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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly
period ended June 30, 2002
Commission File No. 000-30123
FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2004779
(State of incorporation) (I.R.S. Employer Identification Number)
6195 SHILOH ROAD, ALPHARETTA, GEORGIA 30005
(Address of registrant's principal executive offices, including zip code)
(Registrant's telephone number, including area code): (770) 442-9707
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 [ ]
As of August 8, 2002, there were 35,265,688 shares of the Registrant's
Common Stock outstanding.
FIRST HORIZON PHARMACEUTICAL CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Consolidated Balance Sheets at June 30, 2002 and 1
December 31, 2001
Consolidated Statements of Operations for the three and six months ended June 2
30, 2002 and June 30, 2001
Consolidated Statements of Cash Flows for the six months ended 3
June 30, 2002 and June 30, 2001
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 24,307 $ 53,458
Accounts receivable, net of allowance for
doubtful accounts, discounts and
contractual adjustments of $1,481
and $1,087 at June 30, 2002 and
December 31, 2001, respectively 18,422 12,244
Inventories 15,082 4,363
Samples and other prepaid expenses 3,620 1,243
Income taxes receivable 2,302 1,674
Deferred tax assets 3,209 323
------------- --------------
Total current assets 66,942 73,305
Property and equipment, net 1,341 710
Other Assets:
Other assets 476 1,056
Intangibles, net 267,303 92,849
Long term deferred tax asset 17 2,230
------------- --------------
Total other assets 267,796 96,135
Total assets 336,079 170,150
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,394 $ 4,540
Accrued expenses 29,677 22,102
------------- --------------
Total current liabilities 35,071 26,642
Long-Term Liabilities:
Other long-term liabilities 36 144
------------- --------------
Total liabilities 35,107 26,786
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 1,000,000 shares authorized
and none outstanding - -
Common stock, $0.001 par value; 100,000,000
shares authorized; 35,272,237
and 27,626,002 outstanding
at June 30, 2002 and December 31, 2001,
respectively 35 28
Additional paid-in-capital 287,475 131,560
Deferred compensation (382) (557)
Retained Earnings 13,844 12,333
------------- --------------
Total stockholder's equity 300,972 143,364
Total liabilities and stockholders' equity $ 336,079 $ 170,150
============= ==============
(See notes to consolidated financial statements)
1
FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
Net Revenues $ 26,006 $ 12,979 $ 53,126 $ 25,432
Operating costs and expenses
Cost of revenues 4,701 1,707 8,997 3,478
Selling, general and administrative expenses, 16,755 7,582 30,904 15,483
Depreciation and amortization 4,137 398 6,334 794
Research and development expense 286 233 602 850
------------ ------------ ----------- -----------
Total operating costs and expenses 25,879 9,920 46,837 20,605
Operating income 127 3,059 6,289 4,827
------------ ------------ ----------- -----------
Other income (expense)
Interest expense (1,316) - (2,731) (2)
Interest income 110 657 301 899
Other 1 2 1 2
------------ ------------ ----------- -----------
Total other income (expense) (1,205) 659 (2,429) 899
Income (loss) before provision for income taxes (1,078) 3,718 3,860 5,726
Benefit (provision) for income taxes 415 (1,450) (1,486) (2,230)
------------ ------------ ----------- -----------
Net income before extraordinary loss $ (663) $ 2,268 $ 2,374 $ 3,496
Extraordinary loss on debt extinguishment,
net of income taxes $ (863) $ - $ (863) $ -
------------ ------------ ----------- -----------
Net income (loss) $ (1,526) $ 2,268 $ 1,511 $ 3,496
============ ============ =========== ===========
Net income (loss) per common share:
Basic:
Income before extraordinary loss $ (0.02) $ 0.09 $ 0.08 $ 0.16
Extraordinary loss on debt extinguishment, net
of income taxes (0.03) - (0.03) -
------------ ------------ ----------- -----------
Basic earnings per common share: $ (0.05) $ 0.09 $ 0.05 $ 0.16
============ ============ =========== ===========
Diluted:
Income before extraordinary loss $ (0.02) $ 0.09 $ 0.08 $ 0.15
Extraordinary loss on debt extinguishment, net
of income taxes (0.03) - (0.03) -
------------ ------------ ----------- -----------
Diluted earnings per common share: $ (0.05) $ 0.09 $ 0.05 $ 0.15
============ ============ =========== ===========
Weighted average common shares outstanding:
Basic 33,341 24,007 30,485 21,792
============ ============ =========== ===========
Diluted 33,341 26,109 $ 31,513 23,842
============ ============ =========== ===========
(See notes to consolidated financial statements)
2
FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
Cash flows from operating activities:
Net income $ 1,511 $ 3,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,334 794
Non-cash interest expense 1,678 -
Non-cash extraordinary item 1,404 -
Deferred tax provision (673) (321)
Non-cash compensation expense 175 166
Reduction in taxes payable - stock option exercises (215) 2,045
Changes in assets and liabilities, net of
acquired assets and liabilities:
Accounts receivable (6,178) (541)
Inventories (4,473) (729)
Samples and other prepaid expenses (1,795) (167)
Accrued expenses and other 7,466 825
Accounts payable 854 (277)
------------ -----------
Net cash provided by operating activities 6,518 5,291
Cash flows from investing activities:
Purchase of product licenses and other intangibles (186,788) -
Purchase of property and equipment (878) (142)
------------ -----------
Net cash (used in) investing activities (187,666) (142)
Cash flows from financing activities:
Capitalized financing costs incurred (3,082) -
Principal payments on long-term debt (137,000) (221)
Proceeds from issuance of common stock, net 155,079 84,045
Proceeds from long-term debt 137,000 -
------------ -----------
Net cash provided by financing activities 151,997 83,824
Net change in cash and cash equivalents (29,151) 88,973
Cash and cash equivalents, beginning of period 53,458 14,228
------------ -----------
Cash and cash equivalents, end of period $ 24,307 $ 103,201
Supplemental Cash Flow Information:
Cash paid for taxes $ 1,479 $ 1,161
============ ===========
Cash paid for interest $ 1,064 $ 2
============ ===========
3
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) which
management considers necessary for fair presentation of the financial
position, results of operations and cash flows of the Company for the
interim periods. Certain footnote disclosures normally included in
financial statements prepared according to generally accepted accounting
principles have been condensed or omitted from these interim financial
statements as permitted by the rules and regulations of the Securities and
Exchange Commission. Interim results are not necessarily indicative of
results for the full year. The interim results should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 000-30123) and the Company's S-1 Registration Statement (File No.
333-83698).
2. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 eliminates the pooling-of interest method of
accounting for business combinations. SFAS No. 141 is effective for any
business combination completed after June 30, 2001. The adoption of SFAS
No. 141 on January 1, 2002 did not have an impact on the Company's
financial condition or results of operations.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived
intangible assets are no longer amortized. Separate intangible assets that
are not deemed to have an indefinite life will continue to be amortized
over their useful lives. SFAS No. 142 also establishes a new method of
testing goodwill and other unamortized intangible assets for impairment on
an annual basis or on an interim basis if an event occurs or circumstances
change that would reduce the fair value of that goodwill or other
intangible asset below its carrying value. The amortization provisions of
SFAS No. 142 apply to goodwill and other intangible assets acquired after
June 30, 2001. The adoption of SFAS No. 142 on January 1, 2002 did not have
a material impact on the Company's financial condition or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets and is effective for financial periods after January 1,
2002. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on the Company's financial condition or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Revision of FAS Nos. 4,
44 and 64, Amendment of FASB 13 and Technical Corrections." SFAS No. 145
rescinds, amends or makes various technical corrections to certain existing
authoritative pronouncements. The Company does not believe the adoption of
SFAS No. 145 will have a material impact on the Company's financial
condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. Adoption of this
SFAS No. 146 is required with the beginning of fiscal year 2003. The
Company does not expect the adoption of SFAS No. 146 will have a material
impact on the Company's financial condition or results of operations.
4
3. Inventories
Inventories consist of purchased pharmaceutical products and are
stated at the lower cost or market. Cost is determined using the first-in,
first-out method, and market is considered to be net realizable value.
Inventories consist of finished product and bulk product awaiting
processing and packaging into finished product. Inventories at June 30,
2002 and December 31, 2001 consisted of (in thousands):
2002 2001
---- ----
Bulk product......................... $ 3,949 $ 581
Finished product..................... 11,133 3,782
------ ------
$ 15,082 $ 4,363
====== =======
Samples primarily consist of product samples used in the sales and
marketing efforts of the Company's products. Samples are expensed upon
distribution. Sample inventories at June 30, 2002 and December 31, 2001
were $2.5 million and $827,000, respectively.
4. Accrued Expenses
Accrued expenses at June 30, 2002 and December 31, 2001 consist of the
following (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Employee compensation and benefits $1,365 $3,325
Product returns 5,687 3,374
Sales deductions 8,037 5,637
Accrued royalties 1,598 1,042
Assumed liabilities - product acquisitions 7,111 5,593
Other 5,879 3,131
----- -----
$29,677 $22,102
====== ======
5. Earnings Per Share
Below is the calculation of basic and diluted net (loss) income per
share (in thousands, except per share data):
Six Months Six months
Quaretr Ended Quarter Ended ended ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------------- -------------- ------------ ------------
Net (loss) income before extraordinary loss (663) $2,268 $2,374 $3,496
Extraordinary loss on debt extinguishment, net of taxes (863) (863)
-------------- -------------- ------------ ------------
Net (loss) income $(1,526) $2,268 $1,511 $3,496
Weighted average common shares outstanding - basic 33,341 24,007 30,485 21,792
Dilutive effect of stock options - 2,102 1,028 2,050
-------------- -------------- ------------ ------------
Weighted average common shares outstanding - diluted 33,341 26,109 31,513 23,842
Basic net (loss) income per share before extraordinary items $ (.02) $ .09 $ .08 $ .16
============== ============== ============ ============
Extraordinary loss on debt extinguishment, net of taxes (.03) - (.03) -
-------------- -------------- ------------ ------------
Basic earnings (loss) per share $ (.05) $ .09 $ .05 $ .16
============== ============== ============ ============
Diluted net (loss) income per share before extraordinary item $ (.02) .09 .15
Extraordinary loss on debt extinguishment, net of taxes (.03) - (.03) -
-------------- -------------- ------------ ------------
Diluted earnings (loss) per share $ (.05) $ .09 $ .05 $ .15
============== ============== ============ ============
For the quarter ended June 30, 2002, there were 1,933,511 potential common
shares outstanding that were excluded from the diluted net (loss) per share
calculation because their effect would have been anti-dilutive.
5
6. Sular Acquisition
On March 6, 2002, the Company acquired from AstraZenca UK Limited
certain U.S. rights relating to the antihypertensive prescription
medication Sular, which the Company believes will complement its existing
cardiology product, Nitrolingual Pumpspray. The Company also entered into a
long-term manufacturing, supply, and distribution agreement with Sular's
current manufacturer, Bayer AG. The purchase price paid was $185.6 million
in cash, including $623,000 in acquisition costs, plus the assumption of
liabilities of $1,895,000 related to the return of product shipped prior to
the acquisition date. In addition, the Company must pay up to $30 million
in additional purchase price after closing, based on the achievement of
certain performance milestones during a specified period of time. The
agreements include the purchase of the Sular license rights, certain trade
names and managed care contracts and a distribution agreement. The purchase
price also included $6,246,000 of product inventory. The purchase price was
allocated among the fair values of the intangible and tangible assets
acquired and the liabilities assumed and is being amortized over a period
of five to twenty years. The managed care contracts are being amortized
over a period of five years and the distribution agreement is being
amortized over a period of ten years. All other intangibles are being
amortized over twenty years. The weighted average amortization period is
seventeen years. The results of the Sular line are included in the
consolidated statements of operations from March 6, 2002. The preliminary
purchase price allocation was as follows (in thousands):
License rights..................................$ 161,492
Distribution agreement..........................$ 10,350
Managed care contracts..........................$ 6,870
Trade name......................................$ 2,560
----------
Total intangibles...............................$ 181,272
Inventory.......................................$ 6,246
---------
Total assets....................................$ 187,518
Liabilities assumed.............................$ (1,895)
----------
Total acquisition...............................$ 185,623
=========
7. Intangible Assets
The following table reflects the components of intangible assets as of
June 30, 2002 (in thousands):
Gross Accumulated Net Estimated
Amount Amortization Amount Useful Life
------ ------------ ------ ------------
Licensing rights $243,236 $(8,196) $235,040 20 years
Trade names 11,060 (348) 10,712 20 years
Contracts 8,300 (613) 7,687 5 years
Supply/Distribution agreements 11,490 (619) 10,871 1.4 to 3 years
Other intangibles 3,081 (88) 2,993 20 years
Total $277,167 $(9,864) $267,303 18.85
======== ======= ======== =====
For the three months ended June 30, 2002, amortization expense related to
the intangible assets was $4,054,000. Amortization for the six months ended
June 30, 2002 was $6,087,000. Amortization is calculated on a straight line
basis over the estimated useful life of the intangible asset. Estimated
annual amortization expense (in thousands) for each of the five succeeding
fiscal years is as follows:
6
Fiscal year ended December 31: Amount
------------------------------ ------
2002 $ 14,120
2003 $ 16,065
2004 $ 16,065
2005 $ 16,065
2006 $ 16,065
The Company operates in a single segment, the sale and marketing of
prescription products.
8. Follow-On Offering
On April 19, 2002, the Company completed its follow-on offering of
6,500,000 shares of common stock. The underwriters exercised an option to
purchase an additional 975,000 shares of common stock from the Company to
cover any over-allotments, bringing the total shares sold to 7,475,000. The
net proceeds from the offering were $152.6 million after the exercise of
the over-allotment option and after deducting offering expenses. Proceeds
from the offering, which closed on April 24, 2002, were used to repay the
debt incurred under the Company's senior secured credit facility and the
balance of the proceeds will be used for other general corporate needs.
9. Extraordinary Item
In order to finance the Sular acquisition, the Company obtained a $152
million senior secured credit facility. The Company incurred $3.1 million
of deferred financing costs associated with this credit facility. These
deferred financing costs were being amortized over the anticipated facility
repayment period. On April 24, 2002 the credit facility was repaid with the
offering proceeds. The Company recognized an extraordinary loss of
$863,000, net of income tax benefit of $540,000, related to the write off
of loan costs.
10. Subsequent Events
On July 8, 2002, the Company announced a share buyback program. This
program allows for the repurchase of up to $8 million in common stock until
July 5, 2003.
By notice given on July 12, 2002, the Company voluntarily terminated
its credit facility arranged through Deutsche Bank Securities, Inc.
pursuant to Section 3.02 of the Credit Agreement. At June 30, 2002, the
Company was not in compliance with the financial covenants of the credit
facility. As of June 30, 2002, there was no outstanding balance on the
credit facility.
On July 15, 2002, the Company announced the adoption of a shareholder
rights plan. The plan is designed to protect Company shareholders from
coercive or unfair takeover techniques that could deny them the opportunity
to realize the full value of their investment. The terms of the plan
provide for a dividend of one right to purchase a fraction of a share of a
newly created class of preferred stock for each share of common stock
outstanding as of the close of business on July 26, 2002, payable on August
9, 2002. The rights expire on July 26, 2012 and may only be exercised if
certain conditions are met.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read with the financial statements and related
footnotes and Management's Discussion and Analysis of Results of Operations and
Financial Condition included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 (File No. 000-30123) as well as information
included in the registration statement on Form S-1, as amended, dated April 19,
2002. The results discussed below are not necessarily indicative of the results
to be expected in any future periods. The following discussion contains
forward-looking statements that are subject to risks and uncertainties, which
could cause actual results to differ from the statements made.
OVERVIEW
The Company is a specialty pharmaceutical company that currently markets
and sells 17 brand name prescription products through its nationwide sales and
marketing force of approximately 210 professionals. The Company focuses on the
treatment of cardiovascular, obstetrical and gynecological, pediatric and
gastroenterological conditions and disorders. The Company seeks to acquire and
obtain licenses for pharmaceutical products that other companies do not actively
market that have high sales growth potential, are promotion-sensitive and
complement the Company's existing products. In addition, the Company seeks to
increase the value of existing products by developing new formulations, using
new delivery methods and seeking regulatory approval for new indications for
existing products. The Company may also acquire companies with complementary
products or development pipelines consistent with its therapeutic focus.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased $13.0 million, or 100%, over the
quarter ended June 30, 2001, to $26.0 million for the quarter ended June 30,
2002. Net revenues increased $27.7 million, or 109%, over the six month period
ended June 30, 2001 to $53.1 million for the six months ended June 30, 2002. The
increase in net revenues for the quarter and six month period was primarily a
result of the three newly acquired and licensed products added since the second
quarter of 2001: Prenate in August 2001, Furadantin in December 2001, and Sular
in March 2002. The increase in sales was also due to prescription growth since
June 30, 2001 in Ponstel, the Robinul line and Nitrolingual Pumpspray. According
to IMS Health's National Prescription Audit Plus(TM) data, total prescriptions
of Ponstel product increased 28% and Robinul products increased 27% for the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001.
The Company experienced erosion of sales of its Tanafed and Prenate
products during the quarter ended June 30, 2002 due to increased competition
from knock-off products resulting from pharmacists' substituting such knock-off
products for the Company's products. Net revenues for the 2002 quarter were also
adversely affected by distraction arising from the realignment of the Company's
sales force that was completed during the second quarter. The Company expects to
experience continued erosion of sales of Tanafed and Prenate due to competition
from knock-off products. Subject to completion of the Company's development
project for Tanafed, the Company plans to launch a line extension of Tanafed
later during 2002 to seek to mitigate future pharmacists' substitutions for
Tanafed. In addition, the Company is implementing a strategic education program
to mitigate pharmacists' substitutions for Prenate.
If the Company is successful in completing and introducing the line
extension to Tanafed which the Company currently has under development, the
Company anticipates that it may incur a expense estimated at $5 million
associated with the launch of the Tanafed line to buy back Tanafed products held
for sale by wholesalers and pharmacists.
Cost of Revenues. Cost of revenues increased $3.0 million, or 175%, to $4.7
million for the quarter ended June 30, 2002 compared to $1.7 million for the
quarter ended June 30, 2001. Cost of revenues increased $5.5 million, or 157%,
to $9.0 million for the six months ended June 30, 2002 compared to $3.5 million
for the six months ended June 30, 2001.
Gross Margin. Gross margin for the quarter ended June 30, 2002 was 82%
compared to 87% for the quarter ended June 30, 2001. For the six month period
ended June 30, 2002 gross margin was 83% compared to 86% for the six month
8
period ended June 30, 2001. This decrease in gross margin resulted primarily
from the change in product sales mix and Sular having a lower gross margin as
compared to our other products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.2 million, or 121%, to $16.8 million for
the quarter ended June 30, 2002. Selling, general and administrative expenses
increased $15.4 million, or 100%, for the six months ended June 30, 2002. As a
percentage of net revenues, selling, general and administrative expenses were
64% for the quarter ended June 30, 2002, as compared to 58% for the quarter
ended June 30, 2001. Selling related expenses increased due to the outside
commission and co-promotion expenses paid to Otsuka America Pharmaceutical, Inc.
for the Company's Nitrolingual Pumpspray co-promotion and to Professional
Detailing, Inc. for the Company's Prenate co-promotion and the new Sular
co-promotion that began in the second quarter of 2002. The Company also incurred
additional marketing expenses in the quarter, related to the launch of the Sular
product. Selling expenses for the quarter ended June 30, 2002 also increased due
to training costs for 50 new sales professionals added during the second quarter
and the Company's annual national sales meeting held in the second quarter.
General and administrative expenses for the quarter ended June 30, 2002
increased due to costs associated with relocating to the Company's new
headquarters. General and administrative expenses also increased due to
increased insurance costs related to new products acquired.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.7 million, or 939%, to $4.1 million for the quarter ended
June 30, 2002. Depreciation and amortization expense increased $5.5 million, or
687%, to $6.3 million for the six months ended June 30, 2002. This increase
resulted from higher amortization expense related to the acquisition of Prenate
in August 2001, Furadantin in December 2001, and Sular in March 2002 as well as
increased depreciation expense for new furniture, computer equipment and
leasehold improvements at the Company's new corporate headquarters. Amortization
expense could increase if the Company acquires additional products.
Research and Development Expense. Research and development expense
increased $53,000, or 23%, to $286,000 for the quarter ended June 30, 2002
compared to the quarter ended June 30, 2001. Research and development expense
decreased $248,000, or 29%, to $602,000 for the six months ended June 30, 2002
compared to $850,000 for the six months ended June 30, 2001. For the three and
six month period ended June 30, 2002, research and development expenses were
primarily related to the Robinul line extension development project.
Interest Expense. Interest expense increased $1.3 million for the quarter
ended June 30, 2002 compared to $0 for the quarter ended June 30, 2001. Interest
expense was $2.7 million for the six months ended June 30, 2002 compared to
$2,000 for the six months ended June 30, 2001. This increase is a result of the
amortization of deferred financing costs and other interest expenses associated
with the credit facility obtained on March 5, 2002 to finance the acquisition of
Sular. The Company recorded an extraordinary write-off of $1.4 million of
remaining debt fees in the second quarter of 2002 related to the Company's
retirement of its term loan on April 24, 2002. The Company repaid all
indebtedness outstanding under the credit facility in the second quarter of 2002
and has since terminated such credit facility.
Interest Income. Interest income was $110,000 for the quarter ended June
30, 2002 compared to $657,000 for the quarter ended June 30, 2001. Interest
income was $301,000 for the six months ended June 30, 2002 compared to $899,000
for the six months ended June 30, 2001. The decrease in interest income was the
result of the reduced amount of cash invested as the Company used the cash
proceeds from the Company's 2001 offering for the Prenate, Furadantin, and Sular
acquisitions. Most of the cash proceeds from the Company's 2002 offering were
used to repay indebtedness outstanding under the credit facility obtained to
finance the Sular acquisition.
Provision for Income Taxes. Income taxes were provided for at a rate of
38.5% in 2002 compared to 38.9% in 2001. The decrease is due to state income tax
structuring initiatives.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from debt service, working
capital requirements, product development activities and funding of
acquisitions. The Company has met these cash requirements through cash from
operations, proceeds from its line of credit, borrowings for product
acquisitions and the issuance of common stock.
The Company's cash and cash equivalents were $24.3 million at June 30,
2002. Net cash provided by operating activities for the six months ended June
30, 2002 was $6.5 million. This source of cash was primarily the result of net
income plus non-cash depreciation, amortization, compensation expense, and
interest expense, increased accounts payable and accrued expenses, offset by
increased accounts receivables, inventories, and samples and prepaid expenses.
Net cash used in investing activities for the six months ended June 30,
2002 was $187.7 million. The use of this cash was primarily for the Sular
acquisition.
Net cash provided by financing activities was $152 million for the six
months ended June 30, 2002. This source of cash was primarily the result of the
follow-on stock offering in April. This amount was offset by the capitalized
financing costs incurred to obtain the credit facility mentioned below.
On March 5, 2002 we entered into a Credit Agreement for a senior secured
credit facility arranged by Deutsche Bank Securities for $152 million consisting
of a $127 million term loan and a $25 million revolving loan to fund the
purchase of Sular and the Company's working capital requirements. The Company
borrowed $127 million under the term loan facility and $10 million under the
revolving loan facility in connection with its acquisition of Sular. The Company
completed a follow-on offering of its common stock on April 24, 2002. In the
offering, the Company sold 7,475,000 shares of common stock for net proceeds of
$152.6 million. Proceeds from the offering were used to repay all of the debt
incurred under the Company's senior secured credit facility. Borrowings under
the revolving loan bore interest at the Company's option at the base rate in
effect from time to time plus an applicable margin or the Eurodollar rate plus
an applicable margin. The credit facility contained various restrictive
covenants, including covenants relative to maintaining financial ratios and
earnings, limitations on acquisitions, dispositions and capital expenditures,
limitations on incurring additional indebtedness and prohibition on payment of
dividends and other payments on our common stock. The Company was not in
compliance with certain of the financial covenants contained in such credit
facility at June 30, 2002. The Company voluntarily terminated this credit
facility in July 2002 pursuant to Section 3.02 of the Credit Agreement.
The Company believes that its cash and cash equivalents and cash generated
from operations will be adequate to fund its current working capital
requirements for at least the next 12 months. However, in the event that the
Company makes significant acquisitions in the future, it may be required to
raise additional funds through additional borrowings or the issuance of debt or
equity securities.
INFLATION
The Company has only moderate price increases under its agreements with
third-party manufacturers as a result of raw material and labor price increases.
The Company has generally passed these price increases along to its customers.
SEASONALITY
Although the Company's business is generally non-seasonal, sales of certain
products, such as cough and cold products, increase slightly between October and
March due to the cold and flu season. The Company expects the impact of
seasonality to decrease as the Company acquires or obtains licenses for products
that treat chronic conditions. However, the Company anticipates that the
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seasonality may continue to affect sales for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The Company views its critical accounting policies to be those policies
which are very important to the portrayal of the Company's financial condition
and results of operations, and require management's most difficult, complex or
subjective judgments. The circumstances that make these judgments difficult or
complex relate to the need for management to make estimates about the effect of
matters that are inherently uncertain. The Company believes its critical
accounting policies to be as follows:
o Allowance for doubtful accounts. The Company is required to estimate
the level of accounts receivable recorded in its balance sheet that
will ultimately not be paid. Among other things, this assessment
requires analysis of the financial strength of the Company's
customers, which can be highly subjective, particularly in the recent
difficult general economic environment. The Company's policy is to
estimate bad debt expense based on prior experience supplemented by a
periodic customer specific review.
o Sales deductions. The Company provides volume rebates, contractual
price reductions with drug wholesalers and insurance companies, and
certain other sales related deductions on a regular basis. The exact
level of these deductions is not always immediately known and thus the
Company must record an estimate at the time of sale. The Company's
estimates are based on historical experience with similar programs,
and since the Company has a relatively small customer base, customer
specific historical experience is often useful in determining the
estimated level of deductions expected to be refunded to the Company's
customers when sales incentives are offered.
o Product returns. In the pharmaceutical industry, customers are
normally granted the right to return product for a refund if the
product has not been used prior to its expiration date, which is
typically two to three years from the date of manufacture. The
Company's return policy allows product returns for products within a
twelve-month window - from six months prior to the expiration date and
up to six months after the expiration date. Management is required to
estimate the level of sales that will ultimately be returned pursuant
to the Company's return policy, and record a related reserve at the
time of sale. These amounts are deducted from the Company's gross
sales to determine the Company's net revenues. The Company's estimates
take into consideration historical returns of a given product, all of
which have been on the market for many years, product specific
information provided by the Company's customers and information
obtained from independent sources regarding the levels of inventory
being held by the Company's customers, as well as overall purchasing
patterns by the Company's customers.
o Intangible assets. When the Company acquires the rights to manufacture
and sell a product, the Company records the cash purchase price, along
with the value of the product related liabilities the Company assumes,
as intangible assets. The Company uses the assistance of valuation
experts to help the Company allocate the purchase price to the fair
value of the various intangible assets the Company has acquired. Then,
the Company must estimate the economic useful life of each of these
intangible assets in order to amortize their cost as an expense in the
Company's statement of operations over the estimated economic useful
life of the related asset. The factors that drive the actual economic
useful life of a pharmaceutical product are inherently uncertain, and
include patent protection, physician loyalty and prescribing patterns,
competition by products prescribed for similar indications, future
introductions of competing products not yet FDA approved, the impact
of promotional efforts and many other issues. The Company uses all of
these factors in initially estimating the economic useful lives of the
Company's products, and the Company also continuously monitors these
factors for indications of appropriate revisions.
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FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations discussion as well as information contained elsewhere in this
Report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements include
statements about the following:
o the impact of accounting pronouncements on the Company's financial
condition or results of operations;
o developing new formulations, new delivery methods and seeking new
indications for existing products;
o the ability to acquire or license products;
o the ability to acquire other businesses;
o the Company's product development efforts;
o timing, characteristics, success of, and the amount of charges
associated with the planned launch of the Tanafed line extension;
o mitigation of the pharmacy substitutions for Prenate as a result of
the Company's strategic education program;
o future gross margins; o capital expenditures;
o future amortization expenses; o adequacy of capital resources;
o adequacy of funds to fund working capital requirements; and
o the ability to obtain future funds through additional borrowings or
the issue of debt or equity securities.
When used in this Report, the Company intends the words "may", "believe,"
"anticipate," "planned," "expect," "require," "intend," and "depend" to identify
"forward-looking statements." The Company's forward-looking statements involve
uncertainties and other factors, including those described in the "Risk Factors"
section of the Company's Prospectus dated April 19, 2002 under the headings "We
expect our operating results to be substantially dependent upon our results of
operations from Sular, and any factor adversely effecting sales of Sular could
have a materially adverse effect on our sales and profits," "We may have
difficulty maintaining our increasing sales of Sular, Prenate and Furadantin and
successfully integrating these products into our business," "The costs we may
incur to sell our new products may be disproportionately high relative to their
expected revenues," "The potential growth rate for Sular may be limited by
slower growth for the class of drugs to which Sular belongs," "We have no
experience selling Sular, have only limited experience selling Furadantin and
the Prenate products and there is no established market for Prenate GT," "The
regulatory status of prenatal vitamins makes Prenate products subject to
increased competition," "Our level of debt could reduce our growth and
profitability," "Our growth will suffer if we do not acquire rights to new
products and integrate them successfully," "We may encounter problems in the
manufacture of our products that could limit our ability to sell our products,"
"Part of our growth strategy is to acquire businesses, which subjects us to
additional risks," "We face generic and other competition that could lower
prices and unit sales," "Strong competition exists for our products, and
competitors have recently introduced new products and therapies that could make
our products obsolete," "A small number of customers account for a large portion
of our sales and the loss of one of them or changes in their purchasing
patterns, could result in reduced sales," "If our products under development
fail in clinical studies, if we fail or encounter difficulties in obtaining
regulatory approval for new products or new uses of existing products, or if our
development agreements are terminated, we will have expended significant
resources for no return," "We or third parties may violate government
regulations," "If third-parties payors do not adequately reimburse patients for
our products, doctors may not prescribe them," "We depend on highly trained
management, and we may not be able to keep current management or hire qualified
management personnel in the future," "Product liability claims and product
recalls could limit sales and increase costs," "We expect to require additional
funding, and if we cannot obtain it, our sales, profits, acquisitions and
development projects could suffer," "Competitors could offer a product
competitive with Sular," "If we do not secure or enforce patents and other
intellectual property rights, we could encounter increased competition that
would adversely affect our operating results," "Our products could infringe the
intellectual property rights of third parties, which could require us to pay
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license fees to defend litigation that would be expensive or prevent us from
selling products," "The regulatory status of some or products makes these
products subject to increased competition and other risks," "We face risks under
one of our development agreements because the other party to the agreement is a
related party," "Pohl-Boskamp can terminate our rights to Nitrolingual
Pumpspray," and "We have no experience selling products in other countries," We
do not undertake to update our forward-looking statements to reflect future
events or circumstances. These risk factors along with the others may cause
actual results, performance or achievements, to be different from that suggested
by the Company's forward-looking statements. You should not place undue reliance
on forward-looking statements. The Company does not intend to update any of
these factors or to publicly announce the results of any revisions to any of
these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to fluctuations
from changes in foreign currency exchange rates and interest rates. The
Company's purchases of Nitrolingual Pumpspray under its agreement with
Pohl-Boskamp and its purchases of Sular product inventory from Bayer are made in
Euros. In addition, sales of Cognex are recognized in the foreign currencies of
the respective European countries in which it is sold. While the effect of
foreign currency translations has not been material to the Company's results of
operations to date, currency translations on export sales or import purchases
could be adversely affected in the future by the relationship of the U.S. dollar
with foreign currencies.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
There were no material developments during the three months ended June 30,
2002 in our previously reported legal proceedings with Ethex Corporation and
Ther-Rx. Other than these legal proceedings, the Company is not a party to any
material legal proceedings.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 15, 2002, the Company announced the adoption of a shareholder
rights plan. The plan is designed to protect Company shareholders from coercive
or unfair takeover techniques that could deny them the opportunity to realize
the full value of their investment. The terms of the plan provide for a dividend
of one right to purchase a fraction of a share of a newly created class of
preferred stock for each share of common stock outstanding as of the close of
business on July 26, 2002, payable on August 9, 2002. The rights expire on July
26, 2012 and may only be exercised if certain conditions are met. The Company
also entered into a Shareholder Protection Rights Agreement with LaSalle Bank
National Association ("LaSalle") whereby LaSalle agreed to act as rights agent.
A copy of the Shareholder Protection Rights Agreement was filed as an exhibit to
the Company's Registration Statement on Form 8-A filed on July 16, 2002
(Commission File No. 000-30123).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 2002, the Company was not in compliance with financial
covenants under its senior secured credit facility arranged through Deutsche
Bank Securities, Inc. At June 30, 2002, the outstanding balance on the senior
secured credit facility was zero. The Company voluntarily terminated this credit
facility by notice given on July 12, 2002 pursuant to Section 3.02 of the Credit
Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held May 24, 2002, Pierre Lapalme and
Patrick Zenner were re-elected to Company's Board of Directors as Class C
Directors. There were 24,448,364 shares voted for and 275,252 shares withheld
for Pierre Lapalme and 24,392,205 shares voted for and 331,411 shares withheld
for Patrick Zenner. The Company's Class A Directors, John N. Kapoor, Ph.D., and
Jerry Ellis and Class B Directors, Mahendra G. Shah, Ph.D. and Jon Saxe continue
to serve on the Board. The terms of the Class A, B and C Directors expire at the
annual meeting of stockholders in fiscal years 2003, 2004 and 2005,
respectively.
Stockholders also voted at the annual meeting of stockholders to amend the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock to 100,000,000. There were 22,217,348 shares voted for,
2,490,009 shares voted against, and 16,259 shares voted to abstain from the
proposal to amend the Certificate of Incorporation.
Stockholders also voted at the annual meeting of stockholders to approve
and adopt the First Horizon Pharmaceutical Corporation 2002 Stock Plan. There
were 14,190,440 shares voted for, 8,960,791 shares voted against, and 25,805
shares voted to abstain from the proposal to adopt the 2002 Stock Plan.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* - Restated Certificate of Incorporation
3.2* - Amended and Restated By-Laws
3.3** - Certificate of Amendment of Restated Certificate of
Incorporation
4.1* - Form of Stock Certificate
10.1*** - First Horizon Pharmaceutical Corporation 2002 Stock Plan
99.1** - Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2** - Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------
* Incorporated by reference from Company's Registration Statement
on Form S-1 (Commission File No. 333-30764).
** Filed herein.
*** Incorporated by reference from the Company's Proxy Statement for
its May 24, 2002 annual meeting.
(b) The Registrant filed the following Forms 8-K during the quarter ended
June 30, 2002:
(i) On May 31, 2002, the Registrant filed a Form 8-K dated May 24,
2002 pursuant to Item 4 approving the dismissal of Arthur Andersen LLP
as the independent auditor of the Company.
(ii) On June 11, 2002, the Registrant filed a Form 8-K/A dated May 24,
2002 pursuant to Item 4 approving the dismissal of Arthur Andersen LLP
as the independent auditor of the Company.
(iii) On June 12, 2002, the Registrant filed a Form 8-K dated June 7,
2002 pursuant to Item 4 engaging Deloitte & Touche LLP as its
independent auditor for the fiscal year ending December 31, 2002.
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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 on August 13, 2002.
FIRST HORIZON PHARMACEUTICAL CORPORATION
By: /s/ Mahendra G. Shah, Ph.D.
--------------------------------------------
Mahendra G. Shah, Ph.D.
Chairman and Chief Executive Officer
By: /s/ Balaji Venkataraman
--------------------------------------------
Balaji Venkataraman
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)
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