UNITED STATES OF AMERICA
In the Matter of
TIMOTHY E. NOLAN,
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings against Timothy E. Nolan ("Nolan" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and hereby are, instituted.
In anticipation of the institution of these proceedings, Nolan has submitted an Offer of Settlement ("Nolan's Offer"), that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et. seq., and without admitting or denying the findings contained herein, except that Respondent admits that the Commission has jurisdiction over him and over the subject matter of this proceeding, the Respondent consents to the issuance of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order ("Order").
On the basis of this Order and Nolan's Offer, the Commission finds the following:
1. During the first two quarters of 2000 (the "relevant time period"), Cybear, Inc. ("Cybear"), which at that time was more than 70% owned by Andrx, accounted for revenues derived from a joint venture between Andrx1 and Cybear in a manner that did not conform with generally accepted accounting principles ("GAAP"). Pursuant to that joint venture, Cybearclub LC ("Cybearclub"), Cybear sought to sell products over its Internet website that were distributed by Andrx. Cybear generated nearly all of its revenues during the relevant time period from the joint venture, and in its periodic filings with the Commission, described those revenues as "e-commerce revenues" or revenues derived from "orders placed through the Internet."
2. During the relevant time period, however, Cybear employees routed telephone orders generated by Andrx's telemarketing department onto Cybear's Internet website. These orders, which should have been recognized by Andrx, accounted for a majority of Cybear's reported revenues. In July 2000, senior management of Cybear and Andrx, including Respondent Timothy E. Nolan, learned that telemarketing orders were being entered onto Cybear's website and investigated the matter. However, Cybear continued to describe these sales as revenues derived from "orders placed through the Internet" in its Form 10-Q for the quarter ended June 30, 2000. Cybear also did not include this information in a proxy solicitation sent to shareholders in connection with a corporate reorganization and tracking stock plan. These actions resulted in Cybear's violations of the books and records, financial reporting and proxy solicitation provisions of the Exchange Act.
3. Timothy E. Nolan, age 46, resides in Newtown, Pennsylvania. Nolan was Cybear's president and chief operating officer from March 2000 until November 2001, when he resigned from those positions.
4. Andrx, based in Fort Lauderdale, Florida, owns multiple subsidiaries that distribute and manufacture generic and brand name pharmaceuticals. On September 5, 2000, pursuant to a corporate reorganization ("Reorganization"), Andrx became a Delaware holding company and acquired all of the outstanding shares of Cybear. Andrx's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. Between September 7, 2000 and May 17, 2002, Andrx maintained two classes of common stock, both of which were listed on the NASDAQ National Market System ("NASDAQ"): Andrx Group Common Stock, which tracked the performance of all Andrx divisions except Cybear, and Cybear Group Common Stock, which tracked the performance of Cybear and several other related entities. Effective May 17, 2002, Andrx converted all of the outstanding shares of Cybear Group Common Stock into shares of Andrx Group Common Stock, which currently is listed for trading on NASDAQ and is the only outstanding class of common stock of Andrx.
5. Cybear, located in Boca Raton, Florida, is an information technology company providing Internet products and services to the healthcare industry. Before the Reorganization, Cybear was 73% owned by Andrx, and it filed periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. In September 2000, Cybear became a wholly-owned subsidiary of Andrx and no longer files separate periodic reports with the Commission. Andrx continues to file consolidated financial statements with the Commission that include Cybear's results.
The Cybearclub Joint Venture
6. In August 1999, Andrx and Cybear formed Cybearclub for the purpose of selling vaccines and injectibles distributed by Andrx through Cybear's Internet website. In September 1999, Cybearclub began using Andrx's in-house telemarketing staff, who solicit physicians and pharmacies by telephone to buy generic pharmaceuticals from Andrx, to solicit existing Cybear and Andrx physician customers, as well as new customers, to purchase injectibles and vaccines through Cybear's website. The parties intended that, through the introductory efforts of telemarketers, and lower pricing of Internet-ordered products, physician customers would purchase goods over the Internet, rather than through telemarketers.
7. At the time the parties established the joint venture, Andrx and Cybear intended that Cybear would recognize the revenue from purchases made through Cybear's website, while Andrx would continue to recognize the revenue from orders that customers placed over the telephone.2
8. Cybear disclosed the joint venture for the first time in its Form 10-Q for the quarter ended September 30, 1999, which described the joint venture as "an arrangement with Andrx for the sale of products to physician offices on orders placed through Cybear's Physician Practice Portal product." The Form 10-Q separately classified the joint venture's revenue as "e-commerce revenues."
9. During 1999 and early 2000, Andrx telemarketers encountered numerous problems in convincing potential customers to order products through Cybear's website. Among other things, Cybear's website experienced frequent technical problems, the on-line registration process was lengthy and complicated, and many of the physician offices did not have the time, desire, or proper computer equipment to access Cybear's website. As a result, Cybear recognized less than $81,000 in revenues from Cybearclub during all of 1999.
Internally-Entered Cybearclub Orders
10. In an effort to overcome the technical problems and to increase Cybearclub sales, in approximately March 2000, Cybear employees began a practice of entering onto Cybear's website all first-time physician customer orders for any Andrx-distributed product available through Cybearclub, even though the customer placed his or her order over the telephone instead of through the Internet. The Andrx telemarketers accepted such orders from customers over the telephone and then handed the order tickets to a Cybear employee, who then entered the order onto Cybear's website.
11. This practice, however, was not limited to first orders and evolved into telemarketers accepting subsequent orders over the telephone and routing those orders to Cybear employees for entry onto Cybear's website. In some instances, Cybear employees input orders onto Cybear's website for customers who did not have Internet access or the required computer equipment to input the order themselves. The internally-entered Internet orders occurred without the knowledge or approval of senior management of either Cybear or Andrx.
12. Cybear failed to implement internal controls to prevent it from recognizing revenues from the internally-placed orders, which should have been recognized by Andrx according to the joint venture agreement.
13. At least partly because of Cybear employees inputting Internet orders for physicians, the revenues that Cybear recognized from Cybearclub increased to approximately $215,000 in the first quarter of 2000, and to more than $1.1 million in the second quarter of 2000. Cybearclub revenues constituted more than 80% of Cybear's total revenues in each of these quarters.
14. In late July 2000, senior management of Andrx and Cybear were informed for the first time that a majority of Cybearclub's sales resulted from orders that were entered internally through Cybear's website. Upon learning this information, senior management of Cybear and Andrx engaged in internal discussions to determine whether Cybear could recognize the revenues from internally-entered Cybearclub orders. In addition, Andrx and Cybear consulted with their outside auditor. Based on these discussions, Andrx and Cybear determined that Cybear could record revenues from internally-entered Cybearclub orders in its Form 10-Q for the quarter ended June 30, 2000. However, Andrx and Cybear agreed to evaluate whether Cybear could continue recognizing revenues from internally-entered Cybearclub sales in future quarters.
15. Although telephone orders had been routed to Cybear's website and recorded by Cybear as revenue, Cybear's Form 10-Q for the period ended June 30, 2000, which was filed with the Commission on August 14, 2000, did not sufficiently disclose these facts. Prior to the second quarter of 2000, the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") portion of Cybear's periodic filings categorized the revenues from the Cybearclub joint venture as "e-commerce transactions." The notes to Cybear's financial statements further described the joint venture as "an arrangement with Andrx for the sale by Cybear of products to physicians offices on orders placed through Cybear's Physician Practice Portal." After learning of the internal orders, and after further discussions with Nolan and other members of Cybear management, Andrx's general counsel made changes in Cybear's Form 10-Q for the quarter ended June 30, 2000, including changing the description of the joint venture's revenues from "e-commerce" revenues to "Cybearclub" revenues. However, these changes did not sufficiently disclose the facts described in paragraphs 11 through 15, above. Nolan reviewed and signed Cybear's Form 10-Q for the quarter ended June 30, 2000.
16. Cybear's financial statements included in its Forms 10-Q for the first and second quarters of 2000 were not in conformity with GAAP because they did not properly recognize revenues from internally-entered orders. Under GAAP, Andrx should have recognized these revenues. See Statements of Financial Accounting Concepts, Concept 6, par. 78 (stating a company can recognize revenues only from those activities that constitute its ongoing major or central operations); see also Statements of Financial Accounting Concepts, Concept 2, par. 160 (noting that "the quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form.").
17. At the end of the third quarter of 2000, Andrx and Cybear decided that Cybearclub could no longer recognize revenues from internally-entered sales. By that time, Andrx had acquired Cybear, and Cybear's financial results were included in Andrx's periodic filings with the Commission. Andrx's Form 10-Q for the period ended September 30, 2000, disclosed that Cybearclub used Andrx telemarketers to solicit potential customers, and disclosed that a majority of Cybearclub revenues resulted from telephone orders entered internally over Cybear's website.
Inadequate Proxy Statement Disclosures
18. On July 31, 2000, Cybear and Andrx sent their shareholders a joint proxy statement in connection with the proposed Reorganization, pursuant to which Andrx would acquire all of Cybear's outstanding common stock and create a separate class of common stock, Cybear Group Common Stock, to track the performance of Cybear and several other related entities.
19. The "risks" section of the proxy statement warned that the market and price for the newly trading Cybear Group Common Stock could be influenced by any quarterly changes in Cybear's results of operations or changes in financial estimates. The proxy emphasized that Cybear's success would be dependent upon, among other things, Cybear's ability to generate e-commerce revenues. However, the proxy statement did not disclose that the majority of Cybear's "e-commerce" revenues resulted from internally-placed orders that should have been recognized by Andrx, and that Andrx and Cybear were evaluating whether Cybear could recognize those revenues in the future. On September 5, 2000, shareholders for Andrx and Cybear voted to approve the Reorganization.
Violations of Section 13(a) of the Exchange Act
and Rules 13a-13 and 12b-20 Thereunder
20. Section 13(a) of the Exchange Act requires issuers that have securities registered pursuant to Section 12 of the Exchange Act to file periodic reports containing information prescribed by specific Commission rules. Such reports must be complete and accurate. Rule 13a-13 requires the filing of quarterly reports on Form 10-Q. Rule 12b-20 requires that periodic reports filed with the Commission contain all such further material information as is necessary to make the required statements, not misleading. An issuer violates these provisions if it files a periodic report that contains false or misleading information. See Laser Photonics, Inc., Securities Act Release No. 7463 (Sept. 30, 1997); Spectrum Information Technologies, Inc., Securities Act Release No. 7426 (June 25, 1997). No showing of scienter is required to establish a violation of Section 13(a) of the Exchange Act. SEC v. Savoy, 587 F.2d 1149, 1167 (D.C. Cir. 1978).
21. Moreover, Item 303 of Regulation S-K requires a MD&A disclosure as part of periodic reports filed pursuant to Section 13(a). The MD&A is intended to give the investor an opportunity to look at the company through the eyes of management and better evaluate the quality of earnings and the likelihood that past performance is indicative of future performance. See In the Matter of Caterpillar Inc., Admin. Proc. File No. 3-7692 (March 31, 1992). Item 303 specifies that, for interim periods, the MD&A include a discussion and analysis of the results of operations "to enable the reader to assess material changes in financial condition and results of operations" that have occurred since the end of the preceding fiscal year. The discussion should include a description of any known trends or uncertainties that have had or that the registrant reasonably expects will have a material impact on net sales, revenues or income from continuing operations. See Regulation S-K, Item 303(b).
22. During the relevant time period, Cybear was subject to the reporting requirements of Section 13(a) of the Exchange Act and the rules thereunder. Cybear violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 because the financial statements included in its quarterly reports filed with the Commission on Forms 10-Q for the quarters ended March 31, 2000 and June 30, 2000, did not accurately report Cybear's revenues.
23. In addition, Cybear's MD&A disclosure for the period ended June 30, 2000, did not discuss known uncertainties relating to its future revenue stream and financial condition. Specifically, the MD&A did not sufficiently disclose that a majority of Cybear's revenues for the quarter ended June 30, 2000 included orders entered onto the Internet by Cybear employees. Moreover, Cybear did not sufficiently disclose that senior management of both Cybear and Andrx were evaluating whether Cybear would continue to recognize revenues from internally-placed orders in future quarters and the potential impact this could have on Cybear's financial statements.
24. Nolan, who reviewed and signed Cybear's Form 10-Q for the second quarter of 2000, was a cause of Cybear's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
25. Based upon the foregoing, the Commission finds that Nolan was a cause of Cybear's violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder.
In view of the foregoing, the Commission deems it appropriate to accept the Offers of Settlement submitted by Nolan.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Nolan cease and desist from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder.
By the Commission.
Jonathan G. Katz
|1||The joint venture involved one of Andrx's subsidiaries, Anda, Inc., which distributes generic pharmaceuticals, vaccines, and injectibles manufactured by third parties. Anda employs telemarketers to solicit pharmacies and physicians to purchase the products that it distributes.|
|2||Cybearclub was structured as a joint venture, and Cybear consolidated 100% of Cybearclub's operating results.|
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