U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File No. 0-26389
CYBEAR, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3936988
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Blue Lake Drive, Suite 200
Boca Raton, Florida 33431
- ------------------------------- ----------
(Address of principal (Zip Code)
executive offices
(561) 999-3500
--------------
(Registrant's telephone number, including area code)
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 [ ]
As of November 2, 1999, there were 17,650,912 shares of the
Registrant's only class of common stock issued and outstanding.
<PAGE>
CYBEAR, INC.
INDEX TO THE FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
as of September 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Operations -
for the three and nine months ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
CYBEAR, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYBEAR, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,635,207 $ 3,983
Investments available-for-sale 37,878,850 --
Investment interest receivable 1,107,230 --
Accounts receivable, net of allowance of $5,000
as of September 30, 1999 139,018 --
Receivable from Blue Lake Ltd. -- 366,000
Prepaid expenses and other current assets 888,166 194,385
------------ ------------
Total current assets 46,648,471 564,368
Property and equipment, net 3,747,302 2,406,629
Product development costs, net 351,028 358,000
Goodwill, net 3,931,914 --
Other assets 892,175 2,954
------------ ------------
Total assets $ 55,570,890 $ 3,331,951
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 604,386 $ 1,153,059
Accrued liabilities 780,867 301,782
Due to Andrx Corporation -- 2,344,727
------------ ------------
Total current liabilities 1,385,253 3,799,568
------------ ------------
Commitments and contingencies (Note 9)
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.001 par value; 25,000,000 shares
authorized, 17,648,412 shares issued and outstanding
at September 30, 1999 and 13,269,400 shares issued
and outstanding at December 31, 1998 17,648 13,269
Additional paid-in-capital 64,797,287 3,558,695
Accumulated deficit (10,547,761) (4,039,581)
Unrealized loss on investments available-for sale (81,537) --
------------ ------------
Total shareholders' equity (deficit) 54,185,637 (467,617)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 55,570,890 $ 3,331,951
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these balance sheets.
3
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Subscription and other $ 91,369 $ -- $ 118,540 $ --
------------ ------------ ------------ ------------
Operating expenses:
Network operations and operations support 774,873 121,226 2,198,031 248,712
Product development 988,392 391,974 2,184,628 1,126,388
Sales and marketing 1,203,329 136,002 2,767,673 395,276
General and administrative 601,188 307,806 1,917,158 462,391
Depreciation and amortization 360,619 34,336 850,710 89,634
------------ ------------ ------------ ------------
Total operating expenses 3,928,401 991,344 9,918,200 2,322,401
------------ ------------ ------------ ------------
Loss from operations (3,837,032) (991,344) (9,799,660) (2,322,401)
Other income (expense):
Interest expense on due to Andrx Corporation -- (65,610) (216,182) (145,259)
Interest income 633,842 -- 683,593 --
------------ ------------ ------------ ------------
Loss before income taxes (3,203,190) (1,056,954) (9,332,249) (2,467,660)
Income tax benefit -- -- 2,824,069 --
------------ ------------ ------------ ------------
Net loss $ (3,203,190) $ (1,056,954) $ (6,508,180) $ (2,467,660)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.19) $ (0.08) $ (0.44) $ (0.19)
============ ============ ============ ============
Basic and diluted weighted average shares
of common stock outstanding 17,311,421 13,000,000 14,734,744 13,000,000
============ ============ ============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these statements.
4
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,508,180) $ (2,467,660)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 850,710 89,634
Write-off of capitalized product development costs 50,372 --
Write-off of property and equipment 19,100 --
Loss on sale of property and equipment 16,408 --
Changes in operating assets and liabilities:
Investment interest receivable (1,107,230) --
Accounts receivable (82,758) --
Receivable from Blue Lake Ltd. 366,000 --
Prepaid expenses and other current assets (693,781) (135,572)
Other assets (841,249) 10,269
Accounts payable (592,822) 173,493
Accrued liabilities 479,085 85,710
------------ ------------
Net cash used in operating activities (8,044,345) (2,244,126)
------------ ------------
Cash flows from investing activities:
Purchases of investments available-for-sale, net (37,960,387) --
Purchases of property and equipment (1,973,938) (196,279)
Product development costs (119,667) (70,000)
Acquisition of Telegraph Consulting Corporation (1,176,424) --
Proceeds from sale of property and equipment 5,450 --
------------ ------------
Net cash used in investing activities (41,224,966) (266,279)
------------ ------------
Cash flows from financing activities:
Advances from Andrx Corporation, net of Andrx's utilization
of Cybear's tax attributes 5,101,466 2,510,405
Repayment of bank loan (136,347) --
Net proceeds from public share offering 50,778,166 --
Proceeds from exercises of stock options 157,250 --
------------ ------------
Net cash provided by financing activities 55,900,535 2,510,405
------------ ------------
Net increase in cash and cash equivalents 6,631,224 --
Cash and cash equivalents, beginning of period 3,983 1,000
------------ ------------
Cash and cash equivalents, end of period $ 6,635,207 $ 1,000
============ ============
Supplemental disclosure of non-cash activities:
Conversion of due to Andrx Corporation into shares of common stock $ 7,446,193 $ --
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these statements.
5
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared by Cybear, Inc. ("Cybear" or the
"Company"), an approximately 74% owned subsidiary of Andrx Corporation
("Andrx") as of September 30, 1999, 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 generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations. However, management believes
that the disclosures contained herein are adequate to make the information
presented not misleading. The unaudited consolidated financial statements
reflect, in the opinion of management, all material adjustments (which include
only normal recurring adjustments) necessary to present fairly the Company's
unaudited financial position and results of operations. The unaudited
consolidated results of operations for the three and nine months ended September
30, 1999 and the unaudited consolidated cash flows for the nine months ended
September 30, 1999, are not necessarily indicative of the results of operations
or cash flows which may be expected for the remainder of 1999. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes for the year ended December
31, 1998, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Certain prior period amounts have been reclassified to conform to the
current periods presentation.
(2) REGISTRATION STATEMENT
In June 1999, the Company successfully completed the public offering of
3,450,000 shares of its common stock, raising approximately $50.8 million in net
proceeds.
(3) ACQUISITION
On September 17, 1999, the Company acquired Telegraph Consulting
Corporation ("Telegraph"), the programming, networking and interactive design
division of Telegraph New Technology, Inc. The purchase price of approximately
$4.1 million included $1.2 million in cash, the issuance of 320,000 shares of
Cybear unregistered common stock valued at approximately $2.8 million and the
assumption of approximately $148,000 of Telegraph's debt. The acquisition was
recorded using the purchase method of accounting. The excess of the purchase
price over the fair value of the net assets acquired represents goodwill of
approximately $3.9 million. The goodwill is being amortized on a straight-line
basis over its estimated useful life of 10 years. The following summarizes the
acquisition:
Cash used for acquisition $ 1,176,424
Common stock issued 2,771,000
Debt assumed 148,347
-----------
Purchase price 4,095,771
Working capital acquired (24,111)
Property and equipment acquired (124,529)
-----------
Goodwill $ 3,947,131
===========
6
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
The results of Telegraph have been included in the accompanying
unaudited consolidated financial statements since the acquisition date. The
following unaudited pro forma information presents the consolidated results of
operations of Cybear and Telegraph as if the acquisition had occurred at the
beginning of each period presented:
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ -----------
Revenues $ 960,615 $ 832,000
============ ===========
Net loss $ (6,941,566) $(2,756,104)
============ ===========
Basic and diluted net loss per share $ (0.46) $ (0.21)
============ ===========
Such pro forma information has been prepared for comparative purposes
only and is not necessarily indicative of what the consolidated results of
operations of Cybear and Telegraph would have been had the acquisition been made
at the beginning of the periods presented, nor is it necessarily indicative of
the consolidated results of Cybear and Telegraph subsequent to the acquisition.
(4) INVESTMENTS AVAILABLE-FOR-SALE
The Company utilizes the provisions of Financial Accounting Standards
Board ("FASB") Statement on 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,
or (iii) available-for-sale securities. The Company classifies its investments
as available-for-sale and, accordingly, any unrealized gain or loss is reported
as a separate component of shareholders' equity. The cost related to investments
available-for-sale is determined utilizing the specific identification method.
(5) REVENUE RECOGNITION
Revenues for the three and nine months ended September 30, 1999 include
subscriptions to the Company's Physician Practice Portal product, web site
development and maintenance services and e-commerce. Subscription and web site
development and maintenance revenues are earned when the Company's services are
provided. E-commerce revenues are earned when the products are shipped. The
Company has entered into certain agreements with medical organizations (see Note
9) to provide the Company's subscription services to the organizations' members
in exchange for various consulting services. Certain of these agreements result
in a net cash outflow. Such agreements with net cash outflows were reflected as
barter revenue in the three and six months ended June 30, 1999 pending further
evaluation as previously reported. In the three months ended September 30, 1999,
the Company further evaluated such agreements and reversed revenues of $25,000
recognized in the three and six months ended June 30, 1999 relating to such
agreements.
7
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Revenues recorded in the three and nine month periods ended September
30, 1999 consist of the following:
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Subscription $ 81,084 $ 83,255
Reversal of previous period revenues (25,000) --
Web site development and maintenance 23,153 23,153
E-commerce 12,132 12,132
--------- ---------
$ 91,369 $ 118,540
========= =========
Subscription revenues for the three and nine months ended September 30,
1999 include $57,000 from one medical organization.
Subscription revenues for the three and nine months ended September 30,
1999 include $19,311 from Andrx (see Note 10). In September 1999, Cybear started
providing subscriptions to its Physician Practice Portal product to certain of
Andrx customers at the standard monthly rate of $24.95 per subscriber. Andrx
pays for such subscription services on behalf of its customers.
(6) INCOME TAXES
Cybear's taxable results will be included in the consolidated income
tax return of Andrx as long as Andrx owns at least 80% of the common stock of
Cybear. Cybear and Andrx have a tax allocation agreement that provides, among
other things, for the allocation of Federal income tax liabilities or benefits
to Cybear at the approximate amounts which would have been computed as if the
Company had filed separate income tax returns. Cybear's taxable results through
the completion of the public offering (see Note 2) will be 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,
Cybear will now file its income tax returns separately. For the three months
ended September 30, 1999, Cybear did not record any income tax benefit as
Andrx's ownership in Cybear was below 80% and Cybear generated net operating
loss carryforwards. Under the provisions of SFAS No. 109, "Accounting for Income
Taxes", Cybear has provided a valuation allowance to reserve against 100% of its
net operating loss carryforwards due to its history of net losses. For the nine
months ended September 30, 1999, Cybear recorded $2,824,069 in income tax
benefit. The income tax benefit reflects the reimbursement from Andrx for the
utilization of Cybear's tax attributes pursuant to the tax allocation agreement.
For the three and nine months ended September 30, 1998, Cybear did not record
any income tax provision or benefit as Andrx could not utilize Cybear's tax
attributes.
(7) NET LOSS PER SHARE
For all periods presented, basic and diluted net loss per share is
based on the weighted average number of shares of common stock outstanding.
Since the effect of common stock equivalents was antidilutive, all such
equivalents were excluded in the computation of diluted net loss per share.
Common equivalent shares consist of the incremental common shares issuable upon
exercise of stock options and warrants using the treasury stock method. There
were 1,648,708 and 470,500 options and warrants outstanding at September 30,
1999 and 1998, respectively, that could potentially dilute earnings per share in
the future.
8
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(8) COMPREHENSIVE LOSS
The components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,203,190) $(1,056,954) $(6,508,180) $(2,467,660)
Unrealized loss on investments available-for-sale (81,537) -- (81,537) --
----------- ----------- ----------- -----------
Comprehensive loss $(3,284,727) $(1,056,954) $(6,589,717) $(2,467,660)
=========== =========== =========== ===========
</TABLE>
(9) COMMITMENTS
In May 1999, the Company entered into a one-year agreement with Genesis
Health Ventures, Inc. ("Genesis"). Pursuant to the agreement, Genesis will
provide Cybear with certain consulting services. In addition, Genesis will
promote the installation and use of Cybear's Physician Practice Portal product
to 500 of its provider physicians. In consideration thereof, Cybear is paying
Genesis $150,000 for the consulting services with $50,000 payable on the date of
the agreement and $25,000 at the end of each quarter thereafter provided that
its Physician Practice Portal product is installed and used by an additional 125
Genesis providers each quarter. In addition, Cybear will provide its Physician
Practice Portal product to the Genesis providers with no monthly subscription
fee during the term of the agreement. For the three and nine months ended
September 30, 1999, Cybear recorded $37,500 and $50,000, respectively, in
consulting expense relative to this agreement.
In May 1999, Cybear entered into a five-year renewable consulting
agreement with Innovative Clinical Solutions, Ltd. formerly known as PhyMatrix
Management Company, Inc. ("PhyMatrix") superceding the previous three-year
agreement entered in February 1999. In exchange for a $1 million consulting fee
to be paid by Cybear, PhyMatrix will make reasonable good faith efforts to cause
healthcare professionals employed by or any medical practice managed by or
affiliated with PhyMatrix to subscribe to Cybear's Physician Practice Portal
product, to market Cybear's Physician Practice Portal product to others, and to
present Cybear with potential advertisers. PhyMatrix also agreed to pay Cybear
$600,000 representing 24 subscription months for the first 1,000 subscribers
obtained from PhyMatrix. In addition, Cybear and PhyMatrix will share revenues
generated from subscribers and advertisers provided by PhyMatrix. In June 1999,
Cybear paid PhyMatrix $500,000 of the $1 million consulting fee and recorded the
payment to other assets. Cybear is expensing this other asset at a monthly rate
of $41,667 over 24 months. For the three and nine months ended September 30,
1999, Cybear recorded $125,000 and $166,667, respectively, in marketing expense
related to this other asset. For the three and nine months ended September 30,
1999, Cybear also recorded a reduction to its marketing expense totaling $75,000
and $100,000, respectively, representing three and four subscription months,
respectively, for the first 1,000 subscribers obtained from PhyMatrix.
9
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
On June 1, 1999, the Company entered into an agreement with Cox
Interactive Media, Inc. ("CIMedia"), an operator of web sites and other online
and interactive services in over 20 cities in the U.S. The agreement has a
25-month term beginning on June 1, 1999, and may be extended by mutual
agreement. Under the terms of the agreement, beginning on September 1, 1999
Cybear is providing healthcare-related content for health channels that CIMedia
is including on its web sites. Additionally, the Company's products will be
advertised on the CIMedia web sites. The Company is paying to CIMedia a fee of
$3,625,000 in monthly installments during the term of the agreement in exchange
for CIMedia's implementing, updating and maintaining the Internet portal box on
CIMedia's health channels and for advertising services CIMedia is providing to
the Company. These monthly installments are recorded to other assets and are
being expensed at a monthly rate of $164,773 beginning in September 1999 over
the remaining term of this agreement. For the three and nine months ended
September 30, 1999, Cybear made payments to CIMedia of $435,000 and $645,000,
respectively, and has expensed $164,773.
On August 20, 1999, the Company entered into a partnership with
HealthAtoZ.com to supply health news, information and personalized content for
its consumer health site also accessible through CIMedia's new health channels.
The agreement has a 12-month term and may be extended by Cybear for an
additional 12-month term. Under the terms of the agreement, the Company will
share with HealthAtoZ.com 50% of its net advertising and e-commerce revenue
derived from the co-branded site. In September 1999, Cybear paid HealthAtoZ.com
$309,210 to cover the cost of developing, updating and maintaining the
co-branded site and recorded the payment to prepaid expenses. Cybear is
expensing this payment at a monthly rate of $25,768 over 12 months and therefore
recorded $25,768 in expense for the three and nine months ended September 30,
1999.
In September 1999, the Company amended its lease with Blue Lake Ltd. to
expand the leased premises by 16,420 square feet starting April 1, 2000. This
will increase the annual base rent to $490,316 excluding taxes, insurance,
utilities and common area maintenance charges starting on April 1, 2000. In
addition, the lease term was extended to March 31, 2007.
In September 1999, the Company entered into a partnership with Health
Paradigm Advisors ("HPA"), a Medical Services Organization in the northeast
U.S., to co-market Cybear's intranet services to 45,000 physicians served by
HPA. In exchange for marketing Cybear's product to its members, Cybear issued a
warrant to purchase up to 75,000 shares of its common stock to Summit Health
Administrators, Inc., an HPA's affiliate company, at $14.41, which was the
average closing trading price for the 60 day period immediately preceding the
execution of the agreement. The warrant will be exercisable only in the event
Cybear achieves certain paid subscription objectives among HPA's membership. In
addition, Cybear has agreed to pay HPA a one-time marketing fee of $97,500 and
volume rebates of up to $750,000 when Cybear achieves certain paid subscription
objectives among HPA's membership. For the three and nine months ended September
30, 1999, no expenses were recorded relative to this agreement.
(10) RELATED PARTY TRANSACTIONS
In September 1999, the Company started providing subscriptions to its
Physician Practice Portal product to certain of Andrx customers at the standard
monthly rate of $24.95 per subscriber. Andrx pays for such subscription services
on behalf of its customers. Revenues generated from such services were $19,311
for both the three and nine months ended September 30, 1999 and were included in
accounts receivable on the Company's consolidated balance sheet as of September
30, 1999.
10
<PAGE>
CYBEAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Beginning in September 1999, Cybear entered into an arrangement with
Andrx for the sale of products to physician offices on orders placed through
Cybear's Physician Practice Portal product. Andrx purchases, warehouses and
distributes the products to the physician offices and charges Cybear for these
services. Management believes that the amounts incurred for these services
approximate fair market value. For the three and nine months ended September 30,
1999, Cybear recorded product sales of $12,132 under such arrangement. Costs
incurred for the services provided by Andrx were $2,701 for the three and nine
months ended September 30, 1999.
The Company and Andrx have a corporate services agreement whereby Andrx
provides the Company with various services of its management. For the three and
nine months ended September 30, 1999 and 1998, the Company 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 $30,000 for both the three months ended
September 30, 1999 and 1998, respectively, and $90,000 for both the nine months
ended September 30, 1999 and 1998, respectively.
Cybear's taxable results will be included in the consolidated income
tax return of Andrx as long as Andrx owns at least 80% of the common stock of
Cybear. The Company and Andrx have a tax allocation agreement that provides,
among other things, for the allocation of Federal income tax liabilities or
benefits to the Company at the approximate amounts which would have been
computed as if the Company had filed separate income tax returns. For the three
months ended September 30, 1999, Cybear did not record any income tax benefit as
Andrx's ownership in Cybear was below 80% and Cybear generated net operating
loss carryforwards. Under the provisions of SFAS No. 109, the Company has
provided a valuation allowance to reserve against 100% of its net operating loss
carryforwards due to its history of net losses. For the nine months ended
September 30, 1999, Cybear recorded $2,824,069 in income tax benefit reflecting
the reimbursement from Andrx for the utilization of Cybear's tax attributes
pursuant to the tax allocation agreement. For the three and nine months ended
September 30, 1998, Cybear did not record any income tax provision or benefit as
Andrx could not utilize Cybear's tax attributes (see Note 6).
Due to Andrx in the accompanying balance sheet as of December 31, 1998,
represented advances from Andrx to fund the Company's operations and the related
accrued interest. Such advances bore interest at prime plus 1/2%. Upon
completion of the public offering in June 1999 (see Note 2), Andrx converted its
advances due from Cybear, net of the reimbursement for tax attributes described
above, to Cybear's capital in exchange of 465,387 shares of Cybear common stock
at the public offering price of $16.00 per share. The Company did not receive
any advances from Andrx during the three months ended September 30, 1999 and
consequently did not record any related interest expense for that period. The
Company recorded $216,182 in interest expense on the Due to Andrx for the nine
months ended September 30, 1999, and $65,610 and $145,259 for the three and nine
months ended September 30, 1998, respectively.
The Company subleases 4,000 square feet of office space in
Ridgefield Park, New Jersey from Strategy Business and Technology Solutions,
LLC, a company owned by the chairman of the Company, to house its business
development and sales activities. The lease provides for $120,000 and $5,000 in
annual base rent and electricity, respectively, and has a five-year term
commencing on November 1, 1998. The Company recorded $34,166 and $99,974 in rent
expense relative to this lease for the three and nine months ended September 30,
1999, respectively.
11
<PAGE>
CYBEAR, INC.
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SOME OF THE INFORMATION IN THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS
TYPICALLY ARE IDENTIFIED BY USE OF TERMS LIKE "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE" AND SIMILAR WORDS, ALTHOUGH SOME FORWARD-LOOKING
STATEMENTS ARE EXPRESSED DIFFERENTLY. READERS SHOULD BE AWARE THAT THE ACTUAL
RESULTS OF CYBEAR, INC. ("CYBEAR" OR THE "COMPANY") COULD DIFFER MATERIALLY FROM
THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING OUR LIMITED OPERATING HISTORY AND SUBSTANTIAL OPERATING LOSSES,
AVAILABILITY OF CAPITAL RESOURCES, ABILITY TO EFFECTIVELY COMPETE, ECONOMIC
CONDITIONS, UNANTICIPATED DIFFICULTIES IN PRODUCT DEVELOPMENT, ABILITY TO GAIN
MARKET ACCEPTANCE AND MARKET SHARE, ABILITY TO MANAGE GROWTH, RELIANCE ON
SHORT-TERM NON-EXCLUSIVE CONTRACTS, INTERNET SECURITY RISKS AND UNCERTAINTY
RELATING TO THE EVOLUTION OF THE INTERNET AS A MEDIUM FOR COMMERCE, DEPENDENCE
ON THIRD PARTY CONTENT PROVIDERS, DEPENDENCE ON OUR KEY PERSONNEL, ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY, YEAR 2000 PROBLEMS AND THE IMPACT OF FUTURE
GOVERNMENT REGULATION ON OUR BUSINESS. READERS SHOULD ALSO CONSIDER CAREFULLY
THE RISKS DETAILED HEREIN OR DETAILED FROM TIME TO TIME IN OUR FILINGS WITH THE
U.S. SECURITIES AND EXCHANGE COMMISSION (THE "SEC").
INTRODUCTION
Cybear Inc., a Delaware corporation, was incorporated on February 5,
1997. Cybear is an information technology company using the Internet to improve
the efficiency of administrative and communications tasks of managing patient
care. Cybear provides access to the Internet and the Cybear product line through
its own Internet Service Provider ("ISP") system, delivering productivity
applications to health care providers and health information to consumers
In March 1999, Cybear introduced its first product, its Physician
Practice Portal, which addresses the communications and operational needs of
physicians. Cybear's future products will provide Internet-based productivity
software applications and communication networks for other constituents of the
healthcare community. In the three months ended June 30, 1999, Cybear emerged
from the development stage for financial reporting purposes. In June 1999, the
Company successfully completed a public offering of 3,450,000 shares of its
common stock, raising approximately $50.8 million in net proceeds. In September
1999, the Company acquired Telegraph Consulting Corporation ("Telegraph"), the
programming, networking and interactive design division of Telegraph New
Technology, Inc. The purchase price of approximately $4.1 million included $1.2
million in cash, the issuance of 320,000 shares of Cybear unregistered common
stock valued at approximately $2.8 million and the assumption of approximately
$148,000 of Telegraph's debt. The acquisition was recorded using the purchase
method of accounting. As of September 30, 1999, Cybear was approximately 74%
owned by Andrx Corporation ("Andrx").
Cybear has incurred net operating losses and negative cash flows from
operating activities since its inception. As of September 30, 1999, Cybear had
an accumulated deficit of approximately $10.5 million. In addition, Cybear
intends to continue to invest heavily in product development, network
operations, customer support, sales and marketing and administrative areas. As a
result, Cybear expects to continue to incur substantial operating losses for the
foreseeable future, and may never achieve or sustain profitability.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("1999 QUARTER"), AS COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1998 ("1998 QUARTER").
Cybear had $91,369 in revenues for the 1999 Quarter and had no revenues
for the 1998 Quarter. Revenue for the 1999 Quarter represents subscriptions to
the Company's Physician Practice Portal product, as well as revenues from web
site development and maintenance and e-commerce revenues (see Notes 5 and 10 to
the accompanying unaudited consolidated financial statements).
Network operations and operations support costs were $774,873 for the
1999 Quarter compared to $121,226 for the 1998 Quarter. Network operations and
operations support costs consist primarily 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 the 1999 Quarter related to the establishment of the network operations
center and the development of the operations support infrastructure.
Product development costs were $988,392 for the 1999 Quarter compared
to $391,974 for the 1998 Quarter. Product development costs include outside
consultant fees, content fees, payroll, benefits and housing expenses of
employees involved in the creation, design and development of Cybear's products.
The increase in the product development costs for the 1999 Quarter reflects the
progress and expansion of Cybear's development activities. On August 31, 1999,
the Company closed its office in Tampa, Florida, which housed some of its
product development staff and in the process terminated 16 employees. The
Company incurred costs of approximately $100,000 to close this office. In
September 1999, the Company acquired Telegraph (see Note 3 to the accompanying
unaudited consolidated financial statements) resulting in the addition of 15
employees to its product development staff.
Sales and marketing expenses were $1.2 million for the 1999 Quarter
compared to $136,002 for the 1998 Quarter. Sales and marketing expenses consist
primarily of salaries and personnel related costs, outside consultant fees,
costs incurred to CIMedia and costs of developing and distributing promotional
material. The increase in sales and marketing expenses for the 1999 Quarter
related primarily to the establishment of the selling and marketing
infrastructure, the development and distribution of promotional material and
costs incurred for trade shows and to CIMedia.
General and administrative expenses were $601,188 for the 1999 Quarter
compared to $307,806 for the 1998 Quarter. General and administrative expenses
consist primarily of salaries and personnel related expenses for executives and
administrative functions, housing expenses and professional fees. The increase
in general and administrative expenses for the 1999 Quarter related to the
establishment and development of the administrative infrastructure.
Depreciation and amortization expense was $360,619 for the 1999 Quarter
compared to $34,336 for the 1998 Quarter. Depreciation and amortization expense
consists primarily of the depreciation and amortization of property and
equipment and of capitalized product development costs. The increase in
depreciation and amortization for the 1999 Quarter resulted primarily from
Cybear's purchases of computer hardware and software used in the establishment
of its network operations center and the development of its products, and
leasehold improvements to the rented space housing its corporate headquarters
and network operations center.
Cybear had no interest expense for the 1999 Quarter compared to $65,610
for the 1998 Quarter. 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 tax attributes, to
Cybear's capital in exchange of 465,387 shares of Cybear common stock at the
public offering price of $16.00 per share.
13
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Cybear had interest income of $633,842 for the 1999 Quarter and had no
interest income for the 1998 Quarter. The interest income resulted primarily
from the investments of the net proceeds generated from the public offering in
money market funds and interest bearing investment grade securities.
Cybear's taxable results through the completion of the public offering
in June 1999 were included in the consolidated income tax return of Andrx.
Cybear's taxable results were included in the consolidated income tax return of
Andrx as long as Andrx owned at least 80% of the common stock of Cybear. Cybear
and Andrx have a tax allocation agreement that provides, among other things, for
the allocation of Federal income tax liabilities or benefits to Cybear at the
approximate amounts that would have been computed as if Cybear had filed
separate income tax returns. Upon completion of the public offering in June
1999, Andrx's ownership in Cybear was reduced below 80%. Consequently, the
Company did not record any income tax benefit for the 1999 Quarter as Andrx's
ownership in Cybear was below 80% and Cybear generated net operating loss
carryforwards. Under the provisions of SFAS No. 109, the Company has provided a
valuation allowance to reserve against 100% of its net operating loss
carryforwards due to its history of net losses. For the 1998 Quarter, the
Company did not record any income tax provision or benefit as Andrx could not
utilize Cybear's tax attributes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 ("1999 PERIOD"), AS COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1998 ("1998 PERIOD").
Cybear had revenues of $118,540 for the 1999 Period and had no revenues
for the 1998 Period. Revenue for the 1999 Quarter represents subscriptions to
the Company's Physician Practice Portal product, as well as revenues from web
site development and maintenance and e-commerce revenues (see Notes 5 and 10 to
the accompanying unaudited consolidated financial statements).
Network operations and operations support costs were $2.2 million for
the 1999 Period compared to $248,712 for the 1998 Period. The increase in
network operations and operations support costs for the 1999 Period related to
the establishment of the network operations center and the development of the
operations support infrastructure.
Product development costs were $2.2 million for the 1999 Period
compared to $1.1 million for the 1998 Period. The increase in the product
development costs for the 1999 Period reflects the progress and expansion of
Cybear's development activities.
Sales and marketing expenses were $2.8 million for the 1999 Period
compared to $395,276 for the 1998 Period. The increase in sales and marketing
expenses for the 1999 Period related primarily to the establishment of the
selling and marketing infrastructure, the development and distribution of
promotional material and costs incurred for trade shows.
General and administrative expenses were $1.9 million for the 1999
Period compared to $462,391 for the 1998 Period. The increase in general and
administrative expenses for the 1999 Period related to the establishment and
development of the administrative infrastructure.
Depreciation and amortization expense was $850,710 for the 1999 Period
compared to $89,634 for the 1998 Period. The increase in depreciation and
amortization for the 1999 Period resulted primarily from the Company's purchases
of computer hardware and software used in the establishment of its network
operations center and the development of its products, and leasehold
improvements to the rented space housing its corporate headquarters and network
operations center.
Interest expense was $216,182 for the 1999 Period compared to $145,259
for the 1998 Period. Interest expense represented interest on Due to Andrx under
the credit agreement between the two companies to fund Cybear's operations.
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Cybear had interest income of $683,593 for the 1999 Period and had no
interest income for the 1998 Period. The interest income resulted primarily from
the investments of the net proceeds generated from the public offering in money
market funds and interest bearing investment grade securities.
Cybear recorded a tax benefit of $2,824,069 for the 1999 Period
reflecting the reimbursement from Andrx for the utilization of Cybear's tax
attributes pursuant to the tax allocation agreement. For the 1998 Period, the
Company did not record any income tax provision or benefit as Andrx could not
utilize Cybear's tax attributes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, Cybear had $44.5 million in cash, cash
equivalents and investments available-for-sale and $45.3 million of working
capital.
Net cash used in operating activities for the 1999 Period was $8.0
million compared to $2.2 million for the 1998 Period. In the 1999 Period, net
cash used in operating activities was primarily attributable to Cybear's loss
from operations, an increase in interest receivable from the Company's
investments available-for-sale and an increase in other assets, offset by the
depreciation and amortization expense. The increase in other assets results
primarily from the payment of a portion of the consulting fee to Innovative
Clinical Solutions, Ltd. formerly known as PhyMatrix Management Company, Inc.
and payment to Cox Interactive Media, Inc. (see Note 9 to the accompanying
unaudited consolidated financial statements). In the 1998 Period, net cash used
in operating activities was primarily attributable to Cybear's loss from
operations.
Net cash used in investing activities for the 1999 Period was $41.2
million compared to $266,279 for the 1998 Period. In the 1999 Period, Cybear
invested $38.0 million in investments available-for-sale and used $1.2 million
in net cash for the acquisition of Telegraph (see Note 3 to the accompanying
unaudited consolidated financial statements). Cybear also purchased $2.0 million
in property and equipment consisting mainly of computer hardware and software
used in the establishment of its network operations center and the development
of its products, leasehold improvements to the rented space housing its
corporate headquarters and network operations center and furniture for its
corporate headquarters. Cybear also capitalized $119,667 in product development
costs. In the 1998 Period, Cybear purchased $196,279 of property and equipment
consisting mainly of computer hardware and software and furniture used in its
product development activities and capitalized $70,000 in product development
costs.
Net cash provided by financing activities for the 1999 Period was $55.9
million compared to $2.5 million for the 1998 Period. In the 1999 Period, net
cash provided by financing activities consisted mainly of $50.8 million in net
proceeds generated from the public offering of 3,450,000 shares of common stock
of the Company and $5.1 million of advances from Andrx to fund Cybear's
operations, net of the reimbursement from Andrx for the utilization of Cybear's
tax attributes pursuant to the tax allocation agreement. In the 1998 Period, net
cash provided by financing activities consisted of advances from Andrx to fund
Cybear's operations.
From time to time, Cybear may be involved in litigation relating to
claims arising out of its operations in the normal course of business. Cybear is
not currently a party to any legal proceeding or aware of any other claim, the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on Cybear's business, operating
results and financial condition.
Cybear anticipates that its cash requirements will continue to increase
as it continues to expend substantial resources to build its infrastructure,
develop its products and establish its sales and marketing, network operations,
customer support and administrative organizations. Cybear currently anticipates
that its available cash resources will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for the next
twelve months.
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YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Cybear's
computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or a miscalculation, causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based upon its identification and assessment efforts to date, Cybear
believes that certain of the computer equipment and software it currently uses
required or will require replacement or modification. In the ordinary course of
replacing computer equipment and software, Cybear will attempt to obtain
replacements that are Year 2000 compliant. Utilizing both internal and external
resources to identify and assess needed Year 2000 remediation, Cybear began its
Year 2000 identification, assessment, remediation and testing efforts in the
fourth quarter 1998 and expects to complete such activities in the fourth
quarter 1999 and that such efforts will be completed prior to any currently
anticipated impact on its computer equipment and software. Cybear estimates that
as of October 31, 1999, it had completed approximately 80% of the initiatives
that it believes will be necessary to fully address potential Year 2000 issues
relating to its computer equipment and software. The projects comprising the
remaining 20% of the initiatives are in process.
Cybear has also mailed letters to its significant vendors and service
providers to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues and whether the products and services purchased
from or by such entities are Year 2000 compliant. For those significant vendors
and service providers that have not provided written assurance that they are
Year 2000 compliant, Cybear has developed or is developing contingency plans to
address issues that might arise from interfaces with such entities.
Cybear believes that the cost of its Year 2000 identification,
assessment, remediation and testing efforts, as well as currently anticipated
costs to be incurred by Cybear with respect to Year 2000 issues of third
parties, will not exceed $200,000 and will be funded from current existing
financial resources. As of the date of this report, Cybear had incurred costs of
approximately $116,000 related to its Year 2000 identification, assessment,
remediation and testing efforts. These costs were for planning, analysis, repair
of existing software, or evaluation of information received from significant
vendors, service providers, or customers. Other non-Year 2000 efforts have not
been and are not expected to be materially delayed.
Cybear has initiated a comprehensive analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by Cybear and certain third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan for dealing with the most reasonably likely worst case scenario
is under development and should be completed by December 31, 1999.
The costs of Cybear's Year 2000 identification, assessment, remediation
and testing efforts and the dates on which Cybear believes it will complete such
efforts are based upon management's best estimates, which were derived using
numerous assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans, and other
factors. Cybear cannot assure that these estimates will prove to be accurate,
and actual results could differ materially from those currently anticipated.
Specific factors that could cause such material differences include, but are not
limited to, the availability and cost of personnel trained in Year 2000 issues,
the ability to identify, assess, remediate and test all relevant computer codes
and embedded technology and other similar uncertainties. In addition,
variability of definitions of "compliance with Year 2000" and the variety of
different products and services and combinations thereof sold by Cybear may lead
to claims relating to Year 2000 compliance whose impact on Cybear is not
currently estimable. Cybear cannot
16
<PAGE>
provide assurance that the aggregate cost of defending and resolving such
claims, if any, will not materially adversely affect Cybear's results of
operations.
17
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CYBEAR, INC.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
27.1 Financial Data Schedule
(b)Reports on Form 8-K:
A Current Report on Form 8-K was filed on September 29, 1999 reporting
under Item 2 "Acquisition or Disposition of Assets" regarding the Company
acquiring Telegraph Consulting Corporation. The financial statements of the
business acquired and the pro forma financial statements required will be filed
by amendment no later than 60 days from the date of Form 8-K.
18
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CYBEAR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereonto
duly authorized.
By: /s/ EDWARD E. GOLDMAN, M.D.
-----------------------
Name: Edward E. Goldman, M.D.
Title: President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jack Greenman
-------------
Name: Jack Greenman
Title: Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
November 15, 1999
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,635,207
<SECURITIES> 37,878,850
<RECEIVABLES> 139,018
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,648,471
<PP&E> 4,598,652
<DEPRECIATION> (851,350)
<TOTAL-ASSETS> 55,570,890
<CURRENT-LIABILITIES> 1,385,253
<BONDS> 0
0
0
<COMMON> 17,648
<OTHER-SE> 54,167,989
<TOTAL-LIABILITY-AND-EQUITY> 55,570,890
<SALES> 0
<TOTAL-REVENUES> 118,540
<CGS> 0
<TOTAL-COSTS> 9,918,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216,182
<INCOME-PRETAX> (9,332,249)
<INCOME-TAX> 2,824,069
<INCOME-CONTINUING> (6,508,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,508,180)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
