In August 1998, putative class and individual actions have been filed
against Andrx in Alabama, California, Florida, Illinois, Kansas, Michigan,
Minnesota, New York, Tennessee, Wisconsin, North Carolina and the District of
Columbia. Similar class actions have commenced in Federal Court. The actions
pending in federal court have been consolidated for multi-district litigation
purposes in the U.S. District Court for the Eastern District of Michigan. In all
of these suits, Aventis has been named as a co-defendant. The complaint in each
action alleges that Andrx and Aventis, by way of the 1997 stipulation, have
engaged in alleged state antitrust and other statutory and common law violations
that allegedly have given Aventis and Andrx a near monopoly in the U.S. market
for Cardizem CD and a bioequivalent version of that pharmaceutical product.
According to the complaints, the monopoly possessed by the defendants enables
Aventis to perpetuate its ability to fix the price of Cardizem CD at an
artificially high price, free from generic competition, with the result that
direct purchasers such as pharmacies, as well as indirect purchasers such as
medical patients who have been issued prescriptions for Cardizem CD are forced
to overpay for the drug. Each complaint seeks compensatory damages on behalf of
each class member in an unspecified amount and, in some
38
cases, treble damages, as well as costs and counsel fees, disgorgement,
injunctive relief and other remedies. In June 1999, most of those class actions
were consolidated for pretrial purposes in the United States District Court for
the Eastern District of Michigan.
On June 6, 2000, the District Court granted plaintiffs' motion for
partial summary judgment against Andrx and Aventis in the pending putative class
actions. The District Court determined that the 1997 stipulation Andrx had
entered into with Aventis relating to their Cardizem CD patent litigation
constitutes a restraint of trade that is illegal per se under section 1 of the
Sherman-Antitrust Act. On August 15, 2000, the District Court granted Andrx's
and Aventis' motions to certify two questions relating to this determination to
the United States Court of Appeals. On December 12, 2000, the appellate court
accepted the appeal, as certified by the District Court, and set a briefing
schedule for the parties.
On March 14, 2001, the District Court granted the plaintiffs' motion to
certify the case as a class action on behalf of all persons or entities who
directly purchased Cardizem CD from Aventis during a specified period. Andrx is
unable to predict the outcome of the litigation, although Andrx believes that
these actions have no merit and Andrx intends to mount a vigorous defense
against each action.
On March 16, 2000, Andrx was named as a respondent by the FTC in an
administrative action seeking a cease and desist order against future agreements
similar to the stipulation and other remedies. Contrary to the FTC's position,
Andrx believes that the stipulation was pro-competitive and benefited consumers.
The complaint in the administrative proceeding does not seek any monetary
remedies from Andrx of any kind. On November 28, 2000, an order was entered in
the administrative proceeding withdrawing the matter from the adjudicative part
of the agency for the purpose of permitting the FTC to consider a proposed
consent agreement resolving the matter. In December 2000, Andrx and Aventis
reached an agreement with the FTC staff concerning the terms of a proposed
consent decree that has been submitted to the Commissioners for their approval.
The consent decree will not become effective until such approval has been
obtained.
In January 1999, Andrx and Andrx's bioequivalent pharmaceutical
distribution subsidiary, Anda, Inc. were served with third party complaints
filed against them by certain doctors and distributors who are defendants in
various legal actions relating to the sale of phentermine by Anda and its usage
as a diet drug when taken in combination with fenfluramine, commonly known as
"phen-fen". The substance of the third party complaints is that the defendants
are without fault with respect to the claims in those actions but, if they are
found liable on any of those claims, then allegedly having obtained one or more
of the drugs from Anda, they are entitled to indemnification in an amount to pay
and discharge any judgment entered against them in the putative class action
together with costs, expenses and attorney fees. Andrx and Anda have never sold
fenfluramine and believe that these claims are without merit.
In November 1999, another phen-fen diet lawsuit was filed against Anda
in the Superior Court of New Jersey by a husband, who claims to have obtained or
purchased, either directly or indirectly, from Anda and others, and thereafter
ingested, phentermine, dexfenfluramine and fenfluramine, causing serious medical
consequences, all to his financial detriment, and his wife, who, on behalf of
herself and her two children, claims monetary damages arising from emotional
39
distress to herself and her children, loss of spousal/paternal companionship and
expenditure of money, time and care for her husband required by her husband's
alleged injuries which are permanent and continuous in nature. Anda has never
sold dexfenflurarmine or fenfluramine and believes that these claims, including
any based solely on the use of phentermine, have no merit.
Andrx is being represented and defended in both of these lawsuits by
counsel designated by its insurer.
Cybear
In June 2000, Cybear received a claim from Nicebid.com for damages
allegedly incurred by Nicebid.com as a result of alleged breaches of an Internet
commerce contract between Nicebid.com and Telegraph Consulting Corporation or
TCC. Cybear acquired TCC in 1999. Although Nicebid.com has indicated that it
will seek arbitration, this matter has not yet been submitted to arbitration.
Cybear intends to vigorously defend against the claim.
In February 2001, the Southeast Regional Office of the SEC commenced a
formal private investigation of Cybear, primarily focusing on Cybear's revenue
reporting and internal controls with respect to Cybearclub LC, the joint venture
between Andrx and Cybear intended to promote the distribution of certain
healthcare products through the Internet. This investigation followed an
informal inquiry conducted by the SEC staff beginning late in the third quarter
of 2000. Andrx and Cybear cooperated voluntarily with the SEC staff during the
informal inquiry phase and continue to supply requested information to the SEC
staff thereafter.
Other than the patent litigation matters referred to and described in
this item, by Andrx Corporation is not party to a legal proceeding wherein an
adverse outcome would have a material adverse effect on Andrx's consolidated
results of operations, financial condition or business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(A) Market Information
Andrx Corporation has two classes of common stock: Andrx common stock
and Cybear common stock, both of which are quoted on the Nasdaq National Market.
For the calendar quarters indicated, the table below sets forth the high and low
prices per share of Andrx common stock and Cybear common stock, as reported on
the Nasdaq National Market, based on published financial resources. The Cybear
common stock has been listed for trading on the Nasdaq National Market under the
symbol "CYBA" since September 7, 2000. Prior to the September 2000
reorganization, Cybear's common stock was listed for trading on the Nasdaq
National Market under the symbol "CYBA" since June 18, 1999. From January 28,
1999 to June 17, 1999, Cybear's common stock was traded on the OTC Bulletin
Board under the symbol
40
"CYBR." Quotations from the OTC Bulletin Board were over-the-market quotations
and, accordingly, reflected inter-dealer prices, without retail mark-up,
mark-down or commission and may have not represented actual transactions.
Because only 269,400 shares were freely tradable at that time, there was a
limited public market for Cybear's common stock and the prices might not have
reflected the true value of the Cybear's common stock.
Andrx Common Stock Cybear Common Stock
Market Price Market Price
-------------------------------- -------------------------------------
High Low High Low
---------------- ------------ ---------------- ---------------
1999
First Quarter....................... $ 23.13 $ 11.13 $ 53.00(1) $ 3.25(1)
Second Quarter...................... 39.00 15.41 41.00 13.88
Third Quarter....................... 39.00 28.57 22.25 5.62
Fourth Quarter...................... 29.00 19.25 9.57 5.23
2000
First Quarter....................... $ 65.50 $ 20.13 $ 11.72 $ 4.19
Second Quarter...................... 68.31 43.63 5.62 2.39
Third Quarter....................... 95.88 63.94 4.67 0.48
Fourth Quarter...................... 75.00 69.69 1.44 0.19
- ------------------------------------
(1) Commencing January 28, 1999.
Nasdaq has notified Andrx Corporation that the Cybear common stock is
subject to delisting because Cybear common stock is not in compliance with the
continued listing requirements of the Nasdaq National Market since the Cybear
common stock failed to maintain a bid price of $1.00 for 30 consecutive trading
days. Andrx Corporation has appealed Nasdaq's decision to delist the Cybear
common stock so the Cybear common stock will not be delisted until a decision is
rendered on the appeal. A hearing on the appeal was held on March 30, 2001, the
outcome of which is uncertain.
(B) Holders
As of March 1, 2001, there were approximately 200 holders of record of
Andrx common stock and approximately 225 holders of record of Cybear common
stock. Andrx believes the number of beneficial owners of its Andrx common stock
is in excess of 30,000 and the number of beneficial owner of its Cybear common
stock is in excess of 30,000.
(C) Dividends
Andrx Corporation has never paid any cash dividends on its common stock
and does not intend to pay cash dividends for the foreseeable future. Andrx
Corporation intends to retain earnings, if any, to finance the development and
expansion of its business. Payment of cash dividends in the future will depend,
among other things, upon Andrx Corporation's ability to generate earnings, its
need for capital and its overall financial condition.
41
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data is incorporated by reference from Item 7 included
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reorganization
On September 7, 2000, Andrx Corporation completed a Plan of Merger and
Reorganization (the "Reorganization") whereby it acquired the outstanding equity
of Cybear Inc. that it did not own, reincorporated in Delaware and created two
new classes of common stock:
o Andrx Group Common Stock (the "Andrx common stock"), to track the
performance of Andrx Corporation and subsidiaries, other than its
ownership of Cybear Inc. and its subsidiaries, and certain potential
future Internet businesses of Andrx Corporation (the "Andrx Group");
and
o Cybear Group Common Stock (the "Cybear common stock"), to track the
performance of Cybear Inc., its subsidiaries and certain potential
future Internet businesses of Andrx Corporation (the "Cybear Group").
Throughout this Andrx Corporation Form 10-K, the words "Andrx
Corporation" or the "Company" refer to Andrx Corporation, and all of its
subsidiaries. "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 other than Cybear prior to the Reorganization, and to
the Andrx Group following the Reorganization. "Cybear" refers to Cybear, Inc.
and its subsidiaries prior to the Reorganization and to the Cybear Group
following the Reorganization.
Holders of Andrx common stock and Cybear common stock are stockholders
of Andrx Corporation, have no specific rights to assets designated to Andrx or
Cybear and 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 Securities and Exchange Commission.
Included herein is as follows:
PAGE
ANDRX CORPORATION AND SUBSIDIARIES
Consolidated selected financial data 44
Management's discussion and analysis
of financial condition and results of operations 46
ANDRX GROUP
Consolidated selected financial data 52
Management's discussion and analysis
of financial condition and results of operations 53
CYBEAR GROUP
Consolidated selected financial data 57
Management's discussion and analysis
of financial condition and results of operations 58
Included herein in Item 8 "Financial Statements and Supplementary Data"
are Andrx Corporation and subsidiaries consolidated financial statements and
consolidated notes to financial statements. Such notes include separate
supplemental financial statements relating to the business of Andrx and the
business of Cybear. (See Note 19).
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", "could", "would", "estimate",
or "continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Investors are cautioned
that all forward-looking statements involve risk and uncertainties. Andrx
Corporation is also subject to other risks detailed herein or detailed from time
to time in Andrx Corporation's Securities and Exchange Commission filings.
42
Introduction
Andrx was organized in August 1992, and commenced marketing and
distributing bioequivalent pharmaceuticals manufactured by third parties. In
February 1993, Andrx began to engage in the research and development of
bioequivalent versions of controlled-release pharmaceuticals utilizing its
proprietary drug delivery technologies. During 1996, Andrx commenced its
research efforts to develop brand name controlled-released products and an
Internet based application for healthcare providers. In 1999, the Company
commenced its research and development efforts on bioequivalent versions of
specialty and niche pharmaceutical products. Through October 9, 1997, Andrx's
distribution operations had generated substantially all of its revenues. On
October 10, 1997, the FDA granted final approval of Andrx's ANDA for its
bioequivalent version of Dilacor XR, Andrx's first manufactured product, which
it immediately launched as Diltia XT.
In September 1997, Andrx entered into a Stipulation and Agreement
("Stipulation") with Aventis S.A. ("Aventis") in connection with the patent
infringement litigation involving Cardizem CD in order to reduce the risks that
both parties faced as the case was litigated to its conclusion. Andrx agreed to
maintain the status quo in connection with the marketing of its product and to
dismiss certain claims against Aventis. Aventis agreed to compensate the Company
for the Company's lost profits, which were stipulated to be $100.0 million per
year, if Andrx ultimately prevailed in the litigation and to grant Andrx a
license for Aventis' patents under certain conditions, including if Andrx
ultimately lost the litigation. Aventis also agreed to make non-refundable
interim quarterly payments of $10.0 million to Andrx, beginning upon Andrx'
receipt of final FDA approval for its bioequivalent version of Cardizem CD and
continuing until the litigation was resolved or certain other events occurred.
In July 1998, the FDA granted final marketing approval for Andrx' ANDA for a
bioequivalent version of Cardizem CD. In June 1999, the litigation concerning
Cardizem CD was resolved, and on June 23, 1999, the Company launched its
reformulated bioequivalent version of Cardizem CD, Cartia XT, which enjoyed a
180-day period of marketing exclusivity through December 19, 1999. Accordingly,
for the years ended December 31, 1999 and 1998, Andrx received a total $70.7
million and $19.1 million, respectively, in Stipulation fees.
In June 1999, Andrx entered into an agreement with Geneva
Pharmaceuticals, Inc. ("Geneva") a member of the Novartis Pharmaceutical Group,
for the sale and marketing of specified products. Geneva committed to make
license payments of $1.0 million a month for 40 months, in exchange for
exclusive marketing rights in specified territories for controlled-release
dosage forms of existing products that the Company is developing for submissions
as New Drug Applications (NDAs). Under this arrangement, one of Andrx' NDA
products has been out licensed for the United States. Upon receiving approval by
the FDA or other regulatory agencies, Andrx will receive royalties from the sale
of such products with certain minimum guaranteed levels of royalties in the
first three years. In June 2000, the Company amended its agreement with Geneva
to include, among other things, additional license payments to Andrx of up to
$6,000. Andrx has also committed to continuing to sell Geneva's bioequivalent
products through the Company's distribution operations.
In 1997, Andrx formed Cybear, an information technology subsidiary. In
June 1999, Cybear completed a public equity offering of its shares at $16.00 per
share, thereby reducing Andrx' ownership in Cybear below 80%.
In August 1999, Andrx and Cybear formed Cybearclub LC ("Cybearclub"), a
joint venture to distribute healthcare products to physicians through the
Internet.
On September 7, 2000, Andrx completed the Reorganization whereby Andrx
acquired the outstanding equity of Cybear that it did not own, reincorporated
in Delaware, and created the two new classes of common stock.
In connection with the Reorganization, Andrx shareholders exchanged
each share of common stock held for one share of Andrx common stock and .1489
shares of Cybear common stock and Cybear stockholders, other than Andrx,
exchanged each share of Cybear common stock (pre-Reorganization) held for one
share of Cybear common stock.
Holders of Andrx common stock and Cybear common stock have no specific
rights to assets, operating results or cash flows of Andrx or Cybear, as Andrx
Corporation holds title to all its assets and is responsible for all of its
liabilities, operating results and cash flows regardless of how it allocates
assets and liabilities among the classes of common stock and are therefore
subject to the risks of investing in the business, assets and liabilities of
Andrx Corporation as a whole. For instance, the assets allocated to each class
of common stock may be subject to Company-wide claims of creditors and
stockholder litigation. Andrx or Cybear 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 SEC.
Andrx Corporation and subsidiaries' consolidated financial statements
include consolidated operating results, along with net income (loss) and basic
and diluted earnings (loss) per share, basic and diluted shares outstanding for
each series of common stock. Accordingly, after the Reorganization the
consolidated financial statements do not reflect consolidated basic and diluted
earnings (loss) per share since there is no underlying equity security related
to consolidated financial results.
43
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Andrx Corporation and subsidiaries'
Consolidated Financial Statements and related notes thereto included herein.
Years Ended December 31,
(in thousands, except for share and per share amounts)
----------------------------------------------------------------------------
Statement of Income Data* 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Revenues
Distributed products $ 329,110 $ 262,402 $ 215,903 $ 146,237 $ 86,721
Manufactured products 175,428 134,796 11,472 3,324 --
Stipulation fees -- 70,733 19,130 -- --
Licensing and other 15,422 8,059 552 137 50
------------ ------------ ------------ ------------ ------------
Total revenues 519,960 475,990 247,057 149,698 86,771
------------ ------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 301,475 235,346 188,226 126,802 72,400
Selling, general and administrative 61,901 55,266 30,646 18,934 13,778
Research and development 46,669 25,697 16,837 11,251 5,066
Cybear Internet operating expenses 25,833 14,744 4,090 1,473 --
Reorganization costs 2,098 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 437,976 331,053 239,799 158,460 91,244
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 81,984 144,937 7,258 (8,762) (4,473)
Other income (expense)
Minority interest in Cybear 4,146 1,937 85 31 --
Gain on sales of Cybear shares -- 643 700 -- --
Interest income 13,039 3,603 1,064 1,585 1,210
Interest expense (767) (1,661) (380) (490) (765)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 98,402 149,459 8,727 (7,636) (4,028)
Income taxes 39,870 55,405 333 -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 58,532 $ 94,054 $ 8,394 $ (7,636) $ (4,028)
============ ============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
Andrx Group Common Stock
- ------------------------
Net income (loss) allocated to Andrx Group
(including Cybear through September 6, 2000) $ 66,873 $ 94,054 $ 8,394 $ (7,636) $ (4,028)
============ ============ ============ ============ ============
Net income (loss) per Andrx Group common share
Basic $ 0.99 $ 1.52 $ 0.14 $ (0.13) $ (0.08)
============ ============ ============ ============ ============
Diluted $ 0.95 $ 1.45 $ 0.13 $ (0.13) $ (0.08)
============ ============ ============ ============ ============
Weighted average shares outstanding
Basic 67,756,400 61,979,800 60,090,800 56,852,400 48,592,000
============ ============ ============ ============ ============
Diluted 70,455,800 64,953,200 63,706,800 56,852,400 48,592,000
============ ============ ============ ============ ============
Cybear Group Common Stock
-------------------------
Net loss allocated to Cybear Group,
(subsequent to September 6, 2000) $ (8,341)
============
Basic and diluted net loss per Cybear
Group common share $ (0.55)
============
Basic and diluted weighted average shares
outstanding 15,203,000
============
*Certain prior years' amounts have been reclassified to conform with the current
year presentation and Andrx per share amounts have been restated for the
Company's May 1999 and March 2000 two-for-one stock splits of Andrx common stock
effected in the form of 100% stock dividends.
44
December 31,
(in thousands)
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- --------------
Balance Sheet Data
Cash, cash equivalents and
Investments available-for-sale $ 336,809 $ 123,418 $ 23,092 $ 25,543 $ 30,320
Working capital 453,040 180,863 51,345 45,144 32,963
Total assets 667,956 357,954 121,198 90,845 66,538
Short-term borrowings -- 20,226 4,107 546 6,563
Retained earnings (accumulated deficit) 138,835 80,303 (13,751) (22,145) (14,509)
Total shareholders' equity 559,797 220,972 72,583 60,861 42,762
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANDRX CORPORATION AND SUBSIDIARIES
Results of Operations
Year Ended December 31, 2000, As Compared To Year Ended December 31, 1999
For 2000, Andrx Corporation reported net income of $58.5 million, as
compared to net income of $94.1 million for 1999. The year ended December 31,
1999 includes stipulation fees of $70.7 million earned in connection with the
patent infringement litigation involving Cartia XT, Andrx' bioequivalent version
of Cardizem CD, offset by related royalties and corresponding income taxes. In
2000, the Company continued to increase its investment spending in research and
development. Research and development expenses increased by $21.0 million or
81.6% to $46.7 million, as compared to $25.7 million for the year ended December
31, 1999.
Total revenues increased by 9.2% to $520.0 million for 2000, as
compared to $476.0 million for 1999.
Sales from distributed products were $329.1 million for 2000, an
increase of $66.7 million or 25.4%, as compared to $262.4 million for 1999. The
increase in sales from distributed products reflects an increase in sales to
existing customers, an increase in the number of customers, as well as, the
participation in the distribution of new products launched by other
pharmaceutical companies, offset by overall price declines. Sales for 2000 also
include sales generated by Valmed Pharmaceuticals, Inc. ("Valmed"), which the
Company acquired in March 2000.
Sales from manufactured products were $175.4 million for the 2000, as
compared to $134.8 million in 1999. Sales from manufactured products include
sales of Diltia XT, Andrx Corporation's bioequivalent version of Dilacor XR, and
commencing June 23, 1999, Cartia XT, which enjoyed marketing exclusivity through
December 19, 1999.
Pursuant to the Stipulation with Aventis in connection with the patent
infringement litigation involving Cartia XT, the Company earned a total of $70.7
million in interim and final fees in 1999.
Licensing and other revenues were $15.4 million in 2000, as compared to
$8.1 million in 1999, primarily from the Company's domestic and international
licensing arrangements. The revenues in 2000 were primarily generated from the
Company's June 1999 agreement with Geneva, as amended.
Gross profit from sales of distributed and manufactured products were
$203.1 million or a gross margin of 40.2% in 2000, as compared to $161.9 million
or a gross margin of 40.7% in 1999. The increase in gross profit was primarily
the result of an increase in sales of manufactured products as a result of
having twelve months of sales of Cartia XT in 2000, as compared to approximately
six months of sales of Cartia XT in 1999.
Selling, general and administrative expenses were $61.9 million or
11.9% of total revenues for 2000, as compared to $55.3 million or 11.6% of total
revenues for 1999. Selling, general and administrative expenses include
administration, marketing, selling and warehousing of both distributed products
and manufactured products, the establishment of brand sales marketing efforts,
royalties to the Company's Co-Chairman and Chief Scientific Officer related to
sales of Cartia XT and Stipulation fees, as well as, corporate overhead
including legal costs related to patent infringement matters related to the
Company's ANDA filings and anti-trust matters. The increase in selling, general
and administrative expenses in 2000, as compared to 1999, was primarily due to
an increase in the activities necessary to support the increase in sales of both
distributed and manufactured products and legal costs.
Research and development expenses were $46.7 million in 2000, as
compared to $25.7 million in 1999. The increase in research and development
expenses of $21.0 million or 81.6% reflects the progress and expansion of the
Company's development activities in ANDA bioequivalent and NDA brand name
programs.
In 2000, the Company incurred $25.8 million of Cybear Internet
operating expenses, as compared to $14.7 million in 1999. Cybear Internet
operating expenses represent Cybear's operating expenses except cost of goods
sold. Such Cybear operating expenses include network operations and operations
support, selling, general and administrative, product development, depreciation
and amortization, merger costs and other non-recurring charges, offset by
intergroup eliminations. The increase in Cybear Internet operating expenses
primarily relates to the progress in the development of Cybear's Internet based
applications for healthcare providers and the establishment of the related
administrative infrastructure. Cybear's Internet operating expenses also include
a $4.0 million allowance against a note receivable with AHT, offset by a $2.0
million credit related to the receipt of AHT's assets, $2.0 million of severance
costs and impairment charges to certain assets and costs incurred to resolve a
dispute over performance under an agreement and termination of such agreement,
and $1.2 million of costs incurred in connection with the September 2000
Reorganization.
46
In 2000, the Company incurred $2.1 million of one time costs in
connection with the Reorganization.
Minority interest in Cybear was $4.1 million in 2000, as compared to
$1.9 million in 1999. The increase in minority interest was a result of the
increase in Cybear's net loss to $15.0 million for the period from January 1,
2000 to September 6, 2000, the effective date of the Reorganization, as compared
to $10.8 million in 1999. Additionally, minority ownership of Cybear increased
primarily from Cybear's June 1999 public offering and the issuance of Cybear
common shares in the acquisition of Telegraph Consulting Corporation. No
minority interest was recorded after the Reorganization, as Andrx Corporation
now owns 100% of Cybear.
In 1999, the Company recognized a gain on the sales of Cybear's common
stock of $643,000. Such sales were pursuant to existing subscription and warrant
agreements with Cybear's then Chairman and its then Chief Executive Officer,
which were issued at the then current price of $3.00 per share.
Interest income was $13.0 million in 2000, as compared to $3.6 million
in 1999. The increase in interest income is the result of the higher average
level of cash, cash equivalents and investments available-for-sale maintained
during 2000, as compared to 1999. The increase was primarily the result of net
proceeds of $235.8 million received from Andrx' May 2000 public equity offering.
The Company invests in investment grade interest bearing securities.
Interest expense decreased to $767,000 in 2000, as compared to $1.7
million in 1999. The decrease in interest expense was primarily the result of a
lower average level of borrowings under Andrx Corporation's bank loan during
2000, as compared to 1999. The borrowings were primarily utilized to fund the
Company's distribution operations. In December 2000, the bank loan was
terminated.
For 2000, the Company provided income taxes of $39.9 million or 40.5%
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 the Company's inability to utilize its
share of the losses of Cybear after the Company's ownership of Cybear was
reduced below 80% on June 23, 1999 through September 6, 2000, prior to the
effective date of the Reorganization. Accordingly, Cybear was excluded from the
Company's consolidated tax return and will file as a separate tax entity for all
periods from June 23, 1999 through September 6, 2000. As a result, beginning on
the effective date of Reorganization, for tax purposes, Cybear's results of
operations are included in the consolidated tax returns of the Company, as the
Company owns 100% of Cybear and income tax benefits relating to Cybear which are
unable to be utilized by Cybear on a separate company basis, will be allocated
to Andrx. In connection with the Reorganization, effective September 7, 2000,
the Company changed its method of accounting for its allocation of income taxes
within the consolidated group from the pro rata method to the separate return
method. Had the separate return method of allocating income taxes been utilized
prior to the Reorganization, Cybear would not have been able to record any
income tax benefits, as compared to $2.8 million and $ 1.9 million, as
recognized under the pro rata method for the years ended December 31, 1999 and
1998, respectively, (exclusive of the effect of minority interest of
approximately 5% in each year). Conversely, applying the pro rata method to the
period subsequent to the Reorganization would have resulted in an income tax
benefit allocation from Andrx to Cybear of approximately $4.8 million. Such
allocation has earnings per share effect of approximately $0.07 per diluted
Andrx Group common share and $0.32 per diluted Cybear Group common share.
For 1999, the Company provided $55.4 million for income taxes or 37.1%
of income before income taxes. The Company provided for income taxes in excess
of the expected annual effective Federal statutory rate of 35% due to the effect
of state income taxes and the Company's inability to utilize its share of the
losses of Cybear incurred from June 23, 1999 through September 6, 2000, offset
by the utilization of Andrx net operating loss carryforwards. Accordingly, 1999
net income includes the reversal of a valuation allowance of $4.0 million.
In connection with the Reorganization, Cybear and other members of the
Andrx Corporation consolidated group entered into, among other things, a Federal
and state tax sharing agreement. Andrx Corporation will utilize 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, a member of the group will be allocated
its income tax benefits and expenses in the year generated. Except as set forth
in the supplement referred to below, 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
a "tracking stock" member, such as Cybear, 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 is unable to utilize on a separate company basis
will be allocated to Andrx.
47
Under the provisions of the tax sharing agreement related to the
Reorganization, for financial statement purposes, at such time as Cybear
achieves profitability, or is otherwise able to recognize its tax benefits under
accounting principles generally accepted in the United States, if ever, Cybear
will recognize the benefit of its accumulated income tax benefits (which had
previously been utilized by Andrx) in its statement of operations with a
corresponding decrease to Cybear's equity (i.e., effectively accounted for as a
non-cash dividend). To the extent Andrx is profitable and is able to utilize
such tax benefit and Cybear is generating losses, it is expected that Andrx'
effective tax rate will be less than the statutory Federal and state rate. If
Cybear attains profitability or is otherwise able to recognize its tax benefits,
Andrx' effective tax rate may be greater than the statutory Federal and state
income tax rate to the extent of Cybear's then unreimbursed accumulated tax
benefits that can be realized by Cybear (Andrx will then reverse the tax
benefits previously recorded, i.e., effectively transferring such tax benefits
to Cybear in the form of a non-cash equity transaction).
In October 2000, Andrx Corporation 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 1999 Federal corporate tax return
to amortize certain expenses and/or attributes over a period of ten years and
agrees that it will make such election again on its separate 2000 Federal
corporate tax return for the period from January 1, 2000 to September 6, 2000
for certain expenses and/or attributes incurred within that period. Such
reimbursements from the Company will be accounted for by Cybear as a capital
contribution. As a result of the supplement to the tax sharing agreement, Cybear
may be reimbursed for the after-tax effect of amortizing approximately $6
million of such expenses over 10 years.
The basic and diluted weighted average shares of Andrx common stock
outstanding were 67.8 million and 70.5 million, respectively, in 2000, as
compared to 62.0 million and 65.0 million, respectively, in 1999. Such increases
resulted primarily from the Andrx' May 2000 public equity offering of 5.2
million shares. All Andrx common stock share and per share amounts reflect the
May 1999 and March 2000 two-for-one stock splits effected in the form of 100%
stock dividends. The basic and diluted weighted average shares of Cybear common
stock outstanding was 15.2 million for 2000, relating to the period from
September 7, 2000 through December 31, 2000.
Year Ended December 31, 1999, As Compared to Year Ended December 31, 1998
For 1999, the Company reported net income of $94.1 million, as compared
to net income of $8.4 million for 1998. The significant increase in net income
in 1999, as compared to 1998, was a result of the Stipulation fees earned in
connection with the patent infrigement litigation involving Cartia XT and, on
June 23, 1999, the commencement of the sale of the Company's bioequivalent
version of Cardizem CD, Cartia XT, which enjoyed a 180 day period of marketing
exclusivity through December 19, 1999. The increase in profitability occurred
while the Company continued to increase its investment spending in research and
development. Research and development in 1999 increased by $8.9 million or 52.6%
to $25.7 million in 1999, as compared to $16.8 million in 1998.
Total revenues increased by 92.7% to $476.0 million for 1999, as
compared to $247.1 million for 1998.
Sales from distributed products were $262.4 million for 1999, an
increase of $46.5 million or 21.5%, as compared to $215.9 million for 1998. The
increase in sales from distributed products reflects an increase in sales to
existing customers, an increase in the number of customers, as well as, the
participation in the distribution of new products launched by other
pharmaceutical companies, offset by overall price declines.
Sales from manufactured products were $134.8 million for 1999, as
compared to $11.5 million in 1998. Sales from manufactured products include
sales of Diltia XT, the Company's bioequivalent version of Dilacor XR, and
commencing June 23, 1999, Cartia XT, which enjoyed 180 days of marketing
exclusivity through December 19, 1999.
Pursuant to the Stipulation with Aventis, the Company earned a total of
$70.7 million in interim and final fees in 1999, as compared to $19.1 million in
interim fees in 1998.
Licensing and other revenues were $8.1 million in 1999, as compared to
$552,000 in 1998, primarily from domestic and international licensing
arrangements. The revenues in 1999 were primarily generated from the Company's
June 1999 agreement with Geneva.
Gross profit from sales of distributed and manufactured products were
$161.9 million or a gross margin of 40.7% in 1999, as compared to $39.1 million
or a gross margin of 17.2% in 1998. The increase in gross profit and gross
margin was primarily the result of an increase in sales of manufactured products
within the product mix.
Selling, general and administrative expenses were $55.3 million or
11.6% of total revenues for 1999, as compared to $30.6 million or 12.4% of total
revenues for 1998. Selling, general and administrative expenses include
administration, marketing, selling and warehousing of both distributed products
and manufactured products, the establishment of brand sales marketing efforts,
royalties to the Company's Co-Chairman and Chief Scientific Officer related to
sales of Cartia XT and Stipulation fees, as well as, corporate overhead
including legal costs related to patent infringement matters related to the
Company's ANDA filings and anti-trust matters. The increase in selling, general
and administrative expenses was primarily due to an increase in the activities
necessary to support the increase in sales of both distributed and manufactured
products and legal costs related to patent infringement claims related to Andrx'
ANDA filings and anti-trust matters and an increase in royalties to Andrx'
Co-Chairman and Chief Scientific Officer related to the launch of Cartia XT
in 1999 and the higher level of Aventis stipulation fees in 1999.
Research and development expenses were $25.7 million in 1999, as
compared to $16.8 million in 1998. The increase in research and development
expenses of $8.9 million or 52.6% reflects the progress and expansion of
development activities in ANDA bioequivalent and NDA brand name programs.
48
In 1999, the Company incurred $14.7 million of Cybear Internet
operating expenses, as compared to $4.1 million in 1998. Cybear Internet
operating expenses represent Cybear's operating expenses except cost of goods
sold. Such Cybear operating expenses include network operations and operations
support, selling, general and administrative, product development, depreciation
and amortization, merger costs and other non-recurring charges, offset by
intergroup eliminations. The increase in Cybear Internet operating expenses in
1999 as compared to 1998 primarily relates to the progress in the development of
Cybear's Internet based applications for healthcare providers and the
establishment of the related administrative infrastructure.
Minority interest in Cybear was $1.9 million in 1999, as compared to
$85,000 in 1998. The increase in minority interest was a result of the increase
in Cybear's net loss to $10.8 million in 1999 from $2.5 million in 1998. As of
December 31, 1999, Andrx Corporation owned 73% of Cybear. Minority ownership of
Cybear increased, as a result of Cybear's June 1999 public offering and the
issuance of Cybear common shares in the acquisition of Telegraph Consulting
Corporation.
In 1999, Andrx Corporation recognized a gain on the sale of Cybear's
common stock of $643,000, as compared to $700,000 in 1998. Such sales were
pursuant to existing subscription and warrant agreements with Cybear's then
Chairman and its then Chief Executive Officer, which were issued at the then
current price of $3.00 per share.
Interest income was $3.6 million in 1999, as compared to $1.1 million
in 1998. The increase in interest income is the result of the higher average
level of cash, cash equivalents and investments available-for-sale maintained
during 1999, as compared to 1998. The increase was primarily the result of the
net cash provided by operating activities and the net proceeds of $50.8 million
received from Cybear's June 1999 public offering.
Interest expense increased to $1.7 million in 1999, as compared to
$380,000 in 1998. The increase in interest expense was primarily the result of a
higher average level of borrowings under the Company's bank loan during 1999, as
compared to 1998. The borrowings were primarily utilized to fund the Company's
distribution operations.
For 1999, the Company provided $55.4 million for income taxes or 37.1%
of income before income taxes. The Company provided for income taxes in excess
of the expected annual effective Federal statutory rate of 35% due to the effect
of state income taxes and the Company's inability to utilize Cybear's losses
after June 23, 1999, as the Company's ownership in Cybear was reduced below 80%,
offset by the utilization of the Company's net operating loss carryforwards.
Accordingly, 1999 net income includes the reversal of a deferred tax valuation
allowance of $4.0 million. The Company's income tax provision of $333,000 for
1998 resulted from Federal alternative minimum income taxes. The Company's 1998
regular income tax provision of $2.1 million was fully offset by the reversal of
a corresponding amount of valuation allowance against its net deferred income
tax assets.
The basic and diluted weighted average shares of Andrx common stock
outstanding was 62.0 million and 65.0 million, respectively in 1999, as compared
to 60.1 million and 63.7 million, respectively for 1998. Such increase resulted
primarily from the exercises of stock options and warrants during 1999.
Liquidity and Capital Resources
As of December 31, 2000, the Company had $336.8 million in cash, cash
equivalents and investments available-for-sale of which $16.7 million relates to
Cybear, and $453.0 million of consolidated working capital. The increase in
cash, cash equivalents and investments available-for-sale is primarily due to
the 2000 equity offering of Andrx stock which generated $235.8 million in net
proceeds to the Company.
Net cash provided by operating activities was $57.0 million in 2000, as
compared to $49.2 million in 1999 and net cash used in operating activities of
$1.6 million for 1998. In 2000 and 1999, operating activities provided net cash,
primarily due to the Company generating $58.5 million of net income in 2000, as
compared to $94.1 million in 1999. In 2000, 1999 and 1998, operating activities
included increases in accounts receivable and inventories offset by increases in
accounts payable and accrued liabilities, and income tax benefits related to
exercises of stock options. The 2000 and 1999 increase in accounts receivable
and inventories relates to the sale of Cartia XT and the continuing increase in
sales of distributed products. The increase in inventories in 2000 and 1999 also
includes purchases of inventories for distribution in anticipation of potential
price increases by the generic drug manufacturers.
Net cash used in investing activities was $196.5 million in 2000 and
$108.7 million in 1999, as compared to net cash provided by investing activities
of $5.3 million in 1998. In 2000, the Company purchased $130.0 million of
investments available-for-sale, $44.5 million of property, plant and equipment,
and acquired Valmed for $15.2 million, net of cash acquired. The 2000 capital
expenditures included predominantly the construction of the new manufacturing,
research and development and corporate facility. In 1999, the Company purchased
$22.2 million of property, plant and equipment and $85.3 million of investments
available-for-sale, net. In 1998, $13.2 million of investments
available-for-sale matured, net and Andrx Corporation purchased $8.0 million of
property, plant and equipment. In 1999 and 1998 the capital expenditures were
primarily for the procurement of manufacturing equipment and in 1998 capital
expenditures also included the purchase of approximately 15 acres of land.
49
Net cash provided by financing activities was $222.6 million in 2000,
$74.6 million in 1999 and $7.1 million in 1998. Net cash provided by financing
activities for 2000 consisted of $235.8 million from the issuance of shares of
Andrx common stock, and $7.0 million in proceeds from the issuance of shares of
common stock upon the exercises of stock options, offset by $20.2 million of net
repayments on the Company's bank loan. Net cash provided by financing activities
in 1999 consisted of net borrowings of $16.1 million under the Company's bank
loan, $6.7 million in proceeds from the issuance of shares of Andrx common stock
upon the exercise of warrants and stock options, net proceeds of $50.8 million
from Cybear's June 1999 public equity offering, and $675,000 in proceeds from
the sale of shares of Cybear Common Stock. Net cash provided by financing
activities in 1998 consisted of net borrowings of $3.6 million under the
Company's bank loan, $2.8 million in proceeds from the issuance of shares of
common stock upon the exercise of stock options and warrants and $700,000 in
proceeds from the sale of shares of Cybear Common Stock.
As discussed in Note 2 to the Consolidated Financial Statements, as
required by Emerging Issues Task Force ("EITF") 00-15, "Classification in the
Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option", in 2000 the Company has
classified its income tax benefits related to exercises of stock options as an
operating activity in the Consolidated Statements of Cash Flows and has
reclassified prior years' amounts to conform with this presentation. These
amounts were previously classified as financing activities.
Andrx Corporation had an outstanding short-term borrowing balance of
$20.2 million under its bank loan as of December 31, 1999, as compared to $4.1
million as of December 31, 1998. In December 2000, the bank loan was terminated.
The increase in the short-term borrowing balance in 1999, as compared to 1998,
relates primarily to the financing of additional inventories for distribution.
In April 1999, the Company amended its bank loan to increase the total available
borrowings from $10 million to $30 million and decrease the interest rate to the
prime rate. Borrowings under the bank loan were secured by all of the assets of
the distribution operation, and were subject to a borrowing base related to the
value of that operation's accounts receivable and inventories.
In March 2001, the Company agreed to furnish Cybear with a $12.0
million line of credit. The line of credit provides Cybear with the ability to
begin drawing cash once Cybear's cash balance falls below $3.0 million. Drawings
will be subject to covenants, will bear interest at a rate equal to prime plus
1% or the Company's cost of borrowing, whichever is greater, and shall be
payable upon the expiration of the line of credit on March 31, 2004.
Andrx Corporation anticipates that its cash requirements will continue
to increase due to the completion of construction of the Company's research and
development manufacturing and corporate facilities, including the related
equipment and the expected increases in distribution inventories. For the year
ending December 31, 2001, the Company expects to incur approximately $60 million
to $70 million in research and development cost related to its bioequivalent and
brand development programs. Andrx Corporation anticipates that its existing
capital resources will be sufficient to enable it to maintain its operations for
the foreseeable future.
50
Recent Accounting Pronouncements
Derivatives
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The provisions of SFAS No. 133 as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133" require that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", amends
the effective date of SFAS No. 133 to all fiscal years beginning after June 15,
2000. SFAS No. 138, further amends and interprets certain provisions SFAS No.
133. The Company will adopt the provisions of SFAS No. 133, as of January 1,
2001, as required. Adoption will have no effect since the Company does not have
any derivatives.
Shipping and Handling Costs
In September 2000, the EITF issued EITF No. 00-10 "Accounting for
Shipping and Handling Fees and Costs." This EITF requires that all amounts
billed to customers related to shipping and handling be recorded as revenues. In
addition, companies may adopt a policy of excluding shipping and handling costs
from cost of sales as long as the amounts and classification are disclosed. This
EITF was required to be implemented beginning in the fourth quarter of 2000. For
the years ended December 31, 2000, 1999 and 1998, $13.3 million, $11.5 million
and $6.4 million, respectively, of shipping and handling costs were included in
Selling, general and administrative expenses in the Consolidated Statements of
Income. There was no effect on the Consolidated Statements of Income as a result
of adoption of this pronouncement in 2000.
Sales Incentives
In November 2000, the EITF issued EITF No. 00-14, "Accounting for
Certain Sales Incentives". This EITF addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by
vendors. Adoption of this pronouncement in 2000 had no effect on the Company's
accounting for sales incentives.
Stock Compensation
In March 2000, the FASB issued FASB Interpretation No.44, "Accounting
for Certain Transactions Involving Stock Compensation-an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25 and, among other issues clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stocks
options or awards; and the accounting for an exchange of stock compensation
awards in business combinations. The adoption of FIN 44 did not have an impact
on the consolidated financial statements.
Stock Splits
In May 1999 and March 2000, the Company effected two-for-one stock
splits of Andrx common stock in the form of 100% stock dividends. All Andrx
share and per share amounts included herein give effect to these stock splits.
51
ANDRX GROUP
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Andrx Corporation and subsidiaries'
Consolidated Financial Statements and related notes thereto included in herein.
Years Ended December 31,
(in thousands)
-------------------------------------------------------------
Statement of Income Data 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Revenues
Distributed products $ 324,591 $ 262,321 $ 215,903 $ 146,237 $ 86,721
Manufactured products 175,428 134,796 11,472 3,324 --
Stipulation fees -- 70,733 19,130 -- --
Licensing and other 14,966 7,870 552 137 50
--------- --------- --------- --------- ---------
Total revenues 514,985 475,720 247,057 149,698 86,771
--------- --------- --------- --------- ---------
Operating expenses
Cost of goods sold 297,218 235,269 188,226 126,802 72,400
Selling, general and administrative 61,901 55,266 30,646 18,934 13,778
Research and development 46,669 25,697 16,837 11,251 5,066
Reorganization costs 2,098 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 407,886 316,232 235,709 156,987 91,244
--------- --------- --------- --------- ---------
Income (loss) from operations 107,099 159,488 11,348 (7,289) (4,473)
Other income (expense)
Interest income 11,210 2,321 1,064 1,585 1,210
Interest expense (767) (1,661) (380) (490) (765)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 117,542 160,148 12,032 (6,194) (4,028)
Income taxes 39,870 58,229 2,233 -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 77,672 $ 101,919 $ 9,799 $ (6,194) $ (4,028)
========= ========= ========= ========= =========
December 31,
(in thousands)
-------------------------------------------------------------
Balance Sheet Data 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Cash, cash equivalents and
investments available-for-sale $ 320,108 $ 82,586 $ 20,254 $ 22,705 $ 27,482
Working capital 436,852 138,662 41,452 31,470 28,226
Total assets 629,053 302,107 118,468 91,718 63,701
Short-term borrowings -- 20,226 4,107 546 6,563
Andrx Group equity 522,246 181,707 63,720 50,623 31,083
52
ANDRX GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 2000, As Compared To Year Ended December 31, 1999
For 2000, Andrx reported net income of $77.7 million, as compared to net
income of $101.9 million for 1999. The year ended December 31, 1999 includes
stipulation fees of $70.7 million earned in connection with the patent
infringement litigation involving Cartia XT, offset by related royalties and
corresponding income taxes. In 2000, Andrx continued to increase its investment
spending in research and development. Research and development in 2000 increased
by $21.0 million or 81.6% to $46.7 million, as compared to $25.7 million for
1999.
Total revenues increased by 8.3% to $515.0 million for 2000, as compared
to $475.7 million for 1999.
Sales from distributed products were $324.6 million for 2000, an
increase of $62.3 million or $23.7%, as compared to $262.3 million for 1999. The
increase in sales from distributed products reflects an increase in sales to
existing customers, an increase in the number of customers, as well as, the
participation in the distribution of new products launched by other
pharmaceutical companies, offset by overall price declines. Sales for 2000 also
include sales generated by Valmed, which Andrx acquired in March 2000.
Sales from manufactured products were $175.4 million for 2000, as compared
to $134.8 million in 1999. Sales from manufactured products include sales of
Diltia XT, and commencing June 23, 1999, Cartia XT, which enjoyed 180-days of
marketing exclusivity through December 19, 1999.
Pursuant to the Stipulation with Aventis in connection with the patent
infringement litigation involving Cartia XT, Andrx earned $70.7 million in
interim and final fees in 1999.
Licensing and other revenues were $15.0 million in 2000, as compared to
$7.9 million in 1999, primarily from Andrx' domestic and international licensing
arrangements. The revenues in 2000 were primarily generated from the June 1999
agreement with Geneva, as amended.
Gross profit from sales of distributed and manufactured products was
$202.8 million with a gross margin of 40.6% in 2000, as compared to $161.8
million, with a gross margin of 40.8% in 1999. The increase in gross profit was
primarily the result of an increase in sales of manufactured products as a
result of having twelve months of sales of Cartia XT in 2000, as compared to
approximately six months of sales of Cartia XT in 1999.
Selling, general and administrative expenses were $61.9 million or 12.0%
of total revenues for 2000, as compared to $55.3 million or 11.6% of total
revenues for 1999. Selling, general and administrative expenses include
administration, marketing, selling and warehousing of both distributed and
manufactured products, the establishment of brand sales marketing efforts,
royalties to the Company's Co-Chairman and Chief Scientific Officer related to
sales of Cartia XT and Stipulation fees, as well as, corporate overhead
including legal costs related to patent infringement matters related to Andrx'
ANDA filings and anti-trust matters. The increase in selling, general and
administrative expenses in 2000, as compared to 1999, was primarily due to an
increase in the activities necessary to support the increase in sales of both
distributed and manufactured products and legal costs.
Research and development expenses were $46.7 million in 2000, as compared
to $25.7 million in 1999. The increase in research and development expenses of
$21.0 million or 81.6% reflects the progress and expansion of Andrx' development
activities in the ANDA bioequivalent and NDA brand name drug development
programs.
In 2000, Andrx incurred $2.1 million of one-time costs in connection with
the Reorganization.
Interest income was $11.2 million in 2000, as compared to $2.3 million in
1999. The increase in interest income is the result of the higher average level
of cash, cash equivalents and investments available-for-sale maintained during
2000, as compared to 1999. The increase was primarily the result of the net
proceeds of $235.8 million received from Andrx' May 2000 public equity offering.
Andrx invests in investment grade interest bearing securities.
Interest expense decreased to $767,000 in 2000, as compared to $1.7
million in 1999. The decrease in interest expense was primarily the result of a
lower average level of borrowings under Andrx' bank loan during 2000, as
compared to 1999. The borrowings were primarily utilized to fund Andrx'
distribution operations. In December 2000, the bank loan was terminated.
53
For 2000, Andrx provided $39.9 million for income taxes or 33.9% of income
before income taxes. Andrx provided for income taxes less than the expected
annual effective Federal statutory rate of 35%, primarily due to Andrx' ability
to utilize losses of Cybear after the Reorganization offset by the effect of the
state income taxes. Prior to the Reorganization, Cybear was excluded from Andrx'
consolidated tax returns and will file as a separate tax entity for all periods
from June 23, 1999 through September 6, 2000. Beginning on the effective date of
Reorganization, for tax purposes, Cybear's results of operations will be
included in the consolidated tax returns of the Company, as the Company owns
100% of Cybear and income tax benefits relating to Cybear, unable to be utilized
by Cybear on a separate company basis, will be allocated to Andrx. In connection
with the Reorganization, effective September 7, 2000, the Company changed its
method of accounting for its allocation of income taxes within the consolidated
group from the pro rata method to the separate return method. Had the separate
return method of allocating income been utilized prior to the Reorganization,
Cybear would not have been able to record any income tax benefits, as compared
to $2.8 million and $1.9 million, as recognized under the pro rata method for
the years ended December 31, 1999 and 1998, respectively, (exclusive of the
effect of minority interest of approximately 5% in each year). Conversely,
applying the pro rata method to the period subsequent to the Reorganization
would have resulted in an income tax benefit allocation from Andrx to Cybear of
approximately $4.8 million.
For 1999, Andrx provided $58.2 million of income taxes or 36.4% of income
before income taxes. Andrx 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, offset by the utilization of Andrx' net operating loss
carryforwards. Accordingly, 1999 net income includes the reversal of a valuation
allowance of $4.0 million.
In connection with the Reorganization, Cybear and other members of the
Andrx Corporation consolidated group entered into, among other things, a Federal
and state tax sharing agreement. Andrx Corporation will utilize the separate
return method of accounting for purposes of allocating Federal and state
consolidated income tax liabilities among group members. Under the terms of the
tax sharing agreement, a member of the group will be allocated its income tax
benefits and expenses in the year generated. Except as set forth in the
supplement referred to below, to the extent a member cannot utilize its income
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 that any
"tracking stock" members, such as Cybear, 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 is unable to utilize on a separate company basis
will be allocated to Andrx.
Under the provisions of the tax sharing agreement related to the
Reorganization, for financial statement purposes, at such time as Cybear
achieves profitability, or is otherwise able to recognize its tax benefits under
accounting principles generally accepted in the United States, if ever, Cybear
will recognize the benefit of its accumulated income tax benefits (which had
previously been utilized by Andrx) in its statement of operations with a
corresponding decrease to Cybear's equity (i.e., effectively accounted for as a
non-cash dividend). To the extent Andrx is profitable and is able to utilize
such tax benefit and Cybear is generating losses, it is expected that Andrx'
effective tax rate will be less than the statutory Federal and state rate. If
Cybear attains profitability or is otherwise able to recognize its tax benefits,
Andrx' effective tax rate may be greater than the statutory Federal and state
income tax rate to the extent of Cybear's then unreimbursed accumulated tax
benefits that can be realized (Andrx will then reverse the tax benefits
previously recorded, i.e., effectively transferring such tax benefits to Cybear
in the form of a non-cash equity transaction).
In October 2000, Andrx Corporation 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 1999 Federal corporate tax return to amortize
certain expenses and/or attributes over a period of ten years and agrees that it
will make such election again on its separate 2000 Federal corporate tax return
for the period from January 1, 2000 to September 6, 2000 for certain expenses
and/or attributes incurred within that period. Such reimbursements from the
Company will be accounted for by Cybear as a capital contribution. As a result
of the supplement to the tax sharing agreement, Cybear may be reimbursed for the
after-tax effect of amortizing approximately $6 million of such expenses over 10
years.
Year Ended December 31, 1999, As Compared To Year Ended December 31, 1998
For 1999, Andrx reported net income of $101.9 million, as compared to net
income of $9.8 million for 1998. The significant increase in net income in 1999,
as compared to 1998, was a result of Stipulation fees earned from the settlement
of the litigation with Aventis and on June 23, 1999, Andrx commenced the sale of
Cartia XT, which enjoyed a 180 day period of marketing exclusivity through
December 19, 1999. The increase in profitability occurred while Andrx continued
to increase its investment spending in research and development. Research and
development in 1999 increased by $8.9 million or 52.6% to $25.7 million in 1999,
as compared to $16.8 million in 1998.
Total revenues increased by 92.6% to $475.7 million for 1999, as compared
to $247.1 million for 1998.
Sales from distributed products were $262.3 million, an increase of $46.4
million or 21.5%, as compared to $215.9 million for 1998. The increase in sales
from distributed products reflects an increase in sales to existing customers,
an increase in the number of customers, as well as, the participation in the
distribution of new products launched by other pharmaceutical companies, offset
by overall price declines.
54
Sales from manufactured products were $134.8 million for 1999, as compared
to $11.5 million for 1998. Sales from manufactured products include sales of
Diltia XT, and commencing June 23, 1999 Cartia XT, which enjoyed 180-days of
marketing exclusivity through December 19, 1999.
Pursuant with the Stipulation with Aventis, Andrx earned a total of $70.7
million in interim and final fees in 1999, as compared to $19.1 million in
interim fees in 1998.
Licensing and other revenues were $7.9 million in 1999, as compared to
$552,000 in 1998, primarily from Andrx' domestic and international licensing
arrangements. The revenues in 1999 were primarily generated from the Andrx June
1999 agreement with Geneva, as amended.
Gross profit from sales of distributed and manufactured products was
$161.8 million with a gross margin of 40.8% in 1999, as compared to $39.1
million or 17.2% in 1998. The increase in gross profit and gross margin was
primarily the result of an increase in sales of manufactured products within the
product mix.
Selling, general and administrative expenses were $55.3 million or
11.6% of total revenues for 1999, as compared to $30.6 million or 12.4% of total
revenues for 1998. Selling, general and administrative expenses include
administration, marketing, selling and warehousing of both distributed products
and manufactured products, the establishment of brand sales marketing efforts,
royalties to the Company's Co-Chairman and Chief Scientific Officer related to
sales of Cartia XT and Stipulation fees, as well as, corporate overhead
including legal costs related to patent infringement matters related to the
Company's ANDA filings and anti-trust matters. The increase in selling, general
and administrative expenses was primarily due to an increase in the activities
necessary to support the increase in sales of both distributed and manufactured
products and legal costs related to patent infringement claims related to Andrx'
ANDA filings and anti-trust matters and an increase in royalties to Andrx'
Co-Chairman and Chief Scientific Officer related to the launch of Cartia XT
in 1999 and the higher level of Aventis stipulation fees in 1999.
Research and development expenses were $25.7 million in 1999, as compared
to $16.8 million in 1998. The increase in research and development expenses of
$8.9 million or 52.6%, reflects the progress and expansion of Andrx' development
activities in its ANDA and NDA drug development programs.
Interest income was $2.3 million in 1999, as compared to $1.1 million in
1998. The increase in interest income is the result of the higher average level
of cash, cash equivalents and investments available-for-sale maintained during
1999, as compared to 1998.
Interest expense increased to $1.7 million in 1999, as compared to
$380,000 in 1998. The increase in interest expense was primarily the result of a
higher average level of borrowings under Andrx' bank loan during 1999, as
compared to 1998. The borrowings were primarily utilized to fund Andrx'
distribution operations.
For 1999, Andrx provided $58.2 million of income taxes or 36.4% of income
before income taxes. Andrx provided for income taxes in excess of the expected
annual effective Federal statutory rate of 35% due to the effect of state income
taxes, offset by the utilization of Andrx' net operating loss carryforwards.
Accordingly, for 1999 net income includes the reversal of a valuation allowance
of $4.0 million. For 1998, Andrx provided $2.2 million of income taxes, or 18.6%
of income before income taxes. Such provision was less than the expected annual
effective Federal statutory rate of 35% primarily due to the reversal of a
valuation allowance of $2.2 million related to net operating loss carryforwards.
Liquidity and Capital Resources
As of December 31, 2000, Andrx had $320.1 million in cash, cash
equivalents and investments available-for-sale and $436.9 million of
consolidated working capital.
Net cash provided by operating activities was $70.9 million and $59.9
million for 2000 and 1999, respectively, and net cash used in operating
activities of $3.2 million for 1998. In 2000 and 1999 operating activities
provided net cash, primarily due to Andrx generating $77.7 million of net income
in 2000, as compared to $101.9 million in 1999. In 2000, 1999 and 1998,
operating activities included increases in accounts receivable and inventories
offset by increases in accounts payable and accrued liabilities, and income tax
benefits related to exercises of stock options. The 2000, 1999 and 1998 increase
in accounts receivable relates to the sale of Cartia XT and continuing increases
in sales of distributed products. The increase in inventories in 2000 and 1999
includes purchases of inventories for distribution in anticipation of potential
price increases by the generic drug manufacturers.
Net cash used in investing activities was $200.1 million in 2000 and $79.5
million in 1999, as compared to net cash provided by investing activities of
$7.6 million in 1998. In 2000, Andrx purchased $144.2 million of investments
available-for-sale, net, $40.7 million of property, plant and equipment, as well
as acquiring Valmed for $15.2 million, net of cash acquired. The 2000 and 1999
capital expenditures included predominantly the construction of the new
manufacturing, research and development and corporate facility. In 1999, Andrx
purchased $59.2 million of investments available-for-sale, net, and $20.3
million of property, plant and equipment. In 1998, $13.2 million of investments
available-for-sale matured, net, and Andrx purchased $5.6 million of property,
plant and equipment. In 1998, the capital expenditures were primarily for the
procurement of manufacturing equipment and also included the purchase of
approximately 15 acres of land.
55
Net cash provided by financing activities was $222.6 million in 2000,
$22.8 million in 1999, and $6.4 million in 1998. Net cash provided by financing
activities for 2000 consisted of $235.8 million from the issuance of shares of
Andrx common stock in Andrx' public offering in connection with its public
equity offering and $7.0 million in proceeds from the issuance of shares of
common stock upon the exercises of stock options, offset by $20.2 million of net
repayments on Andrx's bank loan. Net cash provided by financing activities in
1999 consisted of net borrowings of $16.1 million under the Andrx bank loan and
$6.7 million in proceeds from the issuance of shares of Andrx common stock upon
the exercise of warrants and stock options. Net cash provided by financing
activities in 1998 consisted of net borrowings of $3.6 million under the Andrx
bank loan and $2.8 million in proceeds from the issuance of shares of Andrx
common stock upon the exercise of stock options and warrants.
As discussed in Note 2 to the Consolidated Financial Statements, as
required by EITF 00-15, "Classification in the Statement of Cash Flows of the
Income Tax Benefit Realized by a Company upon Employee Exercise of a
Non-qualified Stock Option", in 2000 Andrx has classified its income tax
benefits related to exercises of stock options as an operating activity in the
Consolidated Statements of Cash Flows and has reclassified prior years' amounts
to conform with this presentation. These amounts were previously classified as
financing activities.
Andrx had an outstanding short-term borrowing balance of $20.2 million
under this bank loan as of December 31, 1999, as compared to $4.1 million as of
December 31, 1998. In December 2000, the bank loan was terminated. The increase
in short-term borrowing balance in 1999, as compared to 1998 relates primarily
to the financing of additional inventories for distribution. In April 1999,
Andrx amended its line of credit agreement to increase the total available
borrowings from $10 million to $30 million and to decrease the interest rate to
the prime rate. Borrowings under the bank loan were secured by all of the assets
of the distribution operation, and were subject to a borrowing base related to
the value of that operation's accounts receivable and inventories.
In March 2001, Andrx agreed to furnish Cybear with a $12.0 million line of
credit. The line of credit provides Cybear with the ability to begin drawing
cash once Cybear's cash balance falls below $3.0 million. Drawings will be
subject to certain covenants, will bear interest at a rate equal to prime plus
1% or Andrx' cost of borrowing, whichever is greater, and shall be payable upon
the expiration of the line of credit on March 31, 2004.
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 related equipment, and the
expected increases in distribution inventories. For the year ending December 31,
2001, Andrx expects to incur approximately $60 million to $70 million in
research and development related to its bioequivalent and brand development
programs. Andrx anticipates that its existing capital resources will be
sufficient to enable it to maintain its operations for the foreseeable future.
56
CYBEAR GROUP
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Andrx Corporation and subsidiaries'
Consolidated Financial Statements and related notes thereto included herein.
Statement of Operations Data
(in thousands)
For the period
from February 5,
Years Ended December 31, 1997 (inception)
-------------------------------- to December 31,
2000 1999 1998 1997
-------- -------- -------- ----------------
Revenues
Cybearclub LC Internet product sales (1) $ 1,483 $ 81 $ -- $ --
Cybearclub LC telemarketing product sales (1) 2,715 -- -- --
Other product sales 321 -- -- --
Web development, hosting and other services 366 102 -- 96
Subscription 161 87 -- --
-------- -------- -------- --------
Total revenues 5,046 270 -- 96
-------- -------- -------- --------
Operating expenses
Cost of goods sold 4,257 77 -- --
Network operations and operations support 4,501 2,972 643 --
Product development 3,774 3,058 1,717 894
Selling, general and administrative 8,399 7,271 1,672 667
Depreciation and amortization 4,035 1,556 139 65
Merger costs and other non-recurring charges 5,224 -- -- --
-------- -------- -------- --------
Total operating expenses 30,190 14,934 4,171 1,626
-------- -------- -------- --------
Loss from operations (25,144) (14,664) (4,171) (1,530)
Other income (expense)
Interest income 1,829 1,282 -- --
Interest expense on advances from Andrx -- (216) (210) (28)
-------- -------- -------- --------
Loss before income taxes (23,315) (13,598) (4,381) (1,558)
Income tax benefit allocated from Andrx -- 2,824 1,900 --
-------- -------- -------- --------
Net loss $(23,315) $(10,774) $ (2,481) $ (1,558)
======== ======== ======== ========
December 31,
--------------------------------------------
Balance Sheet Data 2000 1999 1998 1997
(in thousands) -------- -------- -------- -----------
Cash, cash equivalents and investments
available-for-sale $ 16,701 $ 37,994 $ 4 $ 1
Working capital (deficit) 16,188 39,390 (3,235) (1,378)
Total assets 39,505 53,068 3,332 395
Cybear Group equity (deficit) 37,551 49,978 (467) (1,014)
(1) For the year ended December 31, 1999 and through the first quarter
of 2000, as reported by Cybear, Cybearclub product sales were reported as
E-commerce sales. In the second quarter of 2000, Cybear changed its presentation
from E-commerce sales to Cybearclub LC sales and in the third quarter of 2000,
Cybear changed the classification to Cybearclub LC Internet product sales (i.e.
physician Internet orders) and Cybearclub LC telemarketing product sales (i.e.
telemarketing orders entered over the Internet on behalf of customers by
57
Cybear employees). Cybear Group is presenting 1999 E-commerce products sales as
Cybearclub LC Internet product sales, although Cybear's systems at that time did
not permit such classification to be fully verified.
CYBEAR GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 2000, As Compared to Year Ended December 31, 1999.
Cybear recorded total revenues of $5.0 million for 2000, as compared to
$270,000 for 1999.
In August 1999, Cybear commenced the Cybearclub LC joint venture
("Cybearclub") with Andrx intended to distribute healthcare products to
physician offices through the Internet. Capital contributions to, distributions
from and net income or loss generated by Cybearclub are allocated in proportion
to Cybear's and Andrx' interests in the joint venture. Such interests are 55% to
Cybear and 45% to Andrx. Cybearclub is managed by and under the direction of a
management committee comprised of five members. Three members are appointed by
Cybear and two members are appointed by Andrx. Based on its majority ownership
and majority representation on the management committee of Cybearclub, Cybear
controls Cybearclub. Accordingly, Cybear consolidates the accounts of Cybearclub
and Andrx utilizes the equity method of accounting for its investment in
Cybearclub.
To help achieve Cybearclub's objective of having physician offices
purchase products through the Internet, Cybearclub initiated a dual strategy of
using Andrx telemarketers to induce physician offices, including Andrx physician
customers, to begin placing orders with Cybearclub, and to then transition those
physician offices from being purchasers who place their orders with a
telemarketer into customers who place orders directly through the Internet.
Accordingly, through October 8, 2000, revenues reported by Cybearclub
consisted of transition revenues procured by Andrx telemarketers as well as
revenues derived from orders placed by physician offices over the Internet. As a
result of an amendment to the joint venture agreement, beginning October 9,
2000, Cybearclub revenues consisted solely of Internet product sales from orders
entered by physician offices over the Internet. Accordingly, effective October
9, 2000, any orders not entered by physician offices over the Internet were
recognized as revenues by Andrx and not by Cybearclub.
Through Cybearclub, Cybear generated $4.2 million in revenues for 2000 as
compared to $81,000 in 1999. Cybearclub 2000 revenues of $4.2 million, consist
of (i) physician Internet sales reported as Cybearclub LC Internet product sales
of $1.5 million and (ii) orders procured by Andrx telemarketers and entered by
Cybear employees over the Internet (i.e. transition revenues) through October 8,
2000, reported as Cybearclub LC telemarketing product sales of $2.7 million.
For the year ended December 31, 1999 and through the first quarter of
2000, as originally reported by Cybear, all Cybearclub product sales were
reported as E-commerce sales. In the second quarter of 2000, Cybear further
changed its presentation from E-commerce sales to Cybearclub LC sales and in the
third quarter of 2000, Cybear further changed its presentation to Cybearclub LC
Internet product sales (i.e. physician office Internet orders) and Cybearclub LC
telemarketing product sales (i.e. telemarketing orders entered over the Internet
on behalf of physician customers by Cybear employees). Cybear is presenting 1999
E-commerce products sales as Cybearclub LC Internet product sales of $81,000
although Cybear's systems at that time did not permit such classification to be
fully verified.
As part of its operations, Andrx purchases products from outside
vendors and distributes them to pharmacies and physicians who it generally
contacts through telemarketers. In connection with Cybearclub, Andrx sells some
of those products to Cybearclub at cost and charges Cybearclub for certain
fulfillment and back office operations such as purchasing, warehousing and
distribution, as well as customer service and telemarketing activities. Under
the joint venture agreement negotiated by the parties, such services were
charged at a rate of 6% of gross sales for the year ended December 31, 2000 and
10% of gross sales for the year ended December 31, 1999. The current rate of 6%
could increase if Cybearclub achieves certain quarterly gross sales levels. For
the years ended December 31, 2000 and 1999, Andrx charged Cybearclub $279,000
and $8,000, respectively, for the services it provided.
Cybearclub operating results were net losses of $43,000 and $17,000 in
2000 and 1999, respectively, for which Cybear recorded Andrx minority interest
of $19,000 and $8,000, respectively.
Cybear generated $321,000 of other product sales in 2000.
Cybear generated $366,000 from Web development, hosting and other services
for 2000, as compared to $102,000 for 1999.
Revenues from subscriptions were $161,000 for 2000, compared to $87,000 in
1999.
Gross profit from Cybearclub Internet product sales, Cybearclub
telemarketing product sales and Other product sales was $262,000 with a gross
margin of 5.8% for 2000, as compared to gross profit of $4,000 with a gross
margin of 4.9% for 1999. The increase in gross profit relates to the increase in
product sales in 2000.
Network operations and operations support costs were $4.5 million in 2000,
as compared to $3.0 million in 1999. Network operations and operations support
consists of personnel and related costs associated with operating the network
operations center and providing customer support, telecommunications costs and
maintenance expense on computer hardware and software. The increase in network
operations and operations support costs for 2000 related primarily to the
expansion of the network operations and operations support infrastructure.
Product development costs were $3.8 million for 2000, as compared to $3.1
million for 1999. The increase in the product development costs for 2000
reflects the progress and expansion of Cybear's development activities.
Selling, general and administrative expenses were $8.4 million for 2000,
as compared to $7.3 million for 1999. Selling, general and administrative
expenses consist primarily of salaries and personnel related expenses for the
sales, executive and administrative functions, consulting and advertising fees,
housing fees and professional fees. During 2000, management is primarily
maintaining the selling, marketing and administrative infrastructure established
in 1999.
Depreciation and amortization expense was $4.0 million for 2000, as
compared to $1.6 million for 1999. The increase in depreciation and amortization
for 2000 resulted primarily from the increase in amortization on the $3.9
million of goodwill established from the acquisition of Telegraph Consulting
Corporation ("TCC") and from the amortization of the $10.4 million of goodwill
established from the Reorganization. In the third quarter of 2000 Cybear
re-evaluated the expected benefits to be received from the 1999 acquisition of
TCC and, as such, as of July 1, 2000 prospectively revised the life of the
goodwill related to the acquisition from ten years to three years.
Merger costs and other non-recurring charges for 2000 of $5.2 million
includes a $4.0 million allowance against the note receivable from AHT recorded
in the 2000 third quarter, offset by a $2.0 million credit related to the
receipt of AHT assets in the 2000 fourth quarter, $2.0 million of severance
costs, impairment charges to certain assets and costs incurred to resolve a
dispute over performance under an agreement and termination of such agreement
and $1.2 million of costs incurred in connection with the Reorganization.
58
Cybear had interest income of $1.8 million in 2000 and $1.3 million in
1999. The interest income was generated primarily from the investments of the
net proceeds of $50.8 million generated from the June 1999 public offering and
from Cybear's convertible notes receivable. Cybear invests in investment grade
interest bearing securities.
Interest expense of $216,000 in 1999 represented interest on the amount
due to Andrx under the credit agreement between the two companies to fund
Cybear's operations.
For the period from September 7, 2000 (after Reorganization) to December
31, 2000, Cybear did not record an income tax benefit as it could not realize
such benefits in the current year, as required by the tax sharing agreement
related to the Reorganization. For 2000, for the period prior to the
Reorganization, Cybear did not record an income tax benefit for the losses it
generated due to its history of operating losses. Accordingly, Cybear provided a
full valuation allowance against its deferred tax assets as a result of its
inability to recognize those benefits. As of December 31, 2000, Cybear has net
operating loss carryforwards of approximately $19 million due to expire in 2019
and 2020 which can only be used by Cybear to offset its separate Company future
taxable income. Had the separate return method of allocating income taxes been
utilized prior to the Reorganization, Cybear would not have been able to record
any income tax benefits, as compared to $2.8 million and $1.9 million, as
recognized under the pro rata method for the years ended December 31, 1999 and
1998, respectively, (exclusive of the effect of minority interest of
approximately 5% in each year). Conversely, applying the pro rata method to the
period subsequent to the Reorganization would have resulted in an income tax
benefit allocation from Andrx to Cybear of approximately $4.8 million. For the
period from June 23, 1999 (date of completion of the public offering) to
December 31, 1999, Cybear generated net operating loss carryforwards of
approximately $10 million which are available to offset future earnings of
Cybear as a separate company. As of December 31, 1999, Cybear had net deferred
tax assets of approximately $4.0 million attributable primarily to the net
operating loss carryforward of approximately $10 million generated from June 23,
1999 to December 31, 1999. Under the provisions of SFAS No. 109, "Accounting for
Income Taxes", Cybear has provided a valuation allowance to reserve against 100%
of its net deferred tax assets due to its history of net losses. For the period
from January 1, 1999 to June 22, 1999, Cybear recorded $2.8 million, in income
tax benefits. The income tax benefits reflect the reimbursement from Andrx for
the utilization of Cybear's income tax attributes pursuant to the tax allocation
agreement.
Under the provisions of the tax sharing agreement related to the
Reorganization, for financial statement purposes, at such time as Cybear
achieves profitability, or is otherwise able to recognize its tax benefits under
accounting principles generally accepted in the United States, if ever, Cybear
will recognize the benefit of its accumulated income tax benefits (which had
previously been utilized by Andrx) in its statement of operations with a
corresponding decrease to Cybear's total group equity (i.e., effectively
accounted for as a non-cash dividend). To the extent Andrx is profitable and is
able to utilize such tax benefit and Cybear is generating losses, it is expected
that Andrx's effective tax rate will be less than the statutory Federal and
state rate. If Cybear is ever able to attain profitability or is otherwise able
to recognize its tax benefits, Andrx's effective tax rate may be greater than
the statutory Federal and state income tax rate to the extent of Cybear's then
unreimbursed accumulated tax benefits that can be realized (Andrx will then
reverse the tax benefits previously recorded, i.e., effectively transferring
such tax benefits to Cybear in the form of a non-cash equity transaction).
In October 2000, Andrx Corporation 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 1999 Federal corporate tax return to amortize
certain expenses and/or attributes over a period of ten years and Cybear agrees
that it will do so again on its separate 2000 Federal corporate tax return for
the period from January 1, 2000 to September 6, 2000 for certain expenses and/or
attributes incurred within that period. Such reimbursements will be accounted
for by Cybear as a capital contribution from Andrx. As a result of this
supplement to the tax sharing agreement, Cybear may be reimbursed by Andrx for
the after-tax effect of amortizing approximately $6 million of such expenses
over ten years.
Through the completion of its public offering in June 1999, Cybear's
results of operations for tax purposes were included in the consolidated income
tax return of Andrx, since Andrx owned at least 80% of the common stock of
Cybear. Cybear and Andrx had a tax allocation agreement pursuant to which
Federal income tax liabilities or benefits were allocated to Cybear on a pro
rata basis as if Cybear had filed a separate income tax return when Cybear's
taxable results are included in the consolidated income tax return of Andrx.
Upon completion of the public offering on June 23, 1999, Andrx' ownership in
Cybear was reduced below 80%. Consequently, thereafter Cybear filed its income
tax returns separately, until September 7, 2000 (the effective date of the
Reorganization). Upon the effective date of Reorganization, Cybear's results of
operations, for tax purposes, will be included in the consolidated income tax
return of Andrx Corporation as Andrx Corporation owns 100% of Cybear. In
connection with the Reorganization, Andrx Corporation changed its method of
accounting for allocating income taxes to Andrx and Cybear from pro rata to
separate return method.
Year Ended December 31, 1999, As Compared to Year Ended December 31, 1998.
Cybear recorded total revenues $270,000 for 1999 and had no revenues for
1998. Cybear is presenting such 1999 Cybear product sales as Cybearclub Internet
product sales, although Cybear's systems at that time did not permit such
classification to be fully verified.
Cybear reported $81,000 of Cybearclub Internet product sales in 1999.
Cybear generated $102,000 in Web development, hosting and other services
in 1999.
Cybear generated $87,000 of subscription revenues in 1999.
59
Gross profit from Cybearclub LC Internet product sales was $4,000 with
a 4.9% gross margin in 1999.
Network operations and operations support costs were $3.0 million in
1999 compared to $643,000 in 1998. The increase in network operations and
operations support costs for 1999 related to the establishment of the network
operations center and the development of the operations support infrastructure.
Product development costs were $3.1 million in 1999 compared to $1.7
million in 1998. The increase in the product development costs for 1999 reflects
the progress and expansion of Cybear's development activities.
Selling, general and administrative expenses were $7.3 million in 1999,
as compared to $1.7 million in 1998. Selling, general and administrative
expenses consist primarily of salaries and personnel related expenses for the
sales, executive and administrative functions, consulting and advertising fees,
housing fees and professional fees. The increase in 1999 related primarily to
the establishment of the selling, general and administrative infrastructure, and
an increase in consulting and advertising fees.
Depreciation and amortization expense was $1.6 million in 1999 compared
to $139,000 in 1998. The increase in depreciation and amortization for 1999
resulted primarily from Cybear's purchases of computer hardware and software
used in its network operations center and the development of its products,
leasehold improvements to the rented space housing its corporate headquarters
and network operations center. In addition, Cybear began amortizing capitalized
product development costs as it released its first products in 1999 and began
amortizing the goodwill arising from the acquisition of TCC.
Cybear had interest income of $1.3 million in 1999 and had no interest
income in 1998. The interest income resulted primarily from the investments of
the net proceeds generated of $50.8 million from the public offering in interest
bearing investment grade securities.
Interest expense was $216,000 in 1999 compared to $210,000 in 1998.
Interest expense represented interest on Due to Andrx under the credit agreement
between the two companies to fund Cybear's operations. Upon completion of the
public offering in June 1999, Andrx converted its advances due from Cybear, net
of the reimbursement for income tax attributes, to Cybear's capital in exchange
for 465,387 shares of Cybear common stock at the public offering price of $16.00
per share.
For the period from June 23, 1999 (date of completion of the public
offering) to December 31, 1999, Cybear generated net operating loss
carryforwards of approximately $10 million which are available to offset future
taxable income of Cybear as a separate company. As of December 31, 1999, Cybear
had net deferred tax assets of approximately $4.0 million attributable primarily
to the net operating loss carryforwards of approximately $10 million generated
from June 23, 1999 to December 31, 1999. Under the provisions of SFAS No. 109,
"Accounting for Income Taxes", Cybear provided a valuation allowance to reserve
against 100% of its net deferred tax assets due to its history of net losses.
For the period from January 1, 1999 to June 22, 1999 and for 1998, Cybear
recorded $2.8 million and $1.9 million, respectively, in income tax benefits.
The income tax benefits reflect the reimbursement from Andrx for the utilization
of Cybear's income tax attributes pursuant to the tax allocation agreement in
place prior to the Reorganization.
Cybear's taxable results through the completion of the public offering
in June 1999 were included in the consolidated income tax return of Andrx since
Andrx owned at least 80% of the common stock of Cybear. Prior to the September
7, 2000 Reorganization, Cybear and Andrx had a tax allocation agreement pursuant
to which Federal income tax liabilities or benefits are allocated to Cybear on a
pro rata basis as if Cybear had filed a separate income tax return when Cybear's
taxable results are included in the consolidated income tax return of Andrx.
Upon completion of the public offering in June 1999, Andrx's ownership in Cybear
was reduced below 80%. Consequently, for 1999, Cybear filed its income tax
returns separately.
Liquidity and Capital Resources
As of December 31, 2000, Cybear had $16.7 million in cash, cash
equivalents and investments available-for-sale and $16.2 million of working
capital.
Net cash used in operating activities was $17.0 million for 2000
compared to $9.8 million for 1999 and $1.4 million in 1998. Net cash used in
operating activities of $17.0 million in 2000 is due to Cybear generating a net
loss of $23.3 million, an increase in accounts receivable, net of $747,000 and a
decrease in accounts payable of $637,000 offset by $4.0 million in depreciation
and amortization, $925,000 in other non-cash charges, $2.0 million in a non-cash
net charge related to the AHT Corporation note receivable and a $730,000
decrease in prepaid and other assets. Net cash used in operating activities in
1999 of $9.8 million is due to Cybear generating a net loss of $10.8 million and
a $2.5 million increase in prepaid and other assets, offset by $1.6 million in
depreciation and amortization and a $1.5 million increase in accounts payable
and accrued liabilities. Net cash used in operating activities in 1998 of $1.4
million is due to Cybear generating a net loss of $2.5 million, offset by a $1.3
million increase in accounts payable and accrued liabilities.
Net cash provided by investing activities was $9.2 million in 2000, as
compared to net cash used in investing activities of $34.2 million and $2.7
million in 1999 and 1998, respectively. In 2000, Cybear received $14.0 million
from maturities of investments available-for-sale, net, $3.0 million from the
repayment of a convertible note receivable. Cybear used $3.9 million related to
a note receivable and investment in AHT Corporation and purchased $3.8 million
in property and equipment consisting mainly of computer hardware and software
used in its network operations center. In 1999, Cybear purchased $26.2 million
of investments available-for-sale, net, funded a $3.0 million convertible note
receivable, used $1.2 million for the acquisition of TCC and
60
also purchased $2.1 million of property and equipment and purchased $1.6 million
of software licenses. In 1998, Cybear purchased $2.3 million of property and
equipment consisting mainly of computer hardware and software used in its
network operations center and in its product development activities.
Net cash provided by financing activities was $322,000 for 2000 as
compared to $56.0 million for 1999 and $4.1 million in 1998. In 2000, net cash
provided by financing activities of $322,000 consisted of proceeds generated
from the exercises of Cybear stock options. In 1999, net cash provided by
financing activities consisted primarily of $50.8 million in net proceeds
generated from the public offering of 3,450,000 shares of common stock of Cybear
and $5.2 million of advances from Andrx to fund Cybear's operations, net of the
reimbursement from Andrx for the utilization of Cybear's income tax attributes
pursuant to the tax allocation agreement prior to the Reorganization. In 1998,
net cash provided by financing activities consisted of $4.1 million of advances
from Andrx to Cybear to fund Cybear's operations, net of reimbursement from
Andrx for the utilization of Cybear's income tax attributes pursuant to the tax
allocation agreement prior to the Reorganization.
Cybear has incurred net operating losses and negative cash flows from
operating activities since its inception. Cybear expects to continue to incur
significant expenses in product development, network operations and customer
support. As a result, Cybear expects to continue to incur substantial operating
losses for the foreseeable future, and may never achieve or sustain
profitability.
In March 2001, Andrx agreed to furnish Cybear with a $12.0 million line
of credit. The line of credit provides Cybear with the ability to begin drawing
cash once Cybear's cash balance falls below $3.0 million. Drawings will be
subject to covenants, will bear interest at a rate equal to prime plus 1% or
Andrx' cost of borrowing, whichever is greater, and shall be payable upon the
expiration of the line of credit on March 31, 2004.
Cybear believes that its existing capital resources will be sufficient
to enable it to meet its anticipated working capital and capital expenditure
requirements for at least the next 12 months. Cybear expects negative cash flows
and net losses to continue for the foreseeable future and certain modifications
of its business plan being considered may further increase its working capital
and capital expenditure requirements. Whether or not the business plan is
modified, Cybear may need to raise additional capital through public or private
debt or equity financing or through funding from Andrx. Additionally, funding,
whether obtained through public or private debt may not be available on terms
favorable to Cybear, if at all.
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANDRX CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants 64
Consolidated Balance Sheets
as of December 31, 2000 and 1999 65
Consolidated Statements of Income
for the years ended December 31, 2000, 1999 and 1998 66
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 67
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 68
Notes to Consolidated Financial Statements 69-111
63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Andrx Corporation:
We have audited the accompanying consolidated balance sheets of Andrx
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Andrx Corporation
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 10 to the consolidated financial statements,
effective September 7, 2000, in connection with the Reorganization, Andrx
Corporation changed its method of allocating income taxes within the
consolidated group from the pro rata method to the separate return method.
As discussed in Note 2 to the consolidated financial statements, as
required by EITF 00-15, in 2000 the Company has classified its income tax
benefits related to exercises of stock options as an operating activity in the
Consolidated Statements of Cash Flows and has reclassified prior years' amounts
to conform with this presentation.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
February 21, 2001 (except with respect to
the matters discussed in Notes 16 and 20 as
to which the date is March 28, 2001).
64
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
December 31,
---------------------
2000 1999
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 115,609 $ 32,555
Investments available-for-sale, at market value 221,200 90,863
Accounts receivable, net of allowances
of $7,077 in 2000 and $6,426 in 1999 92,960 72,032
Inventories 101,219 78,771
Deferred income tax assets, net 18,968 18,442
Prepaid and other current assets 11,243 11,658
--------- ---------
Total current assets 561,199 304,321
Property, plant and equipment, net 77,773 39,874
Other assets, net 28,984 13,759
--------- ---------
Total assets $ 667,956 $ 357,954
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 70,501 $ 51,863
Accrued liabilities 33,714 35,639
Bank loan -- 20,226
Income taxes payable 3,944 15,730
--------- ---------
Total current liabilities 108,159 123,458
Commitments and contingencies (Notes 11, 16 and 20)
Minority interest -- 13,524
Shareholders' 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;
issued and outstanding 69,311,200
shares in 2000 and 62,973,000 shares in 1999 69 63
Cybear Group common stock; $0.001 par value,
50,000,000 shares authorized;
15,203,000 shares issued and outstanding in 2000; none
issued and outstanding in 1999 15 --
Additional paid-in capital 420,674 140,700
Retained earnings 138,835 80,303
Accumulated other comprehensive income (loss),
net of income taxes 204 (94)
--------- ---------
Total shareholders' equity 559,797 220,972
--------- ---------
Total liabilities and shareholders' equity $ 667,956 $ 357,954
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
65
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share amounts)
Years Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues
Distributed products $ 329,110 $ 262,402 $ 215,903
Manufactured products 175,428 134,796 11,472
Stipulation fees -- 70,733 19,130
Licensing and other 15,422 8,059 552
------------ ------------ ------------
Total revenues 519,960 475,990 247,057
------------ ------------ ------------
Operating expenses
Cost of goods sold 301,475 235,346 188,226
Selling, general and administrative 61,901 55,266 30,646
Research and development 46,669 25,697 16,837
Cybear Internet operating expenses 25,833 14,744 4,090
Reorganization costs 2,098 -- --
------------ ------------ ------------
Total operating expenses 437,976 331,053 239,799
------------ ------------ ------------
Income from operations 81,984 144,937 7,258
Other income (expense)
Minority interest in Cybear 4,146 1,937 85
Gain on sale of Cybear shares -- 643 700
Interest income 13,039 3,603 1,064
Interest expense (767) (1,661) (380)
------------ ------------ ------------
Income before income taxes 98,402 149,459 8,727
Income taxes 39,870 55,405 333
------------ ------------ ------------
Net income $ 58,532 $ 94,054 $ 8,394
============ ============ ============
EARNINGS (LOSS) PER SHARE (Note 2)
Andrx Group Common Stock
Net income allocated to Andrx Group
(including Cybear through September 6, 2000) $ 66,873 $ 94,054 $ 8,394
============ ============ ============
Net income per Andrx Group common share
Basic $ 0.99 $ 1.52 $ 0.14
============ ============ ============
Diluted $ 0.95 $ 1.45 $ 0.13
============ ============ ============
Weighted average shares outstanding
Basic 67,756,400 61,979,800 60,090,800
============ ============ ============
Diluted 70,455,800 64,953,200 63,706,800
============ ============ ============
Cybear Group Common Stock
Net loss allocated to Cybear Group
(subsequent to September 6, 2000) $ (8,341)
============
Basic and diluted net loss per Cybear Group common share $ (0.55)
============
Basic and diluted weighted average shares outstanding 15,203,000
============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements
66
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except for share amounts)
Common Stocks
-------------------------------------------------
Andrx Group Cybear Group
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance, December 31, 1997 59,426,800 $ 60 -- $
Shares of Andrx common
stock issued in connection
with exercises
of warrants and stock
options 1,266,800 1 -- --
Income tax benefits
related to exercises
of Andrx stock options -- -- -- --
Andrx options granted to
consultants -- -- -- --
Capital transactions of
Cybear -- -- -- --
Unrealized loss on
investments
available-for-sale -- -- -- --
Net income -- -- -- --
Comprehensive income
---------- ---------- ---------- ----------
Balance, December 31, 1998 60,693,600 61 -- --
Shares of Andrx common
stock issued in
connection with exercises
of warrants and
stock options 2,279,400 2 -- --
Income tax benefits
related to
exercises of Andrx stock
options -- -- -- --
Andrx options granted to
consultants -- -- -- --
Capital transactions of
Cybear -- -- -- --
Unrealized loss on
investments
available-for-sale, net
of income
taxes of $13 -- -- -- --
Net income -- -- -- --
Comprehensive income
---------- ---------- ---------- ----------
Balance, December 31, 1999 62,973,000 63 -- --
Shares of Andrx common
stock issued
in connection with
equity offering 5,185,100 5 -- --
Shares of Andrx common
stock issued in
connection with
exercises of stock
options 1,153,100 1 -- --
Shares of Cybear Stock
issued in connection
with the Reorganization -- -- 15,203,000 15
Income tax benefits
related to
exercises of Andrx
stock options -- -- -- --
Capital transactions of
Cybear -- -- -- --
Unrealized gain on
investments
available-for-sale, net
of income
taxes of $115 -- -- -- --
Net income -- -- -- --
Comprehensive income
---------- ---------- ---------- ----------
Balance, December 31, 2000 69,311,200 $ 69 15,203,000 $ 15
========== ========== ========== ==========
Related Accumulated
Additional Earnings Other
Paid-In (Accumulated Comprehensive Comprehensive
Capital Deficit) Income (Loss) Income
---------- ---------- ---------- ----------
Balance, December 31, 1997 $ 82,909 $ (22,145) $ 37
Shares of Andrx common
stock issued in connection
with exercises
of warrants and stock
options 2,835 -- --
Income tax benefits
related to exercises
of Andrx stock options 67 -- --
Andrx options granted to
consultants 433 -- --
Capital transactions of
Cybear 30 -- --
Unrealized loss on
investments
available-for-sale -- -- (38) $ (38)
Net income -- 8,394 -- 8,394
----------
Comprehensive income $ 8,356
---------- ---------- ---------- ==========
Balance, December 31, 1998 86,274 (13,751) (1)
Shares of Andrx common
stock issued in
connection with exercises
of warrants and
stock options 6,681 -- --
Income tax benefits
related to
exercises of Andrx stock
options 9,368 -- --
Andrx options granted to
consultants 10 -- --
Capital transactions of
Cybear 38,367 -- --
Unrealized loss on
investments
available-for-sale, net
of income
taxes of $13 -- -- (93) $ (93)
Net income -- 94,054 -- 94,054
----------
Comprehensive income $ 93,961
---------- ---------- ---------- ==========
Balance, December 31, 1999 140,700 80,303 (94)
Shares of Andrx common
stock issued
in connection with
equity offering 235,814 -- --
Shares of Andrx common
stock issued in
connection with
exercises of stock
options 6,958 -- --
Shares of Cybear Stock
issued in connection
with the Reorganization 17,348 -- --
Income tax benefits
related to
exercises of Andrx
stock options 19,870 -- --
Capital transactions of
Cybear (16) -- --
Unrealized gain on
investments
available-for-sale, net
of income
taxes of $115 -- -- 298 $ 298
Net income -- 58,532 -- 58,532
----------
Comprehensive income $ 58,830
---------- ---------- ---------- ==========
Balance, December 31, 2000 $ 420,674 $ 138,835 $ 204
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
67
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities
Net income $ 58,532 $ 94,054 $ 8,394
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,570 4,516 2,960
Provision for doubtful accounts 651 3,897 940
Options granted to consultants -- 10 433
Minority interest in Cybear (4,146) (1,937) (85)
Gain on sale of Cybear shares -- (643) (700)
Non-cash net charge related to AHT Corporation note receivable 2,000 -- --
Deferred income tax benefit (3,818) (18,442) --
Income tax benefits related to
exercises of stock options (Note 2) 19,870 9,368 67
Changes in operating assets and liabilities:
Accounts receivable (15,944) (42,062) (12,119)
Inventories (18,286) (36,434) (16,436)
Prepaid and other assets 4,433 (21,672) (163)
Accounts payable and accrued liabilities 12,068 42,869 15,092
Income taxes (7,968) 15,675 55
--------- --------- ---------
Net cash provided by (used in) operating activities 56,962 49,199 (1,562)
--------- --------- ---------
Cash flows from investing activities
Purchases of property, plant and equipment (44,540) (22,233) (7,986)
Maturities (purchases) of investments available-for-sale, net (130,038) (85,323) 13,247
Acquisition of Telegraph Consulting Corporation -- (1,181) --
Acquisition of Valmed Pharmaceutical, Inc., net of cash acquired (15,195) -- --
Cash flows relating to AHT Corporation note receivable and
investment (3,875) -- --
Costs associated with purchase of Cybear minority interest in
connection with the Reorganization (2,838) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities (196,486) (108,737) 5,261
--------- --------- ---------
Cash flows from financing activities
Net proceeds from Andrx public share offering 235,819 -- --
Proceeds from issuance of shares of Andrx common stock
and exercises of warrants and stock options 6,959 6,683 2,836
Net borrowings (repayments) under bank loan (20,226) 16,119 3,569
Net proceeds from Cybear's public share offering -- 50,778 --
Other capital transactions of Cybear 26 379 30
Proceeds from sale of Cybear shares -- 675 700
--------- --------- ---------
Net cash provided by financing activities 222,578 74,634 7,135
--------- --------- ---------
Net increase in cash and cash equivalents 83,054 15,096 10,834
Cash and cash equivalents, beginning of year 32,555 17,459 6,625
--------- --------- ---------
Cash and cash equivalents, end of year $ 115,609 $ 32,555 $ 17,459
========= ========= =========
Supplemental disclosure of cash paid during the year for:
Interest $ 767 $ 1,661 $ 380
========= ========= =========
Income taxes $ 32,440 $ 48,790 $ 210
========= ========= =========
Supplemental disclosure of non-cash investing activities:
Value of Cybear Group common stock issued in Reorganization $ 17,363
Less book value of minority interest at acquisition date (9,757)
---------
Goodwill resulting from purchase of Cybear minority interest $ 7,606
=========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
68
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(1) General
On September 7, 2000, Andrx Corporation completed a Plan of Merger and
Reorganization (the "Reorganization") whereby it acquired the outstanding equity
of Cybear Inc. that it did not own, reincorporated in Delaware and created two
new classes of common stock:
o Andrx Group Common Stock (the "Andrx common stock"), to track the
performance of Andrx Corporation and subsidiaries, other than its
ownership of Cybear Inc., its subsidiaries and certain potential
future Internet businesses of Andrx Corporation (the "Andrx Group");
and
o Cybear Group Common Stock (the "Cybear common stock"), to track the
performance of Cybear Inc., its subsidiaries and certain potential
future Internet businesses of Andrx Corporation (the "Cybear Group").
Cybear shareholders other than Andrx, exchanged each share of Cybear
common stock (pre-Reorganization) held for one share of Cybear stock.
Throughout the Andrx Corporation and subsidiaries notes to consolidated
financial statements, the words "Andrx Corporation" or the "Company" refer to
Andrx Corporation, and all of its subsidiaries. "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 other than
Cybear prior to the Reorganization, and to the Andrx Group following the
Reorganization. "Cybear" refers to Cybear Inc. and its subsidiaries prior to the
Reorganization and to the Cybear Group following the Reorganization.
Andrx Corporation was organized in August 1992 and commenced marketing
and distributing generic pharmaceutical products manufactured by third parties.
In February 1993, the Company began to engage in the research and development of
bioequivalent controlled-release pharmaceutical products utilizing its
proprietary drug delivery technologies. During 1996, the Company commenced its
research efforts to develop brand name controlled-release products, and an
Internet based application for healthcare providers. During 1999, the Company
expanded its research and development efforts to include bioequivalent versions
of specialty or niche pharmaceutical products. Through October 9, 1997, the
Company's distribution operations had generated substantially all of its
revenues. On October 10, 1997, the United States Food and Drug Administration
("FDA") granted final approval of the Company's abbreviated new drug application
("ANDA"), for a bioequivalent version of Dilacor XR, the Company's first
manufactured product, which it immediately launched as Diltia XT.
In September 1997, Andrx entered into a Stipulation and Agreement (the
"Stipulation") with Hoechst Marion Roussel, Inc.(now known as Aventis S.A.) and
Carderm Capital, L.P. (collectively, "Aventis") in partial settlement of a
patent infringement claim brought against Andrx by Aventis (the "Aventis
Litigation") in order to reduce the risks that both parties faced as the case
was litigated to its conclusion. Andrx agreed to maintain the status quo in
connection with the marketing of its product and to dismiss certain claims
against Aventis. Aventis agreed to compensate Andrx for its lost profits,
stipulated to be $100,000 per year, if Andrx ultimately prevailed in the Aventis
Litigation and to grant Andrx a license for its patents under certain
conditions, including if Andrx ultimately lost the litigation. Aventis also
agreed to make non-refundable interim quarterly payments of $10,000 to Andrx,
beginning upon Andrx' receipt of final FDA approval for its bioequivalent
version of Cardizem CD and continuing until the Aventis Litigation was resolved
or certain other events occurred. In July 1998, the FDA granted final marketing
approval for the Company's ANDA for a bioequivalent version of Cardizem CD. In
June 1999, the Aventis Litigation was resolved and on June 23, 1999, the Company
launched its reformulated bioequivalent version of Cardizem CD, Cartia XT, which
enjoyed a 180-day period of marketing exclusivity through December 19, 1999. For
the years ended December 31, 1999 and 1998, the Company earned $70,733 and
$19,130, respectively, in interim and final Stipulation fees.
69
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
On November 20, 1998, Cybear Inc. a Florida corporation, the Company's
subsidiary engaged in the development of Internet applications merged with a
wholly-owned subsidiary of 1997 Corp., a Delaware corporation, pursuant to a
Merger Agreement and Plan of Reorganization dated July 15, 1998. 1997 Corp. was
a "blank check" company that had a registration statement on file with the
Securities and Exchange Commission ("SEC") to seek a business combination with
an operating entity. In June 1999, Cybear completed a public offering of its
common shares generating net proceeds of approximately $50,778. As a result of
the public offering, exercises of Cybear stock options, other Cybear stock
issuances, and sales of shares of Cybear common stock by Andrx, Andrx' ownership
in Cybear decreased to approximately 73% as of December 31, 1999.
Reorganization Plan
Pursuant to the September 7, 2000 Reorganization, Andrx acquired the
outstanding equity of Cybear that it did not own, reincorporated in Delaware and
created two new classes of common stock: Andrx common stock to track the
performance of Andrx Corporation other than its ownership of Cybear and Cybear
common stock to track the performance of Cybear. Cybear's public shareholders
received one share of Cybear common stock for every Cybear share they owned. In
the Reorganization, the number of Cybear shares held by Andrx was reduced from
12.4 million shares to 10.3 million shares so as to provide the equivalent of a
20% increase in shares held by the non-Andrx shareholders of Cybear. As a
result, the non-Andrx shareholders of Cybear owned approximately 34.5% of the
Cybear common stock following the close of the transaction. Pursuant to the
Reorganization, each Andrx common share was converted into (i) one share of
Andrx common stock and (ii) 0.1489 shares of Cybear common stock. Upon
completion of the Reorganization, (i) Cybear was a wholly-owned subsidiary of
Andrx Corporation with 100% of its value publicly traded in the form of Cybear
common stock; (ii) Cybear public shareholders owned approximately 34.5% of the
Cybear common stock; and (iii) Andrx shareholders owned 100% of the Andrx common
stock and approximately 65.5% of the Cybear common stock.
In addition, in connection with the Reorganization, Andrx Corporation
changed its method of accounting for allocating income taxes within the
consolidated group from the pro rata method to the separate return method. (See
Note 10).
The Reorganization was intended to (i) reestablish certain tax
consolidation advantages for Andrx; (ii) separate the operating losses of Cybear
from the operating results of Andrx for financial reporting purposes (iii)
improve liquidity for the publicly traded equity of Cybear; (iv) provide Cybear
with a more viable currency for potential future strategic acquisitions; and (v)
preserve financial flexibility for Andrx management to maximize the long-term
growth of shareholder value.
Holders of Andrx common stock and Cybear common stock have no specific
rights to assets, operating results or cash flows of Andrx or Cybear, as Andrx
Corporation holds title to all its assets and is responsible for all of its
liabilities, operating results and cash flows regardless of how it allocates
assets and liabilities among the classes of common stock and are therefore
subject to the risks of investing in the business, assets and liabilities of
Andrx Corporation as a whole. For instance, the assets allocated to each class
of common stock may be subject to Company-wide claims of creditors and
stockholder litigation. Andrx or Cybear 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 SEC.
In connection with the Reorganization, Andrx Corporation purchased the
minority interest of Cybear by issuing Cybear Group common stock valued at
$17,363 and incurred costs of $2,838 related to the acquisition.
70
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Risks and Uncertainties
Factors which may affect the Company's results include, but are not
limited to, the risks and uncertainties associated with a drug delivery company
which has only commercialized a few products, has new technology and limited
manufacturing experience, included but not limited to current and potential
competitors with significant technical and marketing resources, and dependence
on key personnel. The Company is also subject to the risks and uncertainties
associated with all drug delivery companies, including changes in regulatory
schemes, difficulty in receiving regulatory approval to market new products,
compliance with the government regulations and patent infringement and other
litigation. Additionally, the Company is subject to risks and uncertainties
associated with drug distribution companies, included but not limited to, fierce
competition and decreasing gross profits. In addition, Cybear, Andrx' Internet
based healthcare information technology subsidiary is subject to the risks and
uncertainties of an early stage Internet company, included but not limited to,
limited operating history, substantial operating losses, availability of capital
resources, ability to effectively compete, unanticipated difficulties in product
development, ability to gain market acceptance and market share, ability to
manage growth, reliance on short-term non-exclusive contracts, ability to obtain
content, Internet security risks and uncertainty relating to the evolution of
the Internet as a medium of commerce, dependence on third party content
providers, dependence on key personnel, ability to protect intellectual property
and the impact of future government regulation. The Company is also subject to
other risks detailed herein or detailed from time to time in Andrx Corporation's
filings with the SEC.
71
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Andrx Corporation and its majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Andrx Corporation is presenting consolidated financial statements and
related footnotes. Such footnotes include separate supplemental financial
statements relating to the business of Andrx and the business of Cybear (see
Note 19). Holders of Andrx common stock and Cybear common stock have no specific
rights to assets, operating results or cash flows of Andrx or Cybear as Andrx
Corporation holds title to all its assets and is responsible for all of its
liabilities, operating results and cash flows regardless of how it allocates
assets and liabilities among the classes of common stock and are therefore
subject to the risks of investing in the business, assets and liabilities of
Andrx Corporation as a whole. For instance, the assets allocated to each class
of common stock may be subject to Company-wide claims of creditors and
stockholder litigation.
After the Reorganization, Andrx Corporation consolidated financial
statements include consolidated operating results, as well as net income (loss),
basic and diluted earnings (loss) per share, basic and diluted shares
outstanding for each series of common stock. Accordingly, after the
Reorganization the consolidated financial statements do not reflect consolidated
basic and diluted earnings (loss) per share since there is no underlying equity
security related to consolidated financial results.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include the provision
for doubtful accounts receivable, inventory writedowns, discounts and rebates to
customers or from vendors, returns, pricing adjustments, useful life of
goodwill, including, but not limited to Cybear goodwill, and other adjustments
related to purchases and sales of manufactured and distributed products, and
provisions for litigation (see Note 16).
Management periodically evaluates estimates used in the preparation of
the consolidated financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based on such
periodic evaluations.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months
or less are considered cash equivalents and are carried at cost.
Investments Available-for-Sale
The Company utilizes the provisions of Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that marketable equity securities and all debt securities be classified
into three categories: (i) held to maturity securities, (ii) trading securities,
and (iii) available-for-sale securities. The Company classifies its investments
as available-for-sale and, accordingly, such investments are carried at market
value and any unrealized gain or loss, net of income taxes, is reported as a
separate component of shareholders' equity. The cost related to investments
available-for-sale is determined utilizing the specific identification method.
72
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Inventories
Inventories of pharmaceutical products consist primarily of finished
goods held for distribution, and raw materials, work in process and finished
goods of manufactured products. Inventories are stated at the lower of cost
(first-in, first-out) or market. Cost of inventories held for distribution is
based on purchase price, net of vendor discounts, rebates and other allowances,
but excludes shipping, warehousing and distribution costs which are expensed as
Selling, general and administrative expenses in the Statements of Income when
incurred. As appropriate, provisions are made to reduce inventories to their net
realizable value.
Property, Plant and Equipment, Net
Property, plant and equipment are recorded at cost, less accumulated
depreciation or amortization. Depreciation or amortization is provided using the
straight-line method over the following estimated useful lives:
Buildings 20 years
Manufacturing equipment 10 years
Laboratory equipment 5 years
Leasehold improvements Term of lease
Computer hardware and software 3 years
Furniture and fixtures 5 years
Major renewals and betterments are capitalized, while maintenance,
repairs and minor renewals are expensed as incurred.
Goodwill
Under the purchase method of accounting for acquisitions, goodwill
represents the excess of purchase price over the fair value of the net assets
acquired. Goodwill is capitalized and amortized on a straight-line basis over
the estimated useful life of the business acquired, ranging from 3 to 15 years.
As of December 31, 2000 and 1999, the Company has $22,291 and $3,819,
respectively, of goodwill, net of accumulated amortization of $1,965 and $115,
respectively, included in Other assets in the Consolidated Balance Sheets.
Amortization expense was $1,850 and $115 for the years ended December 31, 2000
and 1999, respectively. There was no goodwill amortization for the year ended
December 31, 1998.
Computer Software
In March 1998, the Accounting Standards Executive Committee released
Statement of Position 98-1, ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires companies to
capitalize certain costs of computer software developed or obtained for internal
use, provided that those costs are not research and development. In 1998, the
Company adopted the guidelines established by SOP 98-1 in accounting for the
costs of computer software developed or obtained for internal use. Upon adoption
of the provisions of this statement, there was no material effect on the
consolidated financial statements.
73
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company utilizes the provision of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstance indicate that the carrying amount of an asset may not
be recoverable. The Company periodically evaluates whether events and
circumstances have occurred that may warrant revision of the estimated useful
life of its long-lived assets or whether the remaining balance of long-lived
assets should be evaluated for possible impairment. The Company uses an estimate
of the related undiscounted cash flows over the remaining life of the long-lived
assets to determine whether an impairment has occurred. Fair value is compared
to cost in calculating the amount of the impairment.
Revenue Recognition
Sales of distributed and manufactured products and the related cost of
goods sold are recognized at the time a product is received by the customer.
Based on currently available information, provisions for discounts, rebates,
returns, pricing adjustments and other adjustments related to sales to customers
are provided in the same period the related sales are recorded.
The Company has entered into long-term supply arrangements with certain
customers related to manufactured products. Prepayments by the Company to
customers related to such arrangements are capitalized in the Consolidated
Balance Sheets as Prepaid and other current assets and Other assets, as
appropriate, and, are amortized in the Consolidated Statements of Income against
Revenues-manufactured products over the life of the arrangements or when the
relationship ends, as appropriate, utilizing the straight line basis. Such
assets are periodically assessed for realizability and any adjustments for
impairment are made as they become known.
Stipulation fees are recognized when earned in accordance with the
terms of the underlying agreements (see Note 16).
Licensing and other revenues include licensing fees earned by the
Company. Such licensing fees are recognized as earned in accordance with the
terms of the underlying agreements (see Note 8). Also included in licensing and
other revenues are Cybear's Physician Practice Portal product, web site
development and maintenance services. Subscription, web site development and
maintenance and software development revenues are earned when Cybear's services
are provided. Cybear has entered into certain agreements with medical
organizations to provide Cybear's subscription services to organizations'
members in exchange for various consulting services. Certain of these agreements
result in a net cash outflow. Subscription services earned under the agreements
resulting in net cash outflows are recorded as a reduction of the amounts
expensed for the consulting services received.
In December 1999, the SEC issued Staff Accounting Bulletin No. ("SAB
101") which summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The effective date of SAB 101 for the Company was the quarter ended December 31,
2000. The Company adopted the provisions of SAB 101, as required, and such
adoption had no effect upon the consolidated financial statements.
Research and Development Expenses
Research and development expenses are expensed as incurred, and consist
of costs related to products being developed internally as well as costs related
to products subject to licensing agreements in both the Company's bioequivalent
(ANDA) and brand name (NDA) programs.
74
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Research and development expenses in the Consolidated Statements of
Income include the equity in the losses of the following joint ventures:
The Company is a 50% partner in ANCIRC Pharmaceuticals, Inc.
("ANCIRC"). In addition to Andrx' 50% ownership in ANCIRC, the Company provided
ANCIRC research and development services at cost. Accordingly, research and
development expenses in the Consolidated Statements of Income exclude costs of
research and development services rendered to ANCIRC, as such costs are charged
to ANCIRC as incurred. In November 2000, the ANCIRC joint venture agreement was
amended (see Note 9).
In August 2000, Andrx Corporation entered into CARAN, a 50/50 joint
venture with Carlsbad Technology, Inc. ("Carlsbad") to develop, manufacture and
sell three bioequivalent products. CARAN's operating results were limited to
research and development expenses. (see Note 9).
Cybear Internet Operating Expenses
On the Company's Consolidated Statements of Income, Cybear Internet
operating expenses represents Cybear's operating expenses except cost of goods
sold. Such Cybear operating expenses include network operations and operations
support, selling, general and administrative, product development, depreciation
and amortization, merger costs and other non-recurring charges, offset by
intergroup eliminations.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". Under the provisions of SFAS No. 123, companies can
either measure the compensation cost of equity instruments issued under employee
compensation plans using a fair value based method, or can continue to recognize
compensation cost using the intrinsic value method under the provisions of
Accounting Principles Board Opinion ("APB") No. 25. However, if the provisions
of APB No. 25 are applied, pro forma disclosures of net income or loss and
earnings or loss per share must be presented in the financial statements as if
the fair value method had been applied. For the years ended December 31, 2000,
1999 and 1998, the Company recognized compensation costs under the provisions of
APB No. 25, and the Company has provided the expanded pro forma disclosures
required by SFAS No. 123 (see Note 14).
Issuance of Stock by Subsidiary
The Company accounted for the issuances of shares of common stock by
Cybear as equity transactions within the Consolidated Statements of
Shareholders' Equity and excluded the results of such transactions from the
Consolidated Statements of Income. The Company does not currently intend to
issue shares of common stock of its other subsidiaries.
Income Taxes
The provisions of SFAS No. 109, "Accounting for Income Taxes", require,
among other things, recognition of future tax benefits measured at enacted rates
attributable to the deductible temporary differences between the financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that the realization of such benefits
is "more likely than not" (see Note 10). Under the provisions of SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
In connection with the Reorganization, the Company changed its method
of accounting for allocating income taxes within the consolidated group from the
pro rata method to the separate return method (see Note 10).
75
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Earnings (loss) per share
The Company utilizes the provisions of SFAS No. 128, "Earnings Per
Share".
As a result of the Reorganization, Andrx Corporation's operating
results for the period subsequent to September 7, 2000 have been allocated to
each series of common stock. The net income used in computing net income per
share of Andrx common stock is based on the consolidated results of Andrx,
including the majority ownership of Cybear through September 6, 2000 and the
net income of Andrx, excluding Andrx' 100% ownership of Cybear from September
7, 2000 to December 31, 2000. The net loss and weighted average shares
outstanding in the computation of net loss per share of Cybear common stock
for the year ended December 31, 2000 are based on the period from September
7, 2000 (the effective date of issuance of Cybear common stock) to December
31, 2000.
ANDRX
The diluted basis considers the weighted average shares of common stock
outstanding for Andrx common stock including common stock equivalents. The
shares used in computing net income per share of Andrx common stock are based on
the weighted average shares of Andrx common stock outstanding for the years
ended December 31, 2000, 1999 and 1998.
A reconciliation of the denominators of basic and diluted earnings per
share of Andrx common stock for the years ended December 31, 2000, 1999 and 1998
is as follows:
Years Ended December 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Basic weighted average shares of
common stock outstanding 67,756,400 61,979,800 60,090,800
Effect of dilutive items:
Stock options 2,699,400 2,356,600 2,296,000
Warrants -- 616,800 1,320,000
---------- ---------- ----------
Diluted weighted average shares
of common stock outstanding 70,455,800 64,953,200 63,706,800
========== ========== ==========
Anti-dilutive weighted options 32,300 118,400 243,100
========== ========== ==========
The above anti-dilutive weighted average options to purchase shares of
Andrx common stock were excluded in computing diluted earnings per share because
their effects were anti-dilutive for the respective periods.
CYBEAR
Cybear generated a net loss for the period from September 7, 2000 to
December 31, 2000. Accordingly, all Cybear common stock equivalents were
excluded from the Cybear calculation of diluted shares since the effects were
anti-dilutive. As of December 31, 2000 there were 1,573,385 anti-dilutive
options outstanding.
76
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
The following table reconciles the consolidated net income in the Andrx
Corporation and subsidiaries' consolidated financial statements to the separate
supplemental group financial statements of Andrx and Cybear (See Note 19). This
table also reflects pro forma earnings (loss) per share of Andrx and Cybear for
all periods presented.
Years ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Andrx Corporation consolidated net income $ 58,532 $ 94,054 $ 8,394
------------ ------------ ------------
Add back Cybear net loss included above:
Subsequent to the Reorganization 8,341 -- --
Prior to the Reorganization 14,974 10,774 2,481
------------ ------------ ------------
Cybear net loss 23,315 10,774 2,481
Less minority ownership in Cybear net losses
prior to the Reorganization (4,146) (1,937) (85)
Less gain on sale of Cybear shares -- (643) (700)
Less intercompany eliminations (primarily interest
and management fees) (29) (329) (291)
------------ ------------ ------------
Andrx Group net income (excluding Andrx' ownership
of Cybear) $ 77,672 $ 101,919 $ 9,799
============ ============ ============
Andrx Group pro forma net income per share
Basic $ 1.15 $ 1.64 $ 0.16
============ ============ ============
Diluted $ 1.10 $ 1.57 $ 0.15
============ ============ ============
Andrx Group pro forma weighted average shares outstanding
Basic 67,756,400 61,979,800 60,090,800
============ ============ ============
Diluted 70,455,800 64,953,200 63,706,800
============ ============ ============
Cybear Group net loss $ (23,315) $ (10,774) $ (2,481)
============ ============ ============
Cybear Group pro forma basic and diluted net loss per share $ (1.53) $ (0.71) $ (0.16)
============ ============ ============
Cybear Group pro forma weighted average shares outstanding 15,203,000 15,203,000 15,203,000
============ ============ ============
For all periods presented, the shares pro forma weighted average
outstanding of Cybear common stock are based on the shares outstanding as of
September 7, 2000.
The following table reconciles the consolidated net income in the Andrx
Corporation consolidated financial statements to the net income allocated to
Andrx Group for the earnings per share calculation:
Years ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
Andrx Corporation consolidated net income $58,532 $94,054 $ 8,394
Add back Cybear net loss included above:
Subsequent to Reorganization 8,341 -- --
------- ------- -------
Net income allocated to Andrx Group
(including Cybear through September 6, 2000) $66,873 $94,054 $ 8,394
======= ======= =======
77
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Stock Splits
In May 1999 and March 2000, the Company effected two-for-one stock
splits of Andrx common stock in the form of 100% stock dividends. All Andrx
share and per share amounts included herein give effect to these stock splits.
Fair Value of Financial Instruments
As of December 31, 2000 and 1999, the carrying amount of Cash and cash
equivalents, Accounts receivable, net, Accounts payable, Accrued liabilities and
Bank loan approximate fair value due to the short maturity of these instruments.
Concentration of Credit Risk
The Company invests in U.S. Treasury and government agency securities,
debt instruments of corporations and tax advantaged money market preferreds with
investment grade credit ratings. The Company has established guidelines relative
to diversification and maturities that are designed to help ensure safety and
liquidity.
Accounts receivable are principally due from independent pharmacies,
pharmacy chains, pharmacy buying groups, physician offices and wholesalers and
distributors. Credit is extended based on an evaluation of the customer's
financial condition and collateral is generally not required. The Company
performs ongoing credit evaluations of its customers and maintains allowances
for potential uncollectable accounts.
The Company has no significant off-balance sheet concentration of
credit risk.
Comprehensive Income
The Company adopted the provision of SFAS No. 130, "Reporting
Comprehensive Income", effective January 1, 1998, as required. SFAS No. 130
establishes standards for reporting and presentation of comprehensive income or
loss and its components in financial statements. The Company has included the
required disclosure of this pronouncement in the accompanying Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2000, 1999
and 1998, as required.
Business Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which was issued by the FASB in June 1997.
These pronouncements replaced SFAS No. 14 "Financial Reporting for Segments of a
Business Enterprise" and establishes new standards for defining the Company's
segments and disclosing information about them. The provisions of SFAS No. 131
require that the segments be based on the internal structure and reporting of
the Company's operations (see Note 17).
Recent Accounting Pronouncements
Classification of Tax Benefits from Option Exercises in the
Consolidated Statements of Cash Flows
In July 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-15, "Classification in the Statement of Cash Flows of the Income Tax Benefit
Realized by a Company upon Employee Exercise of a Non-qualified Stock Option"
("EITF 00-15"). This issue addresses the presentation in the statement of cash
flows of the income tax benefit associated with nonqualified stock options.
Companies receive an income tax deduction for the difference between the
exercise price and the market price of a nonqualified stock option upon exercise
by the employee. EITF 00-15 concludes that the income tax benefit realized by a
company upon employee exercise should be classified in the operating section of
the statement of cash flows. The pronouncement is effective for all quarters
ending after July 20, 2000. The Company adopted EITF 00-15 in 2000 and,
accordingly, has classified its 2000 income tax benefits related to exercises of
stock options of $19,870 as an operating activity in the Consolidated Statements
of Cash Flows and has reclassified $9,368 in 1999 and $67 in 1998 from financing
activities to operating activities to conform with this presentation.
78
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Derivatives
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The provisions of SFAS No. 133 require
that changes in a derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", amends
the effective date of SFAS No. 133 to all fiscal years beginning after June 15,
2000. SFAS No. 138, "Accounting for Certain Derivatives Instruments and Certain
Hedging Activities-an amendment of FASB No. 133", further amends and interprets
certain provisions SFAS No. 133. The Company will adopt the provisions of SFAS
No. 133, as of January 1, 2001, as required. Adoption of this pronouncement will
have no effect, since the Company does not have any derivatives.
Shipping and Handling Costs
In September 2000, the EITF issued EITF No. 00-10 "Accounting for
Shipping and Handling Fees and Costs." This EITF requires that all amounts
billed to customers related to shipping and handling be recorded as revenues. In
addition, companies may adopt a policy of excluding shipping and handling costs
from cost of sales as long as the amounts and classification are disclosed. This
EITF's disclosure was required to be implemented beginning with this filing. For
the years ended December 31, 2000, 1999 and 1998, $13,324, $11,545 and $6,442,
respectively, of shipping and handling costs were included in Selling, general
and administrative expenses in the Consolidated Statements of Income. There was
no effect on the Consolidated Statements of Income as a result of adoption of
this pronouncement in 2000.
Sales Incentives
In November 2000, the EITF issued EITF No. 00-14, "Accounting for
Certain Sales Incentives". This EITF addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by
vendors. Adoption of this pronouncement in 2000, had no effect on the Company's
accounting for sales incentives.
Stock Compensation
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation-an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25 and, among other issues clarifies the following: the definition of an
employee, for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stocks
options or awards; and the accounting for an exchange of stock compensation
awards in business combination. The adoption of FIN 44 did not have an impact on
the Company's consolidated financial statements.
Reclassifications
Certain prior years amounts have been reclassified to conform to the
current year presentation.
79
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(3) Acquisitions
On March 15, 2000, Andrx acquired Valmed Pharmaceutical, Inc.
("Valmed"), a privately owned distributor of bioequivalent pharmaceuticals
headquartered in Grand Island, New York. The acquisition was accounted for using
the purchase method of accounting. Accordingly, the excess of the total purchase
price of approximately $15,500, including transaction costs, over the fair value
of the net assets acquired, primarily accounts receivable, inventories and
property, plant and equipment, was approximately $8,700 which represents
goodwill, and is included in Other assets in the accompanying Consolidated
Balance Sheet. Such goodwill is being amortized on a straight-line basis over
its estimated life of 15 years.
In March 2000, Cybear entered into a software license agreement and a
development service agreement with AHT Corporation ("AHT") whereby, among other
things, Cybear obtained non-exclusive licenses to two AHT software applications
and whereby Cybear agreed to develop a software application for AHT. In
connection with these agreements, Cybear loaned $4,000 to AHT in exchange for a
secured promissory note. In the 2000 third quarter, due to the uncertainty of
collection resulting from AHT filing for bankruptcy protection in September
2000, Cybear recorded a 100% allowance against the $4,000 note. On November 22,
2000, Cybear acquired certain of the operating assets of AHT under the terms of
an acquisition agreement approved by the United States Bankruptcy Court.
Accordingly, Cybear recognized a $2,000 credit in the 2000 fourth quarter. Such
credit represents the receipt of AHT's assets with an estimated value of $2,000,
in exchange for a portion of the $4,000 secured convertible note. Cybear
Internet operating expenses for the year ended December 31, 2000 include the
$4,000 allowance against the note receivable from AHT offset by the $2,000
credit related to the receipt of AHT assets.
On November 16, 2000, the Company entered into a definitive agreement
to acquire CTEX Pharmaceuticals, Inc., a privately owned pharmaceutical sale and
marketing company based in Canton, Mississippi. The acquisition was consummated
on January 23, 2001 with a purchase price of approximately $29,000, comprised of
291,000 shares Andrx common stock and $11,000 cash, and will be accounted for
using the purchase method of accounting.
Due to immateriality, pro forma information is not included herein for
any of the above acquisitions.
80
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(4) Investments Available-for-Sale
Investments available-for-sale consist of the following:
December 31, 2000
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. Treasury and government agency securities $ 78,518 $ 255 $ (1) $ 78,772
Corporate bonds 14,369 59 -- 14,428
Tax advantaged money market preferreds 128,000 -- -- 128,000
--------- --------- --------- ---------
$ 220,887 $ 314 $ (1) $ 221,200
========= ========= ========= =========
December 31, 1999
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. Treasury and government agency securities $ 31,186 $ -- $ (127) $ 31,059
Corporate bonds 10,163 -- (8) 10,155
Tax advantaged money market preferreds 49,649 -- -- 49,649
--------- --------- --------- ---------
$ 90,998 $ -- $ (135) $ 90,863
========= ========= ========= =========
81
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(5) Inventories
Inventories consist of the following:
December 31,
--------------------
2000 1999
-------- --------
Raw materials $ 8,238 $ 8,638
Work in process 4,234 3,899
Finished goods 88,747 66,234
-------- --------
$101,219 $ 78,771
======== ========
(6) Property, Plant and Equipment, Net
Property, plant and equipment are summarized as follows:
December 31,
--------------------
2000 1999
-------- --------
Land $ 2,903 $ 2,804
Buildings 11,643 --
Manufacturing equipment 20,684 14,029
Laboratory equipment 8,801 4,926
Leasehold improvements 11,392 9,042
Computer hardware and software 17,327 11,670
Furniture and fixtures 3,840 3,544
-------- --------
76,590 46,015
Less: accumulated depreciation
and amortization (19,265) (11,777)
-------- --------
57,325 34,238
Construction in progress 20,448 5,636
-------- --------
$ 77,773 $ 39,874
======== ========
Depreciation expense was $7,720, $4,401 and $2,960 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(7) Bank Loan
In April 1999, the Company amended its line of credit agreement to
increase the total available borrowings from $10,000 to $30,000 and to decrease
the interest rate to the prime rate. In December 2000, Andrx terminated the bank
loan.
82
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(8) Licensing Agreements
In June 1999, Andrx entered into an agreement with Geneva
Pharmaceuticals, Inc. ("Geneva"), a member of the Novartis Pharmaceutical Group,
for the sale and marketing of specified products. Geneva committed to make
license payments of $1,000 a month for 40 months, in exchange for exclusive
marketing rights in specified territories for controlled-release dosage forms of
existing products that the Company is developing for submissions as New Drug
Applications (NDAs). Under this arrangement, one of Andrx' NDA products has been
out licensed for the United States. Upon receiving approval by the FDA or other
regulatory agencies, Andrx will receive royalties from the sale of such products
with certain minimum guaranteed levels of royalties in the first three years. In
June 2000, the Company amended its agreement with Geneva to include, among other
things, additional license payments to Andrx of up to $6,000. Andrx has also
committed to continuing to sell Geneva's bioequivalent products through the
Company's distribution operations.
Andrx has entered into additional development and licensing agreements
covering bioequivalent pharmaceuticals with U.S. and foreign pharmaceutical
companies. Pursuant to these agreements, the licensees typically will fund the
cost of product research and development and will pay Andrx royalties in
exchange for a license to market the products for a specified period in a
specified territory.
Andrx also works with other pharmaceutical companies to formulate
controlled-release versions of existing commercialized drugs and drugs they are
developing using Andrx' proprietary drug delivery technologies.
(9) Unconsolidated Joint Ventures
In July 1994, and as originally amended on October 30, 1995, the
Company and Circa Pharmaceuticals, Inc., now a wholly-owned subsidiary of Watson
Pharmaceuticals, Inc. ("Watson") (the Company and Watson are hereafter
collectively referred to as the "Partners"), formed ANCIRC Pharmaceuticals
("ANCIRC"), a 50/50 joint venture to develop, manufacture and market up to eight
bioequivalent controlled-release pharmaceutical products. The agreement between
the Partners contemplates that Andrx, will perform the research and development
formulations for ANCIRC's products, and will market and distribute ANCIRC's
products following FDA approval, and that Watson will provide the regulatory
support for the ANCIRC's products and will manufacture the ANCIRC products.
In September 1998, ANCIRC received approval of its first manufactured
product, a bioequivalent version of Trental and launched this product. On March
24, 1999 the FDA approved the ANDA for the second ANCIRC product, a
bioequivalent version of Oruvail, which was launched in April 1999. Due to
manufacturing problems, ANCIRC halted the production and sale of ANCIRC's
bioequivalent version of Oruvail in June 1999, and is currently not producing or
selling such product.
Capital contributions to, distributions from and net income or loss
generated by ANCIRC are allocated in proportion to the respective Partners'
interest in the joint venture.
ANCIRC is managed by and under the direction of a management committee
which is comprised of six members. Three members are appointed by each Partner.
Based on the equal representation of the management committee and the Company's
inability to unilaterally control the joint venture, the Company utilizes the
equity method to account for this joint venture.
In November 2000, the Company and Watson further amended the terms of
the ANCIRC joint venture agreement. Under the amendment, Andrx is solely
responsible for all of the costs to develop, manufacture and sell the remaining
six products, and Watson may receive a royalty on net sales, if any, from the
commercialization of those products. The amendment also provides that Andrx may
elect to discontinue its efforts to develop any of these six products at any
time. The 50/50 joint venture relationship for the two marketed products is
continuing.
83
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
In August 2000, Andrx Corporation entered into CARAN, a 50/50 joint
venture with Carlsbad to develop, manufacture and sell three bioequivalent
pharmaceutical products, for which ANDAs have been filed with the FDA. Carlsbad
developed and will manufacture the products and Andrx will distribute such
products.
Total equity in losses of the unconsolidated joint ventures, primarily
research and development expenses, of $1,203, $370 and $931 for the years ended
December 31, 2000, 1999 and 1998, respectively, are included in Research and
development expenses in the Consolidated Statements of Income, included herein.
As of December 31, 2000 and 1999, the Company's total investment in
unconsolidated joint ventures was $755 and $617, respectively, and is included
in Prepaid and other current assets in the Consolidated Balance Sheets.
Condensed financial information of the unconsolidated joint ventures is
not presented because they are not material.
84
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(10) Income Taxes
The components of the provision for income taxes are summarized as
follows:
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Current provision
Federal $ 41,326 $ 69,855 $ 333
State 2,362 3,992 --
-------- -------- ------
43,688 73,847 333
-------- -------- ------
Deferred benefit
Federal (3,612) (17,445) --
State (206) (997) --
-------- -------- ------
(3,818) (18,442) --
-------- -------- ------
Total $ 39,870 $ 55,405 $ 333
======== ======== ======
The following table indicates the significant elements contributing to
the difference between the Federal statutory rate and the Company's effective
tax rate:
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal effect 2.0 2.0 2.0
Change in valuation allowance on net deferred income tax assets 3.3 (2.7) (23.6)
Non-deductible goodwill and Reorganization costs 2.9 -- --
Research and development credit (2.7) -- --
Other, net -- 2.8 (9.6)
-------- -------- ------
Effective tax rate 40.5% 37.1% 3.8%
======== ======== ======
85
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Deferred income taxes represent the tax effect of the difference
between book and tax bases of assets and liabilities. The major components of
deferred tax assets and liabilities are as follows:
December 31,
--------------------
2000 1999
-------- --------
Net operating loss carryforwards $ 7,249 $ 3,929
Allowance for doubtful accounts 2,559 2,377
Other operating reserves 15,639 17,358
Tax over book depreciation (1,460) (1,137)
Cybear product development 2,230 (128)
-------- --------
26,217 22,399
Valuation allowance (7,249) (3,957)
-------- --------
Deferred income tax assets, net $ 18,968 $ 18,442
======== ========
The following table indicates the activity in the valuation allowance:
December 31,
-------------------
2000 1999
------- -------
Beginning balance, January 1, $(3,957) $(7,989)
Utilized 3,572 7,989
Provided for Cybear, separate company,
prior to the Reorganization (6,864) (3,957)
------- -------
Ending balance, December 31, $(7,249) $(3,957)
======= =======
Under the provisions of SFAS No. 109, as of December 31, 2000, the
Company recorded a valuation allowance to reserve against 100% of its net
deferred income tax assets resulting from net operating loss carryforwards that
can only be utilized by Cybear on a separate company basis of $7,249, which
resulted in the period from June 23, 1999 through September 6, 2000. From
September 7, 2000 to December 31, 2000, under the provisions of the tax sharing
agreement entered into in connection with the Reorganization (see below), Andrx
recorded a tax benefit of approximately $2,600 in 2000. Under the provisions of
the supplement to the tax sharing agreement (see below), Andrx recorded a tax
benefit of approximately $2,200 in 2000. Such benefits resulted from Andrx' use
of Cybear's deductions which Cybear was unable to use on a separate company
basis.
Net operating loss carryforwards are subject to review and possible
adjustment by the Internal Revenue Service and may be limited in the event of
certain cumulative changes in the ownership interest of significant shareholders
over a three-year period in excess of 50%. As of December 31, 2000, the Company
has net operating loss carryforwards of approximately $19,500 which expire in
2019 and 2020, which can only be used by Cybear to offset its future taxable
income, on a separate company basis.
86
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
In connection with the Reorganization, Cybear and other members of the
Andrx Corporation consolidated group entered into, among other things, a Federal
and state tax sharing agreement. Andrx Corporation will utilize the separate
return method of accounting for purposes of allocating Federal and state
consolidated income tax liabilities among group members. Under the terms of the
tax sharing agreement, a member of the group will be allocated its income tax
benefits and expenses in the year generated. Except as set forth in the
supplement referred to below, to the extent a member cannot utilize its income
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, 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 is unable to utilize on a separate company basis
will be allocated to Andrx.
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 1999 Federal corporate tax return to amortize
certain product development expenses and/or attributes over a period of ten
years and agrees that will make such election again on its separate 2000 Federal
corporate tax return for the period from January 1, 2000 to September 6, 2000
for certain expenses and/or attributes incurred within that period. Such
reimbursements from the Company will be accounted for by Cybear as a capital
contribution. As a result of the supplement to the tax sharing agreement, Cybear
may be reimbursed by Andrx for the after-tax effect of amortizing approximately
$6,000 of such expenses over 10 years.
Under the provisions of the tax sharing agreement related to the
Reorganization, for financial statement purposes, at such time as Cybear
achieves profitability, or is otherwise able to recognize its tax benefits under
accounting principles generally accepted in the United States, if ever, Cybear
will recognize the benefit of its accumulated income tax benefits (which had
previously been utilized by Andrx) in its statement of operations with a
corresponding decrease to Cybear's equity (i.e., effectively accounted for as a
non-cash dividend). To the extent Andrx is profitable and is able to utilize
such tax benefit and Cybear is generating losses, it is expected that Andrx'
effective tax rate will be less than the statutory Federal and state rate. If
Cybear attains profitability or is otherwise able to recognize its tax benefits,
Andrx' effective tax rate may be greater than the statutory Federal and state
income tax rate to the extent of Cybear's then unreimbursed accumulated tax
benefits that can be realized (Andrx will then reverse the tax benefits
previously recorded, i.e., effectively transferring such tax benefits to Cybear
in the form of a non-cash equity transaction).
In connection with the Reorganization, Andrx Corporation changed its
method of accounting for allocating income taxes within the consolidated group
from the pro rata method to the separate return method. Had the separate return
method of allocating income taxes been utilized prior to the Reorganization,
Cybear would not have been able to record any income tax benefits, as compared
to $2,824 and $1,900, as recognized under the pro rata method for the years
ended December 31, 1999 and 1998, respectively (exclusive of the effect of
minority interest of approximately 5% in each year). Conversely, applying the
pro rata method for the period subsequent to the Reorganization would have
resulted in an income tax benefit allocation from Andrx to Cybear of
approximately $4,800. Such allocation has an earnings per share effect of
approximately $0.07 per diluted Andrx Group common share and approximately $0.32
per diluted Cybear Group common share.
87
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(11) Commitments
Purchase Commitments
The Company has entered into agreements for the construction of a new
manufacturing and research and development facility with future commitments of
approximately $15,000.
Operating Leases
The Company leases manufacturing, laboratory, warehouse, office space,
and various equipment under operating leases which expire at various dates
through 2017. The following schedule summarizes future minimum lease payments
required under non-cancellable operating leases with terms greater than one
year, as of December 31, 2000:
2001 4,275
2002 4,237
2003 3,626
2004 3,242
2005 3,274
Thereafter 20,125
-------
$38,779
=======
Rent expense amounted to $4,633, $2,674 and $1,189 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(12) Related Party Transactions
The Company is party to a royalty agreement with Dr. Chen, the
Company's Co-Chairman and Chief Scientific Officer, which provides for royalties
to Dr. Chen upon the sale of Andrx' bioequivalent version of Cardizem CD, for
which the Company received final approval in July 1998 from the FDA. In August
1998, the Company amended that royalty agreement to account for the various
contingencies presented by a Stipulation and Agreement (see Note 1). Royalties
paid to Dr. Chen of $5,033, $6,995 and $637 for the years ended December 31,
2000, 1999 and 1998, respectively, were based on 3.33% of the net sales of
Cartia XT, as defined, and interim and final Stipulation fees. Such royalties
are included in Selling, general, and administrative expenses in the
accompanying Consolidated Statements of Income.
In September 1998, Andrx agreed to sell 333,333 shares of Cybear common
stock for $1,000 or the then current market value of $3.00 per share to Cybear's
then Chairman of the Board. As of December 31, 1998, Andrx had sold 233,333
shares to Cybear's Chairman and in January 1999, Andrx sold the remaining
100,000 shares under this agreement. Accordingly, Gain on sale of Cybear shares
in the Consolidated Statements of Income include $300 and $700, for the years
ended December 31, 1999 and 1998, respectively, from these transactions.
(13) Shareholders' Equity
In June 1999, Watson exercised a warrant to acquire 1,348,400 shares of
Andrx common stock at an exercise price of $2.23 which was issued to Watson in
connection with the original investment in the Company in July 1994.
In May 2000, Andrx completed an underwritten public offering of shares
of common stock whereby Andrx sold 5,185,100 shares of common stock receiving
net proceeds of $235,819 to be used for the expansion of manufacturing, research
and development and administrative facilities, research and development for
branded and bioequivalent products, acquisition of products, product candidates
and/or companies, working capital requirements and other general corporate
purposes.
88
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(14) Stock Incentive Plans
In September 2000, shareholders approved the Company's 2000 Stock
Incentive Plan (the "2000 Plan") which allows for the issuance of up to
12,000,000 shares. Under the provisions of the 2000 Plan, the Company's Board of
Directors or its Compensation Committee (the " Andrx Committee") is authorized
to grant Andrx and Cybear stock options, to employees, consultants or advisors
of the Company. The terms for, and exercise price at which any stock option may
be awarded is to be determined by the Andrx Committee. Prior to the approval of
the 2000 Plan, the Company operated under the 1993 Stock Incentive Plan, as
amended, which allows for the issuance of up to 8,000,000 shares of Andrx common
stock.
In connection with the Reorganization, each Cybear stock option issued
under the 1997 Cybear Stock Incentive Plan was automatically converted into an
option to purchase 0.8842 shares of Cybear common stock under the 2000 Plan.
Additionally, as provided by the Reorganization, similar to Andrx Corporation
shareholders, Andrx Corporation option holders received 0.1489 options to
acquire Cybear Group Common Shares for each option held in Andrx Corporation.
Total Cybear Group options issued to Andrx Corporation option holders were
779,498 at $3.00 per share.
As of December 31, 2000, approximately 9,500,000 options remain
available for future grants under the 2000 Plan.
The Company accounts for options granted to employees under the Plans
in accordance with the provisions of APB Opinion No. 25. Each stock option has
an exercise price equal to the market price on the date of grant, and
accordingly, no compensation expense has been recorded for any employees stock
option grants. On rare occasions, the Company may issue an insignificant amount
of equity instruments to non-employees. No such options were granted for the
years ended December 31, 2000 and 1999. Stock options issued to consultants for
the year ended December 31, 1998 were accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable, as required by SFAS No. 123 and related
interpretations. In instances where the fair value or the goods or services
received is not reliably measurable, the measure is based upon the fair value of
the equity instruments issued, and such value is amortized over the period for
which services are provided. The fair value of equity instruments issued to
consultants are valued using the Black-Scholes option pricing model.
89
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
A summary of the plan activity is as follows:
ANDRX GROUP COMMON STOCK
Outstanding Exercisable
----------------------------------------- -------------------
Number of Exercise Price per Share Wtd. Avg.
Shares -------------------------- Exercise
Under Option Low High Wtd. Avg. Shares Price
------------ ------ ------ --------- ------ ---------
December 31, 1997 3,839,848 $ 0.75 $ 9.47 $ 3.21 1,996,900 $3.21
========== =====
Granted 2,121,000 6.19 10.08 8.16
Exercised (545,172) 0.75 8.25 2.77
Forfeited (250,784) 0.75 10.08 5.63
----------
December 31, 1998 5,164,892 0.75 10.13 5.17 2,268,500 $5.17
========== =====
Granted 1,538,800 5.73 29.94 19.99
Exercised (869,086) 0.75 9.72 4.11
Forfeited (198,000) 1.80 29.94 10.41
----------
December 31, 1999 5,636,606 0.75 30.07 9.19 2,518,056 $9.19
========== =====
Granted 1,760,900 29.25 85.00 55.33
Exercised (1,153,121) 0.75 30.06 6.03
Forfeited (279,000) 4.98 85.00 29.16
----------
December 31, 2000 5,965,385 $ 1.62 $85.00 $22.49 2,492,535 $6.13
========== ====== ====== ====== ========== =====
Options Outstanding Exercisable Options
at December 31, 2000 at December 31, 2000
- -------------------------------------------------------------------------------------------- -----------------------------------
Range of Number of Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Shares Remaining Life Exercise Exercise
Prices Under Option (Years) Price Shares Price
- -------------------------- ---------------- ------------------ ------------------ ------------- ------------------
$ 1.62 - $2.74 1,053,020 3.48 $ 1.84 1,021,020 $ 1.82
$ 2.99 - $7.10 1,020,875 4.53 5.81 816,175 5.72
$8.22 - $14.10 1,039,400 4.86 9.54 462,400 9.05
$16.62 - $23.81 1,045,250 6.96 18.81 136,600 19.92
$29.25 - $62.38 1,693,740 8.39 51.67 56,340 32.97
$77.73 - $85.00 113,100 9.72 81.52 -- --
--------- ---------
5,965,385 6.02 $ 22.49 2,492,535 $ 6.13
========= ==== =========== ========= ===========
The range of weighted average fair value per Andrx share as of the
grant date was $21.93 to $67.90, $5.36 to $20.41 and $5.89 to $16.28, for stock
options granted during the years ended December 31, 2000, 1999 and 1998,
respectively.
90
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
The fair market value of an Andrx option was estimated using the
Black-Scholes option pricing model with the following assumptions:
Years Ended December 31,
---------------------------
2000 1999 1998
------- ------- ------
Risk-free interest rate 4.9% 6.4% 4.6%
Average life of options (years) 5.6 6.0 5.1
Average volatility 85% 70% 99%
Dividend yield -- -- --
The following table summarizes the pro forma consolidated results of
operations of Andrx as though the provisions of the fair value-based accounting
method of SFAS No. 123 had been used in accounting for stock options:
Years Ended December 31,
---------------------------
ANDRX COMMON STOCK 2000 1999 1998
------- ------- ------
Net income allocated to
Andrx Group (including Cybear
through September 6, 2000) As reported $66,873 $94,054 $8,394
======= ======= ======
Pro forma $53,628 $86,969 $5,613
======= ======= ======
Basic net income per Andrx
Group common share As reported $ 0.99 $ 1.52 $ 0.14
======= ======= ======
Pro forma $ 0.79 $ 1.46 $ 0.10
======= ======= ======
Diluted net income per Andrx
Group common share As reported $ 0.95 $ 1.45 $ 0.13
======= ======= ======
Pro forma $ 0.77 $ 1.40 $ 0.09
======= ======= ======
CYBEAR COMMON STOCK
Outstanding Exercisable
--------------------------------------- ------------------
Number of Exercise Price per Share Wtd. Avg.
Shares ------------------------ Exercise
Under Option Low High Wtd. Avg. Shares Price
------------ ----- ------ --------- -------- ---------
September 7, 2000 1,489,998 $1.23 $18.72 $ 6.69 800,517 $ 6.93
======== ======
Granted 312,550 0.75 0.75 0.75
Forfeited (229,163) 1.23 16.00 6.19
---------
December 31, 2000 1,573,385 $0.75 $18.72 $ 5.58 658,760 $ 8.18
========= ===== ====== ====== ======== ======
91
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Options Outstanding at Exercisable Options at
December 31, 2000 December 31, 2000
- -------------------------------------------------------------------------------------------- ---------------------------------
Range of Number of Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Shares Remaining Life Exercise Exercise
Prices Under Option (Years) Price Shares Price
- -------------------------- ----------------- ------------------- ------------------ ------------- ----------------
$0.75 312,550 9.85 $ 0.75 -- $ --
$1.23 - $15.50 1,032,269 6.49 4.13 457,934 3.57
$18.72 228,566 8.46 18.72 200,826 18.72
--------- -------
$0.75 - $18.72 1,573,385 7.44 $ 5.58 658,760 $ 8.19
========= ==== ======= ======= =======
The weighted average fair value per Cybear share as of the grant date
was $0.75 for stock options granted from September 7, 2000 through December 31,
2000.
The fair market value of a Cybear option was estimated using the
Black-Scholes option pricing model with the following assumptions:
Period from September 7,
2000 through December 31,
2000
-------------------------
Risk-free interest rate 5.9%
Average life of options (years) 5.0
Average volatility 215%
Dividend yield --
The following table summarizes the pro forma consolidated results of
operations of Cybear as though the provisions of the fair value-based accounting
method of SFAS No. 123 had been used in accounting for stock options:
For the period from
September 7, 2000 to
December 31, 2000
-------------------------
Net loss allocated to Cybear
Group (subsequent to
September 6, 2000) As reported $ (8,341)
=============
Pro forma $ (9,726)
=============
Basic and diluted net
loss per Cybear Group
common share As reported $ (0.55)
=============
Pro forma $ (0.64)
=============
92
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(15) 401 (k) Plan
In February 1995, the Company adopted a 401(k) retirement plan covering
substantially all of its employees. Monthly contributions to the retirement plan
are made by the Company based upon the employees' contributions to the plan.
On September 24, 1999, as a result of the Company's ownership in Cybear
falling below 80% due to the June 1999 Cybear public offering, Cybear adopted
the Cybear 401(k) retirement plan. The net assets related to Cybear employees in
the Andrx 401(k) retirement plan were transferred to the Cybear 401(k)
retirement plan.
For the years ended December 31, 2000, 1999 and 1998, the Company
contributed $534, $381 and $229 to the 401(k) retirement plans.
In February 2001, as a result of the September 2000 Reorganization,
whereby, among other things, Cybear became a wholly owned subsidiary of Andrx
Corporation, the Cybear 401(k) Plan was merged with the Andrx 401(k) Plan.
(16) Litigation
Waxman-Hatch Patent Infringement Litigation
There has been substantial litigation in the pharmaceutical, biomedical
and biotechnology industries with respect to the manufacture, use and sale of
new products that are the subject of patent rights. Most of the brand name
controlled-release products for which the Company is developing bioequivalent
versions are covered by one or more patents. Under the Drug Price Competition
and Patent Restoration Act of 1984 (the "Waxman-Hatch Amendments"), when a drug
developer files an ANDA for a bioequivalent drug, the developer must make a
certification to the FDA as to whether the developer believes that an unexpired
patent that has been listed with the FDA as covering the relevant brand-name
product will be infringed by the developer's product. If the developer believes
that its product does not infringe the brand product patent or that any such
unexpired patent is invalid or unenforceable (a "Paragraph IV Certification"),
the developer must send a Paragraph IV Certification to the patent holder, who
may then initiate a legal challenge to the developer's Paragraph IV
Certification 45 days from the Paragraph IV Certification, which will prevent
the FDA from approving the ANDA, until the earlier of 30 months or when the
infringement case is decided in favor of the developer. The developer of a
bioequivalent product having the first ANDA containing a Paragraph IV
Certification accepted for filing by the FDA, is awarded a 180-day period of
marketing exclusivity against other companies that subsequently file ANDAs
containing Paragraph IV Certifications for the same drug. The outcome of such
litigation is difficult to predict because of the uncertainties inherent in
patent litigation.
In addition to the current patent infringement claims as described
below, additional claims may be made by other pharmaceutical companies in
connection with the Company's filing of other ANDAs or NDAs with the FDA. The
Company evaluates the probability of patent infringement litigation with respect
to each of its ANDA and NDA submissions on a case by case basis. Accordingly,
the Company provides for the estimated Waxman-Hatch patent infringement
litigation costs to final resolution of each case, as appropriate. Although the
Company believes it has adequately provided for such matters based on currently
available information, the Company may incur additional litigation costs in
future years which may be material to the Company's consolidated results of
operations and financial position.
Cardizem CD Patent Infringement Litigation
In connection with the ANDA filed for Andrx' bioequivalent version of
Cardizem CD, Andrx certified to the FDA that its product did not infringe upon
any of the patents listed as covering that brand name product and sent the
required notices to the holders of each of those patents. In January 1996,
Aventis commenced litigation in the United States District Court, Southern
District of Florida, alleging that Andrx' product infringes upon one of the six
patents listed as covering Cardizem CD.
93
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
In September 1997, Andrx entered into the Stipulation in partial
settlement with Aventis of the patent infringement litigation involving Cardizem
CD in order to reduce the risks that both parties faced as the case was
litigated to its conclusion. The Company agreed to maintain the status quo in
connection with the marketing of its product and to dismiss certain claims
against Aventis. Aventis agreed to compensate the Company for its lost profits,
which were stipulated to be $100,000 per year, if Andrx ultimately prevailed in
the litigation and to grant Andrx a license for their patents under certain
conditions, including if the Company ultimately lost the litigation. Aventis
also agreed to make non-refundable interim quarterly payments of $10,000 to the
Company, beginning upon its receipt of final FDA approval for its bioequivalent
version of Cardizem CD and continuing until the litigation was resolved or
certain other events occurred. In July 1998, the Company received both final FDA
marketing approval for its bioequivalent version of Cardizem CD and its first
quarterly payment for $9,130 (prorated for the 84 days in the quarter ended
September 30, 1998). For the year ended December 31, 1998, the Company received
a total of $19,130 in interim Stipulation fees. In June 1999, the Aventis
Litigation was settled and the lawsuit was dismissed with prejudice. On June 23,
1999, the Company commenced selling Cartia XT, its reformulated bioequivalent
version of Cardizem CD. For the year ended December 31, 1999, the Company
received pursuant to the Stipulation $70,733 in interim and final Stipulation
fees from Aventis. Having been the first Company to have its ANDA with a
Paragraph IV certification accepted as filed by the FDA related to Cardizem CD,
the Company enjoyed 180 days of marketing exclusivity that expired on or about
December 19, 1999.
In January 2001, Biovail Corporation ("Biovail") through one of its
subsidiaries acquired from Aventis the rights to Cardizem CD including Aventis'
rights under the 1999 Stipulation. On January 19, 2001, the Company received a
letter from Biovail's counsel, claiming that certain lots of the Company's
generic version of Cardizem CD did not meet the safe-harbor dissolution values
specified in the 1999 Stipulation and demanding that the non-conforming product,
which according to Biovail constitutes a breach of the 1999 Stipulation, be
removed from the market. In response, among other things, the Company, in
February 2001 filed suit against Biovail in the United States District Court,
Southern District of Florida, alleging (1) breach of contract, (2) violations of
the Lanham Act and Florida's Deceptive and Unfair Practices Act, (3) tortious
interference with business relationships, (4) common law unfair competition, (5)
abuse of process and (6) declaratory judgment that the Company has not breached
the 1999 Stipulation and that the Company's generic product does not infringe
any of Biovail's patent rights.
Biovail Antitrust Litigation
In January, 1998, the Company filed an action in the United States
District Court for the District of Columbia against the FDA, Biovail Corporation
and F.H. Faulding & Co. ("Faulding") regarding the FDA's interpretation of
certain provisions of the Waxman-Hatch Amendments. In May 1998, Biovail filed
counterclaims against Andrx alleging that the 1997 Stipulation violated Sections
1 and 2 of the Sherman-Antitrust Act and seeking a declaratory judgment as to
federal law as well as for alleged violations of state common law of unfair
competition, tortious interference with prospective advantage and tortious
interference with a contract. Biovail also sought injunctive relief and treble
damages in an unspecified amount, plus interest, with respect to its federal law
claims, and actual and punitive damages in unspecified amounts, plus interest,
with respect to its common law claims. In July 1998, Andrx filed a motion to
dismiss the Biovail counterclaims. In January 2000, that motion was granted,
dismissing with prejudice the federal antitrust claims, and dismissing without
prejudice the state law claims. On February 2, 2000, Biovail filed a motion for
reconsideration and to vacate the order dismissing its counterclaims and four
days later filed a notice of appeal to the United States Court of Appeals for
the District of Columbia. On October 26, 2000 the District Court denied
Biovail's motion to reconsider and to vacate the order dismissing the
counterclaims and reconfirmed the dismissal. Biovail then appealed the order
denying reconsideration and, by agreement of the parties, that appeal was
consolidated with the pending appeal from the original order dismissing the
counterclaims. Oral argument of the consolidated appeal was heard on February
12, 2001, at the conclusion of which the Court reserved decision.
94
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Purepac Litigation
On March 7, 2000, Purepac Pharmaceutical Co. (a subsidiary of Faulding,
"Purepac") filed suit against Andrx in the U.S. District Court for the Eastern
District of Pennsylvania claiming patent infringement because of Andrx making,
using, selling and/or offering Cartia XT which, according to Purepac, infringes
a patent issued to Faulding on March 7, 2000, but now owned by Purepac and
sought an injunction enjoining the sales of Cartia XT, damages in an amount no
less than a reasonable royalty, treble damages for willful infringement and
other relief. The letter also offered to license that patent to the Company. On
May 2, 2000, the Company filed an answer to the complaint denying infringement
and alleging certain affirmative defenses and a counterclaim for judgment
declaring that the Company does not infringe and has not infringed any valid
claim of the patent in suit and that such patent is invalid. Purepac then moved
for partial summary judgment of literal infringement. On June 28, 2000, that
motion was denied. On March 2, 2001 the parties settled the case. The settlement
requires Purepac to terminate its suit with prejudice and prohibits Purepac from
bringing future suits against Cartia XT involving the additional patents Purepac
is in the process of obtaining.
Putative Class Action Litigation
Commencing in August 1998, a number of putative class and individual
actions have been filed against Andrx Pharmaceuticals, Inc. ("Andrx Pharm") in
either state or federal courts in Alabama, California, Florida, Illinois,
Kansas, Michigan, Minnesota, New York, North Carolina, Tennessee, Wisconsin and
the District of Columbia. In all of these suits, Hoechst Aktiengesellschaft and
Aventis (collectively, the "Aventis Group") have been named as co-defendants.
The complaint in each action alleges that Andrx Pharm and Aventis Group, by way
of the Stipulation, have engaged in alleged state antitrust and other statutory
and common law violations that allegedly have given Aventis Group and Andrx
Pharm a near monopoly in the U.S. market for Cardizem CD and a bioequivalent
version of that pharmaceutical product. According to the complaints, the
monopoly possessed by the defendants enable Aventis Group to perpetuate its
ability to fix the price of Cardizem CD at an artificially high price, free from
generic competition, with the result that direct purchasers (such as
pharmacies), as well as indirect purchasers (such as medical patients who have
been issued prescriptions for Cardizem CD) are forced to overpay for the drug.
Each complaint seeks compensatory damages on behalf of each class member in an
unspecified amount and, in some cases, treble damages, as well as costs and
counsel fees, disgorgement, injunctive relief and other remedies. In June 1999,
most of these class actions were consolidated for pretrial purposes in the
United States District Court for the Eastern District of Michigan. In the
consolidated proceeding, Aventis Group and Andrx Pharm filed motions to dismiss
the complaints on various grounds and plaintiffs filed motions for partial
summary judgment. On June 6, 2000, the United States District Court for the
Eastern District of Michigan granted plaintiffs' motion for partial summary
judgement against Andrx and Aventis in the pending punitive class actions. The
District Court determined that the Stipulation the Company had entered into with
Aventis relating to their Cardizem CD patent litigation constitutes a restraint
of trade that is illegal per se under section 1 of the Sherman-Antitrust Act. On
August 15, 2000, the District Court granted the Company's and Aventis' motions
to certify two questions relating to this determination to the United States
Court of Appeals for the Sixth Circuit. Thereafter, as required under Federal
Rules of Appellate Procedure, the Company and Aventis filed motions requesting
the appellate court to accept the appeal as certified by the District Court. On
December 12, 2000, the appellate court granted the motions and set a briefing
schedule for the parties. Meanwhile, on March 14, 2001, the District Court
granted the motion of the Sherman Act Class Plaintiffs (i.e. direct purchasers
of Cardizem CD) to certify the case as a class action on behalf of all persons
or entities who directly purchased Cardizem CD from Aventis during a specified
period.
FTC Administrative Proceeding
In March 2000, the FTC commenced an administrative proceeding against
Aventis and the Company concerning the 1999 Stipulation, claiming it had reason
to believe that the Stipulation had or may have had the capacity or the
potential to be anti-competitive. The FTC stated it is not seeking any fines,
penalties, disgorgement or any other monetary remedy in the proceeding. The
Company and Aventis recently reached an agreement with the FTC staff concerning
the terms of a proposed consent decree that has been submitted to the FTC
commissioners for their approval. The decree will not become effective until
such FTC approval has been obtained.
95
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Prilosec Patent Infringement Litigation
In May 1998, Astra, Aktiebolaget Hassle, Astra Merck Enterprises Inc.
and Astra Merck Inc. (collectively, the "Astra Group") filed suit against Andrx
in the U.S. District Court for the Southern District of Florida claiming patent
infringement because of an ANDA filed by Andrx with the FDA for a bioequivalent
version of Prilosec. Subsequently, another patent infringement suit was filed by
the Astra Group against Andrx in the same Court after Andrx made a second
Paragraph IV certification relative to a different strength of Prilosec. In
September 1999, for pretrial purposes, both of these actions were consolidated
in the U.S. District Court for the Southern District of New York with three
other patent infringement suits initiated by the Astra Group relative to ANDAs
submitted by other companies for bioequivalent versions of Prilosec. On February
26, 2001, the Court issued a scheduling order indicating that all pending
motions would be ruled upon within the next sixty days and that a trial was set
for June 11, 2001 (subsequently reset by the Court for May 28, 2001). The
Company is taking steps to determine when it can proceed to trial and whether
the trial will be in New York on May 28, 2001 or in Florida. In March 2001, the
Astra Group listed four new patents in the FDA's Orange Book. Under protest and
with full reservation of its right to challenge the validity of this new
listing, Andrx made a Paragraph IV Certification that its bioequivalent version
of Prilosec does not infringe any valid claims of the new patents.
Tiazac Patent Infringement Litigation
In October 1998, Biovail, Biovail Laboratories Inc. and Galephar Puerto
Rico, Inc. (collectively, the "Biovail Group)filed suit against the Company in
the U.S. District Court for the Southern District of Florida seeking an
injunction enjoining Andrx from further infringing the subject patent and an
order directing that the effective date of any FDA approval of Andrx' proposed
bioequivalent version of Tiazac be no earlier than the expiration date of the
subject patent. The Company responded to this claim by denying infringement,
raising various other defenses, filing certain counterclaims against Biovail
Group and by seeking a declaration that there has been no infringement and that
the patent is invalid. On March 6, 2000, the Court entered an order that the
Company's product does not infringe the Biovail Group patent. Biovail Group
appealed that order to the United States Court of Appeals for the Federal
Circuit. On February 13, 2001, the order was unanimously affirmed by the
appellate court. In the interim, the Biovail Group listed a patent it recently
acquired from a third party in the FDA's Orange Book. The Company believes this
new patent was improperly listed in the FDA's Orange Book and has filed an
action in the United States District Court for the Southern District of Florida
against Biovail Group (and nominally the FDA) seeking, among other things, a
preliminary and permanent injunction ordering Biovail Group to delist the patent
from the FDA's Orange Book and enjoining the FDA from delaying approval of the
Company's generic product for any reason relating to the new patent. On March 1,
2001, the Court denied the Company's motion for a preliminary injunction on the
ground that the Court does not have subject matter jurisdiction over the claim
brought by the Company against Biovail under the provisions of the Waxman-Hatch
Amendments. Meanwhile, under protest and with full reservation of its right to
continue to challenge the validity of Biovail Group's listing, the Company has
certified to the FDA that the Company's generic version of Tiazac does not
infringe any claims of the new patent.
Naprelan Patent Infringement Litigation
In October 1998, Elan Corporation, PLC ("Elan") filed suit against
Andrx in the U.S. District Court for the Southern District of Florida claiming
patent infringement because of an ANDA filed by Andrx with the FDA for a
bioequivalent version of Naprelan. Andrx responded to this claim by denying
infringement, raising various other defenses, filing certain counterclaims
against Elan and by seeking a declaration that there has been no infringement
and that the patent is invalid. Elan seeks a judgment enjoining Andrx from
further infringing the subject patent and ordering that the effective date of
any FDA approval of Andrx' proposed bioequivalent version of Naprelan be no
earlier than the expiration date of the patent. A trial of this case commenced
on January 30, 2001, and, in terms of oral evidence and receiving documents in
evidence, was completed on February 14, 2001. The parties have submitted
proposed findings of fact and conclusions of law to the Court and expect to make
final arguments before the Court in early May 2001.
96
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Wellbutrin SR and Zyban Patent Infringement Litigation
In September 1999, Glaxo Wellcome PLC ("Glaxo") filed suit against the
Company in the U.S. District Court for the Southern District of Florida claiming
patent infringement because of the ANDAs filed by the Company with the FDA for
bioequivalent versions of Wellbutrin SR and Zyban. The Company responded to this
claim by denying infringement, raising various other defenses, filing certain
counterclaims against Glaxo and by seeking a declaration that there has been no
infringement and that the patent is invalid. Glaxo seeks an injunction enjoining
Andrx fro further infringing the subject patents and orders directing that the
effective date of any FDA approval of Andrx's proposed bioequivalent versions of
Wellbutrin SR and Zyban to be no earlier than the expiration date of the subject
patent. The case is currently scheduled to go to trial in July 2001.
Depakote Patent Infringement Litigation
In March 2000, Abbott Laboratories ("Abbott") filed suit against the
Company and two of its subsidiaries in the United States District Court for the
Northern District Court of Illinois, claiming infringement of two of its patents
because of an ANDA filed by the Company with the FDA for a bioequivalent version
of Depakote. Abbott also sued the Company on identical infringement claims filed
in United States District Court for the Southern District of Florida and in the
United States District Court for the Eastern District of Virginia. Subsequently,
all infringement claims filed by Abbott against the Company were transferred to
and consolidated for trial before the United States District Court for the
Southern District of Florida. The Company responded to the claims by denying
infringement, alleging certain affirmative defenses and counterclaiming that the
two patents in suit are invalid. Abbott seeks an injunction enjoining Andrx from
further infringing the subject patents and ordering that the effective date of
any FDA approval of the Company's proposed bioequivalent versions of Depakote be
no earlier than the expiration dates of the subject patents. Trial has been
specially set to commence on November 2, 2001.
Claritin D-24 Patent Infringement Litigation
In March 2000, Schering Plough Corporation "Schering Plough") filed
suit in the U.S. District Court for New Jersey claiming infringement of two of
its patents because of an ANDA filed by the Company with the FDA for a
bioequivalent version of Claritin D-24. The Company filed an answer denying
infringement, raising various other defenses, filing certain counterclaims
against Schering Plough and that the two patents are invalid and by seeking a
declaration that there has been no infringement. The Court has ordered that all
discovery be completed by September 14, 2001.
Claritin Reditabs Patent Infringement Litigation
In January 2001, Schering Plough filed suit in the U.S. District Court
for New Jersey, claiming infringement of one of its patents because of an ANDA
filed by the Company with the FDA for a bioequivalent version of Claritin
Reditabs. Andrx responded to these claims by denying infringement, raising
various other defenses, filing certain counterclaims and that the patent is
invalid and is seeking a declaration that there has been no infringement.
Procardia XL Patent Infringement Litigation
Andrx made a Paragraph IV certification in connection with the ANDA it
filed for its bioequivalent version of Procardia XL. In November 2000, Bayer AG
and Pfizer, Inc. filed suit in the U.S. District Court for the Southern District
of Florida, claiming that Andrx's ANDA product infringed one of Bayer's patents.
The suit was never served on Andrx and in March 2001 the suit was dismissed.
Phentermine (Phen-Fen) Litigation
In January 1999, Andrx was served with third party complaints filed
against them by certain doctors and distributors who are defendants in various
legal actions relating to the sale of phentermine by the Company and its usage
as a diet drug when taken in combination with fenfluramine, commonly known as
"phen-fen". The substance of the third party complaints is that the defendants
are without fault with respect to the claims in those actions but, if they are
found liable on any of those claims, then allegedly having obtained one or more
of the drugs from Andrx, they are entitled to indemnification in an amount to
pay and discharge any judgment entered against them in the putative class action
together with costs, expenses and attorney fees. Andrx has never sold
fenfluramine and believes that these claims are without merit.
97
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
In November 1999, another phen-fen diet lawsuit was filed against Andrx
in the Superior Court of New Jersey by (i) a husband, who claims to have
obtained or purchased, either directly or indirectly, from Andrx and others, and
thereafter ingested, phentermine, dexfenfluramine and fenfluramine, causing
serious medical consequences, all to his financial detriment, and (ii) his wife,
who, on behalf of herself and her two children, claims monetary damages arising
from emotional distress to herself and her children, loss of spousal/paternal
companionship and expenditure of money, time and care for her husband required
by her husband's alleged injuries which are permanent and continuous in nature.
Andrx has never sold dexfenfluramine or fenfluramine and believes that these
claims, including any based solely on the use of phentermine, have no merit.
The Company is being represented and defended in both of these lawsuits
by counsel designated by the Company's insurer.
Cybear SEC Investigation
The Southeast Regional Office of the SEC commenced a formal private
investigation of Cybear, primarily focusing on Cybear's revenue reporting and
internal controls with respect to Cybearclub LC, the joint venture between Andrx
and Cybear intended to promote the distribution of healthcare products through
the Internet (see Note 19). The investigation followed an informal inquiry
conducted by the SEC staff beginning late in the third quarter of 2000. Andrx
and Cybear cooperated voluntarily with the SEC during the informal inquiry phase
and thereafter continue to supply requested information to the SEC staff.
Nicebid.com claim
In June 2000, Cybear received a claim from Nicebid.com for damages
allegedly incurred by Nicebid.com as a result of alleged breaches of an Internet
commerce contract between Nicebid.com and Telegraph Consulting Corporation
("TCC"). Cybear acquired TCC in 1999. This matter has been submitted to
arbitration. Cybear intends to vigorously defend against the claim.
Other Litigation
As of December 31, 2000, the Company was involved with other legal
proceedings incidental to its business. Although it is not possible to predict
the outcome of such proceedings, it is the opinion of management, based on the
legal advice of counsel, that the ultimate outcome of those proceedings will not
have any significant adverse effect on the Company's consolidated financial
statements.
(17) 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 operating segments are
managed separately because of the fundamental difference in their operations or
in the uniqueness of their product(s).
The Company operates in four business segments:
o Anda Inc. ("Anda") markets and distributes generic pharmaceuticals
manufactured by third parties through its in house telemarketing staff
primarily to independent pharmacies, non-warehousing chains and
physician offices. Anda includes the activity of Valmed, after the
March 15, 2000 acquisition date. Anda operating results exclude
participation in the sales of products developed and manufactured by
Andrx Pharm.
98
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
o Andrx Pharm researches and develops bioequivalent versions of selected
controlled-release brand name pharmaceuticals utilizing its proprietary
drug delivery technologies and manufactures and sells such products. The
Andrx Pharm segment also includes the research and development of
bioequivalent versions of specialty and niche pharmaceutical products.
o Aura Laboratories, Inc. ("Aura Labs") applies the proprietary drug delivery
technologies developed by Andrx Pharm to the research and development of
brand name controlled-release formulations of existing immediate-release
and controlled-release drugs.
o Cybear is an information technology company that uses the Internet to
improve the efficiency of clinical, administrative and communications tasks
in the healthcare industry. Cybear is an Internet service provider, or ISP,
and an application service provider, or ASP.
The category "Corporate and Other" consists of corporate headquarters,
including general and administrative expenses, interest income, income taxes and
adjustments for minority interest.
99
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
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.
The following table presents financial information by business segment:
As of and for the Year Ended December 31, 2000
------------------------------------------------------------------------------------
Andrx Aura Corporate
Anda Pharm Labs Cybear & Other Consolidated
--------- --------- --------- --------- --------- ------------
Revenues $ 324,589 $ 176,378 $ 14,018 $ 5,046 $ (71) $ 519,960
Income (loss) from operations 16,770 107,787 (4,078) (25,144) (13,351) 81,984
Interest income -- -- -- 1,829 11,210 13,039
Interest expense 767 -- -- -- -- 767
Depreciation and amortization 2,610 2,484 65 4,035 376 9,570
Capital expenditures 1,811 38,752 176 3,753 48 44,540
Total assets 179,576 118,885 671 39,505 329,319 667,956
As of and for the Year Ended December 31, 1999
------------------------------------------------------------------------------------
Andrx Aura Corporate
Anda Pharm Labs Cybear & Other Consolidated
--------- --------- --------- --------- --------- ------------
Revenues $ 262,321 $ 206,399 $ 7,000 $ 270 $ -- $ 475,990
Income (loss) from operations 20,010 151,073 (2,566) (14,664) (8,916) 144,937
Gain on sale of Cybear shares 643 -- -- -- -- 643
Interest income -- -- -- 1,282 2,321 3,603
Interest expense 1,661 -- -- 216 (216) 1,661
Depreciation and amortization 1,209 1,447 46 1,556 258 4,516
Capital expenditures 6,960 13,009 44 2,149 71 22,233
Total assets 123,494 45,623 134 53,068 135,635 357,954
As of and for the Year Ended December 31, 1998
------------------------------------------------------------------------------------
Andrx Aura Corporate
Anda Pharm Labs Cybear & Other Consolidated
--------- --------- --------- --------- --------- ------------
Revenues $ 215,903 $ 31,154 $ -- $ -- $ -- $ 247,057
Income (loss) from operations 10,698 9,428 (4,023) (4,171) (4,674) 7,258
Gain on sale of Cybear shares 700 -- -- -- -- 700
Interest income -- -- -- -- 1,064 1,064
Interest expense 380 -- -- 210 (210) 380
Depreciation and amortization 982 1,536 33 139 270 2,960
Capital expenditures 833 4,572 145 2,341 95 7,986
Total assets 68,735 29,989 136 3,332 19,006 121,198
100
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(18) Selected Quarterly Data (Unaudited)
Year Ended December 31, 2000
-----------------------------------------------------
March 31, June 30, September 30, December 31,
--------- --------- -------------- ------------
Total revenues $ 115,478 $ 128,581 $ 132,246 $ 143,655
Research and development expenses 8,211 10,483 14,646 13,329
Cybear Internet operating expenses 7,171 5,826 9,196 3,640
Andrx Reorganization costs -- -- 2,098 --
Income from operations 25,350 24,878 12,180 19,576
Net income 16,371 16,742 10,757 14,662
Net income allocated to Andrx Group (includes Cybear
through September 6, 2000) 16,371 16,742 16,056 17,704
Basic net income per Andrx Group common share 0.26 0.26 0.23 0.26
Diluted net income per Andrx Group common share 0.25 0.25 0.22 0.25
Net loss allocated to Cybear Group (subsequent to
September 6, 2000) -- -- (5,299) (3,042)
Basic and diluted net loss per Cybear Group common share -- -- (0.35) (0.20)
Year Ended December 31, 1999
-----------------------------------------------------
March 31, June 30, September 30, December 31,
--------- --------- -------------- ------------
Stipulation fees $ 10,000 $ 60,733 $ -- $ --
Total revenues 77,924 164,560 111,415 122,091
Income from operations 8,448 78,784 27,232 30,473
Net income (including Cybear) 6,944 48,880 17,827 20,403
Basic net income per Andrx Group common share 0.11 0.80 0.28 0.33
Diluted net income per Andrx Group common share 0.11 0.75 0.27 0.32
Earnings per share are computed independently for each quarter
presented. Therefore, the sum of the quarterly earnings (loss) per share for the
years ended December 31, 2000 and 1999, may not equal the total computed for the
year.
101
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
(19) Supplemental Group Financial Statements
Holders of Andrx common stock and Cybear common stock have no specific
rights to assets, operating results or cash flows of Andrx or Cybear as Andrx
Corporation holds title to all its assets and is responsible for all of its
liabilities, operating results and cash flows regardless of how it allocates
assets and liabilities among the classes of common stock and are therefore
subject to the risks of investing in the business, assets and liabilities of
Andrx Corporation as a whole. For instance, the assets allocated to each class
of common stock may be subject to Company-wide claims of creditors and
stockholder litigation. Following are the separate supplemental consolidated
financial statements for Andrx Group and Cybear Group.
Andrx Group
(representing Andrx Corporation and subsidiaries other than Cybear)
Consolidated Balance Sheets
December 31,
---------------------
ASSETS 2000 1999
-------- --------
Current assets
Cash and cash equivalents $111,131 $ 17,795
Investments available-for-sale, at market value 208,977 64,791
Accounts receivable, net of allowances of $6,971 in 2000
and $6,423 in 1999 92,069 71,928
Inventories 101,219 78,771
Deferred income tax assets, net 18,968 18,442
Prepaid and other current assets 11,295 7,335
-------- --------
Total current assets 543,659 259,062
Property, plant and equipment, net 71,433 34,748
Other assets, net 13,961 8,297
-------- --------
Total assets $629,053 $302,107
======== ========
LIABILITIES AND ANDRX GROUP EQUITY
Current liabilities
Accounts payable $ 69,551 $ 49,164
Accrued liabilities 33,312 35,280
Bank loan -- 20,226
Income taxes payable 3,944 15,730
-------- --------
Total current liabilities 106,807 120,400
Commitments and contingencies
Andrx Group equity 522,246 181,707
-------- --------
Total liabilities and Andrx Group equity $629,053 $302,107
======== ========
102
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Andrx Group
(representing Andrx Corporation and subsidiaries other than Cybear)
Consolidated Statements of Income
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Revenues
Distributed products $ 324,591 $ 262,321 $ 215,903
Manufactured products 175,428 134,796 11,472
Stipulation fees -- 70,733 19,130
Licensing fees 14,966 7,870 552
--------- --------- ---------
Total revenues 514,985 475,720 247,057
--------- --------- ---------
Operating expenses
Cost of goods sold 297,218 235,269 188,226
Selling, general and administrative 61,901 55,266 30,646
Research and development 46,669 25,697 16,837
Reorganization costs 2,098 -- --
--------- --------- ---------
Total operating expenses 407,886 316,232 235,709
--------- --------- ---------
Income from operations 107,099 159,488 11,348
Other income (expense)
Interest income 11,210 2,321 1,064
Interest expense (767) (1,661) (380)
--------- --------- ---------
Income before income taxes 117,542 160,148 12,032
Income taxes 39,870 58,229 2,233
--------- --------- ---------
Net income $ 77,672 $ 101,919 $ 9,799
========= ========= =========
103
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Andrx Group
(representing Andrx Corporation and subsidiaries other than Cybear)
Consolidated Statements of Group Equity
Andrx Group Comprehensive
Equity Income
----------- ---- --------
Balance, December 31, 1997 $ 50,623
Allocation of Andrx common stock issued
in connection with exercises of warrants and options 2,836
Allocation of income tax benefits related to exercises
of Andrx stock options 67
Allocation of Andrx options granted to consultants 433
Allocation of unrealized loss on investments available-for-sale (38) $ (38)
Net income allocated to Andrx Group 9,799 9,799
--------- ---------
Comprehensive income $ 9,761
=========
Balance, December 31, 1998 63,720
Allocation of Andrx common stock issued
in connection with exercises of warrants and options 6,683
Allocation of income tax benefits related to
exercises of Andrx stock options 9,368
Allocation of Andrx options granted to consultants
10
Allocation of unrealized gain on investments
available-for-sale, net of income taxes of $13 7 $ 7
Net income allocated to Andrx Group 101,919 101,919
--------- ---------
Comprehensive income $ 101,926
=========
Balance, December 31, 1999 181,707
Allocation of Andrx common stock issued in
connection with equity offering 235,819
Allocation of Andrx common stock issued
in connection with exercises of warrants and options 6,959
Allocation of income tax benefits related to exercises
of Andrx common stock 19,870
Allocation of unrealized gain on investments
available-for-sale, net of income taxes of $115 219 $ 219
Net income allocated to Andrx Group 77,672 77,672
--------- ---------
Comprehensive income $ 77,891
=========
Balance December 31, 2000 $ 522,246
=========
104
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Andrx Group
(representing Andrx Corporation and subsidiaries other than Cybear)
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities
Net income $ 77,672 $ 101,919 $ 9,799
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,716 3,575 2,837
Provision for doubtful accounts 548 3,897 940
Income tax benefits related to exercises of stock options 19,870 9,368 67
Options granted to consultants -- 10 433
Deferred income tax benefits (3,818) (18,442) --
Changes in operating assets and liabilities:
Accounts receivable (15,098) (42,013) (12,119)
Inventories (18,286) (36,434) (16,436)
Prepaid and other assets (721) (12,621) (523)
Accounts payable and accrued liabilities 12,957 34,948 11,770
Income taxes (7,968) 15,675 55
--------- --------- ---------
Net cash provided by (used in) operating activities 70,872 59,882 (3,177)
--------- --------- ---------
Cash flows from investing activities:
Maturity (purchases) of investments available-for-sale, net (144,186) (59,158) 13,247
Purchases of property, plant and equipment (40,707) (20,348) (5,645)
Acquisition of Valmed Pharmaceutical, Inc., net of cash acquired (15,195) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities (200,088) (79,506) 7,602
--------- --------- ---------
Cash flows from financing activities
Net proceeds from Andrx public share offering 235,819 -- --
Proceeds from the issuance of shares of Andrx common stock from
exercises of stock options and warrants 6,959 6,683 2,836
Net borrowings (repayments) under bank loan (20,226) 16,119 3,569
--------- --------- ---------
Net cash provided by financing activities 222,552 22,802 6,405
--------- --------- ---------
Net increase in cash and cash equivalents 93,336 3,178 10,830
Cash and cash equivalents, beginning of year 17,795 14,617 3,787
--------- --------- ---------
Cash and cash equivalents, end of year $ 111,131 $ 17,795 $ 14,617
========= ========= =========
Supplemental disclosure of cash paid during the year for:
Interest $ 767 $ 1,661 $ 380
========= ========= =========
Income taxes $ 32,440 $ 48,790 $ 210
========= ========= =========
105
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Cybear Group
(representing Cybear Inc. and its subsidiaries)
Consolidated Balance Sheets
December 31,
-----------------
2000 1999
------- -------
ASSETS
Current Assets
Cash and cash equivalents $ 4,478 $11,922
Investments available-for-sale, at market value 12,223 26,072
Accounts receivable, net of allowances $106 in 2000 and $3
in 1999 891 104
Convertible note receivable -- 3,000
Prepaid and other current assets 550 1,382
------- -------
Total current assets 18,142 42,480
Property and equipment, net 6,340 5,126
Goodwill and other intangibles, net 14,661 3,819
Other assets, net 362 1,643
------- -------
Total assets $39,505 $53,068
======= =======
LIABILITIES AND CYBEAR GROUP EQUITY
Current liabilities
Accounts payable $ 950 $ 2,699
Accounts payable to Andrx 602 59
Accrued liabilities 402 332
------- -------
Total current liabilities 1,954 3,090
Commitments and contingencies
Cybear Group equity 37,551 49,978
------- -------
Total liabilities and Cybear Group equity $39,505 $53,068
======= =======
106
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Cybear Group
(representing Cybear Inc. and its subsidiaries)
Consolidated Statements of Operations
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Revenues
Cybearclub LC Internet product sales $ 1,483 $ 81 $ --
Cybearclub LC telemarketing product sales 2,715 -- --
Other product sales 321 -- --
Web development, hosting and other services 366 102 --
Subscription 161 87 --
-------- -------- --------
Total revenues 5,046 270 --
-------- -------- --------
Operating expenses
Cost of goods sold 4,257 77 --
Network operations and operations support 4,501 2,972 643
Product development 3,774 3,058 1,717
Selling, general and administrative 8,399 7,271 1,672
Depreciation and amortization 4,035 1,556 139
Merger costs and other non-recurring charges 5,224 -- --
-------- -------- --------
Total operating expenses 30,190 14,934 4,171
-------- -------- --------
Loss from operations (25,144) (14,664) (4,171)
Other income (expense)
Interest income 1,829 1,282 --
Interest expense on advances from Andrx -- (216) (210)
-------- -------- --------
Loss before income taxes (23,315) (13,598) (4,381)
Income tax benefit allocated from Andrx -- 2,824 1,900
-------- -------- --------
Net loss $(23,315) $(10,774) $ (2,481)
======== ======== ========
107
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Cybear Group
(representing Cybear Inc. and its subsidiaries)
Consolidated Statements of Group Equity
Cybear Group Comprehensive
Equity (Deficit) Loss
---------------- -------------
Balance, December 31, 1997 $ (1,014)
Conversion of Due to Andrx upon
consummation of Merger with 1997 Corp. 3,012
Allocation of Cybear options granted to consultants 16
Net loss allocated to Cybear (2,481) $ (2,481)
--------
Comprehensive income $ (2,481)
========
--------
Balance, December 31, 1998 (467)
Allocation of Cybear public offering 50,778
Conversion of Due to Andrx upon consummation of Cybear public offering 7,446
Allocation of acquisition of Telegraph Consulting Corporation 2,771
Allocation of Cybear common stock issued in connection with exercises of warrants 169
Allocation of Cybear options granted to consultants 155
Allocation of unrealized loss on investments available-for-sale (100) $ (100)
Net loss allocated to Cybear (10,774) (10,774)
--------
Comprehensive income $(10,874)
========
--------
Balance, December 31, 1999 49,978
Allocation of equity in connection with the Reorganization 9,411
Allocation of employee Cybear options as a result of the Reorganization 1,053
Allocation of exercises of Cybear common stock issued in connection with exercises of
options 322
Allocation of unrealized gain on investments available-for-sale 102 $ 102
Net loss allocated to Cybear (23,315) (23,315)
--------
Comprehensive income $(23,213)
========
--------
Balance, December 31, 2000 $ 37,551
========
108
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Cybear Group
(representing Cybear Inc. and its subsidiaries)
Consolidated Statements of Cash Flows
Years ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net loss $(23,315) $(10,774) $ (2,481)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 4,035 1,556 139
Other non-cash charges 925 36 160
Non-cash net charge related to AHT Corporation note receivable 2,000 -- --
Changes in operating assets and liabilities
Accounts receivable, net (747) 320 (366)
Prepaid and other assets 730 (2,495) (152)
Accounts payable and accrued liabilities (637) 1,549 1,314
-------- -------- --------
Net cash used in operating activities (17,009) (9,808) (1,386)
-------- -------- --------
Cash flows from investing activities
Maturities (purchases) of investments available-for-sale, net 13,952 (26,172) --
Repayment (funding) of convertible note receivable 3,000 (3,000) --
Purchases of property and equipment (3,753) (2,149) (2,341)
Change in other assets (81) (140) (358)
Purchase of software licenses -- (1,603) --
Acquisition of Telegraph Consulting Corporation -- (1,181) --
Cash flow related to AHT Corporation note receivable and investment (3,875) -- --
-------- -------- --------
Net cash provided by (used in) investing activities 9,243 (34,245) (2,699)
-------- -------- --------
Cash flows from financing activities
Proceeds from exercises of stock options 322 169 --
Proceeds from issuance of shares of common stock -- 50,778 --
Repayment of bank loan -- (136) --
Advances from Andrx, net of Andrx utilization
of Cybear's income tax attributes -- 5,160 4,088
-------- -------- --------
Net cash provided by financing activities 322 55,971 4,088
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (7,444) 11,918 3
Cash and cash equivalents, beginning of year 11,922 4 1
-------- -------- --------
Cash and cash equivalents, end of year $ 4,478 $ 11,922 $ 4
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Purchase of Cybear minority interest by Andrx $ 10,444 $ -- $ --
======== ======== ========
Conversion of due to Andrx into shares of Cybear common stock $ -- $ 7,446 $ --
======== ======== ========
Conversion of due to Andrx into Cybear Group equity $ -- $ -- $ 3,012
======== ======== ========
109
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Related Intergroup Transactions
Certain significant transactions between the groups, which are
eliminated in consolidation, are as follows:
Subscription fees
In September 1999, Cybear provided subscriptions to its Physician
Practice Portal product to certain customers of Andrx at a standard monthly
rate. Andrx paid for such subscription services on behalf of its customers.
Revenues generated from such services were $19 for the year ended December 31,
1999.
Cybearclub LC
In August 1999, Cybear commenced the Cybearclub LC joint venture
("Cybearclub") with Andrx intended to distribute healthcare products to
physician offices through the Internet. Capital contributions to, distributions
from and net income or loss generated by Cybearclub are allocated in proportion
to Cybear's and Andrx' interests in the joint venture. Such interests are 55% to
Cybear and 45% to Andrx. Cybearclub is managed by and under the direction of a
management committee comprised of five members. Three members are appointed by
Cybear and two members are appointed by Andrx. Based on its majority ownership
and majority representation on the management committee of Cybearclub, Cybear
controls Cybearclub. Accordingly, Cybear consolidates the accounts of Cybearclub
and Andrx utilizes the equity method of accounting for its investment in
Cybearclub.
To help achieve Cybearclub's objective of having physician offices
purchase products through the Internet, Cybearclub initiated a dual strategy of
using Andrx telemarketers to induce physician offices, including Andrx physician
customers, to begin placing orders with Cybearclub, and to then transition those
physician offices from being purchasers who place their orders with a
telemarketer into customers who place orders directly through the Internet.
Accordingly, through October 8, 2000, revenues reported by Cybearclub
consisted of transition revenues procured by Andrx telemarketers as well as
revenues derived from orders placed by physician offices over the Internet. As a
result of an amendment to the joint venture agreement, beginning October 9,
2000, Cybearclub revenues consisted solely of Internet product sales from orders
entered by physician offices over the Internet. Accordingly, effective October
9, 2000, any orders not entered by physician offices over the Internet were
recognized as revenues by Andrx and not by Cybearclub.
Through Cybearclub, Cybear generated $4,198 in revenues for 2000 as
compared to $81 in 1999. Cybearclub 2000 revenues of $4,198, consist of (i)
physician Internet sales reported as Cybearclub LC Internet product sales of
$1,483 and (ii) orders procured by Andrx telemarketers and entered by Cybear
employees over the Internet (i.e. transition revenues) through October 8, 2000,
reported as Cybearclub LC telemarketing product sales of $2,715.
For the year ended December 31, 1999 and through the first quarter of
2000, as originally reported by Cybear, all Cybearclub product sales were
reported as E-commerce sales. In the second quarter of 2000, Cybear further
changed its presentation from E-commerce sales to Cybearclub LC sales and in the
third quarter of 2000, Cybear further changed its presentation to Cybearclub LC
Internet product sales (i.e. physician office Internet orders) and Cybearclub LC
telemarketing product sales (i.e. telemarketing orders entered over the Internet
on behalf of physician customers by Cybear employees). Cybear is presenting 1999
E-commerce products sales as Cybearclub LC Internet product sales of $81
although Cybear's systems at that time did not permit such classification to be
fully verified.
As part of its operations, Andrx purchases products from outside
vendors and distributes them to pharmacies and physicians who it generally
contacts through telemarketers. In connection with Cybearclub, Andrx sells some
of those products to Cybearclub at cost and charges Cybearclub for certain
fulfillment and back office operations such as purchasing, warehousing and
distribution, as well as customer service and telemarketing activities. Under
the joint venture agreement negotiated by the parties, such services were
charged at a rate of 6% of gross sales for the year ended December 31, 2000 and
10% of gross sales for the year ended December 31, 1999. The current rate of 6%
could increase if Cybearclub achieves certain quarterly gross sales levels. For
the years ended December 31, 2000 and 1999, Andrx charged Cybearclub $279 and
$8, respectively, for the services it provided.
Cybearclub operating results were net losses of $43 and $17 in 2000 and
1999, respectively, for which Cybear recorded Andrx minority interest of $19 and
$8, respectively.
110
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except for share and per share amounts)
Banner Advertisements
Beginning in July 2000, Cybear developed banner advertisements for
certain Andrx customers and provided such Andrx customers with advertising on
its dr.cybear website. Andrx paid Cybear for such services. Cybear recorded $72
as Web development, hosting and other services revenue for the year ended
December 31, 2000 for such services. Management believes that the amounts billed
for these services approximate fair market value.
Management Services
Cybear and Andrx have a corporate services agreement whereby Andrx
provides Cybear with various management services. For the years ended December
31, 2000, 1999 and 1998, Cybear incurred amounts for these services based upon
mutually agreed upon allocation methods. Management believes that the amounts
incurred for these services approximate fair market value. Costs for such
services were $120 for each of the years ended December 31, 2000, 1999 and 1998.
Accounts Payable
Accounts payable to Andrx in Cybear Group's consolidated balance
sheets, represents amounts payable to Andrx for the purchase of the products
sold by Cybear and services provided by Andrx.
Tax Sharing Agreement
Andrx and Cybear have entered into a tax sharing agreement, as
supplemented, in connection with the Reorganization in September 2000 (see Note
10).
(20) Subsequent Events
On January 10, 2001, Andrx announced a stock for stock merger, wherein
Mediconsult.com, Inc. ("Mediconsult") will become a part of Cybear Group.
Mediconsult includes Physicians' Online (POL), a leading physician Internet
portal, as well as eMedEd, Mediconsult's on-line medical education service for
physicians. In addition to these services, physicians use Mediconsult to provide
on-line information to their patients through Mediconsult's MyDoctor.com
service. The agreement is contingent upon the consummation of certain agreements
that will restructure certain of Mediconsult's existing debt and otherwise
reduce much of Mediconsult's operating losses. The acquisition will be accounted
for using the purchase method of accounting. The transaction is subject to
certain closing conditions, and is expected to be completed in the second
quarter of 2001.
On February 12, 2001, Andrx announced that it has entered into a
definitive agreement with Medeva Pharmaceuticals Manufacturing, Inc. ("Medeva")
to acquire substantially all of the assets of Armstrong Pharmaceuticals, a
Medeva division based in West Roxbury, Massachusetts which manufactures
pharmaceutical aerosols, principally metered dose inhalers ("MDIs") and holds an
ANDA for Albuterol MDIs. The purchase price is $18,000 in cash, subject to
various closing adjustments and closing conditions. The acquisition will be
accounted for using the purchase method of accounting. The transaction is
subject to certain closing conditions, and is expected to be completed in late
March 2001.
In March 2001, Andrx agreed to furnish Cybear with a $12,000 line of
credit. The line of credit provides Cybear with the ability to begin drawing
cash once Cybear's cash balance falls below $3,000. Drawings will be subject to
certain covenants, will bear interest at a rate equal to prime plus 1% or Andrx'
cost of borrowing, whichever is greater, and shall be payable upon the
expiration of the line of credit on March 31, 2004.
In March 2001, Health Canada, Canada's health regulatory authority,
approved the sale of Andrx's bioequivalent version of Cardizem CD in Canada and
Rhoxalpharma, Inc., Andrx' licensee under a December 1997 agreement, commenced
the sale of this product.
111
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
Information regarding directors appearing under the caption "Election
of Directors" in the Andrx Proxy Statement for the 2001 Annual Meeting of
Stockholders is hereby incorporated by reference.
Information regarding executive officers is included in Part I of this
Form 10-K as permitted by General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the captions "Executive Compensation" in
the Andrx 2001 Proxy Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information setting forth the security ownership of certain beneficial
owners and management appearing under the caption "Beneficial Ownership" in the
Andrx 2001 Proxy Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain related transactions appearing under the
caption "Certain Transactions" in the Andrx 2001 Proxy Statement is hereby
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) Documents Filed as Part of this Report
112
(1) Reference is made to the Index to Financial
Statements included in Part II, Item 8 of this
Report.
(2) Financial Statement Schedules
Not Applicable
All other schedules for which provision is made in applicable
regulations of the SEC are omitted because they are not applicable or the
required information is in the Consolidated Financial Statements or notes
thereto.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.2 Agreement and Plan of Merger and Reorganization dated March
23, 2000 by and among Andrx Corporation, Cybear, Inc., New
Andrx Corporation, Andrx Acquisition Corp., and Cybear
Acquisition Corp(10)
3.1 Form of Registrant's Amended and Restated Certificate of
Incorporation(11)
3.2 Form of Registrant's Amended and Restated Bylaws(12)
4.1 Specimen Certificate of Andrx Corporation - Andrx Group Common
Stock(13)
4.2 Specimen Certificate of Andrx Corporation - Cybear Group
Common Stock(13)
10.1 Form of Stock Incentive Plan, as amended(1)*
10.2 Intentionally Deleted
10.3 Intentionally Deleted
10.4 Intentionally Deleted
10.5 Intentionally Deleted
10.6 Royalty Agreement between the Registrant and Chih-Ming J.
Chen(1)*
10.7 Form of Indemnification Agreement between the Registrant and
its officers and directors(1)*
10.8 Development and License Agreement dated as of June 28, 1993 by
and between Zenith Laboratories, Inc. and the Registrant(1)(3)
10.9 Technical Transfer Agreement dated as of July 30, 1993 by and
between Yung Shin Pharmaceutical Ind. Co. Ltd. and the
Registrant(1)(3)
10.11 Development and License Agreement dated as of November 10,
1993 by and between Mylan Pharmaceuticals, Inc. and the
Registrant(1)(3)
10.12 Development and License Agreement dated as of December 7, 1993
by and between Circa Pharmaceuticals, Inc. and the
Registrant(1)(3)
10.13 Development and License Agreement dated as of January 17, 1994
by and between Purzer Pharmaceutical Co., Ltd. and the
Registrant(1)(3)
113
EXHIBIT NO. DESCRIPTION
----------- -----------
10.14 Lease Agreement relating to premises located at 4001 SW 47th
Avenue, Ft. Lauderdale, Florida(1)
10.15 Lease Agreement related to premises located at 4011 SW 47th
Avenue, Ft. Lauderdale, Florida(1)
10.16 Lease Agreement relating to premises located at 3436
University Drive, Davie, Florida(1)
10.17 Loan and Security Agreement by and between Congress Financial
Corporation (Florida) and the Registrant, as amended(1)
10.18 ANCIRC General Partnership Agreement between Circa
Pharmaceuticals, Inc. and the Registrant, as amended(1)
10.19 Research and Development Services Agreement dated as of July
8, 1994 by and between ANCIRC and the Registrant, as
amended(1)
10.20 Manufacturing and Regulatory Approval Agreement dated as of
July 8, 1994 by and between Circa Pharmaceuticals, Inc. and
ANCIRC, as amended(1)
10.21 Distribution and Marketing Agreement dated as of July 8, 1994
between ANCIRC and the Registrant, as amended(1)
10.22 Patent and Know How License Agreement dated as of July 8, 1994
between ANCIRC and the Registrant, as amended(1)
10.23 Patent and Know How License Agreement dated as of July 8, 1994
between Circa Pharmaceuticals, Inc. and ANCIRC, as amended(1)
10.24 Securities Purchase Agreement dated as of July 8, 1994 between
the Registrant and Circa Pharmaceuticals, Inc.(1)
10.25 Securities Purchase Agreement dated as of August 17, 1995
between the Registrant and Circa Pharmaceuticals, Inc.(1)
10.26 Securities Purchase Agreement dated as of October 30, 1995
between the Registrant and Circa Pharmaceuticals, Inc.(1)
10.27 Development Agreement between Sepracor, Inc. and the
Registrant(1)(3)
10.28 Sixth Amendment to the Loan and Security Agreement by and
between Congress Financial Corporation (Florida) and
Registrant(4)
10.29 Employment Agreement between the Registrant and Angelo C.
Malahias(5)*
10.30 First Amendment to Lease Agreement relating to the premises
located at 3436 University Drive, Davie, Florida(5)
10.31 Third Addendum to Lease between the Registrant and New Town
Commerce Centre, Ltd., relating to the premises at 4011 S.W.
47th Avenue, Davie, Florida(6)
10.32 Fourth Addendum to Lease between the Registrant and New Town
Commerce Centre, Ltd., relating to the premises at 4011 S.W.
47th Avenue, Davie, Florida(6)
114
EXHIBIT NO. DESCRIPTION
----------- -----------
10.33 Fifth Addendum to Lease between the Registrant and New Town
Commerce Centre, Ltd., relating to the premises at 4011 S.W.
47th Avenue, Davie, Florida(6)
10.34 Lease by and between Registrant and New Town Commerce Center,
Ltd., relating to the premises located at 4111 S.W. 47th
Avenue, Davie, Florida(6)
10.35 Amendment to Royalty Agreement between the Registrant and
Chih-Ming J. Chen, Ph.D.(7)
10.36 Lease Agreement relating to premises located at 500 Blue Lake
Drive, Boca Raton, Florida(7)
10.37 Lease Agreement relating to premises located at 2915 Weston
Road, Weston, Florida(7)
10.38 Product Distribution, Development and Licensing Agreement
between Geneva Pharmaceuticals, Inc., the Global Generics
Sector of Norvartis AG and the Registrant.(3)(8)
10.39 Lease Agreement relating to premises located at 180 Passaic
Avenue, Fairfield, New Jersey(9)
10.40 Lease Agreement relating to premises located at 5000 Blue Lake
Drive, Suite 200, Boca Raton, Florida(9)
10.41 Second Amendment to Lease Agreement relating to premises
located at 5000 Blue Lake Drive, Suite 200, Boca Raton,
Florida(9)
10.42 2000 Stock Option Plan(11)*
10.43 Intentionally omitted
10.44 Intentionally omitted
10.45 Tax Sharing Agreement(12)
10.46 Intentionally omitted
10.47 Intentionally omitted
10.48 Intentionally omitted
10.49 Intentionally omitted
10.50 Lease Agreement Relating to Premises located at 4491 South
State Road 7, Suite #700, Ft. Lauderdale, Florida 33314(2)
10.51 Second Amendment to General Partnership Agreement regarding
ANCIRC(2)
10.52 CARAN General Partnership Agreement(2)
10.53 Lease Agreement Relating to Premises located at 2945 West
Corporate Lakes Boulevard, Weston, Florida(2)
115
EXHIBIT NO. DESCRIPTION
----------- -----------
10.54 Amendment to Tax Sharing Agreement(2)
10.55 Lease Agreement Relating to Premises located at 3040 Universal
Boulevard, Suite #150, Weston, Florida(2)
21.1 Subsidiaries of the Registrant(2)
23.2 Consent of Arthur Andersen LLP(2)
- -----------------------
* Management Compensation Plan or arrangement.
(1) Filed as an exhibit of the same number to Andrx Corporation's
Registration Statement on Form S-1 (File No. 333-03614) and
incorporated herein by reference.
(2) Filed herewith.
(3) A request for confidential treatment pursuant to Rule 406
under the Securities Act has been made and granted for certain
portions of this exhibit.
(4) Filed as an exhibit of the same number in Andrx Corporation's
Quarterly Report on Form 10-Q for the period ended September
30, 1996 and incorporated herein by reference.
(5) Filed as an exhibit of the same number in Andrx Corporation's
Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
(6) Filed as an exhibit of the same number in Andrx Corporation's
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
(7) Filed as an exhibit of the same number in the Andrx
Corporation's Quarterly Report on Form 10-Q for the period
ended September 30, 1998 and incorporated herein by reference.
(8) Filed as an exhibit of the same number in the Andrx
Corporation's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 and incorporated herein by reference.
(9) Filed as an exhibit to Cybear Inc.'s Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated
herein by reference.
(10) Filed as an exhibit of the same number in Andrx Corporation's
Annual Report on Form 10-K for the year ended December 31,
1999 and incorporated herein by reference.
(11) Filed as Annex C to Andrx Corporation's Registration Statement
on Form S-4 (File No. 333-54926).
(12) Filed as an exhibit of the same number to Andrx Corporation's
Registration Statement on Form S-4 (File No. 333-38226).
(13) Filed as an exhibit of the same number to Andrx Corporation's
Form 8-A12G.
(14) Filed as an exhibit of the same number to Andrx Corporation's
Registration Statement on Form S-4 (File No. 333-54926).
(B) Reports on Form 8-K
None
(C) Item 601 Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in
(A)(3) above
(D) Financial Statement Schedules
The Financial Statement Schedules required by Regulation S-K are set
forth in (A)(2) above
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANDRX CORPORATION
By: /s/ Alan P. Cohen
------------------------------------------------
Alan P. Cohen
Co-Chairman and Chief Executive Officer
By: /s/ Angelo C. Malahias
------------------------------------------------
Angelo C. Malahias
Vice President and Chief Financial Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Alan P. Cohen Co-Chairman, Chief Executive March 30, 2001
- --------------------------- Officer and Director
Alan P. Cohen (Principal Executive Officer)
/s/ Chih-Ming J. Chen, Ph.D. Co-Chairman, March 30, 2001
- ---------------------------- Chief Scientific Office
Chi-Ming J. Chen, Ph.D. and Director
/s/ Elliot F. Hahn, Ph.D. President and Director March 30, 2001
- ---------------------------
Elliot F. Hahn, Ph.D.
/s/ Angelo C. Malahias Vice President and March 30, 2001
- --------------------------- Chief Financial Officer
Angelo C. Malahias (Principal Financial and
Accounting Officer)
/s/ Lawrence J. DuBow Director March 30, 2001
- ---------------------------
Lawrence J. DuBow
/s/ Irwin C. Gerson Director March 30, 2001
- -------------------------------
Irwin C. Gerson
/s/ Timothy D. Nolan Director March 30, 2001
- -------------------------------
Timothy D. Nolan
/s/ Michael A. Schwartz, Ph.D. Director March 30, 2001
- ------------------------------
Michael A. Schwartz, Ph.D.
/s/ Melvin Sharoky, M.D. Director March 30, 2001
- ---------------------------
Melvin Sharoky, M.D.
117
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
----------- -----------
10.50 Lease Agreement Relating to Premises located at 4491 South
State Road 7, Suite #700, Ft. Lauderdale, Florida 33314
10.51 Second Amendment to General Partnership Agreement regarding
ANCIRC
10.52 CARAN General Partnership Agreement
10.53 Lease Agreement Relating to Premises located in Weston,
Florida
10.54 Amendment to Tax Sharing Agreement
10.55 Lease Agreement Relating to Premises located at 3040 Universal
Boulevard, Suite #150, Weston, Florida
21.1 Subsidiaries of the Registrant
23.2 Consent of Arthur Andersen LLP