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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
---------------
Commission file number 0-31475
ANDRX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-1013859
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
4955 ORANGE DRIVE
DAVIE, FLORIDA 33314
(Address of principal executive offices) (Zip Code)
(954) 584-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
[X] YES [ ] NO
The approximate number of shares outstanding of the issuer's common stock as of
November 3, 2003 is 72,030,000.
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ANDRX CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Page
Number
-------------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ANDRX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets -
as of September 30, 2003 (Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income -
for the three and nine months ended September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows -
for the nine months ended September 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21-49
Item 4. Controls and Procedures 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 5. Other Information 51
Item 6. Exhibits and Reports on Form 8-K 51
SIGNATURES 52
CERTIFICATIONS 53-55
This Form 10-Q contains trademarks held by Andrx Corporation and third parties.
2
ANDRX CORPORATION AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ANDRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 128,333 $ 35,521
Investments available-for-sale, at market value 82,012 61,873
Accounts receivable, net of allowance for doubtful accounts of $9,996 and $15,495
at September 30, 2003 and December 31, 2002, respectively 112,906 127,698
Inventories 170,678 140,625
Income taxes receivable -- 33,710
Deferred income tax assets 50,240 68,148
Prepaid and other current assets 28,479 32,360
--------- ---------
Total current assets 572,648 499,935
Property, plant and equipment, net 241,671 227,864
Goodwill, net 33,981 33,981
Other intangible assets, net 14,137 15,604
Other assets 11,183 12,095
--------- ---------
Total assets $ 873,620 $ 789,479
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 106,115 $ 80,671
Accrued expenses and other liabilities 148,401 127,416
--------- ---------
Total current liabilities 254,516 208,087
Deferred income tax liabilities 12,590 12,590
Obligations under capital leases and other liabilities 2,864 3,095
--------- ---------
Total liabilities 269,970 223,772
--------- ---------
Commitments and contingencies
Stockholders' equity
Convertible preferred stock; $0.001 par value, 1,000,000 shares authorized;
none issued and outstanding -- --
Common stocks:
Andrx Group common stock; $0.001 par value, 100,000,000 shares authorized;
issued and outstanding 72,030,000 shares and 71,501,000 shares
at September 30, 2003 and December 31, 2002, respectively 72 72
Cybear Group common stock; $0.001 par value, 12,500,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 495,656 487,928
Restricted stock units, net (8,748) (6,525)
Retained earnings 116,612 84,038
Accumulated other comprehensive income, net of income taxes 58 194
--------- ---------
Total stockholders' equity 603,650 565,707
--------- ---------
Total liabilities and stockholders' equity $ 873,620 $ 789,479
========= =========
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these unaudited condensed consolidated balance sheets.
3
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Distributed products $ 168,334 $ 133,020 $ 484,457 $ 381,567
Andrx products 74,489 53,391 199,600 163,697
Licensing and royalties 9,588 193 73,780 409
Other 2,688 2,418 6,817 7,210
------------ ------------ ------------ ------------
Total revenues 255,099 189,022 764,654 552,883
------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 170,196 178,405 500,922 434,810
Selling, general and administrative 55,055 51,751 168,747 139,495
Research and development 12,729 12,195 38,553 33,537
Litigation settlements and other charges -- -- 7,500 60,000
------------ ------------ ------------ ------------
Total operating expenses 237,980 242,351 715,722 667,842
------------ ------------ ------------ ------------
Income (loss) from operations 17,119 (53,329) 48,932 (114,959)
Other income (expense)
Equity in earnings of joint ventures 1,907 1,145 3,531 2,733
Interest income 503 1,221 1,600 4,456
Interest expense (661) (43) (1,957) (165)
Gain on sales of assets 191 109 773 4,623
------------ ------------ ------------ ------------
Income (loss) before income taxes 19,059 (50,897) 52,879 (103,312)
Provision (benefit) for income taxes 7,318 (17,813) 20,305 (43,407)
------------ ------------ ------------ ------------
Net income (loss) $ 11,741 $ (33,084) $ 32,574 $ (59,905)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
ANDRX GROUP COMMON STOCK:
Net income (loss) allocated to Andrx Group
(including Cybear Group commencing May 17, 2002) $ 11,741 $ (33,084) $ 32,574 $ (53,961)
Premium on Conversion of Cybear Group common stock -- -- -- (526)
------------ ------------ ------------ ------------
Total net income (loss) allocated to Andrx Group $ 11,741 $ (33,084) $ 32,574 $ (54,487)
============ ============ ============ ============
Net income (loss) per share of Andrx Group common stock:
Basic $ 0.16 $ (0.47) $ 0.45 $ (0.77)
============ ============ ============ ============
Diluted $ 0.16 $ (0.47) $ 0.45 $ (0.77)
============ ============ ============ ============
Weighted average shares of Andrx Group common stock
outstanding:
Basic 71,981,000 70,921,000 71,820,000 70,725,000
============ ============ ============ ============
Diluted 72,839,000 70,921,000 72,517,000 70,725,000
============ ============ ============ ============
CYBEAR GROUP COMMON STOCK:
Net loss allocated to Cybear Group (through May 17, 2002) $ (5,944)
Premium on Conversion of Cybear Group common stock 526
------------
Total net loss allocated to Cybear Group $ (5,418)
============
Basic and diluted net loss per share of
Cybear Group common stock $ (0.80)
============
Basic and diluted weighted average shares of
Cybear Group common stock outstanding 6,743,000
============
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these unaudited condensed consolidated statements.
4
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
---------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 32,574 $ (59,905)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 20,068 16,069
Provision for doubtful accounts 5,673 8,215
Gain on sales of assets (773) (4,623)
Asset writedowns at aerosol manufacturing operations 8,177 --
Compensation expense on amortization of restricted stock units 1,086 150
Distributions in excess of (undistributed) equity in earnings of joint ventures 580 (2,733)
Income tax benefits on exercises of Andrx Group stock options 1,252 3,536
Changes in operating assets and liabilities:
Accounts receivable, net 8,994 19,328
Inventories (33,048) 3,028
Prepaid and other assets (3,003) (4,264)
Income tax refund (payment) 51,695 (816)
Accounts payable and accrued expenses and other liabilities 46,300 (4,232)
--------- ---------
Net cash provided by (used in) operating activities 139,575 (26,247)
--------- ---------
Cash flows from investing activities:
Maturities (purchases) of investments available-for-sale, net (20,275) 106,749
Purchases of property, plant and equipment, net (29,285) (67,608)
Proceeds from sales of assets 250 1,550
--------- ---------
Net cash provided by (used in) investing activities (49,310) 40,691
--------- ---------
Cash flows from financing activities:
Proceeds from exercises of Andrx Group stock options 2,289 2,765
Proceeds from issuances of Andrx Group shares
under the employee stock purchase plan 879 1,513
Principal payments on capital lease obligations (621) (54)
--------- ---------
Net cash provided by financing activities 2,547 4,224
--------- ---------
Net increase in cash and cash equivalents 92,812 18,668
Cash and cash equivalents, beginning of period 35,521 62,311
--------- ---------
Cash and cash equivalents, end of period $ 128,333 $ 80,979
========= =========
Supplemental disclosure of cash paid (received) during the period for:
Interest $ 968 $ 168
========= =========
Income taxes $ (51,695) $ 816
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired through capital leases $ 1,234 $ 422
========= =========
Amounts classified as held-for-sale, net
Assets $ 6,169 $ --
========= =========
Liabilities $ 2,254 $ --
========= =========
Issuance of restricted stock units $ 3,309 $ 4,500
========= =========
Conversion of Cybear common stock into Andrx common stock $ -- $ 2,537
========= =========
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these unaudited condensed consolidated statements.
5
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
for each period include the condensed consolidated balance sheets, statements of
income and cash flows of Andrx Corporation and subsidiaries ("Andrx" or the
"Company"). All significant intercompany items and transactions have been
eliminated in consolidation. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted, as
permitted by SEC rules and regulations. However, in the opinion of management,
the disclosures contained herein are not misleading, and the unaudited condensed
consolidated financial statements reflect all material adjustments (which
include normal recurring adjustments) necessary to present fairly the Company's
unaudited financial position, results of operations and cash flows. The
unaudited results of operations for the three and nine months ended September
30, 2003 and cash flows for the nine months ended September 30, 2003, are not
necessarily indicative of the results of operations or cash flows that may be
expected for the remainder of 2003. The unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes thereto included in Andrx's Annual Report
on Form 10-K for the year ended December 31, 2002, and its quarterly reports on
Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003. The December
31, 2002 Condensed Consolidated Balance Sheet included herein was extracted from
the December 31, 2002 audited Consolidated Balance Sheet included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
In the third quarter of 2003 the Company determined that it had met the
plan of sale criteria in Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" and as
a result, the Unaudited Condensed Consolidated Balance Sheets as of September
30, 2003 and December 31, 2002 include assets and liabilities related to its
Massachusetts operations and its Physicians' Online web portal that have been
classified as "held-for-sale". Consequently, Other current assets include $6,169
and $20,243 of balances that have been classified as "held-for-sale" as of
September 30, 2003 and December 31, 2002, respectively. Accrued and other
liabilities include $2,254 and $2,202 of balances that have been classified as
"held-for-sale" as of September 30, 2003 and December 31, 2002, respectively.
The Company sold its Massachusetts operations in October 2003 (see Note 9) and
expects to divest itself of its POL web portal no later than end of the third
quarter of 2004.
EQUITY REORGANIZATION AND CONVERSION
On September 7, 2000, Andrx completed an equity reorganization (the
"Reorganization") whereby it acquired the outstanding equity of its Cybear Inc.
subsidiary ("Cybear") that it did not own, reincorporated in Delaware, and
created two new classes of common stock: (i) Andrx Group common stock ("Andrx
Common Stock") to track the performance of Andrx Group, and (ii) Cybear Group
common stock ("Cybear Common Stock") to track the performance of Cybear Group.
6
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
On May 17, 2002, each share of Cybear Common Stock was converted into
0.00964 of a share of Andrx Common Stock resulting in the issuance of
approximately 65,000 shares of common stock (the "Conversion"). The Conversion
included a 25% premium on the value of Cybear Common Stock as provided by the
terms of Andrx's Certificate of Incorporation. Subsequent to the Conversion,
Andrx has only one class of common stock outstanding.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The provisions of FIN 45 require
that a liability be recorded in the guarantor's balance sheet at fair value upon
issuance of a guarantee. The recognition provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. Adoption of the
provisions of FIN 45 had no impact on the Company's consolidated financial
statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". The provisions of SFAS No. 148 amend SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation, and to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS No. 148 does not amend SFAS No.
123 to require companies to account for their employee stock-based awards using
the fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair value method of accounting described in SFAS No. 123 or the
intrinsic value method described in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees." The disclosure requirements
of SFAS No. 148 are included herein. The Company currently intends to continue
to account for employee stock-based compensation in accordance with the
provisions of APB No. 25.
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB No. 25 and related
interpretations. Stock options are granted under those plans to employees or
members of the Board of Directors with an exercise price equal to the market
value of the underlying common stock on the date of grant. Accordingly, no
stock-based employee compensation expense is reflected in the Consolidated
Statements of Income for stock options. For restricted stock unit grants, the
fair value on the date of the grant is fixed and is amortized on a straight-line
basis over the related period of service and such amortization expense is
included in Selling, general and administrative ("SG&A") expenses.
7
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
The following table summarizes the pro forma consolidated results of
operations of Andrx as though the provisions of the fair value-based method of
accounting for employee stock-based compensation of SFAS No. 123 had been used:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
ANDRX GROUP 2003 2002 2003 2002
---------- ----------- ---------- ----------
Net income (loss) allocated to Andrx Group
(including Cybear Group commencing May 17, 2002)
As reported $ 11,741 $ (33,084) $ 32,574 $ (54,487)
Add: stock-based employee compensation expense included
in reported net income (loss), net of related tax effect 262 72 673 96
Deduct: total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effect (6,248) (4,960) (17,620) (15,695)
---------- ----------- ---------- ----------
Pro forma net income (loss) $ 5,755 $ (37,972) $ 15,627 $ (70,086)
========== =========== ========== ==========
Basic net income (loss) per Andrx Group common share
As reported $ 0.16 $ (0.47) $ 0.45 $ (0.77)
========== =========== ========== ==========
Pro forma $ 0.08 $ (0.54) $ 0.22 $ (0.99)
========== =========== ========== ==========
Diluted net income (loss) per Andrx Group common share
As reported $ 0.16 $ (0.47) $ 0.45 $ (0.77)
========== =========== ========== ==========
Pro forma $ 0.08 $ (0.54) $ 0.22 $ (0.99)
========== =========== ========== ==========
The fair value of Andrx stock options was estimated using the
Black-Scholes option pricing model and the following assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate 3.0% 3.3% 3.0% 2.9%
Average life of options (years) 6.0 7.5 5.5 6.4
Average volatility 76% 91% 88% 91%
Dividend yield -- -- -- --
The range of fair values per share of Andrx options as of the
respective dates of grant was $12.34 to $15.03, and $3.81 to $23.49, for stock
options granted during the three and nine months ended September 30, 2003,
respectively, and $17.99 to $18.75 and $14.19 to $36.68 for the three and nine
months ended September 30, 2002, respectively.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model, like all
option valuation models, requires highly subjective assumptions including
expected stock price volatility. As the Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the assumptions can materially affect the fair value estimate, in
management's opinion, the option pricing models do not necessarily provide a
reliable measure of the fair value of its employee stock options.
8
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
In June 2003, Andrx received approval from its stockholders to amend
the 2000 stock option plan (the "2000 Plan"). The 2000 Plan was amended, for
among other things, (i) to allow for the granting of restricted stock units,
stock appreciation rights, and other performance-based awards (collectively,
"Other Awards"), in addition to stock options and (ii) to prohibit option
re-pricing and the issuance of options at per share exercise prices less than
fair market value. Other Awards may not in the aggregate, exceed 1,500,000
shares of Andrx Common Stock. The June 2003 amendment did not affect the
12,000,000 shares authorized for issuance under the 2000 Plan, approved by
shareholders in September 2000.
January 1, 2002
Through
CYBEAR GROUP May 17, 2002
---------------
Net loss allocated to Cybear Group
As reported $(5,418)
Deduct: total stock-based employee compensation expense determined
under the fair value-based method for all awards (1,230)
-------
Pro forma $(6,648)
=======
Basic and diluted net loss per Cybear Group
common share
As reported $ (0.80)
=======
Pro forma $ (0.99)
=======
As no Cybear options were awarded during 2002, no related Black-Scholes
option pricing model assumptions are provided herein.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities". The provisions of FIN No. 46
clarify the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The provisions of FIN No. 46
require a variable interest entity ("VIE") to be consolidated by a company if
that company is subject to a majority of the risk of loss from the activities or
entitled to receive a majority of the entity's residual returns or both. The
provisions of FIN No. 46 also require disclosures about VIEs that the company is
not required to consolidate but in which it has a significant variable interest.
The consolidation requirements of FIN No. 46 apply immediately to VIEs created
after January 31, 2003, and to existing VIEs in the first interim or annual
period ending after December 15, 2003. The Company expects the adoption of the
provisions of FIN No. 46 will have no effect on its consolidated financial
statements, since the Company does not have any VIEs.
9
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
AMENDMENT OF SFAS NO. 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The provisions of SFAS
No. 149 amend and clarify financial accounting and reporting for derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The provisions of SFAS No. 149
are effective for contracts entered into or modified after June 30, 2003, except
under certain circumstances as contained in SFAS No. 149. Adoption of the
provisions of SFAS No. 149 had no effect on the Company's consolidated financial
statements, since the Company does not have any derivative financial instruments
and does not engage in hedging activities.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
provisions of SFAS No. 150 establish standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability or an asset in some circumstances. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and otherwise are effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of non-public entities and certain other
specific deferrals. Adoption of the provisions of SFAS No. 150 had no effect on
the Company's consolidated financial statements, since the Company does not have
any financial instruments with characteristics of both liabilities and equity.
REVENUE ARRANGEMENT WITH MULTIPLE DELIVERABLES
In May 2003, the Emerging Issues Task Force ("EITF") finalized EITF
00-21, "Revenue Arrangements with Multiple Deliverables". This pronouncement
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, this
issue addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. This pronouncement is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Adoption of the provisions of EITF 00-21 did not have any
effect on the Company's consolidated financial statements.
2. EARNINGS (LOSS) PER SHARE
As a result of the Reorganization, Andrx's operating results for the
period from January 1, 2002 through May 17, 2002, have been allocated to each
class of common stock. Subsequent to the May 17, 2002 Conversion, operating
results and basic and diluted net income (loss) per share of Andrx Common Stock
includes the operating results of Cybear.
10
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
ANDRX
For all periods presented, the shares used in computing basic net
income (loss) per share of Andrx Common Stock are based on the weighted average
number of shares of Andrx Common Stock outstanding and also include the vested
portion of restricted stock units. Diluted per share calculations for the 2003
periods include weighted average shares of common stock outstanding, as well as
dilutive common stock equivalents, which consist of stock options and unvested
restricted stock units as computed using the treasury stock method. For the 2003
periods, the anti-dilutive common stock equivalents include stock options and
the unvested portion of restricted stock units in which the exercise price or
the issuance price, respectively, exceeded the average market price for such
shares during the respective three and nine month periods. For the 2002 periods,
all potential shares, as well as unamortized restricted stock units, were
excluded from the diluted share computation as the Company reported a net loss
and, accordingly, such potential common shares were anti-dilutive.
A reconciliation of the denominators of basic and diluted earnings
(loss) per share of Andrx Common Stock is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic weighted average shares of common stock
outstanding 71,981,000 70,921,000 71,820,000 70,725,000
Effect of dilutive items:
Stock options and unvested restricted
stock units 858,000 -- 697,000 --
---------- ---------- ---------- ----------
Diluted weighted average shares of common stock
outstanding 72,839,000 70,921,000 72,517,000 70,725,000
========== ========== ========== ==========
Anti-dilutive common stock equivalents 4,119,000 4,241,000 5,001,000 3,611,000
========== ========== ========== ==========
CYBEAR
The shares used in computing net loss per share of Cybear Common Stock
were based on the weighted average shares of Cybear Common Stock outstanding for
the period from January 1, 2002 through May 17, 2002. As Cybear incurred a net
loss for such period, all Cybear Common Stock equivalents were excluded from the
Cybear diluted share computation, since the effects were anti-dilutive.
3. INVENTORIES AND COST OF GOODS SOLD
Inventories consist of the following:
September 30, December 31,
2003 2002
------------- ------------
Raw materials $ 38,777 $ 26,350
Work in process 17,422 7,505
Finished goods 114,479 106,770
-------- --------
$170,678 $140,625
======== ========
11
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
As of September 30, 2003, the Company had approximately $7,849 in
inventories, primarily raw materials, relating to products pending launch, while
the Company awaits receipt of final Food and Drug Administration ("FDA")
marketing approval and/or satisfactory resolution of patent infringement
litigation.
For the nine months ended September 30, 2003, the condensed
consolidated statement of income includes $12,759 in charges to cost of goods
sold related to the production of the Company's products and product
commercialization activities, including a provision of $5,723 related to
pre-launch production of Andrx's bioequivalent versions of Wellbutrin
SR(R)/Zyban(R) placed into production after December 31, 2002.
For the nine months ended September 30, 2003, the Company recorded
charges of $8,177, included in cost of goods sold, related to the writedown of
certain assets ($2,994 for inventories and $5,183 for property, plant and
equipment) of the Company's Massachusetts aerosol facilities. The Company also
recorded charges to cost of goods sold for the three and nine months ended
September 30, 2003 of $1,571 and $4,264, respectively, relating primarily to
under utilization and inefficiencies at the Company's Massachusetts aerosol
facilities. The Company sold its Massachusetts aerosol manufacturing operations
in October 2003. (See Note 9.) During the three and nine months ended September
30, 2003, Andrx also recorded charges to cost of goods sold of $1,081 and
$3,812, respectively, associated primarily with its manufacturing facilities in
Morrisville, North Carolina (which the Company is renovating) and in Davie,
Florida (related to under utilization and inefficiencies). Though the 2003 nine
month period also included charges related to Andrx's Weston, Florida
manufacturing facility, Andrx recently modified its plans and now intends to use
that facility for Research and Development ("R&D") and other non-commercial
operations. During the three and nine months ended September 30, 2002, cost of
goods sold included $2,267 and $6,739, respectively, related to excess
capacities at its Massachusetts aerosol facility and $1,147 and $4,283,
respectively, relating to under utilization and inefficiencies at its Davie,
Florida manufacturing facility.
4. LICENSING REVENUES
In October 2002, Andrx entered into an agreement with Genpharm Inc.
("Genpharm") and Kremers Urban Development Co. ("KUDCo"), pursuant to which
Andrx and Genpharm relinquished their marketing exclusivity rights to the 10mg
and 20mg strengths of Omeprazole (generic Prilosec(R)), thereby accelerating the
ability of KUDCo to receive final FDA marketing approval for its version of that
product, which KUDCo received on November 1, 2002. Licensing revenues from KUDCo
for the three and nine months ended September 30, 2003 are $8,290 and $71,176,
respectively. KUDCo estimates that licensing revenues to be earned by Andrx for
October 2003 will be approximately $1,859.
The licensing rate earned by Andrx from its agreement with KUDCo
decreased from 15% to 9% on June 9, 2003 per the terms of the related agreement.
Additional competition has resulted in reduced sales for KUDCo's version of
Prilosec, thereby reducing licensing revenues for Andrx, as a result of the
August 2003 launch of two additional bioequivalent versions of Prilosec and the
September 2003 launch of an over-the-counter ("OTC") version of Prilosec.
Additional competitors may enter the Prilosec marketplace before the end of
2003.
12
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
5. PROVISION (BENEFIT) FOR INCOME TAXES
For the three and nine months ended September 30, 2003, the Company
recorded provisions for income taxes of $7,318 and $20,305, respectively, or 38%
of income before income taxes. For the three and nine months ended September 30,
2003, 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. For the three and nine months ended September 30, 2002, the
Company recorded an income tax benefit of $17,813 and $43,407, or 35% and 42%,
respectively, of loss before income taxes. The income tax benefit for the nine
months ended September 30, 2002, included the reversal of a $7,249 valuation
allowance on deferred income tax assets related to certain net operating loss
carryforwards.
During the nine months ended September 30, 2003, the Company received
$51,695 from income tax refunds.
6. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ 11,741 $(33,084) $ 32,574 $(59,905)
Investments available-for-sale
Unrealized loss, net (74) (172) (213) (246)
Income tax benefit 28 63 77 91
-------- -------- -------- --------
(46) (109) (136) (155)
-------- -------- -------- --------
Comprehensive income (loss) $ 11,695 $(33,193) $ 32,438 $(60,060)
======== ======== ======== ========
7. BUSINESS SEGMENTS
See the Company's Form 10-K for the year ended December 31, 2002 for a
discussion of its business segments.
The following table represents unaudited financial information by
business segment:
As of or for the Three Months Ended
September 30, 2003
----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- --------- --------- ------------
Revenues $ 168,334 $ 72,587 $ 14,178 $ -- $ 255,099
Income (loss) from operations 12,145 29,882 (12,434) (12,474) 17,119
Equity in earnings of joint ventures -- 1,907 -- -- 1,907
Interest income -- -- -- 503 503
Interest expense -- -- 28 633 661
Gain on sales of assets -- -- 191 -- 191
Depreciation and amortization 789 3,525 1,228 871 6,413
Purchases (dispositions) of property,
plant and equipment, net 635 3,798 (220) 2,091 6,304
Total assets, end of period 241,560 305,155 74,484 252,421 873,620
13
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
As of or for the Three Months Ended
September 30, 2002
-----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- --------- --------- ------------
Revenues $ 133,020 $ 50,174 $ 5,828 $ -- $ 189,022
Income (loss) from operations 10,151 (33,578) (16,962) (12,940) (53,329)
Equity in earnings of joint ventures -- 1,145 -- -- 1,145
Interest income -- -- -- 1,221 1,221
Interest expense -- -- -- 43 43
Gain on sales of assets -- -- 109 -- 109
Depreciation and amortization 769 3,572 1,364 12 5,717
Purchases of property, plant and
equipment, net 4,612 17,639 86 740 23,077
Total assets, end of period 218,120 217,383 70,302 271,279 777,084
Nine Months Ended
September 30, 2003
------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- -------- --------- ------------
Revenues $484,457 $244,571 $ 35,626 $ -- $764,654
Income (loss) from operations 31,094 108,897 (49,238) (41,821) 48,932
Equity in earnings of joint ventures -- 3,531 -- -- 3,531
Interest income -- -- -- 1,600 1,600
Interest expense -- -- 96 1,861 1,957
Gain on sales of assets -- -- 773 -- 773
Depreciation and amortization 3,515 11,770 3,769 1,014 20,068
Purchases (dispositions) of property,
plant and equipment, net 3,741 23,238 (96) 2,402 29,285
Nine Months Ended
September 30, 2002
-----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
--------- --------- --------- --------- ------------
Revenues $ 381,567 $ 150,666 $ 20,650 $ -- $ 552,883
Income (loss) from operations 23,343 (2,408) (47,475) (88,419) (114,959)
Equity in earnings of joint ventures -- 2,733 -- -- 2,733
Interest income -- -- -- 4,456 4,456
Interest expense -- -- -- 165 165
Gain on sales of assets -- -- 4,623 -- 4,623
Depreciation and amortization 2,017 9,205 4,799 48 16,069
Purchases of property, plant and
equipment, net 11,196 54,862 296 1,254 67,608
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected the adequacy of the Company's allowance
for doubtful accounts receivable. Management determined that the Company's
provision for doubtful accounts receivable (included in SG&A) was understated
during 1999, 2000, 2001 and the first quarter of 2002, by the aggregate amount
of $4,902. The understatement to the allowance for doubtful accounts receivable
applicable to the unaudited three month period ended March 31, 2002 was $888, of
which $803 was attributable to the distributed products segment and $85 was
attributable to the bioequivalent products segment. After consideration of all
of the facts and circumstances, the Company recognized the entire $4,902 prior
period misstatement in the second quarter of 2002, as the Company believed it
was not material to any period affected.
14
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
8. LITIGATION AND CONTINGENCIES
For the nine month period ended September 30, 2003, the Company
recorded a charge of $7,500 related to various previously disclosed legal
claims, including a negotiated settlement of an obligation to one of the
Company's law firms with respect to Andrx's bioequivalent version of Tiazac(R).
The nine month period ended September 30, 2002, includes a litigation
settlements charge of $60,000 related to the Company's Cardizem(R) CD antitrust
litigation, as discussed below.
TIAZAC RELATED SECURITIES CLAIMS
Several securities fraud class action complaints were filed on or about
March 2002, alleging that Andrx and certain of its officers and directors
engaged in securities fraud and/or made material misrepresentations regarding
the regulatory status of the Company's ANDA for a bioequivalent version of
Tiazac. The amended class action complaint sought a class period for those
persons or institutions that acquired Andrx Common Stock from April 30, 2001,
through February 21, 2002. In November 2002, the U.S. District Court for the
Southern District of Florida granted in part Andrx's motion to dismiss the
amended consolidated class action complaint and determined that all but one of
the statements allegedly made in violation of the federal securities laws should
be dismissed as a matter of law. The Court's decision reduced the class period
to the six week period commencing January 9, 2002, and ending February 21, 2002.
The Court later granted Andrx's motion to strike all allegations of insider
trading from the complaint. Though the Company believes that the plaintiffs are
unlikely to prevail in their claims, an adverse judgment could have a material
adverse effect on the Company's business and consolidated financial statements.
WELLBUTRIN SR/ZYBAN RELATED SECURITIES CLAIMS
Seven putative securities fraud class action complaints have been filed
against Andrx and certain of its officers and directors for alleged violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5. These actions were consolidated and on October 20, 2003,
plaintiffs filed their consolidated class action complaint in the U.S. District
Court for the Southern District of Florida asserting a class period of March 1,
2002 through March 4, 2003. The complaint generally alleges that, during the
class period, Andrx made a series of misrepresentations and/or positive
statements regarding FDA approval of its generic Wellbutrin SR/Zyban product and
failed to disclose dating issues with respect to its product and product
inventory. Though the Company is not in a position to determine the ultimate
outcome of this litigation, an adverse judgment could have a material adverse
effect on the Company's business and consolidated financial statements.
15
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
CARDIZEM CD ANTITRUST LITIGATION
Beginning in August 1998, several putative class action lawsuits were
filed against Andrx and Aventis arising from a 1997 stipulation (the "1997
Stipulation") entered into between Andrx and Aventis S.A. ("Aventis") in
connection with a patent infringement suit brought by Aventis with regard to its
product, Cardizem CD. 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. 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 gave
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 cases, treble damages, as well as costs
and counsel fees, disgorgement, injunctive relief and other remedies. In June
2000, the District Court granted summary judgment to plaintiffs finding that the
1997 Stipulation was a per se violation of antitrust laws. On June 13, 2003, the
U.S. Court of Appeals for the Sixth Circuit affirmed the district court's
opinion finding that the 1997 Stipulation was a per se violation of the federal
antitrust laws. Andrx is considering its legal options, which include seeking
legal review by the U.S. Supreme Court.
On May 14, 2001, the State Attorneys General for the States of New York
and Michigan, joined by 13 additional states and the District of Columbia, filed
suit against Andrx and Aventis in the same federal court in which the above
described consolidated Cardizem CD antitrust class action litigation is being
conducted. The attorneys generals' suit is brought on behalf of their government
entities and consumers resident in their jurisdictions who allegedly were
damaged as a result of the 1997 Stipulation. Subsequently, an amended complaint
was filed adding 12 additional states and Puerto Rico to the action. The lawsuit
essentially reiterates the claims asserted against Andrx in the aforementioned
Cardizem CD antitrust class action litigation and seeks the same relief sought
in that litigation.
On July 26, 2001, Blue Cross Blue Shield of Michigan, joined by three
other Blue Cross Blue Shield plans (one in Minnesota and two in New York), filed
suit against Andrx and Aventis in the U.S. District Court for the Eastern
District of Michigan on behalf of themselves and as claim adjustors for their
self-funded customers to recover damages allegedly caused by the 1997
Stipulation. The complaint essentially repeats the claims asserted against Andrx
that are being litigated in the above-described consolidated Cardizem CD
antitrust class action litigation and seeks substantially the same relief sought
in that litigation.
In addition to the consolidated proceedings in the U.S. District Court
for the Eastern District of Michigan, there are two actions pending in state
courts in Florida, and two actions pending in state courts in Kansas. These
actions are currently stayed.
16
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
On November 26, 2002, the Court approved a settlement between the
direct purchasers and Andrx and Aventis. In October 2003, the Court approved a
settlement among the indirect purchasers, the attorneys general for all 50
states, the District of Columbia and Puerto Rico, Andrx and Aventis. Discovery
is still ongoing for the remaining group of litigants, including those who
timely chose to opt out of the settlements described above. If not settled,
Andrx anticipates that these matters may take several years to be resolved, but
an adverse judgment could have a material adverse effect on the Company's
business and consolidated financial statements. Andrx intends to vigorously
litigate any outstanding related cases that it cannot settle on a reasonable
basis.
ALPHARMA
On or about September 26, 2003, Alpharma USPD, Inc. ("Alpharma") filed
a complaint against Armstrong Pharmaceuticals ("Armstrong"), which was a
subsidiary of the Company, in the United States District Court for the Southern
District of New York for alleged breach of contract and negligent
misrepresentation arising from a recall of Epiniphrine Mist, a product
manufactured by Armstrong for Alpharma. In the complaint, Alpharma seeks to
recover $18,000 in damages for its breach of contract claim, $17,400 in damages
for its negligent misrepresentation claim and $50,000 in punitive damages. Andrx
disputes both the basis for liability and the amount of damages owed and
believes that at least part of the cause of the recall is attributable to
Alpharma. Andrx also believes that it is entitled to indemnification for at
least part of these claims from Medeva Pharmaceuticals Manufacturing, Inc., from
whom Andrx purchased Armstrong in March 2001. Andrx sold Armstrong in October
2003, but has agreed to indemnify the purchaser against certain potential
liabilities of Armstrong, including any liability arising out of the alleged
breach by Armstrong of its manufacturing agreement with Alpharma (see Note 9).
Though the Company is not in a position to determine the ultimate outcome of
this matter, an adverse outcome to this claim could have a material adverse
affect on the Company's business and consolidated financial statements.
CLARITIN D(R)-24 PATENT LITIGATION
In March 2000, Schering Plough Corporation ("Schering") filed suit
against Andrx in the United States District Court for the District of New Jersey
alleging that the Company's bioequivalent version of Claritin D-24 infringed
both a metabolite patent and a formulation patent. On August 8, 2002, the U.S.
District Court for the District of New Jersey entered an order granting Andrx's
Motion for Summary Judgment with respect to the metabolite patent (U.S. Patent
No. 4,659,716) and ruled that claims 1 and 3 of the metabolite patent were
invalid. On August 1, 2003, the U.S. Court of Appeals for the Federal Circuit
affirmed the district court's order finding that the claims asserted against
Andrx were invalid. Schering then moved for a rehearing, which was denied. As
such, unless Schering obtains certiorari from the U.S. Supreme Court, the
appellate court's decision on this patent is final. In October 2003, Andrx and
Schering reached a settlement dismissing the remaining patent issues in the
Claritin D-24 litigation, with prejudice, and Andrx received a license to the
formulation patent at issue in this litigation in exchange for a non-material
payment to Schering.
17
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
NAPRELAN(R) PATENT LITIGATION
In October 1998, Elan Corporation, plc ("Elan") filed suit against
Andrx in the U.S. District Court for the Southern District of Florida alleging
that the Company's bioequivalent version of Naprelan infringed its patent. On
March 14, 2002, the Court issued an order of final judgment in favor of Andrx,
invalidating the patent in issue. In March 2003, the U.S. District Court for the
Southern District of Florida issued an order denying Elan's motion for
reconsideration and its motion to amend and supplement the findings of fact and
also denying Andrx's motion asking the court for a ruling on its defenses of
non-infringement. Both Elan and Andrx have appealed the District Court's
decisions. Andrx has commenced selling its bioequivalent version of Naprelan.
Though the Company believes that Elan is unlikely to prevail in its claims of
infringement, a final court determination that Elan's patent is valid and that
the Andrx product infringes claims thereof could have a material adverse effect
on the Company's business and consolidated financial statements.
LEMELSON PATENT LITIGATION
On November 23, 2001, the Lemelson Medical, Education & Research
Foundation, LP filed an action in the United States District Court for the
District of Arizona alleging patent infringement against Andrx and others
involving "machine vision" or "computer image analysis." On March 20, 2002, the
Court entered an Order of Stay in the proceedings, pending the resolution of
another suit that involves the same patents, but does not involve Andrx. The
Company is not in a position to determine the ultimate outcome of this matter.
ENTEX(R) LINE OF PRODUCTS
On October 17, 2003, FDA issued a draft compliance policy guide with
respect to pharmaceutical products that are presently permitted to be on the
market and sold by prescription without an approved ANDA or New Drug Application
("NDA"), such as the Entex line of products. This draft guidance states that it
is intended to provide notice that once it approves a version of such product,
any unapproved drug product will be subject to FDA enforcement action at any
time, and that FDA will evaluate each product on a case-by-case basis. In
determining whether to permit a grace period, and how long such grace period
will be, FDA indicates that it will consider factors such as: (1) the effects on
the public health of immediate removal, (2) the difficulty of conducting any
required studies, and preparing and obtaining approval of an application, (3)
the burden on affected parties, (4) FDA's available enforcement resources, and
(5) any special circumstances. This guidance is only a draft, and FDA has
requested that comments be received by mid-December 2003. Andrx is continuing to
assess this matter, including whether to seek FDA approval for marketing some or
all of the Entex line of products as prescription products or OTC products and
the requirements imposed by FDA for NDA and ANDA submissions. Andrx will also
continue to periodically assess the unamortized portion of its Entex product
rights ($11,391 as of September 30, 2003) and Entex inventories ($35 as of
September 30, 2003) for any resulting impairment.
18
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
ALTOCOR(TM)
In May 2002, Kos Pharmaceuticals ("KOS") filed a notice of opposition
to Andrx's application for a registered trademark for Altocor alleging a
likelihood of confusion between their trademark, Advicor(R), and Altocor. On
August 13, 2003, KOS also filed a lawsuit against Andrx in the United States
District Court for the District of New Jersey seeking to enjoin Andrx from the
sale of its product under the Altocor name or to recover damages as a result
thereof. On September 18, 2003, the District Court denied KOS' motion for
preliminary injunction. KOS has appealed this decision to the U.S. Court of
Appeals for the Third Circuit. Though the Company believes that KOS is unlikely
to prevail in its claims, an adverse judgment could have a material adverse
effect on the Company's business and consolidated financial statements.
INSURANCE PROGRAMS
The Company maintains self-insured retentions and deductibles for some
of its insurance programs and limits its exposure to claims by maintaining
stop-loss and/or aggregate liability coverages. The estimate of the Company's
claims liability, which may be material, contains uncertainty since management
must use judgment to estimate the ultimate costs that will be incurred to settle
reported claims and unreported claims for incidents incurred but not reported as
of the balance sheet date. When estimating the Company's liability for such
claims, management considers a number of factors, including, but not limited to,
self-insured retentions, deductibles, historical claim experience, demographic
factors, severity factors and maximum claims exposure. If actual claims exceed
these estimates, additional charges may be required.
9. SUBSEQUENT EVENTS
SALE OF MASSACHUSETTS AEROSOL OPERATIONS
On October 9, 2003, Andrx entered into an agreement with Amphastar
Pharmaceuticals, Inc. ("Amphastar"), a California-based generic and specialty
pharmaceutical company, to sell Armstrong, its Massachusetts-based aerosol
manufacturing operations for $3,000. Andrx also agreed, under certain
circumstances, to continue to purchase certain minimum quantities of Albuterol
MDI (metered dose inhalers) manufactured in the Massachusetts facilities for at
least one year. The agreement with Amphastar contains customary terms and
conditions and includes Andrx's undertaking to indemnify Amphastar against
certain potential liabilities of the Massachusetts operations, including any
liability of that operation arising in connection with the claim (now a lawsuit)
by Alpharma for the alleged breach by Armstrong of its manufacturing agreement
with Alpharma. (See Note 8.) The Company estimates that any gain or loss
recorded from this transaction will not be material to the Company's
consolidated financial statements.
APPROVABLE LETTER RECEIVED FOR FORTAMET
In October 2003, FDA issued an approvable letter for Fortamet
(metformin extended-release) tablets, 500mg and 1000mg, Andrx's second
internally developed brand product. An approvable letter sets out the conditions
that a company must meet in order to obtain FDA final marketing approval. Andrx
believes it will address the requirements of the approvable letter before the
end of the fourth quarter of 2003, and that it will receive FDA approval and
otherwise be able to launch Fortamet in the first half of 2004.
19
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(in thousands, except share and per share amounts)
FDA APPROVES ANDA FOR CLARITIN REDITABS
In November 2003, FDA approved the marketing of the Company's ANDA for
loratadine orally disintegrating tablets 10mg, which are bioequivalent to
Schering's Claritin RediTabs. This product is labeled for the relief of symptoms
of seasonal allergic rhinitis (hay fever) and will be marketed by L. Perrigo
Company as an OTC product.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Andrx Corporation and subsidiaries ("Andrx" or the "Company"):
o develops and commercializes bioequivalent versions of
(i) controlled-release pharmaceutical products,
using its proprietary drug delivery
technologies, and
(ii) specialty, niche and immediate-release
pharmaceutical products, including oral
contraceptives,
o develops and commercializes brand name
pharmaceuticals where it believes that the
application of Andrx's drug delivery technologies may
improve the efficacy or other characteristics of
existing pharmaceutical products, and
o distributes pharmaceutical products manufactured by
third parties, primarily generics, to independent
pharmacies, pharmacy chains, pharmacy buying groups
and, to a lesser extent, physicians' offices.
EQUITY REORGANIZATION AND CONVERSION
On September 7, 2000, Andrx completed an equity reorganization (the
"Reorganization") whereby it acquired the outstanding equity of its Cybear Inc.
subsidiary ("Cybear") that it did not own, reincorporated in Delaware, and
created two new classes of common stock: (i) Andrx Group common stock ("Andrx
Common Stock") to track the performance of Andrx Group, and (ii) Cybear Group
common stock ("Cybear Common Stock") to track the performance of Cybear Group.
On May 17, 2002, each share of Cybear Common Stock was converted into
0.00964 of a share of Andrx Common Stock resulting in the issuance of
approximately 65,000 shares of common stock (the "Conversion"). The Conversion
included a 25% premium on the value of Cybear Common Stock as provided by the
terms of Andrx's Certificate of Incorporation. Subsequent to the Conversion,
Andrx has only one class of common stock outstanding.
FORWARD LOOKING STATEMENTS
Forward-looking statements (statements which are not historical facts)
in this release are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained herein or which are otherwise made by or on behalf of the Company 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," " plan," "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, including but not limited to, the Company's dependence
on a relatively small number of products; licensing revenues; the timing and
outcome of patent, antitrust and other litigation and future product launches;
whether the Company will be awarded any market exclusivity period and, if so,
the precise dates thereof; government regulation generally; competition;
manufacturing capacities and output; the Company's ability to develop and
successfully commercialize new products; the loss of revenues from existing
products; development and marketing expenses that may not result in commercially
successful products; Andrx's inability to obtain, or the high cost of obtaining,
licenses for third party technologies; commercial obstacles to the successful
introduction of brand products generally; exclusion of Andrx's brand products
from formularies; the consolidation or loss of customers; Andrx's relationship
to its suppliers; the success of Andrx's joint ventures; difficulties in
integrating, and potentially significant charges associated with, acquisitions
of technologies, products and businesses; the inability to
21
obtain sufficient supplies from key suppliers; the impact of returns, allowances
and chargebacks; product liability claims; rising costs and limited availability
of product liability and other insurance; the loss of key personnel; failure to
comply with environmental laws; and the absence of certainty regarding the
receipt of required regulatory approvals or the timing or terms of such
approvals. Andrx is also subject to other risks detailed herein or detailed from
time to time in its filings with the U.S. Securities and Exchange Commission
("SEC"), including, but not limited to, the Company's Annual Report on Form 10-K
for the year ended December 31, 2002 and Forms 10-Q for the quarters ended March
31, 2003 and June 30, 2003. Andrx disclaims any responsibility to update the
forward-looking statements contained herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of its consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including but not limited to, those related to:
o allowance for doubtful accounts receivable,
o inventories and cost of goods sold,
o sales returns and allowances,
o useful life or impairment of goodwill,
o useful life or impairment of other intangible assets,
o deferred income tax asset valuation allowance,
o licensing revenues and royalties,
o litigation settlements and related accruals, and
o insurance programs.
The Company bases its estimates on, among other things, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Estimates may differ if different assumptions or
conditions are utilized, and actual results may differ from these estimates.
The Company believes that the following critical accounting policies
reflect the more significant judgments and estimates used in the preparation of
its consolidated financial statements:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts receivable for
estimated losses resulting from the Company's inability to collect from
customers. As of September 30, 2003, the Company's net accounts receivable
totaling $112.9 million, include an allowance for doubtful accounts receivable
of $10.0 million. Accounts receivable generated from the Company's distribution
operations are principally due from independent pharmacies, pharmacy chains,
pharmacy buying groups and, to a lesser extent, physicians' offices. Accounts
receivable generated from the Company's bioequivalent and brand product sales
are principally due from large warehousing pharmacy chains, wholesalers and
large managed care customers. In extending credit, the Company attempts to
assess its ability to collect by, among other things, evaluating the customer's
financial condition, both initially and on an ongoing basis. Collateral is
generally not required. In evaluating the adequacy of its allowance for doubtful
accounts receivable, management primarily analyzes accounts receivable balances,
the percentage of accounts receivable by aging category, and historical bad
debts, and also considers, among other things, customer concentrations, customer
credit-worthiness, and changes in customer payment terms or payment patterns. If
the financial condition of the Company's
22
customers were to deteriorate, resulting in an impairment of their ability to
make payments or the Company's ability to collect, an increase to the allowance
may be required. Also, should actual collections of accounts receivable be
different than the Company's estimates included in the determination of its
allowance, the allowance would be increased or decreased through charges or
credits to Selling, general and administrative expenses ("SG&A") in the
Consolidated Statements of Income in the period in which such changes in
collection become known. If conditions change in future periods, additional
allowances or reversals may be required. Such additional allowances could be
significant.
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected the adequacy of the Company's allowance
for doubtful accounts receivable. Management determined that the Company's
provision for doubtful accounts receivable was understated during 1999, 2000,
2001 and the first quarter of 2002, by an aggregate amount of $4.9 million.
After consideration of all of the facts and circumstances, the Company
recognized the full $4.9 million prior period misstatement amount in the second
quarter of 2002, as the Company believed it was not material to any period
affected.
INVENTORIES AND COST OF GOODS SOLD
Inventories consist primarily of finished goods held for distribution,
and raw materials, work in process and finished goods of Andrx bioequivalent and
brand products. As of September 30, 2003, the Company had $170.7 million in
inventories. 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 incurred and reported
as SG&A in the Consolidated Statements of Income. In evaluating whether
inventories are stated at the lower of cost or market, management considers such
factors as the amount of inventory on hand and in the distribution channel, the
estimated time required to sell such inventory, remaining shelf life and current
and expected market conditions, including levels of competition for its
inventories held for distribution, the Company's right to return or exchange
such products with the products' manufacturer. As appropriate, provisions
through cost of goods sold are made to reduce inventories to their net
realizable value. If conditions change in future periods, additional provisions
may be required. Such additional provisions could be significant.
Andrx has made, is in the process of making and/or will scale-up and
make, commercial quantities of certain of its product candidates prior to the
date Andrx anticipates that such products will receive FDA final marketing
approval and/or satisfactory resolution of the patent infringement litigation
involving them (i.e., pre-launch inventory). Production of pre-launch
inventories involves the risk that such products may not be approved for
marketing by FDA on a timely basis, or ever, and/or that the outcome of related
litigation may not be satisfactory. This risk notwithstanding, Andrx may
continue to scale-up and build pre-launch inventories of certain products that
have not yet received final FDA approval and/or satisfactory resolution of
patent infringement litigation when it believes that such action is appropriate
in relation to the commercial value of its product launch opportunity. When an
exclusivity period is involved, this is a particularly difficult determination.
As of September 30, 2003, the Company had approximately $7.8 million of
inventories, primarily raw materials, pending final approval and/or satisfactory
resolution of patent infringement litigation.
23
In July 2003, the Company entered into an Exclusivity Transfer
Agreement ("Exclusivity Agreement") with Impax Corporation ("Impax") and a
subsidiary of Teva Pharmaceutical Industries Ltd ("Teva") pertaining to the
pending ANDAs for bioequivalent versions of Wellbutrin SR and Zyban 100mg and
150mg extended-release tablets filed by Andrx and by Impax. The Exclusivity
Agreement provides, among other things, that while Andrx will continue to seek
to launch its own versions of these ANDA products, if it is unable to do so
within a defined period of time, and Impax is able to market its ANDA products,
Andrx will enable Impax to launch the Impax products through Teva. Impax and
Teva will then share certain profits with Andrx relating to the sale of the
Impax products for a 180-day period. In connection with the Exclusivity
Agreement, the Company has made and will continue to make certain advances in
connection with Impax's preparation for the launch of their product. Upon launch
of their product by Teva, Impax will reimburse Andrx for these advances. As of
September 30, 2003, the Company advanced $7.1 million to Impax and such amount
is included in Prepaid and other current assets in the Unaudited Consolidated
Balance Sheet. These advances involve certain risks. In the event Andrx elects
to manufacture and market its own products, and as a result the Impax product
will no longer be saleable, Andrx will not be paid for such advances and will be
required to reimburse Impax and Teva for certain launch preparation and other
related costs that have been so affected. This risk notwithstanding, Andrx will
continue to make advances for the scale-up and manufacture of commercial
quantities under the Exclusivity Agreement.
For the three and nine months ended September 30, 2003, cost of goods
sold included $1.6 million and $4.3 million, respectively, relating primarily to
under utilization and inefficiencies at Andrx's Massachusetts aerosol
manufacturing facilities. As Andrx sold its Massachusetts aerosol manufacturing
operations on October 9, 2003, such charges will not be included in future
operating results.
During the three and nine months ended September 30, 2003, Andrx also
recorded charges to cost of goods sold of $1.1 million and $3.8 million,
respectively, associated with its manufacturing facilities in Morrisville, North
Carolina (which the Company is renovating) and in Davie, Florida (related to
under utilization and inefficiencies). The nine month period charges to cost of
goods sold also include expenses associated with its Weston, Florida facility,
which the Company now intends to use for R&D and other non-commercial
manufacturing operations. For the nine months ended September 30, 2003, cost of
goods sold also includes charges totaling $12.8 million for the production of
the Company's products and product commercialization activities, including a
provision of $5.7 million related to pre-launch production of Andrx's
bioequivalent versions of Wellbutrin SR/Zyban placed into production after
December 31, 2002. The Company is continuing to work on resolving the FDA and
USP issues that affect its ANDAs for bioequivalent versions of Wellbutrin
SR/Zyban.
SALES RETURNS AND ALLOWANCES
Allowances against net sales for estimated returns, chargebacks, and
other sales allowances are established by the Company concurrently with the
recognition of revenue. The allowances are included in the Company's Condensed
Consolidated Balance Sheets as either accounts receivable, net or in accrued
expenses and other liabilities, as appropriate, and are based upon consideration
of a variety of factors, including but not limited to, actual return experience
by product type, the number and timing of competitive products approved for sale
both historically and as projected, the market for the product, estimated
customer inventory levels by product and current and projected economic
conditions, levels of competition and price declines. Actual product returns,
chargebacks and other sales allowances incurred are dependent upon future
events. The Company periodically monitors the factors that influence sales
allowances and makes adjustments to these provisions when management believes
that actual product returns, chargebacks and other sales returns and allowances
may differ from established allowances. If conditions in future periods change,
additional allowances may be required. Such additional allowances could be
significant. Net sales of
24
the Company's bioequivalent and brand products may be affected by the Company's
estimated sales returns and allowances.
The pharmaceutical industry practice is generally to grant customers
the right to return or exchange purchased goods. In the generic pharmaceutical
industry, this practice has resulted in generic manufacturers issuing inventory
credits (also known as shelf-stock adjustments) to customers based on the
customers' existing inventory, following decreases in the market price of the
related generic pharmaceutical product. Shelf-stock adjustments occur
frequently, potentially in significant amounts. The determination to grant an
inventory credit to a customer following a price decrease is generally at the
discretion of the Company, and not pursuant to contractual arrangements with
customers. Accordingly, the Company makes significant accounting estimates,
including quantities shipped and still on customers' shelves, and price declines
before the products pull through the distribution channel. The Company accrues
an estimate for the sales allowances in the same period the sale is recognized
and periodically reviews such estimates. If conditions in future periods change,
additional allowances or reversals may be required. Such additional allowances
could be significant.
The Company has an arrangement with L. Perrigo Company ("Perrigo") for
the sale of the Company's version of Loratadine-D12, Loratadine-D24 and
Loratadine Quick Dissolve Tabs, that are bioequivalent to the related Claritin
family of brand products, as over the counter ("OTC") products. In June 2003,
Perrigo launched Andrx's OTC version of Claritin D-24. Under the terms of the
arrangement, Andrx will manufacture and Perrigo will package and market these
products, and the parties will share the net profits, as defined, from product
sales. Andrx recognizes revenue from such sales after Perrigo has shipped and
the customer has accepted the product, less estimates for product returns and
other customary allowances. The net profits reported by Andrx are subject to
numerous estimates by Perrigo such as returns and other sales allowances and
certain related expenses.
In its brand business, the Company must make significant estimates for
sales returns and allowances for its products. These estimates are dependent on
the Company's ability to promote to physicians, create demand for its products,
pull products through the distribution channel and estimate returns, future
levels of prescriptions for its products and the inventory levels in the
distribution channel. It is a common pharmaceutical industry practice for brand
manufacturers to offer customers, among other things, buy-in allowances on
initial purchases prior to promotion activities by the manufacturer. In
addition, the Company conducts a significant amount of its sales with a limited
number of large pharmaceutical wholesalers and warehousing pharmacy chains that
have a right to return or exchange product they purchased. In 2003,
approximately 60% of the brand product shipments were made to three customers.
Furthermore, as there are a limited number of large customers, these customers
can and do exert significant leverage on the Company relative to, among other
things, product returns and other concessions. As a result, the Company must
make significant accounting estimates related to sales allowances in connection
with the recognition of revenues, and periodically reviews such estimates. The
Company's policy is to recognize net sales to the extent it can reasonably
estimate returns and the product being pulled through the distribution channel.
If conditions change in future periods, additional allowances or reversals may
be required. Such additional allowances could be significant.
25
USEFUL LIFE OR IMPAIRMENT OF 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. As of September 30, 2003, the Company had approximately $34.0 million
of goodwill in the Unaudited Condensed Consolidated Balance Sheet consisting of
$26.3 million from the acquisition of CTEX Pharmaceuticals, Inc ("CTEX") in
January 2001 and $7.7 million from the acquisition of Valmed Pharmaceuticals,
Inc. ("Valmed") in March 2000. With the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 in 2002, goodwill is no longer amortized
and is subject to a periodic assessment, based on fair value, of whether there
is any impairment in the value of the acquired goodwill. This assessment is to
be performed at least annually, and the applicable impairment loss is the
amount, if any, by which the implied fair value of goodwill is less than the
carrying value. If conditions in future periods change, impairment charges may
be required. Such additional charges could be significant.
USEFUL LIFE OR IMPAIRMENT OF OTHER INTANGIBLE ASSETS
As of September 30, 2003, the Company had $14.1 million of other
intangible assets, net in the Unaudited Condensed Consolidated Balance Sheet,
which consisted primarily of $1.2 million related to patents for Andrx's
electronic prescription process, and $11.4 million, $1.5 million and $5,000 for
product rights related to the Entex, Anexsia(R) and Embrex(R) product lines,
respectively. Andrx's Physicians' Online ("POL") web portal and related
trademarks and patents relating to Andrx's electronic prescription process are
being amortized over periods ranging from four to 14 years. Brand product rights
purchased from other pharmaceutical companies or acquired through the allocation
of purchase price upon the acquisition of another entity are being amortized
over periods ranging from three to 10 years. Management established the
amortization period based on an estimate of the period that the assets would
generate positive cash flow. If conditions in future periods change, the Company
may be required to decrease the estimated amortization period. Amortization is
provided using the straight-line method over the estimated useful life.
Intangible assets are reviewed for change in useful life or impairment whenever
events or changes in circumstances have occurred that may warrant revision of
the estimated useful life or indicate that the carrying amount of an asset may
not be recoverable. If conditions in future periods change, impairment charges
may be required, which could be significant.
On October 17, 2003, FDA issued a draft compliance policy guide with
respect to pharmaceutical products that are presently permitted to be on the
market and sold by prescription without an approved ANDA or New Drug Application
("NDA"), such as Andrx's Entex line of products. This draft guidance states that
it is intended to provide notice that once FDA approves a version of such
product, any unapproved drug product will be subject to FDA enforcement action
at any time, and that FDA will evaluate each product on a case-by-case basis. In
determining whether to permit a grace period, and how long such grace period
will be, FDA indicates that it will consider factors such as: (1) the effects on
the public health of immediate removal, (2) the difficulty of conducting any
required studies, and preparing and obtaining approval of an application, (3)
the burden on affected parties, (4) FDA's available enforcement resources, and
(5) any special circumstances. This guidance is only a draft, and FDA has
requested that comments be received by mid-December 2003. Andrx is continuing to
assess this matter, including whether to seek FDA approval for marketing some or
all of the Entex line of products as prescription products or over-the-counter
("OTC") products and the requirements imposed by FDA for NDA and ANDA
submissions. Andrx will also continue to periodically assess the unamortized
portion of its Entex product rights ($11.4 million as of September 30, 2003) and
Entex inventories ($35,000 as of September 30, 2003) for any resulting
impairment.
26
DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE
Under the provisions of SFAS No. 109, "Accounting for Income Taxes",
the Company is required to record a valuation allowance to reduce its deferred
income tax assets to the amount that is more likely than not to be realized. As
of September 30, 2003, the Company had $50.2 million in deferred income tax
assets. As of September 30, 2003, the Company determined that no valuation
allowance was necessary on its deferred income tax assets after considering its
ability to utilize net operating losses, future taxable income projections and
ongoing prudent and feasible tax planning strategies. In the event the Company
was to determine that it would not be able to realize all or part of its
deferred income tax assets in the future, an adjustment to the deferred income
tax asset would be charged to the Consolidated Statements of Income in the
period such determination was made.
LICENSING REVENUES AND ROYALTIES
In October 2002, Andrx entered into an agreement with Genpharm Inc.
("Genpharm") and Kremers Urban Development Co. ("KUDCo"), pursuant to which
Andrx and Genpharm relinquished any marketing exclusivity rights to the 10mg and
20mg strengths of Omeprazole (generic Prilosec), thereby accelerating the
ability of KUDCo to receive final FDA marketing approval for its version of that
product, which KUDCo received on November 1, 2002. Pursuant to the agreement,
Andrx is entitled to receive:
o 15.0% of KUDCo's net profits, as defined in the agreement
("Net Profits"), through June 8, 2003,
o 9.0% of KUDCo's Net Profits from June 9, 2003 for
(i) approximately the next 12 months, or
(ii) until an appellate court decision, as defined in the
agreement, occurs, and
o 6.25% of KUDCo's Net Profits during approximately the next 24
months thereafter.
Such licensing fees may also cease if either Andrx or Genpharm becomes
lawfully permitted to launch their own bioequivalent version of Prilosec. Under
the agreement, KUDCo is required to provide Andrx with an estimate of Andrx's
licensing revenues for each month within 10 days subsequent to such month.
Payments are currently due to Andrx 60 days after the respective month end.
Based on the estimates received from KUDCo, Andrx recorded $8.3 million in
estimated licensing revenues in the third quarter of 2003. KUDCo estimates that
licensing revenues to be earned by Andrx for October 2003 will be approximately
$1.9 million. Future KUDCo licensing revenues will be dependent on a number of
factors, including, among other things, the applicable licensing rate (which
reduced from 15% to 9% on June 9, 2003), KUDCo's profits derived from its sales
of its generic Prilosec, which is primarily dependent on competition and per
unit selling prices, the outcome of the various litigations involving generic
Prilosec, the number of competitors in the Prilosec marketplace, pricing, an OTC
version of Prilosec and other market pressures and other factors outside of
Andrx's control. In August 2003, two additional companies launched their
bioequivalent versions of Prilosec, which reduced sales for KUDCo's
bioequivalent version of Prilosec and licensing revenues to Andrx. In September
2003, an OTC version of Prilosec was launched. Additional competitors may enter
the Prilosec marketplace before the end of 2003.
27
LITIGATION SETTLEMENTS AND RELATED ACCRUALS
The Company accounts for the exposure of its various litigation matters
under the provisions of SFAS No. 5 "Accounting for Contingencies", which
requires, among other things, an exposure to be accrued with a charge to Andrx's
Consolidated Statement of Income when it becomes probable and estimatable. No
accrual or disclosure of legal exposures judged to be remote is required. The
exposure to legal matters is evaluated and estimated, if possible, based on,
among other things, consultation with legal counsel. Such estimates are based on
currently available information and their ultimate outcome may be significantly
different than the amounts estimated given the subjective nature and
complexities inherent in these areas. The Company's disclosures related to
possible significant exposure for legal matters are included herein in Note 8 to
the Unaudited Condensed Consolidated Financial Statements.
The 2003 nine month period includes, among other things, a $7.5 million
charge relating to various previously announced legal claims, including the
negotiated settlement of an obligation to one of the Company's law firms with
respect to Andrx's bioequivalent version of Tiazac. For the nine months ended
September 30, 2002, in anticipation of potentially reaching a settlement on
certain litigation, Andrx recorded an estimated litigation settlement charge of
$60.0 million. This contingency became probable and estimatable in June 2002 as
a result of mediation discussions between the Company, Aventis S.A. ("Aventis")
and the various classes of plaintiffs in the Cardizem CD antitrust litigation
that was pending for multidistrict proceedings in the United States District
Court for the Eastern District of Michigan. In connection therewith, in July
2002, Andrx and Aventis entered into a settlement, which is now binding, with
the direct purchaser class of plaintiffs. In January 2003, Andrx and Aventis
entered into a settlement, which is now binding, with the indirect purchaser
class of plaintiffs, as well as with the attorneys general for all 50 states,
the District of Columbia and Puerto Rico. Discovery is still ongoing for the
remaining group of litigants, including those who timely choose to opt out of
the settlements described above. If not settled, Andrx anticipates that these
matters may take several years to be resolved, and an adverse judgment could
have a material adverse effect on the Company's business and consolidated
financial statements. The respective payments made or to be made by Andrx and
Aventis under these agreements have not been disclosed. Andrx intends to
vigorously litigate any outstanding related cases that it cannot settle on a
reasonable basis. Any portion of the accrued litigation settlements charge that
was not paid as of September 30, 2003, is included in Accrued expenses and other
liabilities in the September 30, 2003 Unaudited Condensed Consolidated Balance
Sheet.
INSURANCE PROGRAMS
The Company maintains self-insured retentions and deductibles for some
of its insurance programs and limits its exposure to claims by maintaining
stop-loss and/or aggregate liability coverages. The estimate of the Company's
claims liability, which may be material, contains uncertainty since management
must use judgment to estimate the ultimate costs that will be incurred to settle
reported claims and unreported claims for incidents incurred but not reported as
of the balance sheet date. When estimating the Company's liability for such
claims, management considers a number of factors, including, but not limited to,
self-insured retentions, deductibles, historical claim experience, demographic
factors, severity factors and maximum claims exposure. If actual claims exceed
these estimates, additional charges may be required.
28
ANDRX CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 ("2003 QUARTER") AS COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 2002 ("2002 QUARTER")
For the 2003 Quarter, the Company generated net income of $11.7
million, as compared to a net loss of $33.1 million for the 2002 Quarter.
REVENUES AND GROSS PROFIT
Three Months Ended
September 30,
(in thousands)
----------------------------------
2003 2002
--------- ---------
Distributed Products
Revenues $ 168,334 $ 133,020
Gross profit 29,999 26,245
Gross margin 17.8% 19.7%
Andrx Products - Bioequivalent
Revenues $ 62,339 $ 48,020
Gross profit (loss) 36,866 (15,917)
Gross margin (loss) 59.1% (33.1%)
Andrx Products - Brand
Revenues $ 12,150 $ 5,371
Gross profit 8,488 2,291
Gross margin 69.9% 42.7%
Andrx Products - Total
Revenues $ 74,489 $ 53,391
Gross profit (loss) 45,354 (13,626)
Gross margin (loss) 60.9% (25.5%)
TOTAL PRODUCT SALES
Revenues $ 242,823 $ 186,411
Gross profit 75,353 12,619
Gross margin 31.0% 6.8 %
LICENSING AND ROYALTIES
Revenues $ 9,588 $ 193
Gross margin 100.0% 100.0%
OTHER
Revenues $ 2,688 $ 2,418
Gross profit (loss) (38) (2,195)
Gross margin (loss) (1.4%) (90.8%)
TOTAL REVENUES
Revenues $ 255,099 $ 189,022
Gross profit 84,903 10,617
Gross margin 33.3% 5.6%
29
DISTRIBUTED PRODUCTS
Revenues from distributed products increa