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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 No. 000-30123
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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)
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(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 November 5, 2002, there were 35,443,392 shares of the Registrant's
Common Stock outstanding.
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FIRST HORIZON PHARMACEUTICAL CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and September 30, 2001 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and September 30, 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
September 30, December 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 19,322 $ 53,458
Accounts receivable, net of allowance for
doubtful accounts, discounts and
contractual adjustments of $1,141,000 and
$1,087,000 at September 30,2002 and
December 31, 2001, respectively 25,756 12,244
Inventories 15,547 4,363
Samples and other prepaid expenses 4,469 1,243
Taxes receivable 184 1,674
Deferred tax assets 5,955 323
--------------- --------------
Total current assets 71,233 73,305
Property and equipment, net 1,520 710
Other Assets:
Other assets 61 1,056
Intangibles, net 263,791 92,849
Long term deferred tax asset - 2,230
--------------- --------------
Total other assets 263,852 96,135
Total assets $ 336,605 $ 170,150
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,576 $ 4,540
Accrued expenses 30,523 22,102
--------------- --------------
Total current liabilities 35,099 26,642
Long-Term Liabilities:
Other long-term liabilities - 144
Deferred tax liabilities 682 -
--------------- --------------
Total liabilities 35,781 26,786
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 1,000,000 share authorized and none - -
outstanding
Common stock, $0.001 par value; 100,000,000 shares
authorized, 35,295,837 and 27,626,002 outstanding at
September 30, 2002 and December 31, 2001, respectively 35 28
Additional paid in capital 287,102 131,560
Deferred compensation (294) (557)
Retained earnings 13,981 12,333
--------------- --------------
Total stockholder's equity 300,824 143,364
Total liabilities and stockholders' equity $ 336,605 $ 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 Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net Revenues
Net revenues from product sales $ 28,244 $ 18,510 $ 81,370 $ 43,942
Reduction of product returns accrual 2,633 - 2,633 -
Tanafed accrual (3,771) - (3,771) -
------------------- ------------------ ---------------- -----------------
Total net revenues 27,106 18,510 80,232 43,942
Operating costs and expenses
Cost of revenues from product sales 5,505 2,830 14,502 6,307
Prenate GT write-off 700 - 700 -
Tanafed inventory write-off 1,220 - 1,220 -
------------------- ------------------ ---------------- -----------------
Total cost of revenues 7,425 2,830 16,422 6,307
Selling, general and administrative
expenses 15,125 9,733 46,029 25,216
Depreciation and amortization 4,115 930 10,450 1,724
Research and development expense 217 538 819 1,389
------------------- ------------------ ---------------- -----------------
Total operating costs and
expenses 26,882 14,031 73,720 34,636
------------------- ------------------ ---------------- -----------------
Operating income 224 4,479 6,512 9,306
------------------- ------------------ ---------------- -----------------
Other income (expense)
Interest expense (45) - (2,776) (2)
Interest income 82 689 383 1,588
Other 8 1 9 3
------------------- ------------------ ---------------- -----------------
Total other income (expense) 45 690 (2,384) 1,589
------------------- ------------------ ---------------- -----------------
Income before provision for income taxes 269 5,169 4,128 10,895
Provision for income taxes (131) (2,010) (1,617) (4,240)
------------------- ------------------ ---------------- -----------------
Net income before extraordinary items $ 138 $ 3,159 $ 2,511 $ 6,655
Extraordinary loss on debt extinguishment,
net of taxes $ - $ - $ (863) $ -
Net income $ 138 $ 3,159 $ 1,648 $ 6,655
=================== ================== ================= ===================
Basic:
Income before extraordinary loss $ 0.00 $ 0.12 $ 0.08 $ 0.28
Extraordinary loss on debt
extinguishment, net of taxes 0.00 $ 0.00 $ (0.03) 0.00
=================== ================== ================== ===================
Basic earnings per common share: $ 0.00 $ 0.12 $ 0.05 0.28
=================== ================== ================== ===================
Diluted:
Income before extraordinary loss $ 0.00 $ 0.11 $ 0.08 $ 0.26
Extraordinary loss on debt
extinguishment, net of taxes 0.00 0.00 (0.03) 0.00
------------------- ------------------ ---------------- -----------------
Diluted earnings per common share: $ 0.00 $ 0.11 $ 0.05 $ 0.26
Weighted average common shares outstanding:
Basic 35,265 26,969 32,129 23,537
=================== ================== ================== ===================
Diluted 35,757 29,212 33,006 25,590
=================== ================== ================== ===================
(See notes to consolidated financial statements)
2
First Horizon Pharmaceutical Corporation
Consolidated Statements of Cash Flows
(unaudited, in thousands)
For The Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Cash flows from operating activities:
Net income $ 1,648 $ 6,655
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 10,450 1,724
Non-cash interest expense 1,678 -
Non-cash extraordinary item 1,404 -
Deferred tax provision (2,719) (555)
Non-cash compensation expense 262 268
Reduction in taxes payable - stock option exercises 899 3,922
Changes in assets and liabilities, net of acquired assets and
liabilities:
Accounts receivable (13,512) (5,143)
Inventories (4,938) (320)
Samples and other prepaid expenses (2,230) (263)
Accrued expenses and other 9,766 4,054
Accounts payable 36 2,885
---------------- ----------------
Net cash provided by operating activities 2,744 13,227
Cash flows from investing activities:
Purchase of product licenses and other intangibles (187,297) (51,877)
Purchase of property and equipment (1,152) (206)
---------------- ----------------
Net cash used in investing activities (188,449) (52,083)
Cash flows from financing activities:
Capitalized financing costs incurred (3,081) -
Principal payments on long-term debt (137,000) (221)
Proceeds from secondary offering 154,726 84,325
Proceeds from long-term debt 137,000 -
Repurchase of common stock (76) -
---------------- ----------------
Net cash provided by financing activities 151,569 84,104
Net change in cash and cash equivalents (34,136) 45,248
Cash and cash equivalents, beginning of period 53,458 14,228
---------------- ----------------
Cash and cash equivalents, end of period $ 19,322 $ 59,476
================= ================
Supplemental Cash Flow Information:
Cash paid for taxes $ 1,482 $ 513
---------------- ----------------
Cash paid for interest $ 1,109 $ 2
---------------- ----------------
(See notes to consolidated financial statements)
3
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 Prospectus (File No. 333-83698)
filed on April 19, 2002.
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 and is effective for fiscal years beginning
after May 2002 for the rescission of FAS No. 4 and FAS No. 13, and all
other provisions are effective for financial statements issued on or after
May 15, 2002. Early adoption is encouraged. 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. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are
4
initiated after December 31, 2002 with early adoption encouraged. 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.
3. Accounts Receivable
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. Based on an analysis of
actual historical bad debt experience, the Company revised its estimate for
bad debt allowance. As a result of this revised estimate, the Company
reduced the outstanding allowance for doubtful accounts by $363,000 during
the quarter ending September 30, 2002 and recorded the change as a
reduction in selling, general and administrative expenses for the quarter
ended September 30, 2002. The Company will continue to record bad debt
expense based on prior experience supplemented by a periodic customer
specific review.
4. Inventories
Inventories consist of purchased pharmaceutical products and are
stated at the lower of 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. At September 30, 2002, the
Company had an allowance for obsolete inventory of $2.0 million.
Inventories at September 30, 2002 and December 31, 2001 consisted of (in
thousands):
September 30, December 31,
2002 2001
---- ----
Bulk product..................... $ 2,567 $ 581
Finished product................. 12,980 3,782
----------- -----------
$ 15,547 $ 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 September 30, 2002 and December 31,
2001 were $2.2 million and $827,000, respectively.
5. Accrued Expenses
Accrued expenses at September 30, 2002 and December 31, 2001 consist
of the following (in thousands):
September 30, December 31,
2002 2001
---- ----
Employee compensation and benefits $1,342 $3,325
Product returns 6,393 3,374
Accrued rebates 6,291 3,866
Sales deductions 2,068 1,771
Tanafed accrual 4,655 -
Accrued royalties 517 1,042
Assumed liabilities - product acquisitions 3,768 5,593
Other 5,489 3,131
------- -------
$30,523 $22,102
======= =======
5
6. Tanafed Accrual
In September 2002, the Company launched Tanafed DP and Tanafed DMX,
line extensions to the Company's Tanafed and Tanafed DM products. These
line extensions were launched in response to increasing competition by
generic products to Tanafed and Tanafed DM. Due to the launch of Tanafed DP
and Tanafed DMX, the Company expects increased returns of Tanafed, as
prescriptions will be filled with the line extensions. The Company
estimates that additional returns will total approximately $3.8 million and
has provided for this amount as a deduction of revenue in the quarter ended
September 30, 2002.
In relation to the launch of Tanafed DP and Tanafed DMX, the Company
also established a reserve for obsolete inventory for existing Tanafed
inventory on hand at September 30, 2002, of $1.2 million.
7. Reduction of Product Returns Accrual
In connection with the acquisition of rights for Robinul, Ponstel,
Cognex, Prenate, Furadantin and Sular the Company assumed certain
liabilities for returns of product shipped by the seller prior to the
acquisition date. At the acquisition date, the Company estimated the amount
of the assumed liabilities based on actual sales returns data from the
seller and included that amount in the allocation of the total purchase
price. The Company periodically reviews the estimated liability. Generally,
no adjustment is made to the reserve until two to three years subsequent to
the acquisition due to the lag time between when a product is sold and when
it is returned. During the quarter ended September 30, 2002 the Company
determined that the established reserves for Ponstel and Cognex were in
excess of the currently expected returns. As a result of the revised
estimate, the Company reduced the liability and increased net revenues by
$2.6 million for the quarter ended September 30, 2002.
8. Earnings Per Share
Below is the calculation of basic and diluted net income per share (in
thousands, except per share data):
Quarter ended Quarter ended Nine months ended Nine months ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net income before $138 $3,159 $2,511 $6,655
extraordinary loss
Extraordinary loss on
debt extinguishment, net
of taxes - - (863) -
------------------ ------------------ ------------------ ------------------
Net income $138 $3,159 $1,648 $6,655
Weighted average common
shares outstanding - basic 35,265 26,969 32,129 23,537
Dilutive effect of stock
options 492 2,243 877 2,053
------------------ ------------------ ------------------ ------------------
Weighted average common
shares outstanding -
diluted 35,757 29,212 33,006 25,590
Basic net income per
share $0.00 $.12 $.05 $.28
Diluted net income per
share $0.00 $.11 $.05 $.26
================== ================== ================== ===================
6
9. License Agreement with Jame Fine Chemical
On June 27, 2002, the Company entered into an agreement with Jame Fine
Chemical for a ten year exclusive license to make, have made, use,
distribute, market, promote, advertise and sell pharmaceutical formulations
containing the ingredients dextromethorphan tannate and dexchlorpheniramine
tannate. The Company's Tanafed DP and Tanafed DMX contain these
ingredients. The agreement became effective upon the first sale of product
containing the ingredients, which occurred in August 2002. The Company paid
a license fee of $508,500 in cash in connection with the first sale. The
Company has also committed to fund a maximum royalty of $2.5 million in
installments through March 2005. This royalty is refundable under certain
circumstances. A nonrefundable royalty will commence in January 2005. The
Company will amortize the license fee over the life of the agreement.
10. 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 $184.3 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..................................... $ 160,199
Distribution agreement............................. $ 10,350
Managed care contracts............................. $ 6,870
Trade name......................................... $ 2,560
----------
Total intangibles.................................. $ 179,979
Inventory.......................................... $ 6,246
----------
Total assets....................................... $ 186,225
Liabilities assumed................................ $ (1,895)
-----------
Total acquisition.................................. $ 184,330
===========
11. Intangible Assets
The following table reflects the components of intangible assets as of
September 30, 2002 (in thousands):
Gross Accumulated Net Weighted
Amount Amortization Amount Average Life
------ ------------ ------ ------------
Licensing rights $243,745 (11,099) $232,646 20 years
Trade names 11,060 (490) 10,570 20 years
Contracts 8,300 (1,052) 7,248 5 years
Supply/Distribution agreements 11,490 (1,010) 10,480 1.4 to 3 years
Other intangibles 3,081 (234) 2,847 20 years
--------- --------- --------- --------------
Total $277,676 $(13,885) $263,791 18.85
========= ========= ========= ==============
7
For the three months ended September 30, 2002, amortization expense
related to the intangible assets was $4,020,000. Amortization for the nine
months ended September 30, 2002 was $10,107,000. 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:
Fiscal year ended December 31: Amount
----------
2002 $ 14,166
2003 $ 16,043
2004 $ 15,870
2005 $ 15,670
2006 $ 15,567
12. Segment Reporting
The Company operates in a single segment, the sale and marketing of
prescription products.
13. 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.
14. 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 early
retirement of debt. The Company will assess the classification of this loss
under SFAS No. 145 in the second fiscal quarter of 2003. Under the
provisions of SFAS No. 145, this extraordinary loss may be reclassified
into other income.
15. Share buyback program
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. Through September 30, 2002, the Company had repurchased
16,400 shares of common stock.
16. Termination of Credit Agreement
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. As of June 30, 2002, there was no
outstanding balance on the credit facility and the Company was not in
compliance with the financial covenants of that credit facility.
8
17. Shareholder Rights Plan
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.
9
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 Company's Prospectus, 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 from product sales increased $9.7 million, or
53%, over the quarter ended September 30, 2001, to $28.2 million for the quarter
ended September 30, 2002. Net revenues from product sales increased $37.4
million, or 85%, over the nine month period ended September 30, 2001 to $81.4
million for the nine months ended September 30, 2002. Net revenues from product
sales of existing products decreased $9.1 million or 49% for the quarter ended
September 30, 2002, as compared to the quarter ended September 30, 2001, due to
decreases in net sales of cough, cold and allergy products including Tanafed.
Net revenues of products ("New Products") acquired or licensed since September
30, 2001 (namely Furadantin, Sular, Tanafed DM, Tanafed DP and Tanafed DMX),
were $18.9 million for the quarter ended September 30, 2002. Included in third
quarter 2002 net revenues was customary wholesaler and pharmacy stocking of
Tanafed DP and Tanafed DMX of approximately $7.1 million. Net revenues from
product sales of existing products increased $14,000 for the nine months ended
September 30, 2002, as compared to the nine months ended September 30, 2001 due
to decreases in net sales of Tanafed offset by an increase in net sales of the
Prenate line which was acquired in August 2001. Net revenues from product sales
of New Products were $37.4 million for the nine months ended September 30, 2002.
Prescriptions of our other key brands continue to increase. According to
IMS Health's National Prescription Audit Plus(TM) data, total prescriptions of
Ponstel increased 17% and Robinul products increased 24% for the quarter ended
September 30, 2002 as compared to the quarter ended September 30, 2001. Total
dispensed prescriptions of Prenate GT increased 28% for the quarter ended
September 30, 2002 as compared to the quarter ended June 30, 2002 according to
IMS Health's National Prescription Audit Plus(TM) data. Total prescriptions of
Sular for the quarter ended September 30, 2002 were substantially the same as
total prescriptions for the quarter ended June 30, 2002, while new prescriptions
increased 1.1% sequentially, according to IMS Health's National Prescription
Audit Plus(TM) data.
In connection with the acquisition of rights for Robinul, Ponstel, Cognex,
Prenate, Furadantin and Sular the Company assumed certain liabilities for
returns of product shipped by the seller prior to the acquisition date. At the
acquisition date, the Company estimated the amount of the assumed liabilities
based on actual sales return data from the seller and included that amount in
the allocation of the total purchase price. The Company periodically reviews the
estimated liability. Generally, no adjustment is made to the reserve until two
to three years subsequent to the acquisition due to the lag time between when a
10
product is sold and when it is returned. During the quarter ended September 30,
2002 the Company determined that the established reserves for Ponstel and Cognex
were in excess of the currently expected returns. As a result of the revised
estimate, the Company reduced the liability and increased net revenues by $2.6
million for the quarter ended September 30, 2002.
The Company has experienced erosion of sales of its Tanafed and Prenate
products during the nine months ended September 30, 2002 due to increased
competition from knock-off products resulting from pharmacists' substituting
such knock-off products for the Company's products. In response to the
substituting for Tanafed, the Company launched two line extensions, Tanafed DP
and Tanafed DMX, in September 2002. A process patent currently protects Tanafed
DP and Tanafed DMX. The Company recently received a notice of allowance from the
U.S. Patent and Trademark Office for one of its pending patent applications for
Tanafed DP and Tanafed DMX. The patent contains claims which protect against
knock off products to Tanafed DP and DMX. The Company and the manufacturer have
filed several other patent applications. The Company is implementing a strategic
education program to mitigate pharmacists' substitutions for Prenate.
As a result of launching Tanafed DP and Tanafed DMX, the Company
anticipates higher than normal returns of Tanafed. The Company estimates that
additional returns will total approximately $3.8 million and has provided for
this amount as a deduction of revenue in the quarter ended September 30, 2002.
Cost of Revenues. Cost of revenues from product sales increased $2.7
million, or 95%, to $5.5 million for the quarter ended September 30, 2002
compared to $2.8 million for the quarter ended September 30, 2001. Cost of
revenues from product sales increased $8.2 million, or 130%, to $14.5 million
for the nine months ended September 30, 2002 compared to $6.3 million for the
nine months ended September 30, 2001.
Due to decreased sales rates and the introduction of product line
extensions in the third quarter, the Company recorded as cost of revenues an
allowance for obsolete inventory for existing Tanafed and Prenate inventory of
$1.2 million and $700,000, respectively.
Gross Margin. Gross margin, defined as net revenue from product sales less
cost of revenues from product sales as a percentage of net revenue from product
sales, for the quarter ended September 30, 2002 was 81% compared to 85% for the
quarter ended September 30, 2001. For the nine-month period ended September 30,
2002 gross margin was 82% compared to 86% for the nine-month period ended
September 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 $5.4 million, or 56%, to $15.1 million for the
quarter ended September 30, 2002. Selling, general and administrative expenses
increased $20.8 million, or 83%, for the nine months ended September 30, 2002.
As a percentage of net revenues from product sales, selling, general and
administrative expenses were 54% for the quarter ended September 30, 2002, as
compared to 53% for the quarter ended September 30, 2001. Selling related
expenses increased due to the outside commission and co-promotion expenses paid
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 ended September 30,
2002, related to the launch of Tanafed DP and Tanafed DMX.
General and administrative expenses for the quarter and nine months ended
September 30, 2002 increased due to higher rent and operating expenses at the
Company's new headquarters, increased support staff and higher insurance costs.
The Company recorded in the third quarter of 2002 expenses for state and
local taxes associated with prior periods. The Company has estimated this
expense at $590,000, but has not yet settled the amount of its obligations for
11
such taxes. Partially offsetting this expense, the Company reduced its
outstanding allowance for doubtful accounts receivable by $363,000 in third
quarter 2002 based on a review of its historical bad debt experience.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.2 million, to $4.1 million for the quarter ended September
30, 2002. Depreciation and amortization expense increased $8.7 million, to $10.5
million for the nine months ended September 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.
Research and Development Expense. Research and development expense
decreased $321,000, or 60%, to $217,000 for the quarter ended September 30, 2002
compared to the quarter ended September 30, 2001. Research and development
expense decreased $570,000, or 41%, to $819,000 for the nine months ended
September 30, 2002 compared to $1.4 million for the nine months ended September
30, 2001. For the three and nine month period ended September 30, 2002, research
and development expenses were primarily related to the Robinul line extension
development project.
Interest Expense. Interest expense increased $45,000 for the quarter ended
September 30, 2002 compared to no interest expense for the quarter ended
September 30, 2001. Interest expense was $2.8 million for the nine months ended
September 30, 2002 compared to $2,000 for the nine months ended September 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 terminated the credit facility in
July 2002.
Interest Income. Interest income was $82,000 for the quarter ended
September 30, 2002 compared to $689,000 for the quarter ended September 30,
2001. Interest income was $383,000 for the nine months ended September 30, 2002
compared to $1.6 million for the nine months ended September 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 49%
for the quarter ended September 30, 2002 compared to 39% for the quarter ended
September 30, 2001. Income taxes were provided for at a rate of 39% for the nine
months ended September 30, 2002 compared to 39% in 2001. The increase in the
effective tax rate for the quarter and nine-months ended September 30, 2002 was
the result of increased non-deductible expenses.
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, borrowings for product acquisitions and the issuance of common
stock.
The Company's cash and cash equivalents were $19.3 million at September 30,
2002. Net cash provided by operating activities for the nine months ended
September 30, 2002 was $2.7 million. This source of cash was primarily the
result of net income plus non-cash depreciation, amortization, compensation
expense, and interest expense, increased accrued expenses, offset by increased
accounts receivables, inventories, and samples and prepaid expenses.
12
Net cash used in investing activities for the nine months ended September
30, 2002 was $188.5 million. The use of this cash was primarily for the Sular
acquisition.
Net cash provided by financing activities was $151.6 million for the nine
months ended September 30, 2002. This source of cash was primarily the result of
the follow-on stock offering in April. This amount was reduced 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 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
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
13
difficult general economic environment. Based on an analysis of actual
historical bad debt experience, the Company revised its estimate for
bad debt allowance. As a result of this revised estimate, the Company
reduced the outstanding allowance for doubtful accounts by $363,000
during the quarter ending September 30, 2002 and recorded the change
as a reduction in selling, general and administrative expenses for the
quarter ended September 30, 2002. The Company will continue to record
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. Beginning
January 1, 2002, the Company's return policy was revised to allow
product returns for products within an eighteen-month window from six
months prior to the expiration date and up to twelve months after the
expiration date. Previously, the Company's return policy was for a
twelve-month window. The Company changed its return policy to conform
to industry standard practices. The Company believes that it has
sufficient data to estimate future returns over the revised time
period at the time of sale. 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.
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:
14
o the impact of recent accounting pronouncements on the Company's
financial condition or results of operations;
o bad debt allowance estimates;
o estimated returns of Tanafed and the resulting deduction of revenue;
o estimated future amortization expenses;
o the ability to acquire or license products;
o developing new formulations, new delivery methods and seeking new
indications for existing products;
o the ability to acquire other businesses;
o expected issuance of and the protection afforded by a pending patent
related to Tanafed DP and Tanafed DMX;
o mitigation of the pharmacy substitutions for Prenate as a result of
the Company's strategic education program;
o estimated expenses for state and local taxes for prior periods;
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 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," The Company does not undertake to update the forward-looking
statements to reflect future events or circumstances. These risk factors
15
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
prescription data contained in this report 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of
1934) as of a date within 90 days prior to the filing of this Form 10-Q,
the Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective for
their purposes.
Subsequent to the date when the disclosure controls and procedures
were evaluated, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of such evaluation.
16
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
There were no material developments during the three months ended
September 30, 2002 in the Company's legal proceedings with Ethex
Corporation and Ther-Rx previously reported in the Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission
on March 28, 2002. The Company and Ethex Corporation and Ther-Rx had
previously filed motions to dismiss the other party's claims. In March
2002, and October 2002, the United States District Court for the Eastern
District of Missouri granted in part and denied in part, some of the
Company's and the plaintiffs' motions to dismiss. The litigation is still
ongoing.
A putative class action lawsuit was filed in the United States
District Court for the Northern District of Georgia on August 22, 2002 (and
two subsequent lawsuits have been filed based upon substantially the same
allegations) against the Company, members of its Board of Directors,
certain officers of the Company ("Company-related Defendants") and
representatives of the Company's underwriters for its public offering
completed on April 24, 2002. The complaints generally allege that the
Company issued a series of materially false and misleading statements to
the market in connection with the Company's public offering on April 24,
2002 and thereafter, relating to the sales of two of the Company's
products, Tanafed Suspension and Prenate GT. The complaints assert that the
defendants violated Section 11 and that the Company violated Section
12(a)(2) of the Securities Act of 1933. The complaints further allege
violations by the Company and Company-related Defendants of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaints also allege controlling person liability on
behalf of certain officers of the Company under Section 15 of the
Securities Act and Section 20 of the Securities Exchange Act.
The plaintiffs in these class action lawsuits seek unspecified
compensatory damages in an amount to be proven at trial. The Company
believes these cases will be consolidated into one putative class action
lawsuit. The Company denies the claims made in the lawsuits and intends to
vigorously defend against these claims. Due to the inherent uncertainties
involved in litigation, the Company is unable to predict the outcome of
this litigation and an adverse result could have a material adverse effect
on the Company's financial position and results of operations.
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).
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
In accordance with Section 10A of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, during the quarter ended
September 30, 2002, non-audit services were approved by the Company's Audit
Committee to be performed by Deloitte & Touche LLP, the Company's independent
auditors, relating to the preparation and filing of federal and state income tax
returns and other tax consulting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* - Restated Certificate of Incorporation, as Amended
3.2** - Amended and Restated By-Laws
4.1** - Form of Stock Certificate
4.2*** - Shareholder Protection Rights Agreement
10.1*+ - Exclusive License Agreement dated June 27, 2002
between the Company and Jame Fine Chemicals Inc.
10.2* - Nonexclusive Sublicense Agreement dated June 27,
2002 between the Company and Jame Fine Chemicals
Inc.
10.3*+ - Exclusive Distribution Agreement dated June 27,
2002 between the Company and Unisource, Inc.
______________________________
* Filed herein.
** Incorporated by reference from Company's Registration
Statement on Form S-1 (Commission File No.333-30764).
*** Incorporated by reference from the Company's Registration
Statement on Form 8-A filed on July 16, 2002 (Commission
File No. 000-30123).
+ The Company has requested confidential treatment for
portions of this exhibit pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
(b) The Registrant filed the following Forms 8-K during the quarter
ended September 30, 2002:
On July 16, 2002, the Registrant filed a Form 8-K dated July 12,
2002 pursuant to Item 5 adopting the Registrant's Shareholder
Protection Rights Plan (the "Plan") and the Board's declaration
of a dividend of a Right (as defined in the Plan) for each
outstanding share of the Registrant's Common Stock pursuant to
the Plan.
18
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 November 12, 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 Operating Officer,
Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)
19
CERTIFICATIONS
I, Mahendra G. Shah, Ph.D., Chief Executive Officer of First Horizon
Pharmaceutical Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Horizon
Pharmaceutical Corporation;
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 these
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 the 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.
November 12, 2002
/s/ Mahendra G. Shah, Ph.D.
---------------------------
Mahendra G. Shah, Ph.D.
Chairman, Chief Executive Officer
and President
20
I, Balaji Venkataraman, Chief Financial Officer of First Horizon Pharmaceutical
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Horizon
Pharmaceutical Corporation;
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 these
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 the 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.
November 12, 2002 /s/ Balaji Venkataraman
-----------------------------------
Balaji Venkataraman
Executive Vice President, Chief Financial Officer,
Chief Operating Officer and Secretary
21
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