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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2000.
REGISTRATION NO. 333-30764
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 2834 58-2004779
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
660 HEMBREE PARKWAY, SUITE 106
ROSWELL, GA 30076
(770) 442-9707
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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MAHENDRA G. SHAH, PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FIRST HORIZON PHARMACEUTICAL CORPORATION
660 HEMBREE PARKWAY, SUITE 106
ROSWELL, GA 30076
(770) 442-9707
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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STEPHEN D. FOX, ESQ. LESLIE E. DAVIS, ESQ.
ARNALL GOLDEN & GREGORY, LLP TESTA, HURWITZ & THIBEAULT, LLP
2800 ONE ATLANTIC CENTER 125 HIGH STREET
1201 WEST PEACHTREE STREET BOSTON, MA 02110
ATLANTA, GA 30309 (617) 248-7000
(404) 873-8500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1) FEE(2)
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Common Stock, $0.001 par value per share 4,370,000 Shares $14.00 $61,180,000 $16,151.52
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(1) Includes 570,000 shares of common stock that the Underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under The Securities Act of 1933. This fee was
paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 27, 2000
[COMPANY LOGO]
3,800,000 SHARES
COMMON STOCK
First Horizon Pharmaceutical Corporation is offering 3,800,000 shares of
its common stock. This is our initial public offering, and no public market
currently exists for our shares. We have applied to have the shares offered in
this prospectus approved for quotation on the Nasdaq National Market under the
symbol "FHRX". We anticipate that the initial public offering price will be
between $12.00 and $14.00 per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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PER SHARE TOTAL
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Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to First Horizon................................... $ $
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 570,000 shares of common stock to cover over-allotments.
------------------------------
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<S> <C> <C>
ROBERTSON STEPHENS
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
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The date of this prospectus is , 2000.
<PAGE> 3
NITROLINGUAL(R) PUMPSPRAY is an oral spray of nitroglycerin used for the
acute relief or prevention of angina pectoris, which is the medical term for
chest pain due to coronary heart disease.
[GRAPHICS-BOTTLE OF NITROLINGUAL PUMPSPRAY]
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TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 4
Trademarks and Tradenames used in this Prospectus........... 13
Forward-Looking Statements.................................. 13
Use of Proceeds............................................. 13
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 23
Management.................................................. 34
Certain Relationships and Related Transactions.............. 45
Principal Stockholders...................................... 47
Description of Capital Stock................................ 49
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 57
Experts..................................................... 57
Additional Information...................................... 57
Index to Financial Statements............................... F-1
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SUMMARY
THE COMPANY
First Horizon Pharmaceutical Corporation markets and sells brand name
prescription drugs. We focus on the treatment of chronic conditions, including
cardiovascular diseases, respiratory and gastroenterological disorders, and pain
and inflammation. Our strategy is to acquire pharmaceutical products that other
companies do not actively market that we believe have a high sales growth
potential and complement our existing products. In addition, we seek to develop
new patentable formulations, use new delivery methods and seek regulatory
approval for new indications of existing products.
Large multinational companies dominate the U.S. prescription pharmaceutical
market. These companies are increasingly divesting products which, as a result
of consolidation or lack of strategic fit, do not meet the threshold level of
sales required for continued marketing and promotion. In 1999 alone, we acquired
and licensed products from American Home Products Corporation and Aventis
(formerly Rhone-Poulenc Rorer).
Since 1992, we have introduced 11 products, three of which use the same
brand name. We market our products through our nationwide sales and marketing
force of 133 professionals. Our key products include the angina product,
Nitrolingual, the gastrointestinal products, Robinul and Robinul Forte, and the
liquid cold and allergy product, Tanafed. In 1999, we acquired marketing rights
from Aventis and Pohl-Boskamp to Nitrolingual, a product used for the acute
relief or prevention of chest pain resulting from heart disease. We believe that
this product had sales of approximately $12 million in 1998, a 12.6% increase
over 1997. In February 2000, we launched an improved version of this product
called Nitrolingual Pumpspray. We acquired Robinul and Robinul Forte from
American Home Products Corporation in January 1999. Since 1993, we have marketed
Tanafed, a liquid cold and allergy product primarily for children. Third parties
manufacture all of our products.
We recently concluded development agreements with Penwest Pharmaceuticals
Co. and Inpharmakon Corporation for a product that we are developing for the
treatment of migraine headache. The FDA has approved the marketing of the active
ingredient in this product for the treatment of other conditions. We are also
currently developing a new use of the active ingredient in Robinul to treat
symptoms associated with the excessive production of saliva.
Our net revenues have grown from approximately $1.6 million for the year
ended December 31, 1995 to approximately $18.6 million for the year ended
December 31, 1999. We achieved this through a combination of increased sales of
existing products and acquisitions.
Our principal office is located at 660 Hembree Parkway, Suite 106, Roswell,
Georgia 30076 and our telephone number is (770) 442-9707. Our corporate Internet
address is www.horizonpharm.com. We do not intend the information contained on
our website to be a part of this prospectus.
1
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THE OFFERING
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Common stock offered................................. 3,800,000 shares
Common stock to be outstanding after the
offering(1)........................................ 12,339,643 shares
Use of proceeds...................................... We intend to apply the proceeds from
the offering as follows: to repay
approximately $1,840,000 of debt
outstanding as of December 31, 1999
under our credit facility with LaSalle
Bank, and for general corporate
purposes, including the development of
new products, the expansion of our
sales and marketing force and new
product acquisitions.
Nasdaq National Market symbol........................ FHRX
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(1) This number excludes 1,795,000 shares subject to options granted under our
stock plans.
The information presented in this prospectus assumes that the underwriters
do not exercise their over-allotment option.
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SUMMARY FINANCIAL DATA
The following summary historical and as adjusted financial data should be
read together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes
included elsewhere in this prospectus. The as adjusted balance sheet data
summarized below reflects the sale of the 3,800,000 shares of common stock we
are offering at an assumed initial public offering price of $13.00 per share
after deducting the underwriting discounts and commissions and our estimated
offering expenses and the use of proceeds from the offering to repay $1,840,000
of debt outstanding as of December 31, 1999.
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YEAR ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
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(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Net revenues................... $1,620,720 $2,516,616 $5,557,700 $9,252,058 $18,624,514
Operating income (loss)........ (37,715) (395,185) (288,018) 269,421 1,655,049
Net income (loss).............. (92,025) (344,348) (180,446) 135,554 770,464
Net income (loss) per common
share:
Basic:.................... $ (0.02) $ (0.06) $ (0.02) $ 0.02 $ 0.10
Diluted:.................. $ (0.02) $ (0.06) $ (0.02) $ 0.02 $ 0.09
Weighted average common shares
outstanding:
Basic:.................... 5,636,137 5,830,000 7,576,580 7,978,234 8,028,673
Diluted:.................. 5,636,137 5,830,000 7,576,580 8,584,329 8,975,493
</TABLE>
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DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 219,688 $43,621,688
Working capital............................................. (733,884) 42,668,116
Total assets................................................ 11,077,744 56,319,744
Borrowings under revolving loan agreement................... 800,000 800,000
Long-term debt including current portion.................... 2,898,886 1,058,886
Accumulated deficit......................................... (896,822) (896,822)
Total stockholders' equity.................................. 3,615,564 48,857,564
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE CURRENTLY DEPEND ON TWO KEY PRODUCTS FOR A LARGE PORTION OF OUR SALES, AND
SUBSTANTIAL DECLINES IN EITHER OF THEM WOULD RESULT IN OUR BEING UNPROFITABLE.
Any factor that adversely affects the sale of our key products could
significantly decrease our sales and profits. Tanafed, Robinul and Robinul Forte
are our current key products and accounted for approximately 51% of our total
revenues in 1999.
OUR GROWTH WILL SUFFER IF WE DO NOT ACQUIRE RIGHTS TO NEW PRODUCTS AND INTEGRATE
THEM SUCCESSFULLY.
We depend on acquisitions of rights to products from others as our primary
source for new products. Risks in acquiring new products include the following:
- the availability of new products that we find attractive and
complementary to our business; and
- the price to acquire or obtain a license for these products.
We often face significant competition from other pharmaceutical companies
in acquiring rights to products, which makes it more difficult to find
attractive products on acceptable terms. Our failure to acquire rights to
attractive products on acceptable terms would hurt future sales and profits. In
addition, while integrating new products, management will have to continue to
effectively market our existing products. Failure to do this successfully could
reduce our sales and profits.
WE MAY ENCOUNTER PROBLEMS IN THE MANUFACTURE OF OUR PRODUCTS THAT COULD LIMIT
OUR ABILITY TO SELL OUR PRODUCTS.
Third parties manufacture all of our products, and we do not currently have
the ability to manufacture products. If we are not able to obtain our products
from our manufacturers, if our products do not comply with specifications, or if
the prices at which we purchase our products increase, our sales and profits
will suffer. We do not maintain alternative manufacturing sources for any of our
products and we may not be able to locate alternative manufacturers on
commercially acceptable terms in the event of a manufacturing interruption.
Furthermore, due to the patent held on Nitrolingual Pumpspray by our supplier,
Pohl-Boskamp, no alternative source for Nitrolingual exists. Similarly, the
manufacturing process for producing the raw materials for Tanafed is patented,
and no other source for these materials is currently available.
In addition, if we breach our manufacturing agreements, our manufacturers
could terminate the agreements and we would lose sales until we find a
replacement supplier. We do not have a written agreement with the manufacturer
of our Zoto-HC and Protuss-D products. In addition, each of our third-party
manufacturing agreements requires that we purchase all of our product
requirements from the manufacturers that are a party to those agreements. This
could hinder our ability to enter into manufacturing agreements with other
manufacturers that may be more beneficial or less costly to us. We do not have
business interruption insurance.
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POHL-BOSKAMP CAN TERMINATE OUR RIGHTS TO NITROLINGUAL.
Pohl-Boskamp can terminate our distribution agreement for Nitrolingual if a
company with a product competitive with Nitrolingual acquires direct or indirect
influence or control over our company or if a very significant change in our
stockholders occurs so that Kapoor-Pharma Investments and Horizon employees,
management and directors, and any of their respective affiliates, do not in the
aggregate directly or indirectly beneficially own at least 20% of our shares.
FINANCIAL RESULTS MAY FLUCTUATE DUE TO FACTORS OUTSIDE OF OUR CONTROL.
The timing of product acquisitions and licenses and the completion and
launch of products under development is based in part on factors beyond our
control. The unpredictability of such events could cause fluctuations in sales,
profits and our stock price. Further, the seasonality of sales of our cough,
cold and allergy products contributes to quarterly fluctuations in our operating
results.
WE FACE COMPETITION FROM GENERIC PRODUCTS THAT COULD REDUCE SALES OF OUR
PRODUCTS.
Our Zebutal Capsules, Protuss Liquid, Protuss-DM Tablets, Protuss-D Liquid,
Zoto-HC ear drops, Mescolor Tablets, Robinul and Robinul Forte products are not
protected by patents and face competition from less expensive generic products.
Third-party payors and pharmacists can substitute generics for our products even
if physicians prescribe them. Government agencies and third-party payors often
put pressure on patients to purchase generic products instead of brand-name
products as a way to reduce healthcare costs. An increase in the amount of
generic competition against any one or more of our products could reduce sales.
STRONG COMPETITION IN DEVELOPING AND MARKETING PRODUCTS COULD HURT OUR SALES.
Many pharmaceutical companies actively market and sell products that
compete with our products. Our Protuss line and Tanafed, Zebutal, and Defen-LA
products compete against products sold both over-the-counter and by prescription
and which are marketed by larger pharmaceutical companies with greater financial
resources for marketing and manufacturing. In addition, barriers to entry for
products competitive with these products are low, which makes it easier for
smaller companies to enter the market. Also, currently marketed products often
have a significant competitive advantage over new entrants, which could hurt
future sales of our products under development for the treatment of migraine
headache and excessive salivation. Competitors may also be able to complete the
regulatory approval process sooner and therefore be able to market their
products before we can.
The high level of competition in our industry could force us to reduce the
price at which we sell our products, consequently reducing our sales or
requiring us to spend more to market our products, which would increase our
expenses and reduce our profits. Further, other products currently available or
under development by other pharmaceutical companies may be more effective or
offered at lower prices than our current or future products.
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 HURT OUR
BUSINESS.
We sell most of our products to a small number of wholesale drug
distributors. In 1999, sales to Bergen Brunswig Corporation, Cardinal Health,
Inc. and McKesson HBOC, Inc.
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represented approximately 10%, 19% and 28%, respectively, of our total sales.
The loss of any of these distributors or a change in their inventory levels
could hurt sales and profits.
Because of the small number of wholesale drug distributors, further
consolidation in this industry or financial difficulties of these distributors
could result in the combination or elimination of warehouses, which could
increase returns of our products or, as a result of distributors reducing
inventory levels, delay the purchase of our products.
IF WE CANNOT PROTECT OUR TRADEMARK REGISTRATIONS, OUR SALES AND PROFITS COULD
DECLINE.
Because of the large number of products on the market which compete with
our products, we believe that our brand names are an important factor in
establishing product recognition. Our trademark registrations could be
challenged by others. Our inability to use one or more of our trademarks because
of third-party claims could reduce sales and profits. Maintenance of our
trademarks requires that we enforce our rights by preventing infringement by
third parties, and we may not have the resources to stop others from infringing
our trademarks.
THE AVAILABILITY OF A PREVIOUS VERSION OF OUR NITROLINGUAL PRODUCT COULD REDUCE
ITS SALES.
The availability of a previous version of our Nitrolingual Pumpspray
product may affect our sales. We have exclusive rights to sell Nitrolingual
Pumpspray in the United States. However, Aventis previously marketed another
version of this product named Nitrolingual Spray. Although Aventis has never
manufactured and no longer markets this product, existing inventories of
Nitrolingual Spray remain with distributors which, along with retailers, may
wish to sell these existing inventories prior to purchasing our Nitrolingual
product.
IF OUR PRODUCTS UNDER DEVELOPMENT FAIL IN CLINICAL STUDIES OR IF WE FAIL OR
ENCOUNTER DIFFICULTIES IN OBTAINING REGULATORY APPROVAL FOR NEW PRODUCTS OR NEW
USES OF EXISTING PRODUCTS, WE WILL BE UNABLE TO MARKET AND SELL THOSE PRODUCTS.
If we cannot obtain FDA approval for products under development to treat
migraine headache and excessive salivation, our future sales growth will suffer.
In the future, we may develop other products or other uses for our existing
products and we must receive regulatory approval to market these new products or
new indications. To obtain these approvals, we must conduct clinical studies and
demonstrate that the product and the delivery mechanism for the product are safe
and effective. The FDA may require additional data, such as clinical data, which
could result in additional costs. We do not have experience in obtaining FDA
approval for new products or new uses of already-approved products. As a result,
we rely on third-parties to formulate, develop and manufacture the materials
needed for clinical trials, including those for our products under development
to treat migraine headache and excessive salivation. We also rely on third
parties to conduct clinical trials for us. Some aspects of the clinical trials
for our products will therefore be outside of our control.
Our ongoing clinical studies might be delayed or halted for various
reasons, including:
- we do not obtain FDA approval of an investigational new drug application
for our migraine product which is required before clinical trials may
begin;
- we do not obtain FDA approval of a supplemental new drug application to
market our product under development for the treatment of excessive
salivation;
- our products are not shown to be effective;
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- we do not comply with requirements concerning the protection of the
rights and welfare of human subjects;
- patients experience unacceptable side effects or die during clinical
trials;
- patients do not enroll in the studies at the rate we expect; and
- product supplies are not sufficient to treat the patients in the studies.
In addition, the party from whom we license rights to develop a component
of our migraine product could terminate the agreement if we fail to achieve
certain scheduled performance milestones, including the commencement and
completion of clinical trials and applying for and obtaining FDA approval of the
product.
WE OR THIRD-PARTIES MAY VIOLATE GOVERNMENT REGULATIONS AND WE MAY INCUR
SIGNIFICANT EXPENSES TO COMPLY WITH SUCH REGULATIONS.
Many government agencies regulate our business, including the following:
- the FDA;
- the Drug Enforcement Administration;
- the Consumer Product Safety Commission;
- the Occupational Safety and Health Administration;
- the Health Care Financing Administration;
- the Environmental Protection Agency; and
- state, local and foreign governments.
We must process, package, handle, store, label, promote, distribute and
sell all of our products according to approved conditions. There are also
post-marketing requirements for approved products, such as notifying the FDA of
adverse events and complying with requirements relating to recordkeeping and
returning product. We must also comply with federal and state anti-kickback and
other healthcare fraud and abuse laws.
In addition, all of our third-party manufacturers and product packaging
companies are subject to inspection by the FDA and, in appropriate cases, the
Drug Enforcement Administration and foreign regulators. From time to time, some
of our third-party manufacturers have received warning letters from the FDA
concerning noncompliance with manufacturing requirements. If our third-party
manufacturers do not comply with FDA regulations in the future, they may not be
able to deliver products to us or we may have to recall products. Any violation
of these regulations could delay the sale of our products and reduce profits.
IF THIRD-PARTY PAYORS DO NOT ADEQUATELY REIMBURSE PATIENTS FOR OUR PRODUCTS, OUR
SALES AND PROFITS COULD DECLINE.
Because our products are sold by prescription, we depend on third-party
payors, such as the government, private healthcare insurers and managed care
organizations, to include these products on their lists of products for which
third-party payors will reimburse patients. Third-party payors continuously
challenge the pricing of medical products and services by substituting cheaper
products on their approved lists. If these third-party payors remove any of our
products
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from their lists or choose not to pay for our product prescriptions, patients
and pharmacies may not continue to choose our products.
In the past several years there have been federal and state government
initiatives or reforms affecting the payment for healthcare services and
products, including proposals that would limit reimbursement under the Medicare
and Medicaid programs. If the government enacts these reforms, it could reduce
our sales and profits and hinder our development and acquisition of new
products.
WE DEPEND ON HIGHLY TRAINED MANAGEMENT, AND WE MAY NOT BE ABLE TO KEEP CURRENT
MANAGEMENT OR HIRE QUALIFIED MANAGEMENT PERSONNEL IN THE FUTURE.
The loss of the services of our key regulatory, technical and management
personnel could hurt our ability to develop and market products. In addition,
Dr. Mahendra G. Shah, our chief executive officer, does not provide exclusive
full-time services to us. As part of our growth strategy, we will need to
attract new operational and marketing personnel, and we may have difficulty
hiring personnel at an acceptable cost.
PRODUCT LIABILITY CLAIMS AND PRODUCT RECALLS COULD HURT OUR PROFITS.
Side effects or marketing or manufacturing problems pertaining to one of
our approved products could result in product liability claims or adverse
publicity. These claims could be expensive, or could result in withdrawal of
approval to market the product or recall of the product. These problems often
occur with little or no notice in connection with the sale of pharmaceutical
products. For instance, we instituted a voluntary recall on our Protuss-DM
product in January 1999 because of a labeling error. However, we quickly
corrected the error and the financial impact was immaterial to our results of
operations. Our sales and profits would be lower until we satisfy requirements
to recommence sales, which can be a lengthy process.
OUR LEVEL OF DEBT COULD REDUCE OUR GROWTH.
As of December 31, 1999, we had total outstanding indebtedness of
approximately $3,699,000, or approximately 51% of our total capitalization. Even
after this offering and the repayment of the term loan under our credit facility
with LaSalle Bank, we expect that we may incur additional indebtedness to
implement our growth strategy.
Significant debt could:
- limit our operating flexibility as a result of requirements of our
lender;
- require us to use a large portion of our cash flow from operations for
debt payments that would reduce the availability of our cash flow to fund
operations, product acquisitions, the expansion of our sales force and
facilities and research and development efforts; and
- limit additional acquisitions due to restrictive covenants in our credit
facility.
WE EXPECT TO REQUIRE ADDITIONAL FUNDING AND IF WE CANNOT OBTAIN IT, OUR SALES,
PROFITS, ACQUISITIONS AND DEVELOPMENT PROJECTS COULD SUFFER.
After the offering, we expect that we will need additional funds to acquire
or obtain licenses for new products, expand our sales force, support the
marketing and sales of new products and facilities and develop and test new
products. We may seek additional funding
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through public and private financing, including equity and debt offerings.
Adequate funds for these purposes, whether through the financial markets or from
other sources, may not be available when we need them or on terms acceptable to
us. Insufficient funds could cause us to delay, scale back, or abandon some or
all of our product acquisitions, licensing opportunities, marketing, and product
development programs and manufacturing opportunities.
IF WE DO NOT SECURE OR ENFORCE OUR PATENTS OR OTHER INTELLECTUAL PROPERTY
RIGHTS, WE COULD ENCOUNTER INCREASED COMPETITION THAT COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
We do not hold patent rights covering the products we are distributing and
do not in some cases have the right to enforce patents our licensors hold. We
obtained exclusive rights in the United States to distribute our Nitrolingual
Pumpspray and Tanafed products but have no or only limited rights to enforce the
patents relating to these products. We have a license from Penwest
Pharmaceuticals Co. to use the patented TIMERx technology in our migraine
product under development. Any exclusivity afforded by any of these patents
could cease because the other party could terminate the license or because we
have no or only limited rights to enforce patents or to require enforcement
actions by the owners of the patents.
Proceedings involving our rights in patents or patent applications could
result in adverse decisions. In addition, the confidentiality agreements
required of our employees and third-parties may not provide adequate protection
for our trade secrets, know-how and other proprietary information which we rely
on to develop and sell our products. If any of our employees or third-parties
disclose any of our trade secrets or know-how, our sales and operating results
could suffer.
OUR PRODUCTS COULD INFRINGE THE PATENTS OR TRADEMARKS HELD BY THIRD PARTIES,
WHICH COULD REQUIRE US TO PAY LICENSE FEES OR DEFEND LITIGATION THAT COULD BE
EXPENSIVE OR PREVENT US FROM SELLING PRODUCTS.
The manufacture, use or sale of our products may infringe on the patent and
trademark rights of others. Based on the nature of competition, patent and
trademark infringement problems occur frequently in connection with the sale and
marketing of cough, cold, allergy, headache and other pharmaceutical products.
If we do not avoid infringement of the intellectual property rights of others,
we may have to seek a license to sell our products, defend an infringement
action or challenge the validity of the intellectual property in court, all of
which could be expensive and time consuming. In addition, if we are found liable
for infringing a patent, we may have to stop selling some of our products and
pay damages.
Even though most of our product agreements under which we license
intellectual property rights from others contain provisions that allow us to
recover costs and damages if we have to defend or are found liable for
infringing a patent of a third party, the agreement under which we obtained
rights to Nitrolingual does not contain these indemnification provisions. It
could be very costly if we had to defend the patents or trademarks covering
Nitrolingual Pumpspray or if we were found liable for infringement.
TECHNOLOGICAL ADVANCES MAY MAKE OUR PRODUCTS OBSOLETE.
Rapid technological change occurs in the pharmaceutical industry, which
could make our products obsolete and reduce our sales and profits. Specifically,
vaccines and preventative medications to prevent the flu and gene therapy to
treat cardiovascular disease, may reduce the need for our products.
9
<PAGE> 14
THE REGULATORY STATUS OF SOME OF OUR PRODUCTS COULD HURT SALES OF THOSE PRODUCTS
IN THE FUTURE.
The regulatory status of our Protuss, Protuss-D, Protuss-DM, Zoto-HC,
Tanafed, Mescolor and Defen-LA products allows third parties to more easily
introduce competitive products, and may make it more difficult for us to sell
these products in the future. Currently, an FDA program allows us to manufacture
and market these products and permits others to manufacture and market the same
and similar products without submitting safety or efficacy data. This results in
increased competition because other companies can enter the market without
having to submit safety and efficacy data to sell competing products. On several
occasions, the FDA has considered changing the classification of these drugs. If
they do change the classification, we might have to submit safety and efficacy
data on some of our products which could be costly, or we might have to
discontinue selling these products if the FDA does not approve our marketing
application.
The FDA has from time to time considered changing the regulatory
classification of products, including our cough and cold products from
prescription to over-the-counter use. If the FDA changes the regulatory
classification of our products to over-the-counter status, which is likely to
occur at some time in the future, we may have to obtain FDA approval, or
reformulate them or withdraw them, and we could lose third-party reimbursement
for the products and we could face increased competition. We are unable to
predict the timing of any of these actions.
POTENTIAL CONFLICTS MIGHT NOT BE RESOLVED IN OUR FAVOR.
John Kapoor, our majority stockholder and director, also controls
Inpharmakon Corporation, a party to one of our product development agreements.
Conflicts between the parties may develop and may not be resolved in our favor.
RISKS RELATED TO OUR OFFERING
AFTER THE OFFERING, EXISTING OFFICERS, DIRECTORS AND OUR PRINCIPAL STOCKHOLDER
WILL RETAIN A SUBSTANTIAL BLOCK OF STOCK THAT WILL ALLOW THEM TO ELECT DIRECTORS
AND DIRECT THE OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL.
After the offering, our officers, directors and principal stockholder will
beneficially own approximately 65% of our outstanding common stock.
Kapoor-Pharma Investments, L.P. will own approximately 53% of our outstanding
common stock after the offering. As majority stockholder, Kapoor-Pharma
Investments has the power to elect all of our directors. As long as
Kapoor-Pharma Investments has the right to elect a majority of the board of
directors, it will hold significant control or influence over our policies and
acts. John N. Kapoor, Ph.D., one of our directors, is president and sole
shareholder of EJ Financial Enterprises, Inc. EJ Financial Enterprises is the
managing general partner of Kapoor-Pharma Investments, L.P. In addition,
Mahendra G. Shah, Ph.D., our Chairman and Chief Executive Officer, is
vice-president of EJ Financial Enterprises.
THE MARKET PRICE OF OUR COMMON STOCK AFTER THE OFFERING MIGHT NOT EXCEED THE
OFFERING PRICE.
Prior to this offering, there was no public market for our common stock,
and a significant public trading market may not develop or continue after this
offering. We and the underwriters determined the initial public offering price
through negotiations. If the market price of the common stock after the offering
does not exceed the initial public offering price, investors will not realize
any return on their investment. If the market price of the common stock after
the
10
<PAGE> 15
offering is less than the initial public offering price, investors may lose some
or all of their investment.
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE.
The market prices for securities of drug companies are highly volatile.
Various factors, including factors that are not related to our operating
performance, may cause significant volume and price fluctuations in the market.
The following factors may cause fluctuations in our stock price:
- fluctuations in operating results;
- rates of product acceptance;
- timing or delay of regulatory approvals, including our migraine product
under development or our line extension of Robinul to treat symptoms
associated with excessive salivation;
- whether third-party manufacturers experience interruptions in the supply
of raw materials or encounter regulatory problems;
- failure to meet financial estimates or expectations of securities
analysts;
- developments in or disputes regarding patent or other proprietary rights;
and
- future sales of substantial amounts of common stock by our existing
stockholders.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET AFTER THE OFFERING COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
Our shareholders could sell substantial amounts of our common stock in the
public market following the offering. As a result, the aggregate number of
shares of our common stock available to the public would increase and,
consequently, the price of our common stock could fall. We cannot predict the
timing or amount of future sales of shares of our stock or the effect, if any,
that market sales of shares, or the availability of shares for sale, will have
on the prevailing market price of our common stock. Upon completion of the
offering, we will have 12,339,643 outstanding shares of common stock, assuming
no exercise of outstanding options. Of these shares, the 3,800,000 shares sold
in this offering will be freely tradeable. This leaves 8,539,643 currently
outstanding shares that will be eligible for sale in the public market as
follows:
- 100,000 available for immediate sale on the date of this prospectus; and
- 8,439,643 available for sale 180 days after our stock begins trading on
the Nasdaq National Market, subject in some cases to volume and other
restrictions
In addition, 1,795,000 shares are issuable upon the exercise of currently
outstanding options. These shares will be eligible for sale 180 days after our
stock begins trading on the Nasdaq National Market, subject in some cases to
restrictions contained in stock option agreements which defer the exercisability
of the options.
After this offering, we expect to file a registration statement covering
shares of common stock issuable upon exercise of options and other grants under
our stock plans. This will allow
11
<PAGE> 16
shares purchased upon the exercise of such options to be sold in the public
markets, subject in some cases to volume and other restrictions.
ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE A THIRD PARTY FROM MAKING A TAKEOVER
OFFER THAT COULD BE BENEFICIAL TO STOCKHOLDERS.
Some of the provisions in our Restated Certificate of Incorporation and the
anti-takeover provisions under Delaware Law could delay or prevent a third party
from acquiring us or replacing members of our board of directors, even if the
acquisition or the replacements would be beneficial to our stockholders. These
provisions could also reduce the price that certain investors might be willing
to pay for shares of our common stock and result in the market price being lower
than it would be without these provisions. Our charter documents contain anti-
takeover devices including:
- only one of the three classes of directors is elected each year;
- stockholders cannot amend our bylaws unless at least two-thirds of the
shares entitled to vote approve it;
- our board of directors can issue shares of preferred stock without
shareholder approval under any terms, conditions, rights and preferences
that the board determines; and
- stockholders must give advance notice to nominate directors or to submit
proposals for consideration at stockholder meetings.
STOCKHOLDERS WILL EXPERIENCE SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE
OF THEIR COMMON STOCK.
Investors will suffer immediate and substantial dilution. The initial
public offering price per share will significantly exceed the net tangible book
value per share of ($0.23). Accordingly, investors will suffer immediate and
substantial dilution. This dilution will result because our existing investors
paid substantially less than the initial public offering price when they bought
their shares of our common stock. The exercise of outstanding options to
purchase our common stock will result in further dilution to new investors.
THE NET PROCEEDS FROM THE OFFERING MAY BE ALLOCATED IN WAYS WITH WHICH YOU AND
OTHER STOCKHOLDERS MAY NOT AGREE.
Management will have significant flexibility in applying the net proceeds
of this offering and could use these proceeds for purposes other than those
contemplated at the time of the offering.
12
<PAGE> 17
TRADENAMES AND TRADEMARKS USED IN THIS PROSPECTUS
We own or have rights to tradenames and registered trademarks that we use
in connection with the sale of our products. We have filed an application to
register the trademark Zebutal in the United States. We own the U.S. registered
trademarks Tanafed(R), Protuss(R), Mescolor(R), Zoto-HC(R) and Defen(R).
Nitrolingual(R), Robinul(R) and TIMERx(R) are registered U.S. trademarks of G.
Pohl Boskamp GmbH & Co., American Home Products Corporation and Penwest
Pharmaceuticals Co., respectively.
FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and elsewhere are forward-looking
statements that are not based on historical facts. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including those discussed under "Risk
Factors."
The forward-looking statements made in this prospectus relate only to
events as of the date on which the statements are made.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,800,000 shares of
common stock that we are offering will be $45,242,000 after deducting estimated
offering expenses and assuming an initial public offering price of $13.00 per
share. If the underwriters' over-allotment option is exercised in full, assuming
an initial public offering price of $13.00 per share, we estimate that the net
proceeds will be $52,133,300.
We anticipate using the net proceeds from this offering as follows: for
general corporate purposes, including the development of new products, the
expansion of our sales and marketing force, new product acquisitions and
repayment of approximately $1,840,000 of debt outstanding as of December 31,
1999 under the term loan of our credit facility with LaSalle Bank, N.A.
Borrowings under the term loan bear interest at our choice of either the prime
rate of interest or LIBOR plus 2%, and the note matures on December 22, 2001. We
will retain broad discretion over the use of the net proceeds of this offering.
The amounts and timing of the expenditures may vary significantly depending on
numerous factors, such as the progress of our development efforts, technological
advances and the competitive environment for our products. We might also use a
portion of the net proceeds to acquire or invest in complementary businesses,
products and technologies. We are not currently a party to any agreements to
acquire or invest in any new businesses, products or technologies other than as
described under "Business-Product Development." We regularly review
opportunities for new acquisitions or investments, and we are currently in
confidential negotiations to acquire rights to market and sell a product for a
purchase price payable by us to the seller of approximately $13,000,000 in cash
plus royalties on our net sales of the product. Because we have no binding
agreement to acquire this product and we remain in the early stages of
negotiations for this acquisition, we may not be successful in completing this
product acquisition.
Pending use of the net proceeds, we intend to invest the net proceeds in
short-term, interest-bearing, investment-grade securities.
13
<PAGE> 18
DIVIDEND POLICY
We have never paid cash dividends on our common stock. The payment of cash
dividends is subject to the discretion of our board of directors and will be
dependent upon many factors, including our earnings, our capital needs and
general financial condition. We anticipate that for the forseeable future, we
will retain earnings, if any, in order to finance the expansion and development
of our business. Our credit facility prohibits the payment of any dividends or
other distributions on any shares of our stock.
14
<PAGE> 19
CAPITALIZATION
The following table sets forth as of December 31, 1999, the actual
capitalization of our company and our capitalization, as adjusted to reflect the
issuance and sale of the 3,800,000 shares of common stock we are offering at an
assumed public offering price of $13.00 per share and the use of the proceeds
from the offering to repay $1,840,000 of debt outstanding as of December 31,
1999. This table should be read in conjunction with our financial statements and
the notes to the financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
ACTUAL AS ADJUSTED
----------- --------------------
<S> <C> <C>
Borrowings under revolving credit facility........... $ 800,000 $ 800,000
Long-term debt, including current portion............ 2,898,886 1,058,886
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares
authorized, no shares outstanding, actual and as
adjusted........................................ -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized, 8,539,643 shares issued and
outstanding in 1999 and 12,339,643 as adjusted
shares issued and outstanding................... 8,540 12,340
Additional paid-in capital........................... 5,788,220 51,026,420
Deferred compensation................................ (1,284,374) (1,284,374)
Accumulated deficit.................................. (896,822) (896,822)
----------- -----------
Total stockholders' equity................. 3,615,564 48,857,564
----------- -----------
Total capitalization....................... $ 7,314,450 $50,716,450
=========== ===========
</TABLE>
The number of shares of common stock to be outstanding after this offering
does not include:
- 1,795,000 shares issuable upon exercise of options outstanding as of
March 27, 2000, at a weighted average exercise price of $1.69 per share;
and
- 570,000 shares issuable pursuant to the underwriters' over-allotment
option.
The board of directors approved the grant of options under our 2000 Stock
Plan to purchase 177,950 shares subject to completion of this offering at an
exercise price equal to the initial public offering price per share in this
offering. Following this grant, there will be 1,822,050 shares available for
future grants under this plan.
15
<PAGE> 20
DILUTION
Our net tangible book value as of December 31, 1999 was ($1.987) million,
or ($0.23) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of common stock outstanding at that date. After giving
effect to the sale of the 3,800,000 shares of common stock at an assumed initial
public offering price of $13.00 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses, our as adjusted net
tangible book value as of December 31, 1999 would have been $43.255 million, or
$3.51 per share. This represents an immediate increase in pro forma net tangible
book value of $3.74 per share to existing stockholders, and an immediate
dilution of $9.49 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Net tangible book value per share at December 31, 1999.... ($0.23)
Increase per share attributable to new investors.......... 3.74
------
Pro forma net tangible book value per share after this 3.51
offering..................................................
------
Dilution per share to new investors......................... $ 9.49
======
</TABLE>
The following table summarizes, on an as adjusted basis as of December 31,
1999, the differences between the number of shares of common stock that we
issued, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering at an assumed initial public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders....... 8,539,643 69.2% $ 4,234,900 8.6% $ 0.50
New investors........ 3,800,000 30.8 45,242,000 91.4 11.91
---------- ----- ----------- -----
Total...... 12,339,643 100.0% 49,476,900 100.0%
========== ===== =========== =====
</TABLE>
The discussion regarding dilution and these tables assumes no exercise of
any outstanding stock options. The discussion does not include: (a) 1,795,000
shares issuable upon exercise of options outstanding under our 1997
Non-Qualified Stock Option Plan at a weighted average exercise price of $1.69 or
(b) 570,000 shares issuable at an assumed price of $13.00 per share pursuant to
the underwriters' over-allotment option. The board of directors approved the
grant of options to purchase 177,950 shares under our 2000 Stock Plan subject to
completion of this offering, at an exercise price equal to the public offering
price per share in this offering. Following this grant, there will be 1,822,050
shares available for future grants under our 2000 Stock Plan.
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<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with, our financial statements and the related
notes and other financial information included elsewhere in this prospectus, as
well as "Management's Discussion and Analysis of Financial Condition and Results
of Operations". The selected financial data as of December 31, 1997, 1998, and
1999 and for the years ended December 31, 1997, 1998, and 1999 were derived from
our financial statements that have been audited by Arthur Andersen LLP,
independent public accountants. The selected financial data as of December 31,
1995 and 1996 were derived from unaudited financial statements which, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of our financial condition
and results of operations. These results may not be indicative of future
results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 1,620,720 $ 2,516,616 $ 5,557,700 $ 9,252,058 $18,624,514
Operating costs and expenses:
Cost of revenues........................ 329,692 489,905 1,136,691 1,903,054 3,140,416
Selling, general and administrative
expenses, excluding non-cash
compensation expense.................. 1,302,766 2,393,018 4,545,254 6,789,358 12,400,439
Non-cash selling, general and
administrative expense................ -- -- 133,500 -- 143,986
Depreciation and amortization........... 25,977 28,878 30,273 35,225 424,274
Research and development................ -- -- -- 255,000 860,350
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses:....... 1,658,435 2,911,801 5,845,718 8,982,637 16,969,465
Operating (loss) income................... (37,715) (395,185) (288,018) 269,421 1,655,049
Other (expense) income:
Interest expense........................ (54,310) (67,461) (5,496) (14,017) (356,598)
Interest income......................... -- 3,314 2,909 4,383 11,950
Other................................... -- -- 3,629 (2,749) 8,059
----------- ----------- ----------- ----------- -----------
Total other (expense) income.............. (54,310) (64,147) 1,042 (12,383) (336,589)
----------- ----------- ----------- ----------- -----------
(Loss) income before benefit (provision)
for income taxes........................ (92,025) (459,332) (286,976) 257,038 1,318,460
Benefit (provision) for income taxes...... -- 114,984 106,530 (121,484) (547,996)
----------- ----------- ----------- ----------- -----------
Net (loss) income......................... $ (92,025) $ (344,348) $ (180,446) $ 135,554 $ 770,464
=========== =========== =========== =========== ===========
Net (loss) income per common share:
Basic................................... $ (0.02) $ (0.06) $ (0.02) $ 0.02 $ 0.10
=========== =========== =========== =========== ===========
Diluted................................. $ (0.02) $ (0.06) $ (0.02) $ 0.02 $ 0.09
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding:
Basic................................... 5,636,137 5,830,000 7,576,580 7,978,234 8,028,673
=========== =========== =========== =========== ===========
Diluted................................. 5,636,137 5,830,000 7,576,580 8,584,329 8,975,493
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 71,652 $ 30,986 $ 244,766 $ 425,023 $ 219,688
Working capital........................... 188,995 (645,249) 687,426 640,090 (733,884)
Total assets.............................. 643,639 834,238 1,758,872 2,933,101 11,077,744
Borrowings under revolving loan
agreement............................... -- -- -- 602,928 800,000
Long-term debt including current
portion................................. -- -- -- -- 2,898,886
Accumulated deficit....................... (1,278,046) (1,622,394) (1,802,840) (1,667,286) (896,822)
Total stockholders' (deficit) equity...... (131,660) (477,011) 814,326 956,130 3,615,564
</TABLE>
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We currently market and sell 11 brand name prescription drugs through our
nationwide sales and marketing force of 133 professionals. We seek to acquire
and obtain licenses for pharmaceutical products that other companies do not
actively market and to increase sales through aggressive promotion and
marketing. In addition, we seek to increase the value of existing products by
developing new formulations and new delivery methods, and seeking new
indications for existing products.
We have historically increased revenues and seek to increase revenues in
the future from our ability to make product acquisitions and increasing sales of
current products.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Net Revenues. Revenues from product sales are recognized upon shipment to
customers and are shown net of sales adjustments. Net revenues are net of
provisions for discounts, rebates to customers, returns, and other adjustments
are provided in the same period that the related sales are recorded. Net
revenues for the year ended December 31, 1999 were $18,625,000, compared to
$9,252,000 for the year ended December 31, 1998, a 101% increase. Of this
increase, $6,206,000 resulted from product acquisitions and licensing agreements
made in 1999, or from products that earned revenues for the first time in 1999.
Sales of products sold prior to 1999 or "existing products" were $12,419,000, a
$3,167,000 or 34% increase over 1998. This increase primarily resulted from the
expansion of our sales force, increased marketing efforts and the continued
increase in demand for our products as a result of current and prior efforts of
our sales force. Rebates and other sales allowances were $2,156,000 in 1999
primarily related to Medicaid rebates on Robinul and Robinul Forte.
Cost of Revenues. Cost of revenues for the year ended December 31, 1999,
were $3,140,000, compared to $1,903,000 for the year ended December 31, 1998, a
65% increase.
Gross Margin. Gross margin for the year ended December 31, 1999 was 83%,
compared to 79% in 1998. The increase in gross margin primarily resulted from
the higher gross margin earned on Robinul and Robinul Forte which we began
selling in February 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of salaries, commissions, bonuses, training and
education costs, sample and promotional costs, royalty and commission payments
to product licensors, office expenses, travel expenses, payroll taxes, rent and
utilities, insurance, outside professional services, taxes, bad debts and other
general office expenses. Selling, general and administrative expenses for the
year ended December 31, 1999 were $12,400,000, compared to $6,789,000 for the
year ended December 31, 1998, an 83% increase. Selling-related expenses
increased over the previous year due to increased expenses related to sales
force expansion, higher commission and royalty payments and larger sample,
marketing and promotional costs. General and administrative expenses increased
over the previous year due to increased compensation and related expenses, and
increased costs as a result of relocation of our corporate offices from a
7,500-square-foot facility to a 24,300-square-foot facility in September 1998.
18
<PAGE> 23
Non-cash Selling, General and Administrative Expense. Non-cash
compensation expenses were $144,000 for the year ended December 31, 1999,
compared to no expense for the year ended December 31, 1998. This expense
resulted from our issuing stock options in 1999 at exercise prices that were
less than the market value of our stock at time of issuance, as determined by an
independent valuation.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses were $424,000 for the year ended December 31, 1999, compared to $35,000
for the year ended December 31, 1998. This increase primarily resulted from
amortization expense related to the purchase in 1999 of Robinul and Robinul
Forte.
Research and Development Expenses. Research and development expenses
consist primarily of costs incurred to develop formulations, engage contract
research organizations to conduct clinical studies, test products under
development and engage medical and regulatory consultants. We expense all
research and development costs as incurred. Research and development expenses
were $860,000 for the year ended December 31, 1999, compared to $255,000 for the
year ended December 31, 1998. This increase resulted from our continuing
development of a new product for the treatment of migraine headache and our
continuing development of a line extension of Robinul for the treatment of
symptoms associated with excessive salivation.
Interest Expense. Interest expense for the year ended December 31, 1999
was $357,000, compared to $14,000 for the year ended December 31, 1998. The
$343,000 increase resulted primarily from borrowings for the acquisition of
Robinul and Robinul Forte.
Interest Income. Interest income for the year ended December 31, 1999 was
$12,000, compared to $4,000 for the year ended December 31, 1998. This $8,000
increase resulted from increased average cash balances resulting from improved
financial performance.
Income Tax Expense. Income tax expense for the year ended December 31,
1999 was $548,000, compared to $121,000 for the year ended December 31, 1998.
The $427,000 increase resulted from increased pre-tax income.
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Net Revenues. Net revenues for the year ended December 31, 1998 were
$9,252,000, compared to $5,558,000 for the year ended December 31, 1997, a 66%
increase. The increase resulted from the expansion of our sales force from 47
sales representatives and three district managers at the end of 1997 to 69 sales
representatives and three district managers at the end of 1998 and the continued
increase in demand for our products as a result of prior efforts of our sales
force.
Cost of Revenues. Cost of revenues for the year ended December 31, 1998
were $1,903,000, compared to $1,137,000 for the year ended December 31, 1997, a
67% increase.
Gross Margin. Gross margins for the years ended December 31, 1998 and 1997
were 79%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 were $6,789,000,
compared to $4,545,000 for the year ended December 31, 1997, a 49% increase.
Selling-related expenses increased over the previous year due to increased
expenses related to sales force expansion, higher commission and royalty
payments and larger sample, marketing and promotional costs. General and
administrative expenses increased over the previous year due to increased
compensation and related
19
<PAGE> 24
expenses, and increased costs as a result of relocation of our corporate offices
from a 7,500-square-foot facility to a 24,300-square-foot facility in September,
1998.
Non-cash Selling, General and Administrative Expense. We had non-cash
compensation expenses of $0 for the year ended December 31, 1998, compared to
$134,000 for the year ended December 31, 1997. The 1997 non-cash compensation
expense resulted from our issuing stock options in 1997 at exercise prices that
were less than the market value of our stock at the time of issuance, as
determined by an independent valuation.
Research and Development Expenses. Research and development expenses were
$255,000 for the year ended December 31, 1998, compared to no expenses for the
year ended December 31, 1997. We paid $200,000 in development fees to
Inpharmakon Corporation for the fee for licensing our migraine product under
development.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $35,000 for the year ended December 31, 1998, compared to $30,000
for the year ended December 31, 1997, a 17% increase. The increase resulted from
purchases of computers for new personnel and furniture related to our corporate
office relocation.
Interest Income. Interest income for the year ended December 31, 1998 was
$4,000, compared to $3,000 for the year ended December 31, 1997. The $1,000
increase resulted from increased average cash balances resulting from improved
financial performance.
Interest Expense. Interest expense for the year ended December 31, 1998
was $14,000, compared to $5,000 for the year ended December 31, 1997. The $9,000
increase resulted primarily from borrowings on our line of credit with LaSalle
Bank.
Income Tax Expense. Income tax expense for the year ended December 31,
1998 was $121,000, compared to a benefit of $107,000 for the year ended December
31, 1997. The $228,000 increase resulted from 1998 being our first profitable
operating year.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our business and cash requirements primarily with cash
from operations, borrowings for product acquisitions and the issuance of stock
to our majority stockholder.
Our cash and cash equivalents at December 31, 1999, 1998 and 1997 were
$220,000, $425,000 and $245,000, respectively. Net cash provided by operating
activities for the year ended 1999 was $1,018,000. Our sources of cash were
primarily from net income and increases in accounts payable and accrued expenses
partially offset by increases in accounts receivable, inventories and deferred
taxes. Net cash used in operating activities for the years ended 1998 and 1997
was $181,000 and $196,000, respectively. Our use of net cash was primarily a
result of increases in accounts receivable and inventories partially offset by
increase in deferred taxes, accounts payable and accrued expenses plus net
income.
We purchased intangible assets in 1999 for $4,000,000 in cash with an
additional $1,800,000 financed by the seller of the assets. As a part of the
acquisition, we also assumed estimated liabilities of $218,460 for returns of
products shipped by the seller prior to the acquisition date. In addition, we
spent $186,000 for the purchase of property and computer related items in 1999.
Net cash used in investing activities in 1998 and 1997 was $208,000 and
$121,000, respectively. These investments were primarily for the purchase of
property and computer related items.
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During 1999, we borrowed $4,000,000 and incurred indebtedness of $1,800,000
for the purchase of intangible assets. In 1999 we also made payments of
$1,235,000 on long-term debt and had a net increase of $197,000 on our revolving
line of credit. During 1998, we borrowed $563,000 under our revolving line of
credit. During 1997, we financed our capital requirements by raising $550,000
through the issuance of stock to our majority shareholder.
In May 1998, we obtained a revolving credit facility from LaSalle Bank
under which we could borrow up to $1,000,000, subject to borrowing base
limitations based on eligible accounts receivable and inventory balances. The
credit facility was amended and restated on December 22, 1998 to provide for
partial financing of a product acquisition through our term loan described
below. Under the amended facility, terms of the revolving credit provided for
borrowings of up to $2,500,000. Borrowings under the revolving credit facility
bear interest at the bank's prime rate, and are due on January 31, 2001. At
December 31, 1999, the outstanding balance under the revolving loan was $800,000
with an interest rate of 8.50%, and we had additional availability under the
terms of the facility of $1,700,000. During January 2000, the revolving credit
facility was amended and restated to provide for borrowings up to $3,500,000
through June 30, 2000, reducing to $2,500,000 at June 30, 2000. We borrowed
$2,400,000 under our term loan facility in January 1999 bearing interest at our
choice of either LaSalle's prime rate or LIBOR plus 2%. The term loan is
repayable in monthly payments of $40,000 plus accrued interest and matures on
December 22, 2001. At December 31, 1999 outstanding indebtedness under the term
loan was $1,840,000 with an interest rate of 7.96%. We plan to repay this term
loan in full with proceeds from this offering.
Under the terms of our credit facility, we must maintain a minimum net
worth plus subordinated debt of $2,500,000, a ratio of net worth plus
subordinated debt not to exceed 1.75 to 1.00, a minimum EBITDA of $2,000,000 and
a fixed charge coverage ratio of not less than 1.25 to 1.00. The credit facility
also limits our ability to incur additional indebtedness, and prohibits
substantial asset sales and cash dividends.
We expect that the proceeds from this offering, cash from operations and
borrowings under our credit facility will be adequate to fund our current
operations and current working capital requirements for the next eighteen
months. In the event that we make significant future product acquisitions, we
expect that we will need to raise additional funds. Adequate funds for these
purposes, whether through the financial markets or from other sources, may not
be available when needed or on terms acceptable to us. Insufficient funds may
cause us to delay, scale back or abandon some or all of our future product
acquisition opportunities.
Our future capital requirements and the adequacy of our available funds
will depend on many factors, including:
- the timing and cost of product acquisitions and licensing agreements;
- regulatory approval of our migraine product under development and the
Robinul product extension;
- size and scope of our development efforts for additional products;
- cost, timing and outcomes of regulatory reviews;
- expansion of our sales and marketing force;
- determinations as to the commercial potential of our products under
development;
- status of competitive products;
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- defending and enforcing intellectual property rights; and
- establishment, continuation or termination of third-party manufacturing
agreements.
IMPACT OF INFLATION
We have experienced only moderate price increases under our agreements with
third-party manufacturers as a result of raw material and labor price increases.
We have passed these price increases along to our customers.
SEASONALITY
Although our 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. We expect the impact of seasonality to decrease as
we acquire or obtain licenses for products that treat chronic conditions.
However, we anticipate that the seasonality may continue to affect sales for the
foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We must adopt SFAS No. 133 for the year
ending December 31, 2000. SFAS No. 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we do not hold any
derivative financial instruments and do not engage in hedging activities,
adoption of SFAS No. 133 is not expected to have a material impact on our
financial condition or results of operations.
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BUSINESS
OVERVIEW
We currently market and sell 11 brand name prescription drugs to
high-prescribing primary care and select specialty physicians through our
nationwide sales and marketing force of 133 professionals. Since our formation,
we have introduced 11 products including two line extensions. Our strategy is to
acquire and obtain licenses for pharmaceutical products that other companies do
not actively market and to increase sales through aggressive promotion and
marketing. In addition, we seek to increase the value of existing products by
developing new formulations and new delivery methods, and seeking new
indications. We incorporated in 1992 as the surviving corporation of a merger in
July 1992 between Century Pharmaceutical Corporation and Horizon Pharmaceutical
Corporation. The company originally promoted over-the-counter cough and cold
products. In late 1992, we launched the prescription cough and cold products
Defen-LA and Protuss Liquid and began focusing on prescription drugs for chronic
conditions.
Our key products include Nitrolingual, Robinul and Robinul Forte, and
Tanafed. In 1999, we acquired marketing rights to Robinul and Robinul Forte from
American Home Products Corporation and to Nitrolingual from Pohl-Boskamp. In
February 2000, we began marketing a new version of this product called
Nitrolingual Pumpspray. We have marketed Tanafed since 1993. We recently entered
into development agreements with Penwest Pharmaceuticals Co. and Inpharmakon
Corporation for a product that we are developing for the treatment of migraine
headache. We are also currently developing a line extension of Robinul to treat
symptoms associated with the excessive production of saliva.
Our net revenues have grown from approximately $1.6 million for the year
ended December 31, 1995 to approximately $18.6 million for the year ended
December 31, 1999. We achieved this from a combination of increased sales of
existing products and product acquisitions and licenses.
FIRST HORIZON STRATEGY
We believe that our ability to market, acquire and develop brand name
products and our ability to increase our sales and improve our marketing
infrastructure uniquely positions us to continue to grow. We focus on products
that treat chronic conditions primarily because patients and physicians remain
loyal to such products. This results in repeat use over an extended period of
time, generates recurring consistent revenue streams and lowers marketing costs
necessary to maintain existing sales.
The key elements of our strategy include:
- Increase sales of products through targeted promotion. We seek to
increase sales by promoting our products to high-prescribing primary care
and specialty physicians through our nationwide sales and marketing force
that includes 133 professionals. We also use targeted direct mail and
telemarketing to promote our products.
- Identify and license or acquire brand name prescription products. We
seek to acquire the rights to brand name pharmaceutical products that we
believe will benefit from increased marketing efforts to high-prescribing
primary care and specialty physicians, leverage our existing sales
infrastructure, complement our existing products and have the potential
for market exclusivity.
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- Develop proprietary products and line extensions. We seek to reduce the
costs and risks of development by focusing on drugs that the FDA has
already approved in the United States. We plan to develop products,
including line extensions of our current drugs, using patent-protected
delivery systems or formulations that offer market differentiation and
the potential for market exclusivity.
PRODUCTS
We currently market and sell the following products:
<TABLE>
<CAPTION>
PRODUCT DATE OF INTRODUCTION PRODUCT INDICATION
- ------- -------------------- ------------------
<S> <C> <C>
Nitrolingual Pumpspray.......... 2000 Acute relief or prevention of an
attack of angina pectoris due to
heart disease
Robinul and Robinul Forte....... 1999 Adjunctive therapy for the
treatment of peptic ulcer
Zebutal Capsules................ 1999 Tension headache
Protuss DM Tablets.............. 1997 Cough and congestion
Mescolor Tablets................ 1994 Allergy and runny nose
Protuss-D Liquid................ 1994 Cough and congestion
Zoto-HC Ear Drops............... 1994 Swimmer's ear infections
Tanafed Suspension.............. 1993 Allergy and cold
Defen-LA Tablets................ 1992 Cough and cold
Protuss Liquid.................. 1992 Cough and congestion
</TABLE>
The FDA approved Nitrolingual Pumpspray, Robinul and Robinul Forte under
new drug applications. The FDA also approved an abbreviated new drug application
for Zebutal. Our other products are classified by the FDA as drugs that may be
marketed without submitting safety and efficacy data.
Nitrolingual
On February 1, 2000, we began marketing Nitrolingual Pumpspray for which we
acquired from Pohl-Boskamp exclusive distribution rights in the United States.
Nitrolingual Pumpspray is an oral spray of nitroglycerin used for the acute
relief or prevention of chest pain associated with angina pectoris that results
from heart disease. Pohl-Boskamp holds a patent that was issued in 1993 on the
formulation of Nitrolingual.
Aventis previously had the rights to market the chlorofluorocarbon (CFC)
version of this product named Nitrolingual Spray. We believe that Nitrolingual
Pumpspray has marketing advantages over Nitrolingual Spray. Unlike the previous
version, Nitrolingual Pumpspray is packaged in a translucent, plastic-coated
glass bottle, that allows patients to easily see the amount of product left in
the bottle. In addition, Nitrolingual Pumpspray does not contain CFC, making it
environmentally friendly.
The primary competitor to Nitrolingual Pumpspray is nitroglycerin tablets.
Unlike tablets, which begin to lose their potency immediately upon opening the
bottle, Nitrolingual Pumpspray maintains its potency for two years. Further,
studies have shown that Nitrolingual Pumpspray
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<PAGE> 29
provides for more rapid absorption than the tablets. Each metered dose provides
for consistent delivery of nitroglycerin. Also, unlike the tablets, Nitrolingual
Pumpspray requires no special storage or handling to maintain its potency.
According to the American Heart Association, about 6.2 million Americans
suffer from angina pectoris.
Robinul and Robinul Forte
On January 29, 1999, we acquired exclusive rights in the United States to
Robinul and Robinul Forte, which is a higher-strength dosage of Robinul. Both
Robinul and Robinul Forte belong to a class of drugs known as anticholinergics,
which reduce the motion of the gastrointestinal tract. The FDA has approved both
products for use as a therapy in conjunction with other therapeutics in the
treatment of peptic ulcer. Compared to other anticholinergics, the Robinul
product line has an overall better side effect profile and is longer acting,
thereby requiring fewer doses. We are currently developing a line extension and
will seek regulatory approval to use the active ingredient in Robinul to treat
symptoms associated with the excessive production of saliva. Since acquiring the
products, we have substantially increased the sales of Robinul and Robinul
Forte. Industry sources estimate that the U.S. market for anticholinergics was
$130 million in 1999.
Tanafed
Tanafed is a liquid cold and allergy product marketed for children. We
believe that pediatricians prescribe Tanafed because it is effective and
children prefer its taste. The National Center for Health Statistics estimated
that 20 million days were lost from school in 1994.
Cough, Cold and Allergy Products
Our other products for the treatment of cough, cold and allergy are
Defen-LA Tablets, Mescolor Tablets and the Protuss product line, which includes
Protuss Liquid, Protuss DM Tablets and Protuss-D Liquid.
Other Products
We sell Zoto-HC ear drops for the treatment of swimmer's ear infections and
Zebutal Capsules for the treatment of tension headaches. A study has shown that
approximately nine out of ten people have at least one headache in any given
year. Headaches account for approximately 18 million outpatient visits annually
to hospitals and healthcare clinics.
PRODUCT DEVELOPMENT
We seek to maximize the value of drugs by developing new patentable
formulations, using new delivery methods and seeking regulatory approval for new
indications. Through the use of these distinct formulations and patent-protected
delivery systems, we plan to create a marketing advantage over generic drugs and
reduce substitution by the pharmacist. Some of these development projects
include line extensions which allow us to extend the life cycle of our key
products. We expect the strength of extensive literature-based clinical data on
the active ingredients in our products under development, current acceptance and
usage of the active ingredients in these products by healthcare professionals,
and the safety profile of the active
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<PAGE> 30
ingredients in approved products will reduce development costs and risks
associated with FDA approval.
Migraine Product (FHPC 01)
We are developing a proprietary formulation of a product named FHPC 01 for
the treatment of migraine headaches, which contains an active ingredient that is
currently approved by the FDA for other indications. We have entered into a
development agreement with Penwest Pharmaceuticals Co. to develop a product
using Penwest's patented TIMERx controlled-release technology. Penwest has also
granted us the right to reference their Drug Master File as necessary for us to
file a new drug application for this product. A Drug Master File is a submission
to the FDA, often in support of a new drug application, that companies may use
to provide confidential, detailed information about facilities, processes or
articles used in the manufacturing, processing, packaging and storing of one or
more human drugs. We filed an investigational new drug application for this
product on February 17, 2000. We have engaged Parexel International to conduct
clinical trials for this product. A study has shown that an estimated 23.6
million Americans suffer from migraine headaches. Of these, approximately half
suffer from migraines that are moderately to severely disabling.
Excessive Salivation Product (FHPC 02)
We are developing a product named FHPC 02 for the treatment of the symptoms
associated with the excessive production of saliva primarily in children. This
product will be a line extension of our Robinul products. We have entered into
an agreement with Mikart to develop a new dosage form. We plan to initiate
clinical trials and file for a supplementary new drug application to market the
product. Excessive salivation, also known as Sialorrhea, is a socially
embarrassing condition that occurs in patients who suffer from cerebral palsy
and Parkinson's disease.
Formulation and Clinical Trials
We generally seek to contract third parties to formulate, develop and
manufacture materials needed for clinical trials and to perform scale-up work.
We select third-party contractors that we believe have the capability to
commercially manufacture the products. By selecting qualified third parties
capable of both developing formulations and providing full-scale manufacturing
services, we believe we will be able to shorten development and scale-up times
necessary for production. The key advantage to this approach is that the
third-party contractor will have the equipment, operational parameters and
validated testing procedures already in place for the commercial manufacture of
our products. Our management team has experience in selecting and managing
activities of third-party contract companies.
SALES AND MARKETING
To maximize the effectiveness of our selling efforts, our sales force
focuses on high-prescribing primary care and select specialty physicians. Our
sales force seeks to develop close relationships with these physicians and
respond to their needs. We intend to enhance our existing marketing and sales
channels to expand and increase the penetration of our products. We have
expanded our sales and marketing force to 133 professionals nationwide.
We sell our products to pharmaceutical wholesalers (who in turn distribute
to pharmacies), chain drug stores, other retail merchandisers and, on a limited
basis, directly to pharmacies. In
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1999, sales to our top five pharmaceutical wholesalers accounted for over 72% of
all of our sales. Three of the five wholesalers each accounted for 10% or more
of all of our sales: McKessonHBOC (28%), Cardinal Health (19%) and Bergen
Brunswig (10%).
We have traditionally targeted our sales efforts in areas with low
managed-care penetration in which it is easier to establish a presence. In
addition, we have a group of sales professionals that focuses exclusively on
building relationships with managed-care organizations that can be leveraged
across markets. We continue to strengthen this group to gain access to
formularies and develop long-term working relationships that may lead to
adoption of our products.
During 1999, our Robinul line accounted for 27.5% of our revenues and our
cough, cold and allergy products accounted for 57.5% of our revenues. During
1998, our cough, cold and allergy products accounted for 82.0% of our revenues
and Zoto-HC accounted for 18.0% of our revenues. During 1997, our cough, cold
and allergy products accounted for 80.9% of our revenues and Zoto-HC accounted
for 19.1% of our revenues.
THIRD-PARTY AGREEMENTS
Nitrolingual Pumpspray
In July 1999, we acquired from Pohl-Boskamp the exclusive rights to
distribute, market and sell Nitrolingual Pumpspray beginning on February 1, 2000
in the United States for five years plus an additional five-year renewal period
subject to establishing mutually acceptable minimum purchase requirements. Under
the agreement, Pohl-Boskamp supplies us with our requirements of product at
prices that decrease as volume purchased in each year increases. We must
purchase designated minimum quantities in each year of the agreement and pay a
royalty on net sales of the product. Also, Pohl-Boskamp can terminate our
distribution agreement for Nitrolingual if a company with a product competitive
with Nitrolingual acquires direct or indirect influence or control over our
company, or if a very significant change in our stockholders occurs so that
Kapoor-Pharma Investments and Horizon employees, management, directors, and any
of their respective affiliates, do not in the aggregate directly or indirectly
beneficially own at least 20% of our shares.
Aventis had exclusive rights through January 2000, to a version of the
product containing CFC named Nitrolingual Spray. To promote earlier adoption of
Nitrolingual Pumpspray, we obtained exclusive marketing rights from Aventis to
market Nitrolingual Spray in the United States as of November 22, 1999. We
promoted Nitrolingual Spray for a short period of time to reduce inventories of
the product in the distribution channels. Since the launch of Nitrolingual
Pumpspray, we have not marketed this CFC product.
Robinul/Robinul Forte
On January 29, 1999, we acquired exclusive rights in the United States to
Robinul and Robinul Forte tablets from American Home Products Corporation. We
will pay the $1.1 million aggregate remaining portion of the purchase price
quarterly through February 2001. In addition, we must pay royalties on net
sales. We negotiated for American Home Products Corporation or its designee to
continue to manufacture and supply the product to us until January 29, 2001. We
have an agreement with Mikart, dated April 23, 1999, for Mikart to become
qualified under applicable regulations to manufacture and supply our
requirements for Robinul. Under this agreement, Mikart will manufacture the
products for five years from the time Mikart becomes a qualified manufacturer
plus renewal terms of one year until either party elects not to renew. The
agreement with Mikart requires that we purchase certain designated minimum
quantities.
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Tanafed
On January 1, 1996, we obtained exclusive distribution rights from
Unisource, Inc. to Tanafed in North America through December 31, 2003 plus an
additional seven years at our option. The agreement requires us to purchase all
of our requirements for Tanafed from Unisource, including at least certain
minimum quantities of Tanafed in each year of the agreement. We entered into a
patent and license agreement with the supplier of raw material for Tanafed dated
January 1, 2000. Our license allows us to market and distribute Tanafed for
which the manufacturer has a patent covering the manufacturing process for one
of its active ingredients.
Migraine Product (FHPC 01)
On October 31, 1998, we entered into an agreement with Inpharmakon
Corporation in which we acquired rights to the proprietary information for the
migraine product FHPC 01 for which we plan to conduct clinical studies and
submit a new drug application. The agreement expires on October 31, 2008, but we
may renew it indefinitely after expiration. Under the agreement, we must develop
a workable once-a-day formulation for the drug, conduct clinical trials, file
for and obtain regulatory approval, and begin commercial sales of the product
within prescribed times. If we do not reach specified milestones on a timely
basis, Inpharmakon may terminate the agreement. We must also pay up to an
aggregate of $700,000 in non-refundable fees to Inpharmakon at various
developmental milestones through and including regulatory approval of the
product, and, in the event of commercial sales of the product, we must pay
royalties at rates which we believe are within industry customary ranges. If we
elect to sell the business opportunity to a third party, we must share the
proceeds of the sale with Inpharmakon.
On March 25, 1999, we acquired rights from Penwest Pharmaceuticals Co. to
use Penwest's TIMERx controlled-release technology to develop a product
containing the active ingredient in FHPC 01. Under the Penwest agreement, we
have the right to manufacture, use and sell the developed product in North
America and Mexico for a period extending fifteen years from the date a new drug
application is issued for the product, as well as a license under certain
Penwest patents. We must pay Penwest up to an aggregate of approximately
$2,600,000 of non-refundable fees upon achieving specified development
milestones through the first anniversary of the first commercial sale of the
product following regulatory approval and royalties upon any sales of the
migraine product at rates which we believe are within industry customary ranges.
Penwest may terminate the agreement in the event we fail to timely achieve
designated performance milestones within prescribed time periods.
Other Products
Generally, our other products are manufactured pursuant to manufacturing
and supply agreements for remaining terms ranging from one to five years.
Generally, these agreements require that we purchase all of our requirements for
these products from the manufacturers which are a party to these agreements,
including specified minimum purchase quantities of the product for each year.
Except for our Defen-LA, Protuss-D and Zoto-HC products, these agreements
generally state that the product supplier will provide products only to us.
MANUFACTURERS AND SINGLE SOURCE SUPPLIERS
We use third-party manufacturers for the production of our products for
development and commercial purposes. Given the general under-utilization of
resources, the availability of excess
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capacity for manufacturing in the marketplace, and the lower cost of
outsourcing, we intend to continue to outsource our manufacturing for the
near-term.
We currently use the services of six third-party manufacturers for our
products. These manufacturers manufacture our products pursuant to our product
specifications. We have manufacturing and supply agreements with five of these
manufacturers. The terms of these agreements generally range from two years to
ten years. Under some of these agreements, the manufacturers or other
third-parties own the rights to the product that we have under our marketing
licenses. We have not entered into agreements for alternative manufacturing
sources for any of our products. The suppliers of Nitrolingual Pumpspray and the
raw materials for Tanafed hold patents for their respective products. This
provides us with a competitive advantage because the patents create a barrier to
entry to other companies that might otherwise seek to develop similar products.
TRADEMARKS
We have a U.S. registered trademark for Horizon Pharmaceutical and have
filed for the trademark for First Horizon Pharmaceutical. Our products are sold
under a variety of trademarks registered in the United States, including
Zoto-HC, Protuss, Mescolor, Defen and Tanafed. We have filed for the trademark
Zebutal. Further, we have been licensed rights to use the Nitrolingual and
Robinul trademarks in the United States from Pohl-Boskamp and American Home
Products, respectively. We have rights to the TIMERx trademark pursuant to our
rights to market the product we have under development with Penwest.
PATENTS
We consider the protection afforded by patents important to our business.
We intend to seek patent protection in the United States and selected foreign
countries where deemed appropriate for products we develop.
Nitrolingual Pumpspray
By virtue of our distribution agreement with Pohl-Boskamp for Nitrolingual
Pumpspray, we are afforded marketing exclusivity arising from Pohl-Boskamp's
1993 U.S. patent relating to the product. This patent expires in 2010.
Tanafed
We entered into a licensing agreement with the raw material supplier for
our Tanafed product effective January 1, 2000. This agreement grants us a
license to market and distribute Tanafed for which the manufacturer has a patent
covering the manufacturing process of one of its active ingredients. This patent
expires in 2014.
Migraine Product (FHPC 01)
Pursuant to our development agreement with Penwest for a once-a-day
migraine product, we are the licensee of certain Penwest patents for the purpose
of manufacturing and marketing the product under development. These patents
expire from 2008 through 2016.
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Active Ingredient in Robinul/Robinul Forte
In 1999, we filed a patent application directed to the use of
glycopyrrolate for the treatment of certain new indications. Glycopyrrolate is
the active ingredient in Robinul and Robinul Forte.
COMPETITION
The market for drugs is highly competitive with many established
manufacturers, suppliers and distributors actively engaged in all phases of the
business. We believe that competition in the sale of our products is based
primarily on price, service, availability and product efficacy. Our brand-name
pharmaceutical products may be subject to competition from alternate therapies
during the period of patent protection and thereafter from generic equivalents.
Some of our products have generic equivalents in the marketplace.
We also compete with other pharmaceutical companies for new products and
product line acquisitions. These competitors include Dura Pharmaceuticals, Inc.,
Forest Laboratories, Inc., Watson Pharmaceuticals, Inc., King Pharmaceuticals,
Inc., Shire Pharmaceuticals Group plc, Jones Pharma Inc. and other companies
that acquire branded product lines from other pharmaceutical companies.
GOVERNMENT REGULATION
According to the Federal Food, Drug, and Cosmetic Act ("FDC Act"), all new
drugs are subject to premarket approval by the FDA. Applicable FDA law will
treat our development of new products and new uses for approved products or the
development of any of our line extensions as "new drugs," which requires the
submission of a New Drug Application ("NDA") or a supplemental NDA ("sNDA"), and
approval by the FDA.
The steps required for approval of an NDA or sNDA may include:
- pre-clinical studies;
- submission to the FDA of an Investigational New Drug application ("IND"),
which must become effective before human clinical trials commence;
- adequate and well-controlled human clinical trials to establish the
safety and effectiveness of the product;
- submission of an NDA or an sNDA to the FDA; and
- FDA approval of the NDA or sNDA prior to any commercial sale or shipment
of the product.
Pre-clinical studies generally include laboratory evaluation of product
chemistry and formulation, as well as animal studies, if appropriate, to assess
quality and safety. An applicant submits the results of the pre-clinical studies
with chemistry, manufacturing, and control information and pharmacology and
toxicology data to the FDA as a part of an IND and for review by the FDA prior
to the commencement of human clinical trials. Unless the FDA objects to an IND,
the IND will become effective 30 days following its receipt by the FDA.
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Clinical trials involve the administration of the investigational new drug
to humans. The trials are subject to extensive regulation including compliance
with Good Clinical Practices, obtaining informed patient consent and review and
approval of each study by an Institutional Review Board. Clinical trials are
typically conducted in three sequential phases, although phases may overlap. In
Phase I, the investigational new drug usually is administered to healthy human
subjects and is tested for safety. Phase II usually involves studies in a
limited patient population to:
- determine the initial effectiveness of the investigational new drug for
specific indications;
- determine dosage tolerance and optimal dosage; and
- identify possible adverse effects and safety risks.
When an investigational new drug is found to be effective and to have an
acceptable safety profile in Phase II evaluation, Phase III trials are
undertaken to further evaluate clinical effectiveness and to further test for
safety within an expanded patient population. The FDA reviews both the clinical
plans and the results of the trials and may require the study to be discontinued
at any time if there are significant safety issues. In some cases, the FDA can
request Phase IV clinical studies after approval of the NDA. These studies can
be designed to obtain additional safety and efficacy data, detect new uses for
or abuses of a drug, or determine effectiveness for labeled indications under
conditions of widespread usage. These studies can involve significant additional
expenses.
Once the FDA has approved an NDA, the holder of the NDA may request changes
in the conditions of approval contained in its NDA through a sNDA. The format,
content and procedures applicable to NDA supplements are generally the same as
those for NDAs. However, the only information required in a supplement is that
needed to support the requested change. If the NDA or sNDA is based on new
clinical investigations which are essential to the approval of the application,
other than bioavailability studies, it may qualify for a three-year period of
exclusivity, distinct from any applicable patent protection that may exist. The
FDA may also require user fees for prescription drug NDAs or sNDAs. Supplements
proposing to include a new indication for use in pediatric populations are not
subject to user fees.
Another form of an NDA is the so-called "505(b)(2)" NDA, which applicants
submit pursuant to Section 505(b)(2) of the FDC Act. This type of NDA permits
the inclusion of safety and effectiveness studies that the applicant has not
conducted or been granted a right of reference by the sponsor of the studies. In
addition, the FDA recommends a 505(b)(2) NDA for a modification, such as a new
dosage form, of a previously approved drug which requires more than merely
bioequivalence data. This NDA is similar to a full NDA, except that, under
conditions prescribed by the FDA, it may be supported in whole or in part by one
or more study investigations published in scientific literature in lieu of the
applicant's clinical trials. We intend to submit this type of application to
market potential product line extensions or new uses of already-approved
products.
In addition, if we submit a certain type of new drug application, the FDA
will require us to certify as to any patent which covers the drug for which we
seek approval. If there is a patent in existence, a certain type of
certification is made and proper notice to the patent holder of our intent to
market the drugs is given, and the patent holder makes an infringement claim
within a specified time period, then the FDA will not approve our marketing
application for thirty months or until the patent litigation is resolved,
whichever occurs sooner. In addition, distinct
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<PAGE> 36
from patent considerations, approval of a certain type of new drug application
could be delayed because of the existence of non-patent exclusivity afforded by
the FDA for the innovator drug.
The least burdensome application for new drug approval is the abbreviated
NDA ("ANDA"), which may apply to a new drug that is shown to be bioequivalent to
a drug previously approved by the FDA for safety and effectiveness and listed as
the drug to which bioequivalence must be shown. An applicant may submit an ANDA
for products that are the same as an approved drug regarding active
ingredient(s), route of administration, dosage form, strength and conditions of
use recommended on the labeling. The ANDA requires bioequivalence data and other
technical and manufacturing information, but typically no safety and
effectiveness studies.
Even after obtaining regulatory approval, such approval may require
post-marketing testing and surveillance to monitor the safety of the product. In
addition, the product approval may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing. At
present, companies cannot export pharmaceutical products that cannot be lawfully
sold in the United States unless certain statutorily prescribed conditions are
met.
FDA regulations require that we report adverse events, submit new marketing
and promotional materials, submit changes we plan to make to the product
manufacturing or labeling and comply with recordkeeping requirements and
requirements relating to the distribution of drug samples to physicians. In the
event that we do not comply with the FDA requirements, the manufacture, sales
and distribution of our products may be suspended, and we may be prevented from
obtaining FDA approval of new products.
Our third-party manufacturers must adhere to FDA regulations relating to
current good manufacturing practice ("cGMP") regulations, which include
requirements relating to organization of personnel, buildings and facilities,
equipment, control of components and drug product containers and closures,
production and process controls, packaging and labeling controls, holding and
distribution, laboratory controls, records and reports, and returned and
salvaged products. Ongoing compliance with cGMP procedures, labeling and other
regulatory requirements are monitored through periodic inspections and market
surveillance by state and federal agencies, including the FDA. Failure by our
third-party manufacturers to comply with these rules could result in sanctions
being imposed, including fines, injunctions, civil penalties, suspension or
withdrawal of FDA approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. In addition, we rely upon our
third-party manufacturers to provide many of the documents that we use to comply
with our FDA reporting requirements for Robinul, Robinul Forte, and
Nitrolingual.
In addition, we are subject to fees under the Prescription Drug User Fee
Act for new drug applications for new drug products and sNDAs for new uses,
except that we may qualify for a waiver of the fee for our first new drug
application. We will be responsible for paying these fees for sNDAs and
subsequent submissions, unless we receive approval from the FDA for a waiver,
reduction or refund.
We are also subject to regulation under other federal and state laws,
including the Occupational Safety and Health Act and other environmental laws
and regulations, national restrictions on technology transfer, and import,
export and customs regulations. In addition, some of our products that contain
controlled substances, such as Protuss and Protuss-D, are subject to Drug
Enforcement Administration regulations relating to storage, distribution,
importation and sampling procedures. We have registered with the Drug
Enforcement
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<PAGE> 37
Administration under the Controlled Substances Act which establishes, among
other things, registration, security and recordkeeping requirements.
In addition, whether or not we obtain FDA approval, we must obtain approval
of a pharmaceutical product by comparable governmental regulatory authorities in
foreign countries prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval.
REIMBURSEMENT
Our ability to market our products successfully will depend in part on the
extent to which reimbursement for the costs of the products will be available
from government health administration authorities, private health insurers, and
managed care organizations in the United States and in any foreign markets where
we may sell our products. Third-party payors can affect the pricing or relative
attractiveness of our products by regulating the reimbursement they provide on
our products and competing products. Insurance carriers may not reimburse
healthcare providers for use of our products used for new indications. Domestic
and foreign government and third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products.
PRODUCT LIABILITY INSURANCE
We currently maintain a product liability insurance policy. We do not
currently maintain business interruption insurance.
EMPLOYEES
We had 150 full-time employees as of December 31, 1999, including 127 sales
and marketing employees in the field, and 23 in management, finance and
administration. We also maintain active independent contractor relationships
with various individuals with whom we have consulting agreements. We believe our
employee relations are good. None of our employees is subject to a collective
bargaining agreement.
PROPERTIES
We lease a 24,300 square-foot facility in Roswell, Georgia. Our facility
includes space for offices and a warehouse. This lease expires on August 31,
2003. We also lease executive office space on a short-term basis in Raleigh,
North Carolina, and Phoenix, Arizona, for our regional managers. We believe that
our facilities are adequate for our current requirements; however, we anticipate
that as we grow, we will require additional facilities.
LEGAL PROCEEDINGS
From time to time, we may become involved in routine litigation. Currently,
we are not a party to any material legal proceedings.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following are our executive officers and directors as of the date of
this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Mahendra G. Shah, Ph.D............ 55 Chairman of the Board and Chief Executive Officer
R. Brent Dixon.................... 55 President and Director
Gregory P. Hauck.................. 33 Vice President, Developed Products
Balaji Venkataraman............... 33 Vice President and Chief Financial Officer
Robert D. Godfrey, Jr............. 38 Vice President, Sales
William G. Campbell............... 44 Controller
John N. Kapoor, Ph.D.(1).......... 56 Director
John E. Robson(2)................. 69 Director
Jon S. Saxe(1)(2)................. 63 Director
</TABLE>
- ------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mahendra G. Shah, Ph.D. is the Chairman of the Board and Chief Executive
Officer. Dr. Shah has been a director since 1993, and his present term as
director will expire in 2001. Dr. Shah became Chief Executive Officer in October
1999. Dr. Shah maintains other employment and expects to dedicate a majority of
his working time to the company. From 1991 to the present, he has been a Vice
President of EJ Financial Enterprises, Inc. From 1996 to the present, he has
been the President of Protomed Pharmaceuticals, Inc. From 1987 to 1991, he was
the Senior Director of New Business Development with Fujisawa USA, Inc. Prior to
that time, he worked in various scientific and management positions with
Schering-Plough and Bristol Myers-Squibb Company. He serves on the board of
Structural Bioinformatics Inc., Zarix, Introgen Therapeutics and Inpharmakon
Corporation. He previously served on the board of Unimed Pharmaceuticals. Dr.
Shah received a Ph.D. degree in Industrial Pharmacy from St. John's University.
EJ Financial Enterprises, Inc. is the sole shareholder and managing general
partner of Kapoor Pharma Investments, L.P., our largest shareholder.
R. Brent Dixon is the President and a director of the company. He has been
a director since 1993, and his present term as director will expire in 2002. Mr.
Dixon has been with the company since its formation. He has been our President
since 1993 and served as a Vice-President from 1992 to 1993. He has over 30
years of operational, sales, and strategic market development experience in the
pharmaceutical industry. Prior to working at the company, he was President of
Dixon and Associates, a healthcare consulting company. Prior to that he served
as National Sales Manager for Center Laboratories, a subsidiary of Merck AG. Mr.
Dixon has also served as a Regional and District Manager for Roberts
Pharmaceuticals and Adams Laboratories. Mr. Dixon attended St. Petersburg Junior
College and the University of Mississippi.
Gregory P. Hauck is the Vice President of Developed Products. He has been
with the company since its formation and has been serving as Vice-President
since 1993. He is responsible for developing product promotional materials as
well as product line marketing
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<PAGE> 39
strategies. In his previous position as Vice President of Sales and Marketing
for the company from 1994 to 1997, he was responsible for implementing its sales
strategies. Mr. Hauck began working with the company in 1992 as the National
Sales Manager where he was primarily responsible for the hiring and training of
all new sales representatives. He entered the pharmaceutical industry in 1989 as
a sales representative with Hauck Pharmaceuticals and Roberts Pharmaceuticals.
Mr. Hauck received a B.S. degree in Education from the University of Georgia
and, afterwards, spent a brief period of time as an educator.
Balaji Venkataraman has been the Vice President and Chief Financial Officer
since October 1999. Between August 1998 and September 1999, he was Vice
President of Corporate Development and Strategic Planning at the company. He
also served as a consultant to the company during his employment as the Director
of Strategic Planning at EJ Financial Enterprises, Inc. from September 1997 to
August 1998. From 1995 to 1997, he was an Associate, Licensing and New Business
Start-Up, at the University of Pennsylvania Center for Technology Transfer. From
1994 to 1995, he was the Marketing Manager at Curative Technologies Inc., a
wound care services company. From 1993 to 1994, he was a Technical Sales
Representative for Millipore Corporation. From 1991 to 1993 he was the Senior
Research Chemist at Scios Inc. He has also held product management and finance
positions at Schering Plough and Pfizer. Mr. Venkataraman received an M.S.
degree in Organic Chemistry from Case Western Reserve University and an M.B.A.
degree from the Wharton School at the University of Pennsylvania.
Robert D. Godfrey, Jr. has been Vice President of Sales since 1998. He
served as the National Sales Manager between 1996 and 1998. He began his career
with the company in 1992 as a Sales Representative for the Jacksonville,
Florida, territory and was promoted in 1994 to District Manager of the entire
Florida sales territory. At that time, in addition to his managerial
responsibilities, he continued to promote First Horizon products to physicians
and pharmacies until 1995. Prior to his career with the company, Mr. Godfrey
held the position of Marketing Research Consultant with MGT Information Systems
and also worked independently as a Research Consultant in the southeastern
United States. Mr. Godfrey received an M.B.A. degree and a B.S. degree in
Marketing from Jacksonville University.
William G. Campbell has been our Controller and Treasurer since 1998. Prior
to joining First Horizon, from 1995 to 1998, Mr. Campbell was the Controller/CFO
of DialysisAmerica, Inc. He was the Associate Administrator/CFO of Stringfellow
Memorial Hospital from 1993 to 1995; and from 1989 to 1993, he was the Director
of Budgets, Costs and Reimbursement at Grady Memorial Hospital, a large public
teaching hospital. His prior professional experience also includes a number of
profit and not-for-profit consulting, big five public accounting, governmental
auditing and internal audit positions. Mr. Campbell is a Certified Public
Accountant and received a B.A. degree in Accounting from Walsh College of
Accountancy and Business Administration and an M.B.A. degree in Accounting from
Kennesaw State College.
John N. Kapoor, Ph.D. has been one of our directors since 1996, and his
present term as director will expire in December 2000. Dr. Kapoor has over 20
years of experience in the healthcare field through his ownership and management
of healthcare-related businesses. In 1990, Dr. Kapoor founded Kapoor-Pharma
Investments, L.P., our largest stockholder, and its managing partner, EJ
Financial Enterprises, Inc., of which he is the President and sole shareholder.
EJ Financial provides funds and strategic advice to healthcare businesses. Dr.
Kapoor is the Chairman of OptionCare, Inc., Akorn, Inc. and NeoPharm, Inc. Dr.
Kapoor is a director of Integrated Surgical Systems, Inc., as well as a Chairman
of a private company and a director of several other private companies. Dr.
Kapoor received a B.Sc. degree from
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<PAGE> 40
Bombay University and a Ph.D. degree in medicinal chemistry from the State
University of New York.
Dr. Kapoor was previously the chairman and president of Lyphomed Inc.
Fujisawa Pharmaceutical Co. Ltd. was a major stockholder of Lyphomed from the
mid-1980s until 1990, at which time Fujisawa completed a tender offer for the
remaining shares of Lyphomed, including the shares held by Dr. Kapoor. In 1992,
Fujisawa filed suit in federal district court in Illinois against Dr. Kapoor
alleging that between 1980 and 1986, Lyphomed filed a large number of allegedly
fraudulent new drug applications with the FDA, and that Dr. Kapoor's failure to
make certain disclosures to Fujisawa constituted a violation of federal
securities laws and the Racketeer Influenced and Corrupt Organizations Act.
Fujisawa also alleged state law claims. Dr. Kapoor countersued, and in 1999, the
litigation was settled on terms mutually acceptable to the parties. The terms of
the settlement are subject to a confidentiality agreement. Dr. Kapoor also
controls Inpharmakon Corporation, a party to one of our development agreements.
John E. Robson was elected a director in January 2000. His term as
director will expire in 2002. Since October 1993, Mr. Robson has served as
Senior Advisor of Robertson, Stephens. Previously, he was President and Chief
Executive Officer of G.D. Searle & Company. Mr. Robson has held Presidential
appointments in Washington, D.C., including in the White House, as Chairman of
the Civil Aeronautics Board where he initiated airline deregulation in the
1970s. From 1989 to 1993, Mr. Robson served as Deputy Secretary of the United
States Treasury Department during the Bush Administration. He has also been Dean
of the Goizueta School of Business Administration at Emory University, Atlanta,
Georgia from 1986 to 1989, and a corporate lawyer and member of the executive
committee at Sidley and Austin. Mr. Robson holds appointments as a Distinguished
Visiting Fellow at Stanford University's Hoover Institution and as a Visiting
Fellow at The Heritage Foundation, in Washington, D.C. He is also a member of
the United States Postal Service Commission on a Safe and Secure Workplace and
President of the Worklife Institute. Mr. Robson currently serves as a Director
of Exide Corporation, Monsanto Company, Northrop Grumman Corporation and
ProLogis Trust. He is a former board member of Age Wave, LLC, Chiron
Corporation, Conrail, Continental Airlines, Norrell, Inc., and Rand McNally
Company. Mr. Robson received a B.A. degree from Yale University and a J.D.
degree from Harvard University School of Law.
Jon S. Saxe was elected a director in January 2000. His term as director
will expire in December, 2001. He also serves as a Director of Protein Design
Labs, Inc. Mr. Saxe served as President of Protein Design Labs, Inc. from
January 1995 to May 1999. In addition, he is a Director of Questcor
Pharmaceuticals Inc., Incyte Pharmaceuticals Inc., ID Biomedical Corporation,
InSite Vision, and is Chairman of Point Biomedical Corporation and Iconix
Pharmaceuticals. Mr. Saxe served as President of Saxe Associates, a
biotechnology consulting firm, from May 1993 to December, 1994. He served as the
President, Chief Executive Officer and a Director of Synergen, Inc., a
biopharmaceutical company, from October 1989 to April, 1993. Mr. Saxe served in
various positions including Vice President of Licensing and Corporate
Development and Head of the Patent Law Department for Hoffmann-LaRoche, Inc.
from 1960 through 1989. Mr. Saxe received a B.S. Ch.E. degree from
Carnegie-Mellon University, a J.D. degree from George Washington University
School of Law, and an L.L.M. degree from New York University School of Law.
36
<PAGE> 41
EXECUTIVE OFFICERS
Each officer serves at the discretion of our board of directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
ELECTION OF DIRECTORS
Dr. Shah, Mr. Dixon and Dr. Kapoor were elected to the board under a
stockholder agreement. Under the terms of this agreement, the board of directors
was set at three members. In addition, Kapoor-Pharma Investments has the right
to elect two directors, and Dr. Shah, Mr. Dixon and Mr. Hauck have the right to
elect one director by majority vote. This agreement will terminate upon
completion of this offering.
Our board of directors increased the number of directors from three to five
in January 2000. Pursuant to our bylaws, the board filled the two vacancies
created by the increase by appointing Jon S. Saxe and John E. Robson as
directors.
BOARD COMPOSITION
Pursuant to our Restated Certificate of Incorporation, the board of
directors is divided into three classes of directors:
- Class A, whose term will expire at the annual meeting of stockholders to
be held in the year 2000;
- Class B, whose term will expire at the annual meeting of stockholders to
be held in the year 2001;
- Class C, whose term will expire at the annual meeting of stockholders to
be held in the year 2002.
John N. Kapoor is a Class A director. Mahendra G. Shah and Jon S. Saxe are
Class B directors. R. Brent Dixon and John E. Robson are Class C directors.
Directors within each class are elected to serve three-year terms and
approximately one-third of the directors sit for election at each annual meeting
of the Company's stockholders.
A classified board of directors may have the effect of deterring or
delaying any attempt by any group to obtain control of the company by a proxy
contest since a third party would be required to have its nominees elected at
two separate meetings of the board of directors in order to elect a majority of
the members of the board.
BOARD COMMITTEES
The board of directors has formed an audit committee to review the results
and scope of the audit of our annual financial statements, to discuss various
matters with the auditors, to receive statements from the auditors and to make
recommendations to the board of directors regarding the inclusion of audited
financial statements in our annual reports. The current members of our audit
committee are Jon S. Saxe and John E. Kapoor.
The board of directors has also formed a compensation committee to
recommend salaries and incentive compensation for executive officers and to
administer our stock plan. The members of the compensation committee are Jon S.
Saxe and John E. Robson.
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<PAGE> 42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
In January 2000, our board of directors established a compensation
committee. Messrs. Robson and Saxe serve as members of the compensation
committee. For the year ended December 31, 1999, the entire board of directors
determined executive compensation. Two members of our board of directors,
Mahendra G. Shah and R. Brent Dixon, are also employees. Dr. Shah has
participated in certain transactions with us in the past. See "Certain
Relationships and Related Transactions."
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. Each director who
is not an employee also receives a fee of $12,000 per year and $1,000 for each
board meeting attended. Each director who is not an employee and not affiliated
with a greater than 10% stockholder receives options to purchase shares of our
common stock upon election to the board.
SCIENTIFIC ADVISORY BOARD
We have engaged a scientific and medical advisor to advise us on issues
related to specific pharmaceutical products. The current advisor is an expert in
clinical development, medical sciences and drug development. We plan to add
additional members with different expertise to support our growth. In certain
cases, this advisor has agreed to be available for consultation for a specified
number of days each year, but he may consult and meet informally with us on a
more frequent basis. Our current scientific and medical advisor may have other
commitments that may limit his availability to us. Our scientific advisory board
consists of the following individual:
Nelson L. Levy, M.D., Ph.D., is currently the Chief Executive Officer of
the CoreTechs Corporation, which implements a unique paradigm of technology
transfer and which starts science-based companies. He was previously President
of Fujisawa Pharmaceutical Company, where he refocused and revitalized the sales
and marketing organizations, in-licensed two major pharmaceuticals and filed an
NDA for FK-506 (Prograf), Fujisawa's leading product. From 1981 to 1984, he was
the Vice President for Pharmaceutical Research at Abbott Laboratories. He is on
the board of directors of two public and three private companies and on the
scientific advisory boards of three other companies, two of which are publicly
traded. He is a Summa Cum Laude graduate of Yale University, received his M.D.
degree from the Columbia College of Physicians and Surgeons and a Ph.D. degree
in Immunology from Duke University.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation awarded to or earned by our chief executive officer and by each of
our four other most highly compensated executive officers (the "Named Executive
Officers") who earned in excess of $100,000 in cash compensation during the year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------ ---------------------- ALL OTHER
SHARES COMPEN-
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS SATION(1)
- --------------------------- -------- ------- ---------------------- ---------
<S> <C> <C> <C> <C>
Mahendra G. Shah, Ph.D.(1)..............
Chairman and Chief Executive
Officer............................ $ -- $55,200 300,000 $ --
R. Brent Dixon
President and Director................ 100,000 27,600 60,000 1,634(2)
Balaji Venkataraman
Vice President and Chief Financial
Officer............................ 93,400 21,250 200,000 24(3)
Gregory P. Hauck
Vice President, Developed Products.... 89,000 20,000 50,000 624(4)
Robert D. Godfrey, Jr.
Vice President, Sales................. 85,950 20,000 70,000 2,024(5)
</TABLE>
- ------------
(1) Dr. Shah did not receive a salary in 1999.
(2) Represents $1,610 contributed under the 401(k) plan and $24 for term life
insurance premiums.
(3) Represents $24 for term life insurance premiums.
(4) Represents $600 contributed under the 401(k) plan and $24 for term life
insurance premiums.
(5) Represents $2,000 contributed under the 401(k) plan and $24 for term life
insurance premiums.
STOCK OPTION GRANTS
The following tables show for the year ended December 31, 1999, information
regarding options granted to, and held at year end by, the Named Executive
Officers.
Amounts reported in the potential realizable value column below are
hypothetical values that may be realized upon exercise of the options
immediately prior to the expiration of their term, calculated by assuming that
the stock price on the date of grant as determined by the board of directors
appreciates at the indicated annual rate compounded annually for the entire term
of the option (10 years). The 0% annual rate of appreciation shows the value at
the grant date based upon the stated market price of the stock on the date of
grant. The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price.
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<PAGE> 44
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE OF
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS MARKET STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE PRICE ON FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER DATE OF ----------------------------------
NAME GRANTED FISCAL YEAR(1) SHARE GRANT EXPIRATION DATE 0% 5% 10%
- ---- ---------- -------------- --------- -------- --------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mahendra G. Shah,
Ph.D................... 25,000(2) 3.2% $2.50 $3.08 3/17/09 $ 14,500 $ 62,925 $ 137,218
275,000(3) 35.0 2.65 4.48 10/22/09 503,250 1,278,048 2,466,741
R. Brent Dixon........... 60,000(4) 7.6 2.50 3.08 3/17/09 34,800 151,020 329,324
Balaji Venkataraman...... 40,000(5) 5.1 1.88 4.48 9/1/09 104,000 216,698 389,599
60,000(3) 7.6 1.88 4.48 10/22/09 156,000 325,047 584,398
100,000(3) 12.7 2.65 4.48 10/22/09 183,000 464,745 896,997
Robert D. Godfrey, Jr.... 20,000(4) 2.5 2.50 3.08 3/17/09 11,600 50,340 109,775
50,000(3) 6.4 2.65 4.48 10/22/09 91,500 232,372 448,498
Gregory P. Hauck......... 50,000(4) 6.4 2.50 3.08 3/17/09 29,000 125,850 274,436
</TABLE>
- ------------
(1) In 1999, options to purchase a total of 785,500 shares of common stock were
granted.
(2) The option holder may exercise the option to purchase 25% of these shares of
common stock on March 17, 1999 and an additional 25% per year on the next
three anniversaries thereof.
(3) The option holder may exercise the option to purchase 25% of these shares of
common stock on October 22, 2000 and an additional 25% per year on the next
three anniversaries thereof.
(4) The option holder may exercise the option to purchase 25% of these shares of
common stock on March 17, 2000 and an additional 25% per year on the next
three anniversaries thereof.
(5) The option holder may exercise the option to purchase 25% of these shares of
common stock on September 1, 1999 and an additional 25% per year on the next
three anniversaries thereof.
None of our Named Executive Officers exercised stock options in the fiscal
year ended December 31, 1999. The following table sets forth information
concerning the number and value of unexercised options held by each of our Named
Executive Officers on December 31, 1999. There was no public market for our
common stock as of December 31, 1999. Accordingly, the fair market value on
December 31, 1999 is based on an assumed initial public offering price of $13.00
per share. This valuation at December 31, 1999 does not represent the actual
value of our stock at December 31, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mahendra G. Shah, Ph.D.......................... 106,250 293,750 $1,303,125 $3,043,125
R. Brent Dixon.................................. 265,000 135,000 3,309,375 1,558,125
Balaji Venkataraman............................. 10,000 190,000 111,200 2,035,800
Robert D. Godfrey, Jr........................... 35,000 115,000 414,375 1,228,125
Gregory P. Hauck................................ 265,000 125,000 3,309,375 1,453,125
</TABLE>
EXECUTIVE OFFICERS EMPLOYMENT AGREEMENTS
On January 1, 2000, we entered into employment agreements with Mahendra G.
Shah, Ph.D., R. Brent Dixon, Balaji Venkataraman, Robert D. Godfrey, Jr.,
Gregory P. Hauck and William G. Campbell. These employment agreements may be
terminated by us with or without cause. The officers may terminate employment
upon sixty days written notice to us. Upon
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<PAGE> 45
termination of Messrs. Shah, Dixon and Venkataraman's employment without cause,
as defined in the agreement, each officer will be entitled to receive his salary
for twelve months following termination, a lump sum equal to 100% of the bonus
he received the preceding calendar year, if any, continued health insurance
coverage substantially equivalent to that provided to the officer prior to
termination for twelve months following termination, a car allowance for twelve
months following termination, and all of the officer's unvested options will
immediately vest and become exercisable.
Upon termination of Messrs. Godfrey, Hauck and Campbell's employment
without cause, each officer will be entitled to receive his salary for six
months following termination, a lump sum equal to 50% of the bonus he received
the preceding calendar year, if any, continued health insurance coverage
substantially equivalent to that provided to the officer prior to termination
for six months following termination, a car allowance for six months following
termination and all of the officer's unvested options will immediately vest and
become exercisable.
Upon termination by us for cause, termination in the event of death or
termination by the officer, each officer or his estate is entitled to receive
all accrued but unpaid salary as of the date of termination. Upon any
termination of these agreements, each officer or his estate will have 120 days
from the date of termination to exercise any vested options.
These employment agreements provide for a base salary of $110,000 for Dr.
Shah, $102,000 for Mr. Dixon, $95,000 for Mr. Venkataraman, $90,000 for Mr.
Godfrey, $85,000 for Mr. Hauck and $80,000 for Mr. Campbell. In addition, these
employment agreements entitle each executive officer to receive a bonus based on
the percentage of his salary, if we and/or the officer meets certain performance
goals to be established by the board of directors each year. The compensation
committee will review the performance goals and determine whether or not we
and/or the executive have achieved the performance goals based on our financial
statements. The board retains the right to award additional compensation to each
officer based on the officer's contributions to the company.
The agreements provide that in the event of a change of control, as defined
in the agreements, all options become fully vested and immediately exercisable.
The employment agreements restrict each officer from engaging in or having
any financial interest in a business that is in competition with our business
during that officer's employment with the company and for thirty-six months
following termination of employment. A business is in competition with us if it
involves research and development work involving products that we market at the
time of termination or that were under study by us at that time and were
expected to be marketed within six months. This provision does not prevent the
officers from investing in a publicly held company, provided that the officer's
beneficial ownership of securities does not exceed 5% of the outstanding class
of the publicly held company's securities. The employment agreements also
restrict each officer from soliciting our suppliers, customers or clients for
thirty-six months after employment. This provision does not prohibit an officer
from soliciting wholesale customers, managed care agencies, scientific or
computer consultants, lawyers or manufacturers as long as manufacturers have
excess capacity. The employment agreements also prohibit each officer from
soliciting, employing or engaging any of our employees or affiliates for
thirty-six months following employment. The employment agreements prohibit each
officer from disclosing any of our trade secrets, confidential information or
ideas that the officer may have acquired or developed relating to our business
for twelve months following employment.
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EMPLOYEE BENEFIT PLANS
1997 Non-Qualified Stock Option Plan
Our 1997 Non-Qualified Stock Option Plan, as amended, was adopted by our
board of directors and approved by our stockholders June 18, 1997. The 1997 plan
authorizes the issuance of up to 4,000,000 shares of our common stock.
Currently, options to purchase an aggregate of 1,795,000 shares of our common
stock at a weighted average exercise price of $1.69 per share are outstanding
under the 1997 plan. Upon the closing of this offering, no additional grants of
stock options will be made under this 1997 plan.
Options granted under the plan are not transferable by the optionee except
by will or by the laws of descent and distribution. Options will become
immediately exercisable in the event of a change of control if the surviving
company does not assume the options granted under the plan.
The 2000 Stock Plan
Our board of directors and stockholders approved the 2000 Stock Plan in
February 2000. This plan provides for the granting of:
- incentive stock options under the Internal Revenue Code of 1986;
- options that do not qualify as incentive stock options;
- stock awards or stock bonuses; and
- sales of stock.
The 2000 Stock Plan provides for the grants of these options and other
awards to officers, directors, full and part-time employees, advisors and
consultants. Only full-time employees may receive incentive stock options. We
have reserved 2,000,000 shares of common stock for issuance under the 2000 Stock
Plan. Our compensation committee administers the 2000 Stock Plan and has the
sole authority to determine:
- the meaning and application of the terms of the plan and all grant
agreements;
- the persons to whom option or stock grants are made;
- the nature and amount of option or stock grants;
- the price to be paid upon exercise of each option;
- the period within which options may be exercised;
- the restrictions on stock awards; and
- the other terms and conditions of awards.
In order to meet one of the requirements of Section 162(m) of the Internal
Revenue Code, the 2000 Stock Plan limits to 500,000 the number of shares that
may be covered by grants to any single person in any one calendar year.
The exercise price per share for incentive stock options cannot be less
than the fair market value of our common stock on the date of the grant. If a
recipient owns more than 10% of our common stock, incentive stock options
granted to that recipient must have an exercise price of not less than 110% of
the fair market value of our common stock on the grant date.
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<PAGE> 47
Determinations of fair market value are made in accordance with the plan. The
compensation committee has the authority to determine the exercise price for
non-qualified stock options.
The compensation committee has the authority to determine the term of each
option. However, the term of stock options may not exceed 10 years from the date
of grant. In the case of an incentive option granted to an owner of more than
10% of our common stock, the term may not exceed five years from the date of
grant.
Generally, the recipient of an option may exercise it only while employed
by us, except that a recipient may exercise vested options for 60 days after
termination of employment or such later date as set forth in the grant
agreement, a recipient may exercise vested options for twelve months following
disability, and if a recipient dies while employed by us, his or her estate,
heirs or beneficiaries may exercise vested options held by the recipient within
twelve months following the date of death. The plan also provides for the
acceleration of vesting and exercisability of options and vesting of stock
awards if we are subject to a change of control.
The compensation committee has the authority to award stock under the plan
as stock bonuses. In addition, the compensation committee may issue stock under
the plan for consideration, including promissory notes and services. The
compensation committee also has the authority to determine the terms, conditions
and restrictions of stock awards and sales of stock, which may include
restrictions on transferability, voting, repurchase by us and forfeiture of
shares. If shares of the stock are subject to forfeiture, we will retain all
dividends or other distributions paid on the stock until the shares are no
longer subject to forfeiture, at which time we will pay all accumulated amounts
to the recipient. Unless otherwise determined by the compensation committee,
shares awarded as a stock bonus to an officer or director may not be sold until
six months after the date of the award. All shares relating to stock awards or
stock sales are counted against the aggregate number of shares available for
granting awards under the 2000 Stock Plan.
If a stock split, stock dividend, consolidations, recapitalizations,
reorganizations or similar event occurs, we will make proportional adjustments
to the number of shares of common stock reserved for issuance under the 2000
Stock Plan and issuable under outstanding options and adjustments to the
exercise prices of outstanding options.
Awards under the plan are not transferable except by will or the laws of
descent and distribution. The 2000 Stock Plan will terminate in February, 2010,
and we may not grant awards under it after termination. Our board of directors
may amend, alter or discontinue the plan at any time, provided that we must
obtain shareholder approval for any change that would increase the number of
shares reserved for issuance or would change the class of persons eligible to
receive grants. In addition, the board may not amend the plan to:
- fix the exercise price per share for incentive stock options at less than
100% of the fair market value of a share of common stock on the date of
grant;
- extend the expiration date of the plan;
- extend the maximum period of ten years during which holders may exercise
options; or
- materially increase the benefits to participants under the plan.
In no event may the board or shareholders amend the plan, alter or impair
the rights of an existing recipient without their consent.
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<PAGE> 48
As a condition to the exercise of an option, the vesting or award of a
stock bonus or the vesting or sale of stock, we may require the recipient to pay
over to us all applicable federal, state and local taxes that we must withhold.
At the discretion of the compensation committee and upon the request of a
recipient, the withholding tax requirements may be satisfied by withholding
shares of stock otherwise issuable to the recipient.
The board of directors approved the grant of options, subject to completion
of this offering, to purchase 177,950 shares at an exercise price per share
equal to the public offering price per share in this offering. These options
will be issued upon completion of this offering. Following this grant, there
will be 1,822,050 shares available for future option grants under the 2000 Stock
Plan.
Employee Stock Purchase Plan
Our employee stock purchase plan was adopted in February 2000 and is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. We have reserved 500,000 shares of
common stock for the stock purchase plan. In order to participate in the stock
purchase plan, employees must meet eligibility requirements, including length of
employment. At present participating employees will be able to direct us to make
payroll deductions of up to 7% of their regular compensation during an offering
period for the purchase of shares of our common stock. Each offering period will
be six months, with the first offering period beginning on the later of July 1,
2000 or the effective date of the registration statement for the plan. The stock
purchase plan will provide participating employees with the right, subject to
specific limitations, to purchase our common stock at a price equal to 85% of
the lesser of the fair market value of our common stock on the first or last day
of the offering period. The stock purchase plan will terminate on December 31,
2010. The board of directors has the authority to amend, suspend or discontinue
the stock purchase plan as long as the change will not adversely affect
participants without their consent and as long as we receive any shareholder
approval required by law.
401(k) Profit Sharing Plan
We have established a tax-qualified employee savings and retirement plan
for all of our employees who satisfy certain eligibility requirements, including
requirements relating to age and length of service. Under the 401(k) plan,
employees may elect to reduce their current compensation by up to 15% or the
statutory dollar limit, whichever is less, and have us contribute the amount of
this reduction to the 401(k) plan. In addition, we match a percentage of an
employee's contribution that we establish from time to time. Each employee is
fully vested in his or her salary contributions and our matching contributions
vest over six years.
We intend for the 401(k) plan to qualify under Section 401 of the Code so
that contributions by employees or by us to the 401(k) plan, and income earned
on plan contributions, are not taxable to employees until withdrawn from the
401(k) plan. Our contributions, if any, will be deducted by us when made.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officers and Directors
Mahendra G. Shah, Ph.D., our Chairman and Chief Executive Officer, is the
Vice President of EJ Financial Enterprises, Inc. John N. Kapoor, Ph.D., one of
our directors, is President and sole shareholder of EJ Financial. EJ Financial
is the Managing General Partner of Kapoor-Pharma Investments, L.P. which
beneficially owns 76% of our Common Stock.
John E. Robson, one of our directors, is a Senior Advisor of Robertson
Stephens, which is acting as one of the representatives of underwriters for this
offering.
Collaboration Agreement
In 1998, we entered into a collaboration agreement with Inpharmakon
Corporation under which we acquired rights to the proprietary information for
our migraine product FHPC 01 currently under development. Under the agreement,
we must develop a workable once-a-day formulation for the drug, conduct clinical
trials, file for and obtain regulatory approval, and begin commercial sales of
the product within prescribed times. If we do not reach specified milestones on
a timely basis, Inpharmakon may terminate the agreement. We must also pay up to
an aggregate of $700,000 in non-refundable fees at various developmental
milestones through and including regulatory approval of the product, and, in the
event of commercial sales of the product, we must pay royalties at rates which
we believe are within industry customary ranges. If we elect to sell the
business opportunity to a third party, we must share the proceeds of the sale
with Inpharmakon. We paid $200,000 and $1,352 to Inpharmakon in 1998 and 1999,
respectively, under this agreement. The agreement expires on October 31, 2008
with automatic five-year renewals thereafter. The terms of this agreement were
negotiated at arms' length by management, and we believe the terms are fair to
us. The John N. Kapoor Trust, dated September 30, 1989 (the "Trust") owns 50% of
the shares of Inpharmakon Corporation. John N. Kapoor is Trustee of the Trust,
and the Trust is a partner of Kapoor-Pharma Investments. In addition, Dr. Shah
is a director of Inpharmakon Corporation and owns options to purchase 25,000
shares of Inpharmakon.
Packaging Agreement
In 1997, we entered into a packaging agreement with Diversified Healthcare
Services, Inc., under which we agreed to exclusively use Diversified Healthcare
to package samples of our Defen-LA, Mescolor, Protuss-DM and Zebutal products.
Under this agreement, Diversified Healthcare has the right to provide exclusive
packaging services for these products. We paid $83,000, $132,152 and $282,493 to
Diversified Healthcare in 1997, 1998 and 1999, respectively, under this
agreement. The term of this agreement is three years, with automatic yearly
renewals unless terminated by either party. The terms of this agreement were
negotiated at arm's length by management, and we believe the terms are fair to
us. Warren Hauck, Chief Executive Officer of Diversified Healthcare, is the
father of Gregory P. Hauck, our Vice President of Developed Products, and Daniel
C. Hauck, who currently owns 5.6% of our common stock. Steven Hauck, the
President of Diversified Healthcare, is the brother of Gregory and Daniel Hauck.
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<PAGE> 50
Non-compete Agreements
In 1996, we entered into two agreements with Crabapple Enterprises, Inc., a
prior and potential competitor, under which Crabapple agreed not to market
products that compete with our Protuss, Protuss-D and Zoto-HC products. We paid
$91,000, $159,902 and $162,768 to Crabapple in 1997, 1998 and 1999,
respectively, under these agreements. These agreements require us to pay
royalties on sales of these products at rates which we believe are within
industry customary standards. The term of the agreement for Protuss and
Protuss-D is seven years with an option to renew for an additional five years.
The term of the agreement for Zoto-HC is ten years with an option to renew for
an additional five years. Crabapple may cancel these agreements if minimum
royalty amounts are not paid. The terms of these agreements were negotiated at
arm's length by management, and we believe the terms are fair to us. Warren
Hauck, Chief Executive Officer of Crabapple, and Mary Hauck, Secretary of
Crabapple, are the parents of Gregory and Daniel Hauck.
Conversion of Notes into Common Stock
On January 11, 1999, Kapoor-Pharma Investments loaned us $1,600,000 at an
interest rate of 2% over the prime rate. In December, 1999, we converted
principal and $144,984 of accrued interest into 558,395 shares of common stock
pursuant to the terms of the loan agreement. We used this loan to acquire the
Robinul product line.
During 1997, we converted $385,000 in loans from Kamal R. Kapoor plus
$124,363 accrued interest into 814,978 shares of our common stock at a
conversion rate of $0.625 per share. Kamal Kapoor is John N. Kapoor's brother.
During 1997, we converted $150,000 in loans from the Trust plus $3,345
accrued interest into 245,352 shares of common stock at a conversion rate of
$0.625 per share.
During 1997, we converted $100,000 in loans from EJ Financial Enterprises
plus $25,575 accrued interest into 200,918 shares of common stock at a
conversion rate of $0.625 per share.
Sale of Common Stock
On January 27, 1997, we issued 320,000 shares of common stock to the Trust
for $200,000 or $0.625 per share.
On June 30, 1997, we issued 560,000 shares of common stock to Kapoor-Pharma
Investments for $350,000 or $0.625 per share.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock and as adjusted to reflect the sale of the shares
of common stock in this offering, by:
- each person or entity we know to own beneficially more than 5% of our
common stock;
- each of our directors;
- each of the Named Executive Officers; and
- all directors and executive officers as a group.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power, or shares voting and/or investment power
with his or her spouse, with respect to all shares of capital stock listed as
owned by that person or entity. Except as otherwise noted below, the address of
each person listed below is our address.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission and assumes
the underwriters do not exercise their over-allotment option. the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
has sole or shared voting power or investment power and any shares as to which
the individual has the right to acquire beneficial ownership within 60 days of
the date of this prospectus through the exercise of any stock option, warrant or
other right. The inclusion in the following table of those shares, however, does
not constitute an admission that the named stockholder is a direct or indirect
beneficial owner of those shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
NUMBER OF SHARES --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Kapoor-Pharma Investments, L.P.(1)
225 E. Deerpath, Suite 250
Lake Forest, IL 60045................. 6,487,583 76.0% 52.6%
Daniel C. Hauck(2)...................... 480,000 5.6 3.9
842 Gable Gate Turn
Roswell, GA 30076
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John N. Kapoor, Ph.D.(1)................ 6,487,583 76.0 52.6
R. Brent Dixon(3)....................... 785,000 8.9 6.2
Gregory P. Hauck(4)..................... 782,500 8.9 6.2
Mahendra G. Shah, Ph.D.(5).............. 424,560 4.9 3.4
Robert D. Godfrey, Jr.(6)............... 55,000 * *
Balaji Venkataraman(7).................. 10,000 * *
John E. Robson.......................... -- -- --
Jon S. Saxe............................. -- -- --
All directors and executive officers as
a group (9 persons)(8)................ 8,549,643 91.6 65.1
</TABLE>
- ------------
* Represents less than 1%.
(1) John N. Kapoor, Ph.D., one of our directors, is the president and sole
stockholder of the managing general partner of Kapoor-Pharma Investments,
L.P. In such capacity, Mr. Kapoor has the authority to vote and dispose of
the shares owned by Kapoor-Pharma Investments and is therefore deemed the
beneficial owner of those shares.
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<PAGE> 52
(2) Includes 240,000 shares owned through Gable Gate Enterprises, LLP, a family
limited partnership of which Mr. Hauck is the general partner.
(3) Includes 305,000 shares of common stock issuable upon exercise of stock
options exercisable within 60 days.
(4) Includes 302,500 shares of common stock issuable upon exercise of stock
options exercisable within 60 days.
(5) Includes 112,500 shares of common stock issuable upon exercise of stock
options exercisable within 60 days. Also includes 10,000 shares that Dr.
Shah owns as custodian for his daughter that he may be deemed to
beneficially own.
(6) Includes 55,000 shares of common stock issuable upon exercise of stock
options exercisable within 60 days.
(7) Includes 10,000 shares of common stock issuable upon exercise of stock
options exercisable within 60 days.
(8) Includes 790,000 shares of common stock issuable upon exercise of stock
options exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $.001, and 1,000,000 shares of preferred stock, par value $.001. Upon
the closing of this offering, there will be 12,339,643 shares of common stock
outstanding assuming that the underwriters do not exercise their over-allotment
right, and no shares of preferred stock outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of our stockholders. The holders of
common stock have no cumulative voting rights with respect to the election of
directors or any other matter.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the board of directors may from time to time
determine.
Upon the liquidation, dissolution, distribution of assets or winding up of
the company, holders of common stock are entitled to share ratably, in
proportion to the number of shares of common stock held, all the assets
remaining after distribution of the full preferential amounts due to the holders
of the outstanding shares of preferred stock, if any.
Holders of common stock are not entitled to preemptive rights or rights to
covert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Under our Restated Certificate of Incorporation, the board of directors has
the authority, without further action by the stockholders, to issue up to
1,000,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the company, which could have a depressive effect on the
market price of our common stock. We have no present plan to issue any shares of
preferred stock.
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DELAWARE ANTI-TAKEOVER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder unless:
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- On or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- Any merger or consolidation involving the corporation and the interested
stockholder;
- Any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- Subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder; or
- The receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CHARTER AND BYLAWS ANTI-TAKEOVER PROVISIONS
Pursuant to our Restated Certificate of Incorporation, the board of
directors is divided into three classes of directors. Directors within each
class are elected to serve three-year terms and approximately one-third of the
directors sit for election at each annual meeting of stockholders. A classified
board of directors may have the effect of deterring or delaying any attempt by
any group to obtain control of the company by a proxy contest since a third
party would be required to have its nominees elected at two separate meetings of
the board of directors in order to elect a majority of the member of the board.
A director may be removed only for cause and requires a vote of at least
two-thirds of the shares entitled to vote for election of directors.
In addition, our Restated Certificate of Incorporation also provides that
amendment of our bylaws by shareholders requires a vote of at least two-thirds
of the shares entitled to vote for the election of directors. This supermajority
restriction makes it more difficult for stockholders to
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<PAGE> 55
require an amendment of the bylaws and enhances the board's power with respect
to matters of corporate governance that are governed by the bylaws.
Our bylaws establish an advance notice procedure for stockholders to bring
matters before stockholder meetings, including proposed nominations of persons
for election to the board of directors and bringing business matters or
stockholder proposals before a meeting. These procedures specify the information
stockholders must include in their notice and the timeframe in which they must
give us notice. At a stockholder meeting, stockholders may only consider
nominations or proposals specified in the notice of meeting, nominations or
proposals brought before the meeting by or at the direction of the board of
directors, and nominations or proposals by a person who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given us timely written notice, in proper form, of his or
her intention to bring that nomination or proposal before the meeting.
The bylaws do not give the board of directors the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a meeting. However, our bylaws may have the effect
of precluding the conduct of that item of business at a meeting if the proper
procedures are not followed. These provisions may discourage or deter a
potential third party from conducting a solicitation of proxies to elect their
own slate of directors or otherwise attempting to obtain control of our company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Restated Certificate of Incorporation contains certain provisions
permitted under Delaware law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in circumstances involving
certain wrongful acts, such as:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for any acts under Section 174 of the Delaware General Corporation Law;
or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.
In addition, our Restated Certificate of Incorporation and Bylaws provide
the directors and executive officers indemnification protection to the fullest
extent permitted by Delaware law. We believe that these provisions will assist
us in attracting and retaining qualified individuals to serve as directors and
officers. Our Bylaws permit us to enter into agreements providing to each
officer or director indemnification rights substantially similar to those set
forth in the Bylaws and such agreements are expected to be entered into by each
member of our board of directors and each of our executive officers. Although
the form of indemnification agreement offers substantially the same scope of
coverage afforded by our Bylaws, it provides greater assurances to directors and
executive officers that indemnification will be available because, as a
contract, it cannot be modified unilaterally in the future by the board of
directors or by the stockholders to eliminate the rights it provides.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is LaSalle Bank N.A.,
Chicago, Illinois.
LISTING
We have applied to have First Horizon common stock quoted on the Nasdaq
National Market under the symbol "FHRX."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices of shares of First
Horizon. In addition, since no shares outstanding prior to this offering will be
available for sale shortly after this offering because of certain contractual
and legal restrictions on resale as described below, sales of substantial
amounts of common stock in the public market after these restrictions lapse
could adversely affect the prevailing market price of shares of First Horizon
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
12,339,643 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and excluding 1,795,000 shares issuable upon exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act. The remaining 8,539,643 shares of
common stock currently outstanding and 1,795,000 shares issuable upon the
exercise of outstanding options are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
Beginning either on the date of this prospectus or 90 days after the date
of this prospectus, all 8,539,643 shares currently outstanding and 1,795,000
shares issuable upon the exercise of outstanding options will become eligible
for sale in the public market under Rule 144(k), Rule 144 or Rule 701. All but
100,000 of the shares currently outstanding are subject to lock-up agreements.
All 1,795,000 shares issuable upon the exercise of outstanding options are
subject to lock-up agreements. These lock-up agreements provide that the
stockholders will not sell or otherwise dispose of any shares of common stock
without the prior written consent of FleetBoston Robertson Stephens Inc. for a
period of 180 days from the date our shares commence trading on the Nasdaq
National Market. FleetBoston Robertson Stephens Inc. may release all or any
portion of the securities subject to the lock-up agreements without notice. See
"Underwriting."
Rule 144
Under Rule 144, beginning 90 days after the date the registration statement
of which this prospectus is a part is declared effective, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, which generally includes the holding period of any prior owner
other than an affiliate, would generally be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the outstanding shares of our common stock then outstanding, which
will equal approximately 123,396 shares immediately after this offering;
or
- The average weekly trading volume of First Horizon's common stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the company.
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Rule 144(k)
Under Rule 144(k), a person who was not an affiliate of the company at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, which generally includes the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors, other than affiliates, who purchases or receives shares
from us in connection with a compensatory stock purchase plan or option plan or
other written agreement will be eligible to resell such shares beginning 90 days
after the effective date of the registration statement of which this prospectus
is a part, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144 without compliance with the Rule 144 holding period
requirements.
We intend to file a registration statement under the Securities Act
covering the 2,000,000 shares of common stock reserved for issuance under our
2000 Stock Plan following completion of this offering. Thereafter, shares that
are issued under the plan will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market.
54
<PAGE> 59
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc. and FleetBoston Robertson Stephens
International Limited, Banc of America Securities LLC, and Chase Securities
Inc., have severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth below opposite their respective names. The underwriters are committed
to purchase and pay for all shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
U.S. UNDERWRITERS
FleetBoston, Robertson Stephens Inc.........................
Banc of America Securities LLC..............................
Chase Securities Inc........................................
INTERNATIONAL UNDERWRITERS
FleetBoston Robertson Stephens International Limited........
Banc of America Securities LLC..............................
Chase Securities Inc........................................
-------
Total.............................................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 570,000
additional shares of common stock, to cover over-allotments, if any, at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus. If the underwriters exercise their over-allotment option to
purchase any of the additional 570,000 shares of common stock, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof as the number of shares to be purchased by each of
them bears to the total number of shares of common stock offered in this
offering. If purchased, these additional shares will be sold by the underwriters
on the same terms as those on which the shares offered hereby are being sold. We
will be obligated, pursuant to the over-allotment option, to sell shares to the
underwriters to the
55
<PAGE> 60
extent the over-allotment option is exercised. The underwriters may exercise the
over-allotment option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering.
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
TOTAL
---------------------
WITHOUT WITH
OVER- OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- --------- ---------
<S> <C> <C> <C>
Underwriting Discounts and Commissions payable
by First Horizon............................. $ $ $
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $ .
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Each executive officer and director of First Horizon and substantially all
other holders of our securities have agreed during the period of 180 days after
the effective date of this prospectus, subject to specified exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of common stock or any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock owned as of the date of this
prospectus or thereafter acquired directly by those holders or with respect to
which they have the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc.
may, in its sole discretion and at any time or from time to time, without
notice, release all or any portion of the securities subject to lock-up
agreements. There are no existing agreements between the representatives and any
of our stockholders who have executed a lock-up agreement providing consent to
the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable for
shares of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options or
warrants, and the issuance of options under existing stock option and incentive
plans provided that those options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
56
<PAGE> 61
Listing
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "FHRX."
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or purchase
of common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid" is
an arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by such underwriter or syndicate
member purchased by the representatives in a syndicate covering transaction and
has therefore not been effectively placed by such underwriter or syndicate
member. The representatives have advised us that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Directed Share Program
The underwriters have reserved up to 5% of the common stock to be issued by
us and offered for sale in this offering, at the initial public offering price,
to directors, officers, employees, business associates and persons otherwise
connected to First Horizon. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase reserved shares. Any reserved shares that are not purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered in this offering.
LEGAL MATTERS
The validity of the shares of common stock that we are offering will be
passed upon for us by Arnall Golden & Gregory, LLP. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Testa,
Hurwitz & Thibeault, LLP.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
57
<PAGE> 62
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock we are offering. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedule filed with it. We have omitted certain items in accordance
with the rules and regulations of the Commission. For further information with
respect to our business and the common stock we are offering, please see the
registration statement and the exhibits and schedule filed therewith. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each statement being qualified in all
respects by such reference. You may inspect a copy of the registration
statement, and the exhibits and schedule filed with it, without charge at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional offices
located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048, and you can obtain copies of all or any part of the registration
statement from these offices upon the payment of the fees prescribed by the
Commission. You can obtain information on the operation of the public reference
room by calling the Commission at 1-800-SEC-0330. The Commission maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov. We have
electronically filed the registration statement, including all exhibits and
schedule filed with it, with the Commission.
58
<PAGE> 63
FIRST HORIZON PHARMACEUTICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Horizon Pharmaceutical Corporation:
We have audited the accompanying balance sheets of FIRST HORIZON
PHARMACEUTICAL CORPORATION (formerly Horizon Pharmaceutical Corporation, a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Horizon Pharmaceutical
Corporation as of December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 2000
F-2
<PAGE> 65
FIRST HORIZON PHARMACEUTICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 425,023 $ 219,688
Accounts receivable, net of allowance for doubtful
accounts and discounts of $35,395 and $55,783 for 1998
and 1999, respectively................................. 1,147,248 2,900,623
Inventories............................................... 402,397 798,615
Samples and other prepaid expenses........................ 470,382 553,614
Deferred tax assets....................................... 146,931 550,780
---------- -----------
Total current assets.............................. 2,591,981 5,023,320
---------- -----------
Property and equipment, net................................. 305,247 422,096
Other Assets:
Note receivable from related party........................ 30,000 30,000
Intangibles, net.......................................... 5,873 5,602,328
---------- -----------
Total other assets................................ 35,873 5,632,328
---------- -----------
Total assets...................................... $2,933,101 $11,077,744
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 553,318 $ 794,088
Accrued expenses.......................................... 795,645 2,892,727
Borrowings under revolving loan agreement................. 602,928 800,000
Current portion of long-term debt......................... -- 1,270,389
---------- -----------
Total current liabilities......................... 1,951,891 5,757,204
---------- -----------
Long-Term Liabilities:
Long-term debt, net of current maturities................. -- 1,628,497
Deferred tax liabilities.................................. 25,080 76,479
---------- -----------
Total liabilities................................. 1,976,971 7,462,180
---------- -----------
Commitments and Contingencies (Notes 1,5,6,8,10 and 11)
Stockholders' Equity:
Preferred stock, 1,000,000 shares authorized and none
outstanding............................................ -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 7,981,248 and 8,539,643 shares issued and
outstanding in 1998 and 1999, respectively............. 7,982 8,540
Additional paid-in capital................................ 2,615,434 5,788,220
Deferred compensation..................................... 0 (1,284,374)
Accumulated deficit....................................... (1,667,286) (896,822)
---------- -----------
Total stockholders' equity........................ 956,130 3,615,564
---------- -----------
Total liabilities and stockholders' equity........ $2,933,101 $11,077,744
========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 66
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues..................................... $5,557,700 $9,252,058 $18,624,514
Operating costs and expenses
Cost of revenues............................... 1,136,691 1,903,054 3,140,416
Selling, general and administrative expenses,
excluding non-cash compensation expense..... 4,545,254 6,789,358 12,400,439
Non-cash selling general and administrative
expense..................................... 133,500 -- 143,986
Depreciation and amortization.................. 30,273 35,225 424,274
Research and development expense............... -- 255,000 860,350
---------- ---------- -----------
Total operating costs and expenses..... 5,845,718 8,982,637 16,969,465
---------- ---------- -----------
Operating (loss) income.......................... (288,018) 269,421 1,655,049
---------- ---------- -----------
Other income (expense):
Interest expense............................... (5,496) (14,017) (356,598)
Interest income................................ 2,909 4,383 11,950
Other.......................................... 3,629 (2,749) 8,059
---------- ---------- -----------
Total other income (expense)........... 1,042 (12,383) (336,589)
---------- ---------- -----------
Income before benefit (provision) for income
taxes.......................................... (286,976) 257,038 1,318,460
Benefit (provision) for income taxes............. 106,530 (121,484) (547,996)
---------- ---------- -----------
Net (loss) income................................ $ (180,446) $ 135,554 $ 770,464
========== ========== ===========
Net (loss) income per common share:
Basic.......................................... $ (0.02) $ 0.02 $ 0.10
========== ========== ===========
Diluted........................................ $ (0.02) $ 0.02 $ 0.09
========== ========== ===========
Weighted average common shares outstanding:
Basic.......................................... 7,576,580 7,978,234 8,028,673
========== ========== ===========
Diluted........................................ 7,576,580 8,584,329 8,975,493
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 67
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
--------- ------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 5,830,000 $5,830 $1,139,553 $ -- $(1,622,394) $ (477,011)
Conversion of debt to
equity..................... 1,261,248 1,262 787,021 -- -- 788,283
Proceeds from sale of
stock...................... 880,000 880 549,120 -- -- 550,000
Deferred compensation........ -- -- 133,500 -- -- 133,500
Net loss..................... -- -- -- -- (180,446) (180,446)
--------- ------ --------- ---------- ---------- ---------
Balance, December 31, 1997..... 7,971,248 7,972 2,609,194 -- (1,802,840) 814,326
Stock options exercised...... 10,000 10 6,240 -- -- 6,250
Net income................... -- -- -- -- 135,554 135,554
--------- ------ ---------- ----------- ---------- ----------
Balance, December 31, 1998..... 7,981,248 7,982 2,615,434 -- (1,667,286) 956,130
Conversion of debt to
equity..................... 558,395 558 1,744,426 -- -- 1,744,984
Deferred compensation........ -- -- 1,428,360 (1,284,374) -- 143,986
Net income................... -- -- -- -- 770,464 770,464
--------- ------ ---------- ----------- ---------- ----------
Balance, December 31, 1999..... 8,539,643 $8,540 $5,788,220 $(1,284,374) $ (896,822) $3,615,564
========= ====== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 68
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(180,446) $ 135,554 $ 770,464
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization................ 30,273 35,225 424,274
Non-cash interest expenses................... -- -- 144,984
Deferred tax provision....................... (108,867) 102,000 (352,450)
Non-cash compensation expense................ 133,500 -- 143,986
Loss on disposal of equipment................ -- 4,404
Changes in assets and liabilities net of
acquired assets and liabilities:
Accounts receivable........................ (226,597) (486,629) (1,753,375)
Inventories................................ 35,309 (261,368) (396,218)
Samples and other prepaid expenses......... (304,815) (139,445) (83,232)
Note receivable from related party......... -- (30,000) --
Accrued expenses........................... 153,621 446,429 1,763,019
Accounts payable........................... 272,031 13,288 356,850
--------- --------- -----------
Net cash (used in) provided by operating
activities........................... (195,991) (180,542) 1,018,302
--------- --------- -----------
Cash flows from investing activities:
Purchase of intangibles......................... 500 -- (4,000,000)
Purchase of property and equipment.............. (121,272) (208,464) (185,709)
--------- --------- -----------
Net cash used in investing activities... (120,772) (208,464) (4,185,709)
Cash flows from financing activities:
Proceeds from revolving loan agreement.......... -- 563,013 197,072
Proceeds from long-term debt.................... -- -- 4,000,000
Principal payments on long-term debt............ (19,457) -- (1,235,000)
Proceeds from issuance of common stock.......... 550,000 6,250 --
--------- --------- -----------
Net cash provided by financing
activities........................... 530,543 569,263 2,962,072
--------- --------- -----------
Net change in cash and cash equivalents........... 213,780 180,257 (205,335)
Cash and cash equivalents, beginning of year...... 30,986 244,766 425,023
--------- --------- -----------
Cash and cash equivalents, end of year............ $ 244,766 $ 425,023 $ 219,688
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 69
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
First Horizon Pharmaceutical Corporation (formerly Horizon Pharmaceutical
Corporation, the "Company") is an emerging pharmaceutical company that markets
and sells brand name prescription drugs to high-prescribing primary care and
select specialty physicians in the United States through their nationwide sales
and marketing field force. The Company focuses on the treatment of chronic
conditions, including cardiovascular diseases, respiratory and
gastroenterological disorders, and pain and inflammation. The Company's strategy
is to acquire and obtain licenses for pharmaceutical products that other
companies do not actively market, and to increase sales through aggressive
promotion and marketing. In addition, the Company seeks to maximize the value of
their drugs by developing new patentable formulations, using new delivery
methods and seeking regulatory approval for new indications.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment to customers and
are shown net of sales adjustments. Provisions for discounts, rebates to
customers, returns, and other adjustments are provided in the same period that
the related sales are recorded. Cost of revenues is comprised of purchased
product costs.
ROYALTIES AND COMMISSION COSTS
The Company pays royalties and commissions on the sale of certain products.
These costs are included in selling general and administrative costs in the
accompanying statement of operations. Total royalties and commission costs were
$81,000, $194,000 and $620,000 for the years ending December 31, 1997, 1998 and
1999, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs incurred to
develop formulations, engage contract research organizations to conduct clinical
studies, test products under development and engage medical and regulatory
consultants. The Company expenses all research and development costs as
incurred. Research and development costs were $0, $255,000 and $860,350 for the
years ended December 31, 1997, 1998 and 1999, respectively.
RETURNS AND REBATE ALLOWANCES
The Company provides all customers with a right of return within six months
of the expiration date of the product, and as a result records a provision for
returns at the time of sale. The Company is contractually obligated to pay
rebates on the sale of certain prescription drugs.
F-7
<PAGE> 70
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The reserve for returns and rebates is estimated based upon historical
experience and other relevant information, in accordance with generally accepted
accounting principles. There is no certainty that future returns and rebates
will not exceed established reserves.
CASH AND CASH EQUIVALENTS
The Company considers only those investments that are highly liquid, and
readily convertible to cash with an original maturity of three months or less to
be cash equivalents. The Company had no cash equivalents at December 31, 1998 or
1999.
CONCENTRATION OF CREDIT RISK
The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors and retail pharmacy chains throughout the United
States. Historically, the Company has not experienced significant credit losses
on its accounts.
The Company's five largest customers accounted for approximately 79% and
66% of account's receivable at December 31, 1998 and 1999, respectively.
The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:
<TABLE>
<CAPTION>
CUSTOMER 1997 1998 1999
- -------- ---- ---- ----
<S> <C> <C> <C>
McKesson HBOC, Inc......................................... 29% 29% 28%
Cardinal Health, Inc....................................... 28 28 19
Bergen Brunswig Corporation................................ 12 12 10
</TABLE>
The Company relies on third-party suppliers to produce its products. The
supply of a product whose sales comprised 24% of the Company's sales in 1999 is
exclusively available through a single supplier.
Two products accounted for 46%, 49% and 51% of the Company's sales in 1997,
1998 and 1999, respectively.
SEGMENT REPORTING
The Company operates in a single segment, the sale and marketing of
prescription drugs.
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.
SAMPLES AND OTHER PREPAID EXPENSES
Samples and other prepaid expenses primarily consist of product samples
used in the sales and marketing efforts of the Company's products. Samples are
expensed upon distribution.
F-8
<PAGE> 71
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements, which extend
the lives of existing property and equipment, are capitalized. Depreciation is
provided for on the straight-line basis over the estimated useful lives of the
assets. Accelerated depreciation is used for income tax purposes. Expenditures
for maintenance and repairs that do not extend the lives of the applicable
assets are charged to expense as incurred.
The estimated useful lives of the classes of assets generally are as
follows:
<TABLE>
<S> <C>
Office equipment....................................... Five to ten years
Furniture and fixtures................................. Five to ten years
Computer hardware and software......................... Three to seven years
Leasehold improvements................................. Five years
</TABLE>
The components of property and equipment as of December 31, 1998 and 1999
are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Office equipment....................................... $ 36,583 $ 42,315
Furniture and fixtures................................. 81,641 131,065
Computer hardware and software......................... 172,892 294,414
Leasehold improvements................................. 89,617 98,648
-------- ---------
380,733 566,442
Less accumulated depreciation and amortization......... (75,486) (144,346)
-------- ---------
Property and equipment, net.................. $305,247 $ 422,096
======== =========
</TABLE>
Depreciation and amortization expense related to property and equipment,
for the years ended December 31, 1997, 1998, and 1999 was $29,924, $34,745, and
$68,860, respectively.
In the event that facts and circumstances indicate that the carrying
amounts of property and equipment may be impaired, an evaluation of
recoverability is performed using the estimated future undiscounted cash flows
associated with the asset compared to the asset's carrying amount to determine
if a write-down is required.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP," No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company was required to implement SOP No.
98-1 for the year ending December 31, 1999. The adoption of SOP No. 98-1 had no
impact to the financial condition or results of operations of the Company.
INTANGIBLE ASSETS
The costs of obtaining patents and product licenses are capitalized and
amortized on a straight-line basis over the estimated periods benefited by the
asset (15 to 20 years). Amortization of such assets is included in depreciation
and amortization expense in the accompanying financial statements. Amortization
expense for the years ended December 31, 1997, 1998, and 1999 was $979, $480,
and $269,326 respectively.
F-9
<PAGE> 72
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company continually reevaluates the propriety of the carrying amount of
intangibles as well as the related amortization period to determine whether the
current events and circumstances warrant adjustments to the carrying values
and/or estimates of useful lives. This evaluation is performed using the
estimated projected future undiscounted cash flows associated with the asset
compared to the asset's carrying amount to determine if a write-down is
required. To the extent such projections indicate that the undiscounted cash
flows are not expected to be adequate to recover the carrying amounts, the
assets are written down to fair value as determined by discounting future cash
flows.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
SFAS No. 109 requires recognition of deferred tax assets and liabilities using
currently enacted tax rates.
ADVERTISING COSTS
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expenses were $46,188, $39,233, and $178,929
for the years ending December 31, 1997, 1998 and 1999 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's borrowings under its variable rate long-term debt agreements
are recorded at cost, which approximates fair value.
EARNINGS PER SHARE
As required by SFAS No. 128, "Earnings Per Share," the Company has
presented basic and diluted earnings per common share amounts in the
accompanying financial statements. Basic earnings per common share is calculated
based on the weighted average common shares outstanding during the year, while
diluted earnings per common share also gives effect to all potential dilutive
stock equivalents during each year such as options, warrants, and contingently
issuable shares. The Company incurred a net loss in 1997 and, as such, the
weighted average number of common shares used for diluted earnings per common
share does not consider the potential dilutive effect of such common stock
equivalents as such consideration would have an antidilutive effect on earnings
per common share.
Below is the calculation of basic and diluted net (loss) income per common
share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Net (loss) income........................ $ (180,446) $ 135,554 $ 770,464
========== ========== ===========
Weighted average common shares
outstanding -- basic................... 7,576,580 7,978,234 8,028,673
Dilutive effect of stock options......... N/A 606,095 946,820
---------- ---------- -----------
Weighted average common shares
outstanding -- diluted................. 7,576,580 8,584,329 8,975,493
========== ========== ===========
Basic net (loss) income per share........ $ (0.02) $ 0.02 $ 0.10
========== ========== ===========
Diluted net (loss) income per share...... $ (0.02) $ 0.02 $ 0.09
========== ========== ===========
</TABLE>
F-10
<PAGE> 73
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year financial statement presentation.
RESTATED FINANCIAL STATEMENTS
The financial statements for the period ending December 31, 1997 have been
restated to reflect certain adjustments for accrued expenses net of taxes.
SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company purchased intangible assets for $4,000,000 in cash with an
additional $1,800,000 financed by the seller. Pursuant to the acquisition, the
Company also assumed estimated liabilities of $218,460 for returns of products
shipped by the seller prior to the acquisition date in 1999.
The Company issued 1,261,248 and 558,395 shares of common stock in the
conversion of outstanding convertible debt (including accrued interest) totaling
$788,283 and $1,744,984 and in 1997 and 1999, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
---- ------- --------
<S> <C> <C> <C>
Cash paid for taxes................................ $ -- $ -- $777,927
==== ======= ========
Cash paid for interest............................. $970 $10,855 $235,889
==== ======= ========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company must
adopt SFAS No. 133 for the year ending December 31, 2000. SFAS No. 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company does not hold any derivative financial
instruments and does not engage in hedging activities, adoption of SFAS No. 133
is not expected to have a material impact on the Company's financial condition
or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires additional disclosure and presentation of
amounts comprising comprehensive income beyond net income. The Company had no
comprehensive income amounts for the periods presented. As a result, the
adoption had no impact on the Company's reporting under generally accepted
accounting principles.
2. REVOLVING LOAN AGREEMENT
In May 1998, the Company entered into a revolving loan agreement with a
bank under which the Company can borrow up to $1,000,000, subject to borrowing
base limitations based
F-11
<PAGE> 74
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
on eligible accounts receivable and inventory balances, as defined in the
agreement. The revolving loan agreement was amended and restated on December 22,
1998 to provide for partial financing of a product acquisition through a term
loan. Under the amended agreement, terms of the revolving loan facility provide
for up to $2,500,000, subject to borrowing base limitations based on eligible
accounts receivable and inventory, as defined in the agreement. Borrowings under
the revolving loan facility bear interest at the bank's prime rate, and are due
on January 31, 2001. At December 31, 1999, the outstanding balance under the
revolving loan was $800,000 with an interest rate of 8.5%, and the Company had
additional availability under the terms of the agreement of approximately
$1,700,000. During January 2000, the loan agreement was amended and restated to
provide for borrowings up to $3,500,000 through June 30, 2000, reverting back to
$2,500,000 from June 30, 2000 to January 31, 2001. The revolving loan agreement
contains certain restrictive covenants including, among other things, minimum
EBITDA levels and debt to equity ratio. Any failure to comply with these
requirements could have a material adverse effect on the Company's operations,
unless waivers are obtained.
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- -----------
<S> <C> <C>
Term note payable (initial amount of $2,400,000) to a
bank bearing interest at the lesser of Prime or
LIBOR plus 2% (7.96% at December 31, 1999), with
monthly payments of $40,000 plus accrued interest
maturing in December 2001.......................... $ -- $ 1,840,000
Obligation to a seller of intangible assets payable
in quarterly installments of $225,000 through
February 2001, net of an unamortized discount of
$52,850, using an interest rate of 8.75%........... -- 1,058,886
-------- -----------
-- 2,898,886
Less current maturities.............................. -- (1,270,389)
-------- -----------
Total...................................... $ -- $ 1,628,497
======== ===========
</TABLE>
The term note payable contains certain restrictive covenants including,
among other things, minimum EBITDA levels and debt to equity ratio. Any failure
to comply with these requirements could have a material adverse effect on the
Company's operations, unless waivers are obtained.
Future maturities of long-term debt are $1,270,389 and $1,628,497 for the
years ended December 31, 2000 and 2001, respectively.
F-12
<PAGE> 75
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- ----------
<S> <C> <C>
Employee compensation and benefits........................ $510,578 $ 949,325
Customer return allowance................................. 140,000 272,423
Product rebates........................................... -- 851,248
Interest.................................................. 15,028 64,011
Other..................................................... 130,039 755,720
-------- ----------
$795,645 $2,892,727
======== ==========
</TABLE>
5. STOCKHOLDER'S EQUITY
In 1998, the Company approved a four-for-one common stock split, thus
increasing authorized common shares from 10 million to 40 million. All common
stock information for all periods presented herein has been restated to give
effect to this stock split.
Through 1996, the Company borrowed $635,000 from related parties accruing
interest at Prime plus 2%. During 1997, the Company issued 1,261,248 shares of
common stock by converting the $635,000 of debt to shareholders, plus accrued
interest of $153,283 to common stock at a rate of $0.625 per share, the then
estimated fair market value. Additionally, the Company issued 880,000 shares of
common stock at $0.625 per share in exchange for $550,000 in cash.
In 1998, 10,000 shares of common stock were issued upon exercise of stock
options at an exercise price of $0.625 per share.
In December 1999, the Company issued 558,395 shares of common stock to the
Company's majority stockholder upon the conversion of $1.6 million of
convertible debt incurred in January 1999 for the purchase of a product license
and accrued interest of $144,984 thereon to common stock. The shares were
converted at a rate of $3.125 as stipulated in the applicable agreement. The
original debt agreement stipulated an interest rate of Prime plus 2% (10.25% at
the conversion date) with the full principal amount due by December 1, 2001.
Under the Company's Restated Certificate of Incorporation the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company, which could have a depressive effect on the
market price of our common stock. The Company has no present plan to issue any
shares of preferred stock. As of December 31, 1998 and 1999 there were no shares
of preferred stock outstanding.
F-13
<PAGE> 76
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTIONS
Pursuant to the Company's 1997 Non-Qualified Stock Option Plan (the
"Plan"), the Board of Directors approved the issuance of options to purchase
shares of common stock of the Company to various employees. Under the Plan,
4,000,000 shares (adjusted for the 1998 four-for-one stock split) of common
stock were reserved for issuance. Vesting periods range from immediate to four
years, and options granted generally expire seven years from the date of grant.
All options also include accelerated vesting provisions in the event of a change
in control, as defined in the Plan.
The Company has granted stock options to officers, directors, and employees
as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF SHARES AVERAGE
SUBJECT TO EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Outstanding at December 31, 1996........................ -- N/A
Granted............................................... 870,000 $0.556
Canceled.............................................. -- N/A
---------
Outstanding at December 31, 1997........................ 870,000 0.556
Granted............................................... 122,000 1.875
Canceled.............................................. (10,000) 1.375
Exercised............................................. (10,000) 0.625
---------
Outstanding at December 31, 1998........................ 972,000 0.712
Granted............................................... 785,500 2.494
Canceled.............................................. (5,000) 2.250
Exercised............................................. -- N/A
---------
Outstanding at December 31, 1999........................ 1,752,500 $1.506
=========
Shares vested at December 31, 1999...................... 753,750
=========
</TABLE>
At December 31, 1999, approximately 2,237,500 shares remained reserved for
issuance under the 1997 Plan. Subsequent to year-end the Company retired the
1997 Plan. Prior to the retirement of the 1997 Plan the Company's board approved
the issuance of an additional 47,500 options, exercisable at $8.35 per share. At
February 14, 2000, 1,800,000 options were issued and outstanding under the 1997
Plan. The intent of Company management is to no longer issue options under the
1997 Plan. The following table sets forth the range of exercise prices, number
of shares, weighted average exercise price, and remaining contractual lives by
similar price and grant date at December 31, 1999.
F-14
<PAGE> 77
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------- -----------------------
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AT AVERAGE AVERAGE AT AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICE 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
- --------------------------- ------------ ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.500 - $0.625 856,000 4.9 years $0.556 706,000 $0.540
1.875 - 1.880 234,000 7.7 years 1.876 41,500 1.877
2.500 - 2.650 662,500 9.6 years 2.605 6,250 2.500
--------- -------
Total 1,752,500 753,750
========= =======
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock options. Accordingly, the Company obtained appraisals
of the fair market value of the stock on the date of the option grant and will
recognize compensation expense over the vesting period of the options. The
Company has recognized compensation expense related to stock option grants of
$133,500, $0 and $143,986, in 1997, 1998 and 1999, respectively. Had
compensation costs for these options been determined using the minimum value
option pricing model prescribed by SFAS 123, "Accounting for Stock Based
Compensation," the Company's Pro forma net (loss) income per common share would
have been reported as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported................................ $(180,446) $135,554 $770,464
Pro-forma.................................. (251,889) 111,734 476,823
Net (Loss) Income per Common Share -- basic:
As Reported................................ (0.02) 0.02 0.10
Pro-forma.................................. (0.03) 0.01 0.06
Net (Loss) Income per Common
Share -- diluted:
As Reported................................ (0.02) 0.02 0.09
Pro-forma.................................. (0.03) 0.01 0.05
</TABLE>
The weighted average minimum value of options granted during 1997, 1998 and
1999 is estimated at $0.44, $1.51, and $2.01 per share. The minimum value of
options is estimated on the date of the grant using the following weighted
average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate....................... 6.19% 5.53% 5.57%
Expected dividend yield....................... -- -- --
4 4 4
Expected lives................................ years years years
Expected volatility........................... --% --% --%
</TABLE>
On February 14, 2000, the Board of Directors and stockholders approved the
2000 Stock Plan. This plan provides for the granting of incentive stock options
under the Internal Revenue Code of 1986; options that do not qualify as
incentive stock options, stock awards or stock bonuses, and sales of stock. The
2000 Stock Plan provides for the grants of these options and other awards to
officers, directors, full- and part-time employees, advisors and consultants.
Only full-time employees may receive incentive stock options. The Company has
reserved 2,000,000
F-15
<PAGE> 78
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
shares of common stock for issuance under the 2000 Stock Plan. The Company's
compensation committee administers the 2000 Stock Plan and has the sole
authority to determine the meaning and application of the terms of the plan and
all grant agreements, the persons to whom option or stock grants are made, the
nature and amount of option or stock grants, the price to be paid upon exercise
of each option, the period within which options may be exercised, the
restrictions on stock awards, and the other terms and conditions of awards. The
2000 Stock Plan will terminate in February 2010. Subsequent to the approval of
this plan, the Company's Board of Directors approved the grant of options to
purchase 177,950 shares of common stock which will become effective upon the
issuance of stock by the Company in a public offering. Such options will be
exercisable at the offering price.
The Company adopted an employee stock purchase plan on February 14, 2000
that is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. The Company has reserved
500,000 shares of common stock for the stock purchase plan. In order to
participate in the stock purchase plan, employees must meet eligibility
requirements, including length of employment. Participating employees will be
able to direct the Company to make payroll deductions of up to 7% of their
compensation during an offering period for the purchase of shares of the
Company's common stock. Each offering period will be six months, beginning on
July 1, 2000. The stock purchase plan will provide participating employees with
the right, subject to specific limitations, to purchase the Company's common
stock at a price equal to 85% of the lesser of the fair market value of the
Company's common stock on the first or last day of the offering period. The
Board of Directors has the authority to amend, suspend or discontinue the stock
purchase plan as long as the change will not adversely affect participants
without their consent and as long as the Company receives the shareholder
approval required by law. The stock purchase plan will terminate on December 31,
2010.
7. INCOME TAXES
The benefit (provision) for income taxes for 1997, 1998 and 1999 consisted
of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Current.................................. $ (2,337) $ (19,484) $(900,446)
Deferred................................. 108,867 (102,000) 352,450
-------- --------- ---------
Total.......................... $106,530 $(121,484) $(547,996)
======== ========= =========
</TABLE>
A reconciliation of the statutory rate to the effective rate as recognized
in the statement of operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................. 35% (35)% (35)%
State taxes, net....................................... 4 (4) (4)
Nondeductible meals and entertainment expenses......... (2) (8) (3)
-- --- ---
37% (47)% (42)%
== === ===
</TABLE>
F-16
<PAGE> 79
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities reflect the impact of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts recognized for income tax purposes.
Significant components of the Company's net deferred tax assets as of December
31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Current deferred tax assets:
Net operating loss carryforward....................... $ 33,196 $ --
Accrued liabilities................................... 60,335 439,785
Deferred compensation................................. 53,400 110,995
-------- --------
146,931 550,780
-------- --------
Long-term deferred tax liabilities:
Depreciation and amortization......................... 25,080 76,479
-------- --------
Net deferred tax assets....................... $121,851 $474,301
======== ========
</TABLE>
8. LICENSE AGREEMENTS AND PRODUCT RIGHTS
On January 1, 1996, the Company obtained exclusive distribution rights from
Unisource, Inc. for Tanafed in North America through December 31, 2003 with an
option for an additional seven years. The agreement requires the Company to
purchase all of their requirements for Tanafed from Unisource, including at
least certain minimum quantities of Tanafed in each year of the agreement. The
Company entered into a patent and license agreement with the raw materials'
supplier for Tanafed dated January 2000, which provides a license to a patent
covering an active ingredient in Tanafed.
On October 31, 1998, the Company entered into an agreement with Inpharmakon
Corporation in which the Company acquired rights to the proprietary information
for a migraine product for which the Company plans to conduct a clinical study
and submit a new drug application. The agreement expires on October 31, 2008;
however, the Company may renew it indefinitely after expiration. Under the
agreement, the Company must develop a workable once-a-day formulation for the
drug, conduct clinical trials, file for regulatory approval, obtain regulatory
approval and begin commercial sales of the product within prescribed times. If
the Company does not reach specified milestones on a timely basis, Inpharmakon
may terminate the agreement. The Company paid $200,000 to Inpharmakon during
1998 under the terms of the agreement. The Company must also pay an aggregate of
up to $700,000 in non-refundable fees at various developmental milestones
through and including regulatory approval of the product and, in the event of
commercial sales of the product, the Company must pay royalties at rates which
the Company believes are within industry customary ranges. If the Company elects
to sell the opportunity to a third party, the Company must share the proceeds of
the sale with Inpharmakon.
On January 29, 1999, the Company acquired exclusive rights in the United
States to Robinul and Robinul Forte tablets from American Home Products
Corporation. The Company agreed to pay royalties on net sales as long as the
Company sells the product. The Company negotiated for AHP, or its designee, to
continue to manufacture and supply the product to the Company until January 29,
2001. The Company has an agreement with a supplier, dated
F-17
<PAGE> 80
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
April 23, 1999, for the supplier to become qualified under applicable
regulations to manufacture and supply the requirements for Robinul. Under this
agreement, the supplier will manufacture the products for five years from the
time the supplier becomes a qualified manufacturer plus renewal terms of one
year until either party elects to not renew. The agreement with the supplier
requires that the Company purchase certain designated minimum quantities. The
Company has capitalized the cost of obtaining the license and is amortizing it
over an estimated economic life of 20 years.
On March 25, 1999, the Company acquired the rights from Penwest
Pharmaceuticals Co. to the application of Penwest's controlled release TIMERx
technology to the active ingredient in the migraine product. Under the Penwest
agreement, the Company has the right to manufacture, use and sell the developed
product in North America and Mexico for a period extending fifteen years from
the date a new drug application is issued for the product, as well as a license
to the TIMERx(R) patents for such purpose. The Company must pay Penwest an
aggregate of up to approximately $2,600,000 of non-refundable fees upon
achieving specified development milestones through the first anniversary of the
first commercial sale of the product following regulatory approval and royalties
upon any sales of the migraine product. Penwest may terminate the agreement in
the event the Company fails to timely achieve designated performance milestones
within prescribed time periods.
In July 1999, the Company entered in to an agreement with Pohl-Boskamp for
the exclusive rights to distribute, market and sell Nitrolingual Pumpspray
beginning on February 1, 2000 in the United States for five years plus an
additional five year renewal period subject to establishing mutually acceptable
minimum purchase requirements. Under the agreement, Pohl-Boskamp supplies the
Company with their requirements of product at prices that decrease as volume
purchased in each year increases. The Company must purchase designated minimum
quantities in each year of the agreement and pay a royalty on net sales of the
product. Aventis had exclusive rights through January 2000 to a version of the
product containing CFC named Nitrolingual Spray. To promote earlier adoption of
Nitrolingual Pumpspray, the Company obtained exclusive rights from Aventis to
market this CFC product in the United States as of November 22, 1999.
Each of the Company's third-party manufacturing agreements requires that
the Company purchase all of their product requirements from the manufacturers
that are a party to those agreements.
The Company uses third-party manufacturers for the production of its
products for development and commercial purposes. Given the general
under-utilization of resources, the availability of excess capacity for
manufacturing in the marketplace, and the lower cost of outsourcing, the Company
intends to continue to outsource manufacturing for the near-term.
The Company currently uses the services of six third-party manufacturers
for manufacturing of the Company's products pursuant to the Company's product
specifications. The Company has manufacturing and supply agreements with five of
these manufacturers. The remaining terms of these agreements generally range
from one to five years. Under some of these agreements, the manufacturers or
other third parties own the rights to the product that the Company has under
their marketing licenses. Except for our Defen-LA, Protuss-D, and Zoto-HC
products, these agreements generally state that the product supplier will
provide products only to us. The Company has not entered into agreements for
alternative
F-18
<PAGE> 81
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
manufacturing sources for any of its products. The suppliers of Nitrolingual
Pumpspray and the raw materials for Tanafed hold patents for their respective
products.
9. RETIREMENT PLAN
In 1996, the Company began a qualified defined contribution 401(k) plan,
which provides benefits to substantially all employees. The annual contribution,
if any, to the trust is at the discretion of the Board of Directors of the
Company. There were no employer contributions to the plan for the year ended
December 31, 1997. Employer contributions to the plan for the year ended
December 31, 1998 and 1999 were $20,695 and $36,055 respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under a cancelable operating lease that
expires in August 2003. The total annual rent expense was $38,962, $90,315, and
$211,533 for 1997, 1998 and 1999, respectively. The Company leases vehicles for
certain employees under cancelable lease agreements expiring in 2001. The total
annual vehicle lease expense under the lease agreement for the years ended
December 31, 1997, 1998 and 1999 was $0, $0, and $434,393, respectively.
The total minimum future commitment under leases for years succeeding
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
2000................................................ $ 999,969
2001................................................ 621,903
2002................................................ 198,073
2003................................................ 137,640
2004................................................ 8,525
----------
Total....................................... $1,966,110
==========
</TABLE>
Subsequent to year end, the Company entered in employment contracts with
certain executives. These contracts provide base salaries ranging from $80,000
to $110,000.
11. RELATED-PARTY TRANSACTIONS
The Company purchases repackaging services from Diversified Healthcare
Services, a related party. For the years ended December 31, 1997, 1998, and
1999, the amounts paid for repackaging were approximately $83,000, $132,000, and
$282,000, respectively.
The Company pays royalties to a related party for particular products sold.
For the years ended December 31, 1997, 1998, and 1999, the amounts paid for
royalties were approximately $91,000, $160,000, and $163,000, respectively.
During 1997, the Company converted $385,000 in loans from Kamal Kapoor, a
related party, plus $124,363 accrued interest, into 814,978 shares of common
stock at a rate of $0.625 per share.
F-19
<PAGE> 82
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1997, the Company converted $150,000 in loans from the John N.
Kapoor Trust dated September 30, 1989, an affiliate of the Company, plus $3,345
accrued interest, into 245,352 shares of common stock at a rate of $0.625 per
share.
The Chairman and Chief Executive Officer of the Company did not receive a
salary for the year ended December 31, 1999.
During 1997, the Company converted $100,000 in loans from EJ Financial
Enterprises, plus $25,575 accrued interest, into 200,918 shares of common stock
at a rate of $0.625 per share.
On January 27, 1997, the Company issued 320,000 shares of its common stock
to the John Kapoor Trust in exchange for $200,000.
On June 30, 1997, the Company issued 560,000 shares of its common stock to
Kapoor-Pharma Investments in exchange for $350,000.
The Company extended a non-interest bearing note receivable to an officer
of the Company during 1998. As of December 31, 1998 and 1999 the amount due to
the Company under this note was $30,000.
During 1998, the Company entered into a collaboration agreement with
Inpharmakon Corporation, an affiliate of an officer of the Company, under which
Inpharmakon will assist the Company in developing their FHPC 01 product. The
Company paid $200,000, and $1,352 to Inpharmakon in 1998 and 1999, respectively,
under this agreement.
On January 11, 1999, Kapoor-Pharma Investments, an affiliate of the
Director of the Company, loaned the Company $1,600,000 at an interest rate of 2%
over the Prime Rate of Interest. In November 1999, the Company converted
principal and $144,984 of accrued interest totaling $1,744,984 into 558,395
shares of common stock at $3.125 per share, pursuant to the terms of the loan
agreement.
F-20
<PAGE> 83
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT BUY, SELL, OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the common stock being registered. All the amounts are estimates except for
the registration fee, the Nasdaq listing fee and the NASD filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
Registration fee............................................ $16,151.52
Nasdaq National Market listing fee.......................... *
NASD filing fee............................................. 6,618
Blue sky qualification fees and expenses.................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, the Registrant's Restated Certificate of
Incorporation provides that no director of the Registrant will be personally
liable to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of duty of
loyalty to First Horizon or to its stockholders, (b) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the Delaware General Corporation Law, or (d) for
any transaction from which the director derived an improper personal benefit.
The Registrant's Restated Certificate of Incorporation further provides that the
Registrant must indemnify its directors and executive officers and may indemnify
its other officers and employees and agents to the fullest extent permitted by
Delaware law. The Registrant maintains a policy of directors and officers
insurance that provides insurance against certain expenses and liabilities which
may be incurred by directors and officers.
The Underwriting Agreement (Exhibit 1) will provide for indemnification by
the underwriters of the Registrant, its directors, its officers who sign the
registration statement, and the Registrant's controlling persons for certain
liabilities, including liabilities arising under the Securities Act.
II-1
<PAGE> 85
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant has sold or issued the
following unregistered securities:
(1) As of December 8, 1999, the Registrant issued an aggregate of
558,395 shares of its common stock for an aggregate consideration of
$1,744,984 to an accredited investor pursuant to the conversion of a
convertible promissory note issued to such accredited investor as of
January 11, 1999.
(2) As of December 7, 1998, the Registrant made effective a four for
one stock split with respect to its issued and outstanding common stock.
(3) As of April 20, 1998, the Registrant issued 10,000 shares of its
common stock for an aggregate consideration of $6,250 to an employee
pursuant to the exercise of its stock option.
(4) As of June 30, 1997, the Registrant issued 560,000 shares of its
common stock for an aggregate consideration of $350,000 to one accredited
investor.
(5) At various times during the relevant three-year time period, the
Registrant issued to certain employees and consultants options to purchase
in the aggregate up to 1,725,500 shares of its common stock at exercise
prices ranging from $0.50 to $2.65 per share.
Exemption from the registration provisions of the Securities Act for the
transaction described in paragraph 2 above was claimed on the basis that such
transaction did not constitute an "offer," "offer to sell," "sale," or "offer to
buy" under Section 5 of the Securities Act. Exemption from the registration
provisions of the Securities Act for the other transactions described above was
claimed under Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transaction did not involve any
public offering, the purchasers were sophisticated with access to the kind of
information registration would provide and that such purchasers acquired such
securities without a view towards distribution thereof. In addition, exemption
from the registration provisions of the Securities Act for the transactions
described in paragraphs 3 and 5 was claimed under Section 3(b) of the Securities
Act on the basis that such securities were sold pursuant to a written
compensatory benefit plans or pursuant to a written contract relating to
compensation and not for capital raising purposes under Rule 701 of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of exhibits filed as a part of this
registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <C> <S>
1* -- Form of Underwriting Agreement
3.1* -- Restated Certificate of Incorporation of the Registrant
3.2* -- Amended and Restated Bylaws of the Registrant
4** -- Form of Stock Certificate
5** -- Opinion of Arnall Golden & Gregory, LLP
10.1* -- 1997 Non-Qualified Stock Option Plan
10.2* -- 2000 Stock Plan
</TABLE>
II-2
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <C> <S>
10.3* -- Form of Nonqualified Stock Option Agreement
10.4* -- Form of Employment Agreement dated as of January 1, 2000
between the Registrant and certain of its executive officers
10.5* -- Convertible Term Loan Note dated January 11, 1999 made by
the Registrant for the benefit of Kapoor Pharma Investments,
L.P., as amended by Amendment No. 1 to the Convertible Term
Note dated January 11, 1999 made by the Registrant for the
benefit of Kapoor Pharma Investments, L.P.
10.6* -- Convertible Term Note Agreement dated January 11, 1999
between the Registrant and Kapoor Pharma Investments, L.P.,
as amended by Amendment No. 1 to the Convertible Term Note
dated January 11, 1999 made by the Registrant for the
benefit of Kapoor Pharma Investments, L.P.
10.7* -- Lease Agreement dated June 28, 1998 between the Registrant
and ASC North Fulton Associates Joint Venture
10.8*** -- Product Development and Supply Agreement dated March 25,
1999 between the Registrant and Penwest Pharmaceuticals Co.
10.9*** -- Collaboration Agreement dated October 31, 1998 between the
Registrant and Inpharmakon Corporation
10.10*** -- Exclusive Patent License Agreement dated January 1, 2000
between the Registrant and Jame Fine Chemicals, Inc.
10.11*** -- Exclusive Distribution Agreement dated January 1, 1996
between the Registrant and Unisource, Inc.
10.12*** -- Manufacturing and Supply Agreement dated April 23, 1999
between the Registrant and Mikart, Inc.
10.13*** -- Product Supply Agreement dated January 29, 1999 between the
Registrant and American Home Products Corporation
10.14*** -- License Agreement dated January 29, 1999 between the
Registrant and American Home Products Corporation
10.15*** -- Distribution Agreement dated July 22, 1999 between the
Registrant and G. Pohl-Boskamp GmbH & Co.
10.16* -- Form of Indemnity Agreement between the Registrant and its
directors and executive officers
23.1+ -- Consent of Arthur Andersen LLP
23.2** -- Consent of Arnall Golden & Gregory, LLP (included in Exhibit
5)
24* -- Powers of Attorney
27+ -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
*** First Horizon has requested confidential treatment for certain portions of
this exhibit pursuant to Rule 406 of the Securities Act of 1933, as
amended.
+ Filed herewith
(b) The following is the schedule filed as a part of the registration
statement: Schedule II -- Valuation and Qualifying Accounts.
II-3
<PAGE> 87
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will governed by the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of the registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 88
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement on Form S-1 to be signed
on its behalf by the undersigned, in the City of Roswell, State of Georgia on
the 27th day of March, 2000.
FIRST HORIZON PHARMACEUTICAL CORPORATION
By: /s/ R. BRENT DIXON
--------------------------------------
R. Brent Dixon
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MAHENDRA G. SHAH, PH.D.* Chairman of the Board and Chief March 27, 2000
- --------------------------------------------- Executive Officer (principal
Mahendra G. Shah, Ph.D. executive officer)
/s/ R. BRENT DIXON President and Director March 27, 2000
- ---------------------------------------------
R. Brent Dixon
/s/ JOHN. N. KAPOOR, PH.D.* Director March 27, 2000
- ---------------------------------------------
John. N. Kapoor, Ph.D.
/s/ BALAJI VENKATARAMAN* Vice President and Chief March 27, 2000
- --------------------------------------------- Financial Officer (principal
Balaji Venkataraman financial and accounting
officer)
/s/ JON S. SAXE* Director March 27, 2000
- ---------------------------------------------
Jon S. Saxe
/s/ JOHN E. ROBSON* Director March 27, 2000
- ---------------------------------------------
John E. Robson
*By:/s/ R. BRENT DIXON
--------------------------------------
R. Brent Dixon
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Horizon Pharmaceutical Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of FIRST HORIZON PHARMACEUTICAL CORPORATION (formerly
Horizon Pharmaceutical Corporation, a Delaware corporation) included in this
registration statement and have issued our report thereon dated February 17,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule located in this registration
statement at item 16(b) is the responsibility of the company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 2000
II-6
<PAGE> 90
SCHEDULE II
FIRST HORIZON PHARMACEUTICAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS BALANCE
-------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowance for doubtful accounts $ -- $ 25,924 $ -- $ (12,674) $ 13,250
Allowance for customer returns 100,000 38,289 -- (38,289) 100,000
1998 Allowance for doubtful accounts 13,250 40,714 (18,569) 35,395
Allowance for customer returns 100,000 80,994 (40,994) 140,000
1999 Allowance for doubtful accounts 35,395 51,493 (31,105) 55,783
Allowance for customer returns 140,000 366,904 (234,481) 272,423
Allowance for product rebates -- 1,294,072 (442,824) 851,248
</TABLE>
II-7
<PAGE> 91
EXHIBIT INDEX
The following is a list of exhibits filed as a part of this registration
statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <C> <S>
1* -- Form of Underwriting Agreement
3.1* -- Restated Certificate of Incorporation of the Registrant.
3.2* -- Amended and Restated By-Laws of the Registrant.
4** -- Form of Stock Certificate
5** -- Opinion of Arnall Golden & Gregory, LLP
10.1* -- 1997 Non-Qualified Stock Option Plan
10.2* -- 2000 Stock Plan
10.3* -- Form of Nonqualified Stock Option Agreement
10.4* -- Form of Employment Agreement dated as of January 1, 2000
between the Registrant and certain of its executive officers
10.5* -- Convertible Term Loan Note dated January 11, 1999 made by
the Registrant for the benefit of Kapoor Pharma Investments,
L.P., as amended by Amendment No. 1 to the Convertible Term
Note dated January 11, 1999 made by the Registrant for the
benefit of Kapoor Pharma Investments, L.P.
10.6* -- Convertible Term Note Agreement dated January 11, 1999
between the Registrant and Kapoor Pharma Investments, L.P.,
as amended by Amendment No. 1 to the Convertible Term Note
dated January 11, 1999 made by the Registrant for the
benefit of Kapoor Pharma Investments, L.P.
10.7* -- Lease Agreement dated June 28, 1998 between the Registrant
and ASC North Fulton Associates Joint Venture
10.8*** -- Product Development and Supply Agreement, dated March 25,
1999 between the Registrant and Penwest Pharmaceuticals Co.
10.9*** -- Collaboration Agreement dated October 31, 1998 between the
Registrant and Inpharmakon Corporation
10.10*** -- Exclusive Patent License Agreement dated January 1, 2000
between the Registrant and Jame Fine Chemicals, Inc.
10.11*** -- Exclusive Distribution Agreement, dated January 1, 1996,
between the Registrant and Unisource, Inc.
10.12*** -- Manufacturing and Supply Agreement, dated April 23, 1999,
between the Registrant and Mikart, Inc.
10.13*** -- Product Supply Agreement, dated January 29, 1999, between
the Registrant and American Home Products Corporation
10.14*** -- License Agreement, dated January 29, 1999, between the
Registrant and American Home Products Corporation
10.15*** -- Distribution Agreement dated July 22, 1999 between the
Registrant and G. Pohl-Boskamp GmbH & Co.
10.16* -- Form of Indemnity Agreement between the Registrant and its
directors and executive officers
</TABLE>
II-8
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <C> <S>
23.1+ -- Consent of Arthur Andersen LLP
23.2** -- Consent of Arnall Golden & Gregory, LLP (included in Exhibit
5)
24* -- Powers of Attorney
27+ -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
*** First Horizon has requested confidential treatment for certain portions of
this exhibit pursuant to Rule 406 of the Securities Act of 1933, as amended.
+ Filed herewith
II-9
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
Arthur Andersen LLP
Atlanta, Georgia
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 219,688
<SECURITIES> 0
<RECEIVABLES> 2,956,406
<ALLOWANCES> (55,783)
<INVENTORY> 798,615
<CURRENT-ASSETS> 5,023,320
<PP&E> 566,442
<DEPRECIATION> (144,346)
<TOTAL-ASSETS> 11,077,744
<CURRENT-LIABILITIES> (5,757,204)
<BONDS> 0
0
0
<COMMON> (8,540)
<OTHER-SE> 1,284,374
<TOTAL-LIABILITY-AND-EQUITY> (11,077,744)
<SALES> (18,624,514)
<TOTAL-REVENUES> (18,624,514)
<CGS> 3,140,416
<TOTAL-COSTS> 16,969,465
<OTHER-EXPENSES> (20,009)
<LOSS-PROVISION> 83,916
<INTEREST-EXPENSE> 356,598
<INCOME-PRETAX> (1,318,460)
<INCOME-TAX> 547,996
<INCOME-CONTINUING> (770,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (770,464)
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
</TABLE>
