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C O L L A G E N E X
p h a r m a c e u t i c a l s
November 14, 2002
Via EDGAR
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Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: CollaGenex Pharmaceuticals, Inc. (Commission File No. 0-28308)
Form 10-Q for the Quarter Ended September 30, 2002
Dear Sirs:
Pursuant to Rule 13a-13(a) under the Securities Exchange Act of 1934, as
amended, on behalf of CollaGenex Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), submitted herewith for filing is the Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
If you have any questions or comments concerning this filing, kindly
contact the undersigned at (215) 579-7388 ext. 3110.
/s/ Frank Ruffo
Frank Ruffo
Controller
CollaGenex Pharmaceuticals, Inc., 41 University Drive, Newtown, PA 18940 USA
215-579-7388 voice 215-579-8577 fax
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
41 University Drive, Newtown, PA 18940
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
-------------------------------
(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 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:
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Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of October 31, 2002:
Class Number of Shares
--------------------------- ----------------
Common Stock $.01 par value 11,364,727
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION........................................... 1
Item 1. Financial Statements...................................... 1
Condensed Consolidated Balance Sheets as of September
30, 2002 (unaudited) and December 31, 2001............ 2
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2002 and 2001
(unaudited)........................................... 3
Condensed Consolidated Statements of Operations for
the Nine Months Ended September 30, 2002 and 2001
(unaudited) .......................................... 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and 2001
(unaudited)........................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)........................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Results of Operations..................................... 12
Liquidity and Capital Resources........................... 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
Item 4 Controls and Procedures................................... 27
PART II. OTHER INFORMATION............................................... 28
Item 5. Other Information......................................... 28
Item 6. Exhibits and Reports on Form 8-K.......................... 28
SIGNATURES............................................................... 30
CERTIFICATIONS........................................................... 31
-i-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
-1-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(dollars in thousands, except per share data)
September 30, December 31,
------------- ------------
Assets 2002 2001
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents ........................... $ 5,137 $ 6,171
Accounts receivable, net of allowance of $1,416
and $950 at September 30, 2002 and December 31,
2001, respectively.................................. 5,380 4,478
Inventories ......................................... 1,478 1,402
Prepaid expenses and other current assets ........... 1,487 1,200
-------- --------
Total current assets ............................ 13,482 13,251
Equipment and leasehold improvements, net ............. 638 537
Other assets .......................................... 2,110 910
-------- --------
Total assets .................................... $ 16,230 $ 14,698
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable ..................... $ -- $ 35
Accounts payable .................................... 3,406 3,769
Accrued expenses .................................... 4,300 3,153
-------- --------
Total current liabilities ....................... 7,706 6,957
-------- --------
Deferred revenue ...................................... 522 614
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; 200,000 shares of Series D cumulative
convertible preferred stock issued
and outstanding at September 30, 2002 and
December 31, 2001 (liquidation value of $20,000
at September 30, 2002)............................. 2 2
Common stock, $0.01 par value; 25,000,000 shares
authorized, 11,364,727 and 10,999,573 shares
issued and outstanding at September 30, 2002
and December 31, 2001, respectively................. 114 110
Common stock to be issued (no shares at
September 30, 2002 and 103,196 shares at
December 31, 2001) ................................. -- 840
Additional paid in capital .......................... 82,856 80,129
Accumulated deficit ................................. (74,970) (73,954)
-------- --------
Total stockholders' equity ...................... 8,002 7,127
-------- --------
Total liabilities and stockholders' equity ...... $ 16,230 $ 14,698
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2002 and 2001
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended September 30,
--------------------------------
2002 2001
--------------------------------
Revenues:
Product sales.................................... $ 10,767 $ 8,320
Contract revenues................................ 422 913
License revenues................................. 40 16
---------- ----------
Total revenues............................... 11,229 9,249
---------- ----------
Operating expenses:
Cost of product sales............................ 1,713 1,274
Research and development......................... 1,355 1,024
Selling, general and administrative.............. 7,420 8,548
---------- ----------
Total operating expenses..................... 10,488 10,846
---------- ----------
Operating income (loss)...................... 741 (1,597)
Other income (expense):
Interest income.................................. 18 53
Interest expense................................. (3) (2)
---------- ----------
Net income (loss)............................ 756 (1,546)
Preferred stock dividend........................... 400 420
---------- ----------
Net income (loss) allocable to common stockholders. $ 356 $ (1,966)
========== ==========
Basic net income (loss) per share allocable to
common stockholders.............................. $ 0.03 $ (0.18)
========== ==========
Shares used in computing basic net income (loss)
per share allocable to common stockholders....... 11,321,679 10,745,876
========== ==========
Diluted net income (loss) per share allocable to
common stockholders.............................. $ 0.03 $ (0.18)
========== ==========
Shares used in computing diluted net income (loss)
per share allocable to common stockholders....... 11,589,483 10,745,876
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2002 and 2001
(dollars in thousands, except per share data)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------------------------
Revenues:
Product sales ................................ $ 31,026 $ 21,701
Contract revenues ............................ 1,769 2,812
License revenues ............................. 162 472
------------- ------------
Total revenues ........................... 32,957 24,985
------------- ------------
Operating expenses:
Cost of product sales ........................ 4,891 4,156
Research and development ..................... 3,054 2,842
Selling, general and administrative .......... 25,248 25,095
------------- ------------
Total operating expenses ................. 33,193 32,093
------------- ------------
Operating loss ........................... (236) (7,108)
Other income (expense):
Interest income .............................. 55 189
Interest expense ............................. (5) (7)
Other income ................................. -- 8
------------- ------------
Net loss ................................. (186) (6,918)
Preferred stock dividend ....................... 1,229 1,260
------------- ------------
Net loss allocable to common stockholders ...... $ (1,415) $ (8,178)
============= ============
Basic and diluted net loss per share
allocable to common stockholders ............. $ (0.13) $ (0.80)
============= ============
Shares used in computing basic and diluted
net loss per share allocable to common
stockholders ................................. 11,189,318 10,216,213
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
------------------
2002 2001
------------------
Cash flows from operating activities:
Net loss ............................................ $ (186) $(6,918)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash compensation expense ..................... -- 183
Depreciation and amortization expense ............ 194 192
Accounts receivable provisions.................... 466 221
Change in assets and liabilities:
Accounts receivable............................... (1,368) (1,503)
Inventories ...................................... (76) (893)
Prepaid expenses and other assets ................ (1,487) (992)
Accounts payable ................................. (363) 1,814
Accrued expenses ................................. 1,147 548
Deferred revenue ................................. (92) (47)
-------- --------
Net cash used in operating activities....... (1,765) (7,395)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (295) (74)
Proceeds from the sale of short term investments ..... -- 1,936
Purchase of short term investments ................... -- (296)
-------- --------
Net cash provided by (used in)
investing activities .................... (295) 1,566
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock ........... 1,279 9,814
Payment of preferred dividends ....................... (218) --
Repayment of long-term debt .......................... (35) (57)
-------- --------
Net cash provided by financing activities... 1,026 9,757
Net increase (decrease) in cash and cash ............... (1,034) 3,928
equivalents
Cash and cash equivalents at beginning of period ....... 6,171 3,709
-------- --------
Cash and cash equivalents at end of period ............. $ 5,137 $ 7,637
======== ========
Supplemental schedule of noncash financing
activities:
Common stock dividends issued or issuable
on preferred stock .................................. $ 611 $ 840
======== ========
Issuance of common stock to be issued ............... 840 872
======== ========
Issuance of warrants to purchase common stock
in connection with equity line ................... 248 --
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ............ $ 5 $ 7
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(dollars in thousands)
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting principles
generally accepted in the United States of America. Certain information and
footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's 2001 audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2001.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly the Company's consolidated financial position as of September 30,
2002, their results of operations for the three and nine months ended September
30, 2002 and 2001, and their cash flows for the nine months ended September 30,
2002 and 2001. Interim results are not necessarily indicative of results
anticipated for the full fiscal year.
Note 2 -- Inventories:
Inventories at September 30, 2002 and December 31, 2001 consist of the
following:
2002 2001
----------- -----------
Raw materials....... $ 49 $ 174
Work-in-process..... 778 66
Finished goods...... 651 1,162
----------- -----------
$ 1,478 $ 1,402
=========== ===========
NOTE 3 -- COMMON STOCK AND DEBT FINANCING:
On March 19, 2001, the Company consummated a one-year revolving credit
facility (the "Facility") with Silicon Valley Bank (the "Bank"). The Facility
was subsequently amended on
-6-
March 22, 2002 to increase the amount available to the Company under the
Facility to the lesser of $4,000 or 80% of eligible accounts receivable, as
defined in the amendment. The amount available is also reduced by outstanding
letters of credit which may be issued under this agreement in amounts totaling
up to $1,500.
The Facility may be used only for working capital purposes. The Company is
not obligated to draw amounts under the Facility and any such draws under the
Facility will bear interest at the then prevailing prime rate plus 1.0 to 1.5%
per annum. The Company must also maintain (i) a tangible net worth of $5,000,
subject to certain upward adjustments as defined in the amendment, as a result
of profitable operation or additional debt or equity financings and (ii) a
minimum of $2,000 in cash, net of borrowings under the facility, at all times
during the term of the Facility, which expires March 15, 2004. Without the
consent of the Bank, the Company, among other things, shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business; or (iii) pay or declare any cash dividends on the Company's Common
Stock. In addition, the Company has secured its obligations under the Facility
through the granting of a security interest in favor of the Bank with respect to
all of the Company's assets, including its intellectual property. At September
30, 2002, there were no borrowings against the Facility, however, the Company
has issued an irrevocable letter of credit under the Facility for $549. This
letter of credit will be used to secure future purchases of inventory that the
Company expects to make from a supplier. As the Company pays down amounts under
the letter of credit, the amount available to the Company under the Facility
will increase.
On February 14, 2002, the Company entered into an equity line (the "Equity
Line") arrangement under the terms of a Common Stock Purchase Agreement (the
"Agreement") with Kingsbridge Capital Limited ("Kingsbridge"). Under the terms
of the Agreement, the Company may, at its sole discretion and from time to time
over the twelve month period that began February 14, 2002, sell shares of its
Common Stock to Kingsbridge at a discount to market price of up to 10%, as
determined prior to each such sale. The maximum amount of each draw down is
based on the Company's market capitalization and may not exceed $3,000. Pursuant
to the terms of the Agreement, as amended, the Company committed to draw down on
the Equity Line an amount aggregating at least $1,500 in registered shares of
Common Stock, prior to October 29, 2002 (the "Minimum Commitment Amount"), of
which the Company had drawn down an aggregate of $1,266 as of such date. Because
the Company did not satisfied such Minimum Commitment Amount, the Company is
obligated to pay to Kingsbridge approximately $23. The Equity Line provides for
the sale of up to an aggregate $8,500 in registered shares of Common Stock. In
connection with the consummation of the Equity Line, the Company issued to
Kingsbridge a warrant to purchase 40,000 shares of Common Stock at an exercise
price of $9.38 per share. Such warrant is exercisable as of August 14, 2002, and
will expire on August 13, 2007. The fair value of the warrants issued in
connection with the Equity Line of approximately $248 has no net impact as the
increase to additional paid in capital representing the value of the warrants
issued is offset by the decrease in additional paid in capital representing a
cost of the offering. On May 30, 2002, the Company issued 119,335 shares of its
Common Stock under the Equity Line for gross proceeds of approximately $1,000
and on June 28, 2002, the Company issued 32,187 shares of its Common Stock under
the Equity Line for gross proceeds of approximately $266.
-7-
NOTE 4 -- COMMITMENTS:
During 1999, the Company entered into a three-year co-promotion agreement
with Merck & Co., Inc. for Vioxx under which the Company is committed to spend
up to $1,000 annually for promotional expenses. In September 2002, the parties
amended this agreement and extended the term thereof to December 31, 2003.
Pursuant to the Company's License and Marketing Agreement with Atrix
Laboratories, the Company is committed to: (i) expend no less than $2,000 in
advertising and selling expenses related to the Atrix products during the fiscal
year beginning January 1, 2002; (ii) maintain, through 2003, a force of no less
than ninety full time dental consultants and divisional and regional managers to
make sales and product recommendation calls on dental professionals; and (iii)
make the Atrix products the subject of a specific number of detail calls in the
United States during 2002. The Company will also be required to make certain
annual minimum expenditures for advertising and promotional activities after
2002, through the term of the agreement, including: (i) the lesser of $4,000 or
30% of the Company's contribution margin, as defined in the agreement, relating
to a specific Atrix product that the Company's markets, and (ii) the lesser of
$2,000 or 30% of the Company's contribution margin, as defined in the agreement,
relating to a separate Atrix product that the Company markets. For the nine
months ended September 30, 2002, the Company had fulfilled $1,481 of the $2,000
advertising and selling expense commitment for 2002.
On February 11, 2002, the Company executed a Co-operation, Development and
Licensing Agreement with Thomas Skold pursuant to which the Company was granted
an exclusive, sublicenseable, transferable license with respect to the
Restoraderm(TM) topical drug delivery system which the Company intends to
develop for dermatological applications. Pursuant to the terms of such
agreement, upon the occurrence of certain events, the Company will be required
to pay certain consulting, royalty and milestone payments in the aggregate
amount of up to $3,955, of which no more than $318, $950, $1,650 and $1,037
shall be payable prior to December 31, 2002, January 1, 2003, January 1, 2004
and January 1, 2005, respectively. The term of such agreement is for the life of
any patent that may be issued to the Company for the first product the Company
develops utilizing such technology, or, if the Company does not acquire any
patentable products, seven years.
On May 24, 2002, the Company executed a Sublicense Agreement with Altana
Inc. ("Altana"), the United States subsidiary of Altana Pharma AG, pursuant to
which the Company was granted the exclusive right to create improvements to,
market, advertise, promote, distribute, offer for sale and sell, in the United
States and Puerto Rico, Pandel(R) Cream, a mid-potency topical corticosteroid
that is indicated for the relief of mild-to-moderate inflammatory disorders of
the skin, such as atopic dermatitis and psoriasis. Altana currently licenses
such rights from Taisho Pharmaceutical Co., Ltd., a company organized and
existing under the laws of Japan. The Company will purchase from Altana all
Pandel products to be sold. Pursuant to the terms of such agreement, the Company
agreed to pay Altana an aggregate sublicense fee of $1,700, of which $800 was
paid in September 2002 and $900 of which is due on May 31, 2003. The sublicense
fee has been capitalized and will be amortized to cost of product sales over the
estimated term of agreement. In addition, the Company is required to pay a
royalty fee equal to a percentage of the net sales of the product, if any. The
agreement may be terminated by the
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Company: (i) at any time, without cause, upon twelve months prior written
notice; (ii) if Altana shall commit any uncured, willful or material breach of
the provisions of the agreement; or (iii) if Altana shall cease to manufacture
or supply the product to the Company. Altana may terminate the agreement: (i) at
any time, without cause, upon twelve months written notice; (ii) if the Company
shall commit any uncured, willful or material breach of the provisions of the
agreement; (iii) if the Company shall cease to offer the product for
distribution to its customers; or (iv) if the Company fails to make certain
payments or fulfill certain invoicing obligations. In certain circumstances, all
monies paid to the other party under the agreement shall be refunded to the
paying party upon termination.
On June 10, 2002, the Company executed a Development and Licensing
Agreement with Shire Laboratories, Inc. ("Shire") pursuant to which the Company
was granted an exclusive worldwide license (including the right to sublicense)
to develop, make, have made, use, supply, export, import, register and sell
products for the treatment of various inflammatory disorders using Shire's
technology. In addition, under the agreement, Shire shall perform certain
product development functions for the Company. Also under the agreement, the
Company has committed to payments, in cash or at the Company's option, a
combination of cash and the Company's Common Stock, upon the achievement of
certain clinical and regulatory milestones in the event the Company pursues
certain applications of the technology which could total up to $7,900 in the
aggregate. Pursuant to the terms of such agreement, the Company shall also pay
to Shire a percentage of certain net sales of products, if any, utilizing any
part of Shire's technology. The Company may terminate the agreement upon sixty
days notice.
NOTE 5 -- STOCK OPTION PLANS:
At the Company's 2002 Annual Meeting of Stockholders held on May 9, 2002,
the stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number
of shares of the Company's Common Stock available for issuance under the 1996
Stock Option Plan from 2,000,000 to 2,500,000 shares and to reserve an
additional 500,000 shares of the Company's Common Stock for issuance in
connection with awards granted under the 1996 Stock Option Plan.
NOTE 6 -- ADOPTION OF AMENDED AND RESTATED SHAREHOLDER PROTECTION RIGHTS
AGREEMENT:
On May 29, 2002, the Company's Board of Directors approved an Amended and
Restated Shareholder Protection Rights Agreement (the "Rights Agreement"). The
Rights Agreement amended and restated, in its entirety, the Company's then
existing Shareholder Protection Rights Agreement (the "Prior Rights Agreement")
dated September 15, 1997, as amended, by and between the Company and American
Stock Transfer & Trust Company, as rights agent thereunder. American Stock
Transfer & Trust Company remains as rights agent under the Rights Agreement.
Each right previously authorized and distributed under the Prior Rights
Agreement was deemed to constitute a Right under the Rights Agreement effective
May 29, 2002. The Board of Directors further authorized the issuance of one
Right for each share of the Company's Common Stock issued between the date of
the Rights Agreement and the earlier of the Distribution Date or the Expiration
Date, as defined in the Rights Agreement.
-9-
Each Right, once exercisable, entitles the holder to purchase from the
Company one one-hundredth of a share of the Company's Series A Participating
Preferred Stock at an exercise price of $65. All Rights expire on September 26,
2007 unless earlier redeemed. At June 30, 2002, the Rights were neither
exercisable nor traded separately from the Company's Common Stock, and become
exercisable only if a person or a group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the voting power of all outstanding shares of the Company's Common Stock and
in certain other limited circumstances. Upon separation from the Common Stock,
each Right will entitle the holder, other than the acquiring person that has
triggered such separation, to effectively purchase certain shares of the
Company's Common Stock equal in market value to two times the then applicable
exercise price of the Right. If the Company is acquired in a merger or other
business combination transaction, or 50% or more of the Company's assets or
earning power are sold in one or more related transactions, the Rights will
entitle holders, upon exercise of the Rights, to receive shares of Common Stock
of the acquiring or surviving company with a market value equal to twice the
exercise price of each Right.
NOTE 7 -- Change of Control Agreements:
In September 2002, the Company entered into Change of Control Agreements,
with certain officers of the Company, which provide for acceleration of vesting
of stock options upon a change in control, as defined in the agreements.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product, Periostat,
is an orally administered, prescription pharmaceutical product that was approved
by the United States Food and Drug Administration in September 1998 and is the
first and only pharmaceutical to treat adult periodontitis by inhibiting the
enzymes that destroy periodontal support tissues. We are marketing Periostat to
the dental community through our own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. Pursuant to an
exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox(R), Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental
market. In May 2002, we executed a sublicense agreement with Altana Inc. to,
among other things, market and distribute, in the United States and Puerto Rico,
Pandel(R), a topical corticosteroid product developed by Altana Inc. and
indicated for dermatologic use. We distribute Periostat and Pandel through drug
wholesalers and large retail chains in the United States. Periostat is also sold
through wholesalers in the United Kingdom. The Atrix dental products are
distributed through a specialty distributor who sells these products directly to
dental practitioners in the United States. Our sales force also currently
co-promotes Vioxx, a prescription non-steroidal anti-inflammatory drug developed
by Merck & Co., Inc., in the United States, and, effective October 1, 2002,
began co-promoting Denavir(R), a topically applied prescription medication for
the treatment of recurrent cold sores in adults, for Novartis Consumer Health,
Inc.
We began operations in January 1992 and functioned primarily as a research
and development company until 1998. During this period, we operated with a
minimal number of employees, and substantially all of our pharmaceutical
development activities were contracted to independent contract research and
other organizations. Following FDA approval of Periostat in September 1998, we
significantly increased our number of employees, primarily in the areas of sales
and marketing. We continue to outsource the majority of our research and
development activities as well as manufacturing, warehousing and distribution
functions.
We have incurred losses each year since inception and have an accumulated
deficit of $75.0 million at September 30, 2002.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Our business of selling, marketing and
developing pharmaceutical products is subject to a number of significant risks,
including risks relating to the implementation of our sales and marketing plans
for Periostat and other products that we market, risks inherent in
-11-
research and development activities, risks associated with conducting business
in a highly regulated environment and uncertainty relating to clinical trials of
products under development. Our success depends to a large degree upon the
market acceptance of Periostat by periodontists, dental practitioners, other
health care providers, patients and insurance companies. Periostat has been
approved by the FDA for marketing in the United States, approved by the
Medicines Control Agency for marketing in the United Kingdom and approved for
marketing in Austria, Finland, Ireland, Israel, Italy, Luxembourg, the
Netherlands and Portugal. There can be no assurance that any of our other
product candidates will be approved by any regulatory authority for marketing in
any jurisdiction or, if approved, that any such products will be successfully
commercialized by us. In addition, there can be no assurance that we will
successfully commercialize Vioxx, Denavir, Pandel, Atridox, Atrisorb FreeFlow
and Atrisorb-D. As a result of these risks, and others expressed from time to
time in our filings with the Securities and Exchange Commission, our actual
results may differ materially from the results discussed in the forward-looking
statements contained herein.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM),
The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(R) are United
States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R),
Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(TM) and Dentaplex(TM) are
European Community trademarks of CollaGenex Pharmaceuticals Inc.
Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(R),
Dentaplex(R), Restoraderm(R), Dermostat(R), Periocycline(R), Periostatus(R) are
United Kingdom trade marks of our wholly-owned subsidiary, CollaGenex
International Limited. And, CollaGenex(R), PS20(R), "C" Logo(R), The Whole Mouth
Treatment(R) are both European Community trade marks and United Kingdom trade
marks of CollaGenex International Limited. All other trade names, trademarks or
service marks appearing in this Quarterly Report on Form 10-Q are the property
of their respective owners and are not property of CollaGenex Pharmaceuticals,
Inc. or any of our subsidiaries.
RESULTS OF OPERATIONS
During the three months ended September 30, 2002, we achieved worldwide net
product sales of $10.8 million. Net product sales include sales of Periostat,
Atridox, Atrisorb FreeFlow, Atrisorb-D and, since July 1, 2002, Pandel. In
addition, during the three months ended September 30, 2002, we generated
$422,000 in contract revenues mainly from our co-promotion agreement for Vioxx
and $40,000 in international licensing revenue.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Management's discussion and analysis of its financial position and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make judgments and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Management believes the critical accounting policies and areas
that require the most significant judgments and estimates to be used in the
preparation of the consolidated financial statements pertain to revenue
recognition.
-12-
We recognize product sales revenue upon shipment, net of estimated returns,
provided that collection is determined to be probable and no significant
obligations remain. Sales revenue from our customers is subject to agreements
allowing limited rights of return, rebates and price protection. Accordingly, we
reduce revenue recognized for estimated future returns, rebates and price
protection at the time the related revenue is recorded. The estimates for
returns are adjusted periodically based upon historical rates of returns,
inventory levels in the distribution channel and other related factors. While
management believes it can make reliable estimates for these matters, unsold
products in these distribution channels may be exposed to expiration.
Accordingly, it is possible that these estimates will change in the future or
that the actual amounts could vary materially from our estimates and that the
amounts of such changes could impact our results of operations, financial
condition and our business.
Since our inception, a portion of our revenue has been generated from
license and distribution agreements for our products. We recognize nonrefundable
signing or license fees that are not dependent on future performance under these
agreements as revenue when received and over the term of the arrangement if we
have continuing performance obligations. Any amounts deferred are amortized to
revenue over the expected performance period of each underlying agreement. The
expected performance period is based on management's best estimate and subject
to change based on current market conditions. Deferred revenue represents the
portion of up front license payments received that has not been earned.
Milestone revenue from licensing arrangements is recognized upon completion of
the milestone event or requirement if it represents the achievement of a
significant step in the research, development or regulatory process.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues
Revenues
(dollars in thousands) 2002 Change 2001
- ---------------------- ------- -------- -------
Product Sales .................. $10,767 29.4% $ 8,320
Contract Revenues .............. 422 (53.8)% 913
License Revenues ............... 40 150.0% 16
------- -------- -------
Total ....................... $11,229 21.4% $ 9,249
Total revenues during the three months ended September 30, 2002 were $11.2
million, representing a 21.4% increase over total revenues of $9.2 million
during the three months ended September 30, 2001. Such 2002 revenues included
approximately $10.8 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D and Pandel, $422,000 in contract revenues, which were
derived from our co-promotion of Vioxx and Pandel, and $40,000 in previously
deferred foreign license income and milestone revenues for Periostat. Product
sales increased $2.4 million, or 29.4%, to $10.8 million during the three months
ended September 30, 2002 compared to $8.3 million during the three months ended
September 30, 2001 due to higher prescriptions for Periostat and the addition of
the Atrix dental products, which we began marketing in October 2001, and Pandel,
which we launched on July 1, 2002.
-13-
Contract revenues for the three months ended September 30, 2002 declined
53.8% to $422,000 from $913,000 million during the three months ended September
30, 2001 as a result of a decline in contract revenues from Merck relating to
our co-promotion of Vioxx. The decline in contract revenues from Merck was due
to lower levels of prescriptions for Vioxx resulting from increased competitive
activity experienced during the quarter.
In accordance with SAB 101, which we adopted in 2000, we recorded $15,000
and $16,000 in licensing revenues during each of the three months ended
September 30, 2002 and September 30, 2001, respectively. This revenue was
attributable to our recognition of previously recognized up-front license fees
received for various agreements that were deferred upon the adoption of SAB 101
and is being recognized as income over the expected performance period of these
agreements. We also recorded milestone revenues from our foreign licensing
partners of $25,000 during the three months ended September 30, 2002. There were
no additional milestone revenues recognized for the three months ended September
30, 2001.
Cost of Product Sales
Cost of Product Sales
(dollars in thousands) 2002 Change 2001
-------- ------ ------
Cost of Product Sales ................. $ 1,713 34.4% $1,274
Percent of Product Sales .............. 15.9% 15.3%
Cost of product sales includes product packaging, third-party royalties,
amortization of product licensing fees, and the costs associated with the
manufacturing, storage and stability of Periostat, Pandel and the Atrix
products.
Cost of product sales were $1.7 million, or 15.9% of product sales during
the three months ended September 30, 2002, compared to $1.3 million, or 15.3% of
product sales during the three months ended September 30, 2001. Cost of product
sales increased in absolute dollars and as a percentage of product sales during
such period in 2002 compared to 2001, primarily due to increased cost of sales
associated with the Atrix products and Pandel launched in November 2001 and July
2002, respectively, which have lower gross margins than Periostat.
Research and Development
Research and Development
(dollars in thousands) 2002 Change 2001
-------- ------ ------
Research and development .............. $ 1,355 32.3% $1,024
Percentage of Total revenue ........... 12.1% 11.1%
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs.
-14-
Research and development expenses increased $331,000, or 32.3%, to $1.4
million during the three months ended September 30, 2002 from $1.0 million
during the three months ended September 30, 2001.
Development projects conducted during the three months ended September 30,
2002 included our continuing formulation development work for a once-a-day
formulation of Periostat and formulation and stability testing for several
potential products utilizing our licensed Restoraderm technology, which totaled
$706,000 and $83,000, respectively. Future development of the once-a-day
technology will be contingent on the outcome of the initial phase of the
project, which is expected to be determined by the end of 2002. Additional
expenses ranging from approximately $375,000 in 2002 to as much as $5.4 million
through completion could be incurred if the project is successful.
Clinical projects totaling $176,000 were conducted during the three months
ended September 30, 2002 and included several Phase IV studies for Periostat in
various dental indications, initiation of a 70-patient clinical study to
evaluate the efficacy of Periostat to treat meibomiantis (an ocular condition),
clinical development work relating to Periostat in dermatological indications
and initiation of a Phase III trial in 160 patients to evaluate Periostat for
the treatment of rosacea. Until the outcome of these trials are determined, it
is premature to estimate the future costs associated with the development of
Periostat for dermatological indications.
Other research and development expenses incurred during the three months
ended September 30, 2002 included $85,000 in regulatory consulting and filing
fees under the Mutual Recognition Procedure in Europe and $40,000 for various
regulatory costs, including annual FDA filing fees, legal, and regulatory
expenses in the United States. Direct salaries and other personnel expenses
incurred during the three months ended September 30, 2002 were $124,000.
Additionally, during such period we incurred $141,000 in consulting, travel and
other office expenses.
Research and development expenses incurred during the three months ended
September 30, 2001 included $7,000 in research grants to various academic
institutions for conducting research related to our core technology, $30,000 in
Periostat Phase IV clinical trial grants, $182,000 in contracted clinical and
development expenses related to a safety and pharmacokinetic study for Metastat
and other IMPACS compounds in the development stage. Other development projects
included $236,000 for the initial expenses for the once-a-day formulation for
Periostat and $12,000 for a Phase II trial using Periostat for the treatment of
acne.
Other research and development expenses incurred during the three months
ended September 30, 2001 included $130,000 in regulatory consulting and filing
fees under the Mutual Recognition Procedure in Europe and $167,000 for various
regulatory costs, including annual FDA filing fees and legal and regulatory
expenses in the United States related to obtaining FDA approval for Periostat
tablets. Research and development expenses incurred during the three months
ended September 30, 2001 also included $131,000 in direct salaries and other
personnel related expenses and $129,000 relating to consulting, travel and other
office expenses.
-15-
Selling, General and Administrative
Selling, General and Administrative
(dollars in thousands) 2002 Change 2001
-------- ------ ------
Selling, general and administrative ........ $ 7,420 (13.2)% $8,548
Percentage of Total revenue ................ 66.1% 92.4%
Selling, general and administrative expenses consist primarily of personnel
salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses decreased 13.2% to $7.4
million during the three months ended September 30, 2002 from $8.5 million
during the three months ended September 30, 2001. This decrease of $1.1 million
was primarily the result of a $1.8 million reduction in our Direct-to-Consumer
advertising and other Periostat promotional expenditures offset in part by
approximately $700,000 in professional promotion expenses for Periostat,
additional promotional expenses for the Atrix dental products and Pandel, and
the expansion of our dermatology sales operation.
Significant components of selling, general and administrative expenses
incurred during the three months ended September 30, 2002 included $3.9 million
in direct selling and sales training expenses, $2.2 million in marketing
expenses (including advertising and promotion expenditures for Periostat, the
Atrix products and co-promotion expenses relating to Vioxx and Pandel) and $1.3
million in general and administrative expenses, which include business
development, finance and corporate activities. Significant components of
selling, general and administrative expenses during the three months ended
September 30, 2001 included $3.3 million in direct selling and training
expenses, $3.9 million in marketing expenses (including Periostat DTC
advertising expenditures, launch expenses for Dentaplex and co-promotion
expenses related to Vioxx) and $1.3 million in general and administrative
expenses.
Other Income/Expense
Other Income/Expense 2002 Change 2001
-------- ------ -------
Interest income ................. $18,000 (66.0)% $53,000
Interest expense ................ $ 3,000 (50.0)% $ 2,000
Interest income decreased to $18,000 for the three months ended September
30, 2002 compared to $53,000 for the three months ended September 30, 2001. This
decrease was due to lower average balances in cash and short-term investments
and lower investment yields during the three months ended September 30, 2002.
Interest expense for the three months ended September 30, 2002 was $3,000,
compared to $2,000 for the three months ended September 30, 2001.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $400,000 and $420,000 during each of the
three months ended September 30, 2002 and September 30, 2001, respectively. Such
preferred stock
-16-
dividends, paid in shares of our Common Stock through May 11, 2002, and
thereafter in cash, are the result of our obligations in connection with the
issuance of our Series D Preferred Stock in May 1999. As more fully set forth in
the Amended Certificate of Designation, Preferences and Rights of the Series D
Cumulative Convertible Preferred Stock, after May 11, 2002, we no longer pay
dividends on the Series D Preferred Stock in shares of our Common Stock, and we
became obligated to pay such dividends in cash, at a rate equal to 8% per annum.
Cash dividends accrued for the period July 1, 2002 to September 30, 2002 were
$400,000.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues
Revenues
(dollars in thousands) 2002 Change 2001
-------- ------- -------
Product Sales ................... $31,026 43.0% $21,701
Contract Revenues ............... 1,769 (37.1)% 2,812
License Revenues ................ 162 (65.7)% 472
-------- ------- -------
Total ........................ $32,957 31.9% $24,985
Total revenues during the nine months ended September 30, 2002 were $33.0
million, representing a 31.9% increase over total revenues of $25.0 million
during the nine months ended September 30, 2001. Such 2002 revenues included
approximately $31.0 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D, Pandel (since July 1, 2002) and Dentaplex, $1.8 million in
contract revenues, which were derived from our co-promotion of Vioxx and Pandel
(prior to June 30, 2002), and $161,000 in deferred foreign license and milestone
revenues for Periostat. Product sales increased $9.3 million, or 43.0%, during
the nine months ended September 30, 2002 to $31.0 million compared to $21.7
million during the nine months ended June 30, 2001, mainly due to significantly
higher prescriptions for Periostat and the addition of the Atrix dental
products, which we began marketing in October 2001, and Pandel, which we
launched on July 1, 2002.
Contract revenues for the nine months ended September 30, 2002 declined
37.1% to $1.8 million from $2.8 million during the nine months ended September
30, 2001 as a result of the termination in April 2001 of our prior agreement
with Novartis Pharmaceuticals to co-promote Denavir and a decline in contract
revenues from Merck relating to our co-promotion of Vioxx. Contract revenues for
the nine months ended September 30, 2001 included $297,000 in co-promotion
revenues for Denavir. There were no contract revenues for Denavir in the nine
months ended September 30, 2002. The decline in contract revenues from Merck was
due to lower levels of prescriptions for Vioxx resulting from increased
competitive activity experienced during 2002.
In accordance with SAB 101, which we adopted in 2000, we recorded $45,000
in licensing revenues during each of the nine months ended September 30, 2002
and September 30, 2001. This revenue was attributable to our recognition of
previously recognized up-front license fees received for various agreements that
were deferred upon the adoption of SAB 101 and is being recognized as income
over the expected performance period of these agreements. We also
-17-
recorded milestone revenues from our foreign licensing partners of $117,000 and
$427,000 during the nine months ended September 30, 2002 and 2001, respectively.
Cost of Product Sales
Cost of Product Sales
(dollars in thousands) 2002 Change 2001
-------- ------- -------
Cost of Product Sales............ $ 4,891 17.7% $ 4,156
Percent of Product Sales......... 15.8% 19.2%
Cost of product sales includes product packaging, third-party royalties,
amortization of new product licensing fees, and the costs associated with the
manufacturing, storage and stability of Periostat, Pandel and the Atrix
products.
Cost of product sales were $4.9 million, or 15.8% of product sales during
the nine months ended September 30, 2002, compared to $4.2 million, or 19.2% of
product sales during the nine months ended September 30, 2001. Cost of product
sales increased in absolute dollars but decreased as a percentage of product
sales during such period in 2002 compared to 2001, primarily due to
manufacturing cost savings for Periostat tablets, which we launched in July
2001, compared to Periostat capsules. This decrease in percent of product sales
was slightly offset by a higher percent of product sales for the Atrix products
and Pandel, launched in November 2001 and July 2002, respectively.
Research and Development
Research and Development
(dollars in thousands) 2002 Change 2002
-------- ------- -------
Research and development......... $ 3,054 7.5% $ 2,842
Percentage of Total revenue...... 9.3% 11.4%
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs.
Research and development expenses increased $212,000, or 7.5% to $3.1
million during the nine months ended September 30, 2002 from $2.8 million during
the nine months ended September 30, 2001.
Development projects conducted during the nine months ended September 30,
2002 included our continuing formulation development work for a once-a-day
formulation of Periostat and formulation and stability testing for several
potential products utilizing our licensed Restoraderm technology, which totaled
$953,000 and $293,000, respectively. Future development of the once-a-day
technology will be contingent on the outcome of the initial phase of the
project, which is expected to be determined by the end of 2002. Additional
expenses ranging from approximately $375,000 in 2002 to as much as $5.4 million
through completion could be incurred if the project is successful.
-18-
Clinical projects totaling $704,000 were conducted during the nine months
ended September 30, 2002 and included several Phase IV studies for Periostat in
various dental indications, initiation of a 70-patient clinical study to
evaluate the efficacy of Periostat to treat meibomiantis (an ocular condition),
clinical development work relating to Periostat in dermatological indications
and initiation of a Phase III trial in 160 patients to evaluate Periostat for
the treatment of rosacea. Until the outcome of these trials are determined, it
is premature to estimate the future costs associated with the development of
Periostat for dermatological indications.
Other research and development expenses incurred during the nine months
ended September 30, 2002 included $184,000 in regulatory consulting and filing
fees under the Mutual Recognition Procedure in Europe and $222,000 for various
regulatory costs, including annual FDA filing fees, legal, and regulatory
expenses in the United States. Direct salaries and other personnel expenses
incurred during the nine months ended September 30, 2002 were $391,000.
Additionally, during such period we incurred $307,000 in consulting, travel and
other office expenses.
Research and development expenses incurred during the nine months ended
September 30, 2001 included $182,000 in research grants to various academic
institutions for conducting research related to our core technology, $125,000 in
Periostat Phase IV clinical trial grants, $517,000 in contracted clinical and
development expenses related to a safety and pharmacokinetic study for Metastat
and other IMPACS compounds in the development stage and $71,000 in manufacturing
development and validation expenses for Dentaplex. Other development projects
included $236,000 for the initial expenses for the once-a-day formulation for
Periostat and $12,000 for a Phase II trial using Periostat for the treatment of
acne.
Other research and development expenses incurred during the nine months
ended September 30, 2001 included $420,000 in regulatory consulting and filing
fees under the Mutual Recognition Procedure in Europe and $441,000 for various
regulatory costs, including annual FDA filing fees and legal and regulatory
expenses in the United States related to obtaining FDA approval for Periostat
tablets. Research and development expenses incurred during the nine months ended
September 30, 2001 also included $360,000 in direct salaries and other personnel
related expenses, $164,000 related to stock compensation expense and $314,000 in
consulting, travel and other office expenses.
Selling, General and Administrative
Selling, General and Administrative
(dollars in thousands) 2002 Change 2001
------- ------ --------
Selling, general and administrative $25,248 0.6% $ 25,095
Percentage of Total revenue...... 76.6% 100.4%
Selling, general and administrative expenses consist primarily of personnel
salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
-19-
Selling, general and administrative expenses increased 0.6% to $25.2
million during the nine months ended September 30, 2002 from $25.1 million
during the nine months ended September 30, 2001. The increase of $153,000 in
selling, general and administrative expenses, or 0.6%, from the nine months
ended September 30, 2001 to the nine months ended September 30, 2002, was
primarily the result of professional promotion expenses for Periostat,
additional promotional expenses for the Atrix dental products and Pandel, and
the expansion of our dermatology sales operation, offset in part by the
reduction in our DTC and other Periostat promotion expenditures.
Significant components of selling, general and administrative expenses
incurred during the nine months ended September 30, 2002 included $12.0 million
in direct selling and sales training expenses, $8.9 million in marketing
expenses (including Periostat DTC advertising and promotion expenditures for
Periostat, the Atrix products and co-promotion expenses relating to Vioxx and
Pandel) and $4.3 million in general and administrative expenses, which include
business development, finance and corporate activities. Significant components
of selling, general and administrative expenses during the nine months ended
September 30, 2001 included $10.1 million in direct selling and training
expenses, $11.4 million in marketing expenses (including Periostat DTC
advertising expenditures, launch expenses for Dentaplex and co-promotion
expenses related to Vioxx) and $3.6 million in general and administrative
expenses.
Other Income/Expense
Other Income/Expense 2002 Change 2001
------- ------ ---------
Interest income.................. $55,000 (70.9)% $ 189,000
Interest expense................. $ 5,000 (28.6)% $ 7,000
Other income..................... $ -- N/A $ 8,000
Interest income decreased to $55,000 for the nine months ended September
30, 2002 compared to $189,000 for the nine months ended September 30, 2001. This
decrease was due to lower average balances in cash and short-term investments
and lower investment yields during the nine months ended September 30, 2002.
Interest expense for the nine months ended September 30, 2002 was $5,000,
compared to $7,000 for the nine months ended September 30, 2001. Other income
during the nine months ended September 30, 2001 of $8,000 was recognized as a
result of foreign currency transactions.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $1.2 million for the nine months ended
September 30, 2002 and $1.3 million for the nine months ended September 30,
2001. Such preferred stock dividends, paid in shares of our Common Stock through
May 11, 2002, and thereafter in cash, were the result of our obligations in
connection with the issuance of our Series D Preferred Stock in May 1999. As
more fully set forth in the Amended Certificate of Designation, Preferences and
Rights of the Series D Cumulative Convertible Preferred Stock, after May 11,
2002, we no longer pay dividends on the Series D Preferred Stock in shares of
our Common Stock, and we became obligated to pay such dividends in cash, at a
rate equal to 8% per annum. Cash dividends incurred for the period May 12, 2002
to September 30, 2002 were approximately $618,000.
-20-
LIQUIDITY AND CAPITAL RESOURCES
Since our origin in January 1992, we have financed our operations through
private placements of our preferred and Common Stock, an initial public offering
of 2,000,000 shares of Common Stock, which generated net proceeds to us of
approximately $18.0 million after underwriting fees and related expenses, and a
subsequent public offering of 1,000,000 shares of Common Stock, which generated
net proceeds to us of approximately $11.6 million after underwriting fees and
related expenses. On May 12, 1999, we consummated a $20.0 million financing
through the issuance of our Series D Preferred Stock, which generated net
proceeds to us of $18.5 million. The issuance of the Series D Preferred Stock
was approved by a majority of our stockholders at our Annual Meeting of
Stockholders on May 11, 1999. A portion of the proceeds of the Series D
Preferred Stock financing consummated in May 1999 were used to repay a $10.0
million senior secured convertible note provided by one of the investors on
March 19, 1999 in connection with such financing. The remaining proceeds have
been and will be used for general working capital purposes.
The Series D Preferred Stock is convertible at any time into shares of our
Common Stock at a current conversion price of $9.91 per share, which conversion
price reflects a decrease from the initial conversion price of $11.00 per share
as a result of both a Common Stock financing in March 2001 and the sale of
shares of our Common Stock to Atrix Laboratories, Inc. in August 2001. Such
conversion price is not subject to reset except in the event that we should fail
to declare and pay dividends when due or we should issue new equity securities
or convertible securities at a price per share or having a conversion price per
share lower than the then applicable conversion price of the Series D Preferred
Stock. During the first three years following issuance, holders of the Series D
Preferred Stock received dividends payable in shares of fully registered Common
Stock at a rate of 8.4% per annum. Thereafter, and beginning on May 12, 2002, we
began paying such dividends in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Preferred Stock shall, at our
option (as determined by our board of directors), automatically be converted
into fully paid, registered and non-assessable shares of Common Stock, if the
following two conditions are met: (i) the last sale price, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices on
the Nasdaq National Market is at least 200% of the conversion price then in
effect (as of September 30, 2002, such conversion price was $9.91 per share) for
forty consecutive trading days; and (ii) a shelf registration statement is in
effect for the shares of Common Stock to be issued upon conversion of the Series
D Preferred Stock. Without written approval of a majority of the holders of
record of the Series D Preferred Stock, we, among other things, shall not: (i)
declare or pay any dividend or distribaggregate outstanding at any time for
working capital requirements in the ordinary course of business; or (iii) make
research and development expenditures in excess of $7.0 million in any
continuous twelve month period, unless we have reported positive net income for
four consecutive quarters immediately prior to such twelve month period.ution on
any shares of our capital stock other than dividends on the Series D Preferred
Stock; (ii) make any loans, incur any indebtedness or guarantee any
indebtedness, advance capital contributions to, or investments in any person,
issue or sell any securities or warrants or other rights to acquire our debt
securities, except that we may incur such indebtedness in any amount not to
exceed $10.0 million in the aggregate outstanding at any time for working
capital requirements in the ordinary course of business; or (iii) make research
and development expenditures in excess of $7.0 million in any continuous twelve
month period, unless we have reported positive net income for four consecutive
quarters immediately prior to such twelve month period.
-21-
In April 1999, we received $219,000 in proceeds from our issuance of a note
payable. We used the proceeds of such note to fund the purchase of equipment,
fixtures and furniture for our corporate offices in Newtown, Pennsylvania. The
term of the note was three years at 9.54% per annum, with monthly minimum
payments of principal and interest. We repaid such note on May 1, 2002.
On March 12, 2001, we consummated a private equity offering of 1,500,000
shares of Common Stock for an aggregate purchase price of $7.5 million, which
generated net proceeds to us of approximately $6.8 million. We are using such
proceeds primarily for our DTC advertising campaign and for general working
capital purposes. In addition, the investors in such financing were also issued
an aggregate of 400,000 warrants which are exercisable for up to three years
from the date of such financing into 400,000 shares of our Common Stock at an
exercise price per share of $6.00. The consideration received for such warrants
is included in the aggregate proceeds received in such financing. We also issued
to our financial advisor in such financing warrants to purchase an aggregate of
150,000 shares of our Common Stock exercisable for up to three years at an
exercise price of $5.70 per share, as partial consideration for services
rendered in connection with the financing. Such warrants may be deemed
automatically exercised in certain circumstances based upon our stock price. In
connection with the March 2001 financing, we are obligated to maintain the
effectiveness of a shelf registration statement with respect to all such shares
of Common Stock issued and shares underlying all such warrants for a continuous
24 month period, or we will be required to issue to the investors and the
financial advisor an additional 27,500 shares of our Common Stock, in the
aggregate, for no additional consideration.
On March 19, 2001, we consummated a revolving credit facility with Silicon
Valley Bank, which was subsequently amended in March 2002. The credit facility,
as amended, extends through March 15, 2004. We may borrow up to the lesser of
$4.0 million or 80% of eligible accounts receivable, as defined under the credit
facility. The amount available to us is also reduced by outstanding letters of
credit which may be issued under the credit facility in amounts totaling up to
$1.5 million. On March 26, 2002, we initially secured our expected purchase
order commitments for Periostat from Pharmaceutical Manufacturing Research
Services, Inc., a contract manufacturing company, with a letter of credit under
the credit facility for approximately $1.3 million. This amount was reduced
during the third quarter of 2002 to $549,000. As we continue to pay down amounts
under the letter of credit, the amount available to us under the Facility will
increase. We are not obligated to draw amounts and any such borrowings bear
interest, payable monthly, currently at the prime rate plus 1.0 to 1.5% per
annum and may be used only for working capital purposes. Without the consent of
the Silicon Valley Bank, we, among other things, shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business; or (iii) pay or declare any cash dividends on our Common Stock. We
must also maintain a certain tangible net worth and a minimum of $2.0 million in
cash at Silicon Valley Bank, net of borrowings under the credit facility, at all
times during the term thereto. In addition, we have secured our obligations
under the credit facility through the granting of a security interest in favor
of the bank with respect to all of our assets, including our intellectual
property. As of September 30, 2002, we had no current borrowings outstanding
against the credit facility.
On August 24, 2001, we signed a License and Marketing Agreement with Atrix
Laboratories, Inc. to market Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and
-22-
Atrisorb-D, to the United States dental market. Pursuant to the terms of this
agreement, among other things: (i) Atrix will manufacture the dental products
for us at an agreed upon transfer price and will receive royalties on future net
sales of the products each calendar year; (ii) we paid to Atrix a $1.0 million
licensing fee to market such products; (iii) we have committed to no less than
$2.0 million in advertising and selling expenses related to the Atrix products
during the fiscal year beginning January 1, 2002 ($1.5 million of which we have
expended as of September 30, 2002); (iv) we have agreed to maintain, for a
period of 24 months, a force of no less than ninety full time dental consultants
and divisional and regional managers to make sales and product recommendation
calls on dental professionals; and (v) we have agreed that the Atrix products
will be the subject of a specific number of detail calls in the United States
during 2002. We will also be required to make certain annual minimum
expenditures for advertising and promotional activities over the term of the
agreement beginning January 1, 2003, including: (i) the lesser of $4,000,000 or
30% of our contribution margin relating to a specific Atrix product that we
market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin
relating to a separate Atrix product that we market.
In addition, pursuant to the terms of a Stock Purchase Agreement that we
executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered
shares of our Common Stock for an aggregate purchase price of approximately $3.0
million. As a result of the sale of such shares to Atrix, the conversion price
of our Series D Preferred Stock was reduced from $9.94 to $9.91 per share.
On February 14, 2002, we entered into an equity line arrangement under the
terms of a Common Stock Purchase Agreement with Kingsbridge Capital Limited.
Pursuant to this agreement, we may, at our sole discretion and from time to time
through February 13, 2003, sell shares of our Common Stock to Kingsbridge at a
discount to market price, as determined prior to each such sale. Under the terms
of the agreement, as amended, we committed to draw down on this equity line, an
amount aggregating at least $1.5 million in registered shares of Common Stock
prior to October 29, 2002, of which we had drawn down an aggregate of $1.3
million as of such date. Because we have not satisfied such minimum commitment
amount, we are obligated to pay Kingsbridge approximately $23,000. The equity
line provides for the sale of up to $8.5 million in registered shares of our
Common Stock to Kingsbridge. As of September 30, 2002, we had drawn down and
issued an aggregate of approximately $1.3 million in registered shares of Common
Stock under such equity line arrangement.
Additionally, in connection with the consummation of the equity line and
pursuant to the terms of a warrant agreement executed by us, we issued
Kingsbridge a warrant to purchase 40,000 shares of our Common Stock at an
exercise price of $9.38 per share. The conversion price of our Series D
Preferred Stock was not reduced as a result of such issuance. Such warrant is
exercisable as of August 14, 2002, and will expire on August 13, 2007. We have
registered the shares of our Common Stock which may be issued by us under the
equity line and upon any exercise of the warrant by Kingsbridge under a shelf
registration statement on Form S-3 which registered an aggregate of 964,880
shares of our Common Stock. On April 29, 2002, the Securities and Exchange
Commission declared such shelf registration statement on Form S-3 effective.
-23-
At September 30, 2002, we had cash and cash equivalents of approximately
$5.1 million, a decrease of $1.1 million from the $6.2 million balance at
December 31, 2001. In accordance with investment guidelines approved by our
Board of Directors, cash balances in excess of those required to fund operations
have been invested in short-term United States Treasury securities and
commercial paper with a credit rating no lower than A1/P1. Our working capital
at September 30, 2002 was $5.8 million, a decrease of $500,000 from $6.3 million
at December 31, 2001. This decrease primarily reflects our current obligation to
Altana for the sublicensing rights for Pandel acquired in June 2002.
Prior to the third quarter of 2002, we historically have had negative cash
flows from operations and have used the net proceeds of public and private
placements of our equity to fund operations. We currently believe that projected
increases in sales of our United States marketed products in combination with
contract and license revenues, anticipated cash inflows from both our equity
line of credit with Kingsbridge and our revolving credit facility with Silicon
Valley Bank will allow us to achieve continued profitability and positive cash
flows through 2003. At this time, however, we cannot accurately predict the
effect of certain developments on future product sales such as the degree of
market acceptance of our products and technology, competition, the effectiveness
of our sales and marketing efforts and the outcome of our research and
development to demonstrate the utility of Periostat in indications beyond those
already included in the FDA approved label. Contract and license revenues
include receipts from co-promotion agreements and performance milestones. The
continuation of any of these agreements is subject to the achievement of certain
milestones and to periodic review by the parties involved.
We believe that other key factors that could affect our internal and
external sources of cash are:
o Revenues and margins from sales of Periostat and other products and
contracted services;
o The success of our dermatology franchise;
o The success of our pre-clinical, clinical and development programs;
o The receptivity of the capital markets to future financings and our
ability to draw down on our equity line at desired price levels;
o Our ability to enter into additional strategic collaborations and to
maintain existing and new collaborations and the success of such
collaborations; and
o Our ability to meet the covenant requirements under our revolving
credit facility.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate to cash dividends on
our outstanding Series D Preferred Stock, operating leases for our office space
and other contractual commitments with our marketing partners for certain
selling and promotional expenses
-24-
associated with the products we are currently detailing. Additionally, we also
expect to make certain inventory purchases from our contract manufacturer of
Periostat, guaranteed by our irrevocable Letter of Credit with Silicon Valley
Bank.
Our Series D Preferred Stock paid dividends in Common Stock at a rate of
8.4% per annum from the date of issuance of such Series D Preferred Stock
through May 11, 2002. After May 11, 2002, the Series D Preferred Stock pays
dividends in cash at a rate of 8.0% per annum. The Series D Preferred Stock is
convertible into our Common Stock at a current conversion price of $9.91 per
share, subject to adjustment, at any time by the holder and under certain
conditions by us. The conversion price of the Series D Preferred Stock is
subject to adjustment in the event we fail to declare or pay dividends when due
or should we issue new equity securities or convertible securities at a price
per share or having a conversion price per share lower than the applicable
conversion price of the Series D Preferred Stock.
In May 1999, we entered into a lease agreement relating to our office space
in Newtown, Pennsylvania. The lease has an initial term of ten years. Rent is
expected to be approximately $318,000 per year and is subject to market
adjustments at the end of the fifth year.
During 1999, we entered into a three-year co-promotion agreement with Merck
& Co., Inc. for Vioxx under which we are committed to spend up to $1.0 million
annually for promotional expenses, unless the agreement is earlier terminated.
In September 2002, we amended this agreement and extended the term thereof to
December 31, 2003.
Pursuant to our License and Marketing Agreement with Atrix Laboratories, we
have committed to: (i) expend no less than $2.0 million in advertising and
selling expenses related to the Atrix products during the fiscal year beginning
January 1, 2002; (ii) maintain, through 2003, a force of no less than ninety
full time dental consultants and divisional and regional managers to make sales
and product recommendation calls on dental professionals; and (iii) make the
Atrix products the subject of a specific number of detail calls in the United
States during 2002. We will also be required to make certain minimum
expenditures for advertising and promotional activities after 2002, including:
(i) the lesser of $4.0 million or 30% of our contribution margin, as defined in
the agreement, relating to a specific Atrix product that we market, and (ii) the
lesser of $2.0 million or 30% of our contribution margin, as defined in the
agreement, relating to a separate Atrix product that we market. For the nine
months ended September 30, 2002, we had fulfilled $1.5 million of the $2.0
million advertising and selling expense commitment for 2002.
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement with Thomas Skold pursuant to which we were granted an exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug delivery system which we intend to develop for dermatological applications.
Pursuant to the terms of such agreement, upon the occurrence of certain events,
we will be required to pay certain consulting, royalty and milestone payments in
the aggregate amount of up to $4.0 million, of which no more than $318,000,
$950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002,
January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of
such agreement is for the life of any patent that may be issued to us for the
first product we develop utilizing such technology, or, if we do not acquire any
patentable products, seven years.
-25-
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which we were granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders using Shire's technology. In addition, under
the agreement, Shire shall perform certain product development functions for us.
Pursuant to the terms of such agreement, we will pay to Shire a percentage of
certain net sales of products utilizing any part of Shire's technology. Also
under the agreement, we have committed to payments, in cash or at our option, a
combination of cash and our Common Stock, upon the achievement of certain
clinical and regulatory milestones in the event we pursue certain applications
of the technology which could total up to $7.9 million in the aggregate.
Belowis a table which presents our maximum contractual obligations and
commercial commitments as of September 30, 2002:
Payments Due by Period
---------------------------------------------------------------------------
Three
Months
ending
Contractual December 2003 and 2005 and 2007 and
Obligations Total 31, 2002 2004 2006 after
- ------------------- ----------- ------------- ----------- ----------- --------------
Operating Leases(1) $ 2,280,000 $ 83,000 $ 667,000 $ 668,000 $ 862,000
Unconditional ..... $ 366,000(2)
Purchase ........ $ 644,000(3) $1,000,000(3)
Obligations ..... $ 2,529,000 $ 519,000(4) $ --(4) $ --(4) $ --(4)
Cash Dividends on
Series D
Preferred Stock . $ 6,800,000(5) $ 400,000(5) $3,200,000(5) $3,200,000(5) $ --(5)
Total Contractual
Obligations ..... $11,609,000 $ 2,012,000 $4,867,000 $3,868,000 $ 862,000
(1) Such amounts primarily include minimum rental payments for our office
lease in Newtown, Pennsylvania.
(2) Such amount represents committed inventory purchases on a purchase
order under the terms of our Agreement with Pharmaceutical Research
Manufacturing Services, Inc.
(3) Such amount represents the maximum amounts payable under the terms of
our Co-Promotion Agreement with Merck & Co., Inc. for Vioxx.
(4) Such amounts are payable under the terms of our Agreement with Atrix
Pharmaceuticals. As of September 30, 2002, we will be required to
expend $519,000 in advertising and selling expenses related to the
Atrix products in the fourth quarter of 2002, and to make certain
annual minimum expenditures for advertising and promotional activities
after 2002, during the term of agreement, including: (i) the lesser of
$4,000,000 or 30% of our contribution margin (as defined in the
agreement) relating to a specific Atrix product that we market, and
(ii) the lesser of $2,000,000 or 30% of our contribution margin (as
defined in the agreement) relating to a separate Atrix product that we
market.
-26-
(5) Pursuant to the terms of our Series D Cumulative Convertible Preferred
Stock issued in May 1999, and unless earlier converted pursuant to its
terms, the holders of the Series D Preferred Stock are entitled to
dividends payable in cash at a rate of 8.0% per annum.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that we are not subject to a material impact to our financial
position or results of operations relating to market risk.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Based on our
evaluation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Quarterly Report on Form 10-Q, our
chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
-27-
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Amended and Restated Bylaws
On September 12, 2002, our Board of Directors approved Amended and Restated
By-Laws of the Company.
Research Collaboration
On October 17, 2002, we announced that we had entered into a research
collaboration with Discovery Laboratories, Inc. to evaluate the combination of
their respective platform technologies for the development of novel respiratory
disease therapeutics.
License Agreement
On October 21, 2002, we announced an agreement pursuant to which Medtronic,
Inc. obtained an exclusive, worldwide license with respect to certain of the
Company's IMPACS compounds (Inhibitors of Multiple Proteases and CytokineS)
relating to the use of such compounds to treat aortic aneurysms and other forms
of vascular disease with medical devices.
Co-Promotion Agreements
On September 23, 2002, we executed an amendment, extension and restatement
of our Co-Promotion Agreement with Merck & Co., Inc. with respect to Vioxx,
having a term through December 31, 2003.
On October 1, 2002, we entered into a Product Detailing Agreement with
Novartis Consumer Health, Inc. Pursuant to this Agreement, we will co-promote
Novartis' Denavir product to our target dentists in the United States and we
will receive detailing fees and performance payments from Novartis.
Change of Control Agreements
On September 18, 2002, we entered into Change of Control Agreements with
each of the following executive officers: Brian Gallagher, Nancy C. Broadbent,
Robert Ashley, David Pfeiffer and Douglas Gehrig.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated By-Laws of CollaGenex Pharmaceuticals, Inc.
10.1 Form of Change of Control Agreement executed with each of Brian
Gallagher, Nancy C. Broadbent, Robert Ashley, David Pfeiffer and
Douglas Gehrig.
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99.1 Certification Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter to which this
report on Form 10-Q relates.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CollaGenex Pharmaceuticals, Inc.
Date: November 14, 2002 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 By: /s/ Nancy C. Broadbent
-------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATION
I, Brian M. Gallagher, Ph.D., Chief Executive Officer of CollaGenex
Pharmaceuticals, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Brian M. Gallagher, Ph.D.
-----------------------------
Dated: November 14, 2002 Brian M. Gallagher, Ph.D.
Chief Executive Officer
CERTIFICATION
I, Nancy C. Broadbent, Chief Financial Officer of CollaGenex Pharmaceuticals,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Nancy C. Broadbent
----------------------
Dated: November 14, 2002 Nancy C. Broadbent
Chief Financial Officer