SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2000
Commission File No. 000-30123
--------------------------------------------
FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2004779
(State of incorporation) (I.R.S. Employer Identification Number)
660 HEMBREE PARKWAY, SUITE 106, ROSWELL, GEORGIA 30076
(Address of registrant's principal executive offices, including zip code)
--------------------------------------------
(Registrant's telephone number, including area code): (770) 442-9707
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of November 8, 2000, there were 12,919,143 shares of the Registrant's
Common Stock outstanding.
<PAGE>
FIRST HORIZON PHARMACEUTICAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE
<S> <C> <C> <C>
Item 1. Balance Sheets at September 30, 2000 and 1
December 31, 1999
Statements of Operations for the three months ended 2
September 30, 2000 and September 30, 1999 and for the
nine months ended September 30, 2000 and September 30, 1999
Statements of Cash Flows for the nine months ended 3
September 30, 2000 and September 30, 1999
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIRST HORIZON PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(unaudited)
September 30, December 31,
2000 1999
------------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 10,810,828 $ 219,688
Accounts receivable, net of allowance for doubtful
accounts, discounts and contractual adjustments
of $174,440 and $55,783 at September 30, 2000 and
December 31, 1999, respectively..................................... 5,807,565 2,900,623
Inventories........................................................... 3,240,399 798,615
Samples and other prepaid expenses.................................... 1,694,070 553,614
Deferred tax assets................................................... 923,780 550,780
------------------- -----------------
Total current assets.......................................... 22,476,642 5,023,320
------------------- -----------------
Property and equipment, net........................................... 659,812 422,096
Other Assets:
Notes receivable from related party................................. 30,000 30,000
Intangibles, net.................................................... 23,363,264 5,602,328
------------------- -----------------
Total other assets............................................ 23,393,264 5,632,328
------------------- -----------------
Total assets.................................................. $ 46,529,718 $ 11,077,744
=================== =================
LIABILITIES AND STOCKHODERS' EQUITY
Current Liabilities:
Accounts payable...................................................... $ 1,463,733 $ 794,088
Accrued expenses...................................................... 8,423,141 2,892,727
Borrowings under revolving loan agreement............................. - 800,000
Current portion of long-term debt..................................... 437,186 1,270,389
------------------- -----------------
Total current liabilities..................................... 10,324,060 5,757,204
Long -Term Liabilities:
Long-term debt, net of current maturities............................. - 1,628,497
Deferred tax liabilities.............................................. 76,479 76,479
------------------- -----------------
Total liabilities............................................. 10,400,539 7,462,180
Stockholders' Equity:
Preferred stock, 1,000,000 shares authorized and none
outstanding......................................................... - -
Common stock, $0.001 par value; 40,000,000 shares
authorized; 12,919,143 and 8,539,643 issued and outstanding
at September 30, 2000 and December 31, 1999, respectively........... 12,921 8,540
Additional paid-in capital............................................ 36,952,184 5,788,220
Deferred compensation................................................. (1,032,588) (1,284,374)
Accumulated deficit................................................... 196,662 (896,822)
------------------- -----------------
Total stockholders' equity.................................... 36,129,179 3,615,564
Total liabilities and stockholders' equity.................... $ 46,529,718 $ 11,077,744
=================== =================
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
For the Quarter For the Quarter For the Nine For the Nine
Ended Ended Months Ended Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Revenues.............................. $ 9,632,716 $ 5,505,964 $ 24,595,902 $ 13,683,058
Operating costs and expenses
Cost of revenues................... 1,401,940 959,948 3,623,549 2,311,534
Selling, general and administrative
expenses, excluding non-cash
compensation expense........... 5,805,848 3,344,036 16,524,409 8,663,464
Non-cash compensation expense...... 81,257 47,839 251,786 67,323
Depreciation and amortization...... 338,637 113,779 741,371 305,868
Research and development expense 525,564 240,107 1,513,261 465,650
------------------ ------------------ ------------------ ------------------
Total operating costs and
expenses................... 8,153,246 4,705,709 22,654,376 11,813,839
------------------ ------------------ ------------------ ------------------
Operating income.......................... 1,479,470 800,255 1,941,526 1,869,219
------------------ ------------------ ------------------ ------------------
Other income (expense):
Interest expense................... (11,476) (97,634) (316,114) (270,424)
Interest income.................... 137,209 3,159 184,740 7,434
Other.............................. (15,786) 35 21,985 1,786
------------------ ------------------ ------------------ ------------------
Total other income
(expense).................. 109,947 (94,440) (109,389) (261,204)
------------------ ------------------ ------------------ ------------------
Income before provision for
income taxes.......................... 1,589,417 705,815 1,832,137 1,608,015
Provision for income taxes................ (634,284) (293,197) (738,653) (670,291)
------------------ ------------------ ------------------ ------------------
Net income................................ $ 955,133 $ 412,618 $ 1,093,484 $ 937,724
================== ================== ================== ==================
Net income per common share:
Basic................................. $ 0.07 $ 0.05 $ 0.10 $ 0.12
================== ================== ================== ==================
Diluted............................... $ 0.07 $ 0.05 $ 0.09 $ 0.11
================== ================== ================== ==================
Weighted average common shares outstanding:
Basic................................. 12,919,143 7,981,248 10,449,247 7,981,248
Diluted............................... 14,554,541 8,848,269 12,052,730 8,848,269
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
-------------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,093,484 $ 937,724
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 741,371 305,868
Deferred tax benefit ................................. (373,000) -
Non-cash compensation expense......................... 251,786 67,323
Changes in assets and liabilities, net of acquired
assets and liabilities:
Accounts receivable................................. (2,906,942) (1,208,302)
Inventories......................................... (2,441,784) (386,039)
Samples and other prepaid expenses.................. (1,140,456) (146,979)
Notes receivable from related party................. - -
Accrued expenses.................................... 3,634,654 1,383,560
Accounts payable.................................... 669,645 312,824
-------------------------- -----------------------
Net cash (used in) provided by operating
activities..................................... (471,242) 1,265,979
Cash flows from investing activities:
Purchase of intangibles.................................... (16,508,990) (4,000,000)
Purchase of property and equipment......................... (335,273) (80,184)
-------------------------- -----------------------
Net cash (used in) investing activities........ (16,844,263) (4,080,184)
Cash flows from financing activities:
Revolving loan agreement payments.......................... (800,000) (152,927)
Principal payments on long-term debt....................... (2,461,700) (827,858)
Proceeds from long-term debt............................... - 4,000,000
Proceeds from issuance of common stock, net................ 31,168,345 -
-------------------------- -----------------------
Net cash provided by financing activities....... 27,906,645 3,019,215
Net change in cash and cash equivalents......................... 10,591,140 205,010
Cash and cash equivalents, beginning of period.................. 219,688 425,023
-------------------------- -----------------------
Cash and cash equivalents, end of period........................ $ 10,810,828 $ 630,033
========================== =======================
</TABLE>
3
<PAGE>
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) which management
considers necessary for fair presentation of the financial position, results of
operations and cash flows of the Company for the interim periods. Certain
footnote disclosures normally included in financial statements prepared
according to generally accepted accounting principles have been condensed or
omitted from the interim financial statements as permitted by the rules and
regulations of the Securities and Exchange Commission. Interim results are not
necessarily indicative of results for the full year. The interim results should
be read in conjunction with the financial statements and notes thereto included
in the Company's Registration Statement on Form S-1 (File No. 333-30764).
2. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Management believes that adopting SFAS No. 133 (as amended by SFAS
No. 138) on January 1, 2001, will not have a material impact on the Company's
financial condition or results of operations.
3. Inventories
Inventories are stated at the lower of cost or market and primarily
consists of purchased finished goods. Cost is determined using the first-in
first-out method.
4. Earnings Per Share
Below is the calculation of basic and diluted net income per share:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Year to Date Year to Date
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income..................... $ 955,133 $ 412,618 $ 1,093,484 $ 937,724
Weighted average shares
outstanding - basic.......... 12,919,143 7,981,248 10,449,247 7,981,248
Dilutive effect of stock
options...................... 1,635,398 867,021 1,603,483 867,021
--------------- --------------- -------------- --------------
Weighted average shares
outstanding - diluted........ 14,554,541 8,848,269 12,052,730 8,848,269
Basic earnings per share $ .07 $ .05 $ .10 $ .12
Diluted earnings per share $ .07 $ .05 $ .09 $ .11
</TABLE>
4
<PAGE>
5. Product Agreements
The Company entered into a patent license agreement with Jame Fine
Chemicals, Inc., a supplier of raw material for the drug Tanafed, effective
January 1, 2000. This agreement grants the Company a semi-exclusive license to
use, sell and distribute finished products containing an active ingredient used
in Tanafed. Pursuant to this agreement, the Company must pay a royalty on future
sales. The license continues through the life of the licensed patent which
expires in 2014.
On April 14, 2000, the Company acquired exclusive rights from
Warner-Lambert Company ("Warner-Lambert") to distribute, market and sell the
drug Ponstel in the U.S. for $9,500,000 in cash and a $3,500,000 promissory note
to the seller. The agreement includes the purchase of the licensing rights and
certain trademarks. The purchase price was preliminarily allocated among the
fair values of tangible and intangible assets and liabilities assumed, the
majority of which is being amortized over 20 years.
The Company negotiated with Warner-Lambert to continue to manufacture and
supply Ponstel to the Company through December 31, 2000 and is negotiating an
agreement with another manufacturer for the manufacturing of Ponstel subsequent
to December 31, 2000.
On June 22, 2000, the Company acquired exclusive rights to market,
distribute and sell the drug Cognex and a new unapproved version of Cognex
called Cognex CR, in the U.S. and other countries for $3,500,000 in cash. The
Company must also pay up to $1,500,000 in additional purchase price if the
Company obtains FDA approval to market Cognex CR. The purchase price was
preliminarily allocated among the fair values of tangible and intangible assets
and liabilities assumed, the majority of which is being amortized over 20 years.
The Company negotiated a supply agreement with a Warner-Lambert affiliate
to continue to manufacture and supply Cognex and the active ingredient in Cognex
for two years subject to a one year renewal.
In addition, the Company entered into a transition services agreement with
Warner-Lambert under which Warner-Lambert will provide transitional
administrative services to the Company until December 31, 2000 in connection
with the sale of Cognex in European countries. The Company is currently seeking
relationships with third parties to secure marketing, distribution and
administrative services in connection with sales of Cognex in Europe beginning
January 1, 2001.
On April 14, 2000, the Company entered into an amended credit facility with
LaSalle Bank that provided for bridge financing of up to $13,000,000 to finance
the Company's acquisitions. The Company borrowed $9,500,000 under this bridge
loan agreement for the acquisition of Ponstel. Borrowings under the bridge loan
bore an interest rate at the Company's choice of the prime rate or LIBOR plus
1.5%. Interest on the bridge loan became payable monthly on May 1, 2000. The
bridge loan matured, and was repaid, upon completion of the Company's initial
public offering on May 31, 2000.
6. Initial Public Offering
On May 31, 2000, the Company completed its initial public offering of
3,800,000 shares of common stock at a price of $8.00 per share. On June 5, 2000,
the Company received net proceeds of $28,272,000 pursuant to the offering. On
June 30, 2000, the Company's underwriters exercised an over-allotment option and
the Company sold an additional 570,000 shares of common stock at $8.00 per share
from which the Company received $4,240,800 in net proceeds. After deducting
offering expenses of $1,357,578, the Company received net proceeds of
$31,155,222 from its initial public offering. The proceeds were used to finance
product acquisitions, repay indebtedness and for general corporate purposes.
5
<PAGE>
7. Related Party Transactions
In connection with the $9,500,000 bridge loan discussed above, the Company
paid a fee of $16,848 to a Trust affiliated with John N. Kapoor, Ph.D., a
Director and the President and sole stockholder of the managing general partner
of the Company's majority stockholder, in return for the pledge of certain Trust
assets as collateral for the loan.
On May 3, 2000, the Company entered into an Amendment to the Collaboration
Agreement with Inpharmakon Corporation, a related party, to amend certain
payment terms under its existing Collaboration Agreement between Inpharmakon and
the Company relating to the Company's migraine product under development. Under
the amended agreement, the Company paid $200,000 to Inpharmakon on June 15,
2000. See "Item 2- Changes in Securities and Use of Proceeds."
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read with the financial statements and related
footnotes and Management's Discussion and Analysis of Results of Operations and
Financial Condition included in the Company's Registration Statement on Form S-1
(File No. 333-30764). The results discussed below are not necessarily indicative
of the results to be expected in any future periods. The following discussion
contains forward-looking statements that are subject to risks and uncertainties
which could cause actual results to differ from the statements made.
OVERVIEW
The Company currently markets and sells 13 brand name prescription drugs
through its nationwide sales and marketing force of 147 professionals. The
Company seeks to acquire and obtain licenses for pharmaceutical products that
other companies do not actively market and increase sales through aggressive
promotion and marketing. In addition, the Company seeks to increase the value of
existing products by developing new formulations, new delivery methods and
seeking new indications for existing products.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased $4,126,752, or 75%, over the quarter
ended September 30, 1999, to $9,632,716 for the quarter ended September 30,
2000. Net revenues increased $10,912,844, or 80%, over the nine month period
ended September 30, 1999, to $24,595,902 for the nine months ended September 30,
2000. Sales of continuing products for the quarter ended September 30, 2000
decreased $77,970, or 1%, compared to the quarter ending September 30, 1999.
Sales of continuing products increased $3,147,577, or 24%, over the nine months
ended September 30, 1999. Sales of a discontinued product were $81,889 and
$327,589 for the quarter and nine month period ended September 30, 1999,
respectively. The decrease in sales of continuing products for the quarter ended
September 30, 2000 was due to decreased sales of the Company's cough, cold and
allergy products. This aniticpated decrease was due to reduced promotion. The
company expects that sales of the cough, cold and allergy products will continue
to decline as more promotional emphasis is placed on the Company's key growth
drivers Nitrolingual Pumpspray, Ponstel, Robinul and Tanafed. The increase in
sales of continuing products for the nine month period was primarily due to
higher unit sales of Robinul and Tanafed. Sales of the Company's newly acquired
and licensed products Nitrolingual Pumpspray, Ponstel and Cognex were $4,286,611
for the quarter ended September 30, 2000 and $8,092,856 for the nine months
ended September 30, 2000. The Company began to sell Nitrolingual Pumpspray on
February 1, 2000 (under a license agreement entered into in 1999), Ponstel on
April 14, 2000 and Cognex on June 22, 2000.
Cost of Revenues. Cost of revenues increased $441,992 or 46%, to $1,401,940
for the quarter ended September 30, 2000 compared to $959,948 for the quarter
ended September 30, 1999. Cost of revenues increased $1,312,015 or 57%, to
$3,623,549 for the nine months ended September 30, 2000 compared to $2,311,534
for the nine months ended September 30, 1999.
Gross Margin. Gross margin for the quarter and nine months ended September
30, 2000 was 85% compared to 83% for the quarter and nine months ended September
30, 1999. This increase resulted primarily from increased sales of Robinul and
Robinul Forte, which have higher margins than the Company's other products, as
well as sales of the newly acquired Cognex and Ponstel products, which also have
higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2,461,812, or 74%, to $5,805,848 for the
quarter ended September 30, 2000. Selling, general and administrative expenses
increased $7,860,945, or 91%, to $16,524,409 for the nine months ended September
30, 2000. Selling related expenses increased due to expansion of the Company's
7
<PAGE>
sales force, higher commission expense due to increased sales, increased
marketing and promotional expenses due to promotional campaigns for new
products, increased sampling of the Company's products, increased training
expenses for new and existing sales representatives, and other market research
activities. Royalty expense increased due to increased sales of Robinul, Robinul
Forte and Zebutal and royalties on sales of Nitrolingual Pumpspray and Tanafed.
There was no comparable royalty expense on Tanafed sales in 1999. The Company
expects selling expenses to continue to increase for the remainder of 2000 due
to higher marketing and promotional expenses for Nitrolingual Pumpspray and
Ponstel and due to higher royalty and commission expense.
General and administrative expenses increased due to additions to the
Company's management team and support personnel in the Company's corporate
office, higher insurance costs due to increased insurance coverage and higher
professional fees related to the Company's SEC reporting requirements. In
addition, in March 2000, the Company engaged a consulting firm to make
recommendations on the alignment and optimization of its sales force and future
expansion possibilities. As a result, the Company has realigned its sales force
in order to increase its sales territory coverage area and to optimize the
efficiency of the Company's sales representatives.
Non-Cash Compensation. Non-cash compensation expense was $81,257 for the
quarter ended September 30, 2000 compared to $47,839 for the quarter ended
September 30, 1999. Non-cash compensation expense was $251,786 for the nine
months ended September 30, 2000 compared to $67,323 for the nine months ended
September 30, 1999. This increase resulted from the Company issuing stock
options at exercise prices that were lower than the market value of the
Company's stock at the time the options were issued, as determined by an
independent valuation.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $224,859 or 198% to $338,637 for the quarter ended September
30, 2000. Depreciation and amortization expense increased $435,503 or 142% to
$741,371 for the nine months ended September 30, 2000. This increase resulted
from higher amortization expense related to the acquisition of Robinul and
Robinul Forte in January 1999, Ponstel on April 14, 2000, Cognex on June 22,
2000 and increased depreciation expense for furniture, computer equipment and
leasehold improvements at the Company's corporate headquarters. Amortization
expense could further increase if the Company concludes any more product
acquisitions.
Research and Development Expense. Research and development expense
increased $285,457, or 119%, to $525,564 for the quarter ended September 30,
2000. Research and development expense increased $1,047,611, or 225%, to
$1,513,261 for the nine months ended September 30, 2000. This increase resulted
from continued development of FHPC 01, the Company's migraine product under
development, and the Robinul line extension. In addition, on May 3, 2000, the
Company amended the payment terms under its Collaboration Agreement with
Inpharmakon Corporation relating to the development of FHPC 01. Under the
amended terms, the Company paid a $200,000 fee to Inpharmakon upon completion of
the Company's initial public offering. The Company anticipates incurring
$500,000 of research and development expense for the remainder of 2000 and
$3,000,000 through 2002 in research and development cost for FHPC 01 relating to
conducting clinical trials, filing a new drug application and making milestone
payments under the Company's development agreements.
Interest Expense. Interest expense decreased $86,158, or 88%, to $11,476
for the quarter ended September 30, 2000 due to the company using proceeds from
its initial public offering to repay borrowings under the revolving credit
facility as well as the term note payable to LaSalle Bank related to the
acquisition of Robinul. Interest expense increased $45,690, or 17%, to $316,114
for the nine months ended September 30, 2000. This increase resulted from
borrowings under the bridge loan agreement with LaSalle Bank used for the
acquisition of Ponstel in April 2000, as well as higher average interest rates.
The Company currently does not have any long- term debt outstanding and
therefore expects interest expense to decrease. However, the Company could incur
significant interest expense in the future if it continues to acquire products
and finance the purchase of these products with debt.
Interest Income. Interest income was $137,209 for the quarter ended
September 30, 2000 compared to $3,159 for the quarter ended September 30, 1999.
Interest income was $184,740 for the nine months ended September 30, 2000
8
<PAGE>
compared to $7,434 for the nine months ended September 30, 1999. The increase
was the result of interest earned on the remaining proceeds from the Company's
initial public offering.
Provision for Income Taxes. Income taxes were provided for at a rate of
40.3% in 2000 compared to 41.7% in 1999. The decrease is primarily due to state
income tax structuring initiatives.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from debt service, working
capital requirements and funding of acquisitions. The Company has met these cash
requirements through cash from operations, proceeds from its line of credit,
borrowings for product acquisitions and the issuance of common stock.
The Company's cash and cash equivalents were $10,810,828 at September 30,
2000. Net cash used in operating activities for the nine months ended September
30, 2000 was $471,242. This use of cash was the result of increased purchases of
inventory primarily for Nitrolingual Pumpspray, increased accounts receivable
due to higher sales, and higher prepaid expenses. This use was partially offset
by increased accounts payable and accrued expenses, net income and non-cash
depreciation, amortization and compensation expense. The Company estimates that
its supply agreements with its manufacturers require that it purchase
approximately $1,400,000 of inventory during the remaining quarter of 2000. The
Company is negotiating an agreement win another manufacturer for the manufacture
of Ponstel subsequent to expiration of its manufacturing agreement with
Warner-Lambert on December 31, 2000. However, the Company believes that based on
the current level of inventory of Ponstel and the amount scheduled to be
delivered in the first quarter of 2001, that it will have enough inventory to
sell Ponstel through 2001. The Company expects to use significant cash for
operating activities in the future in connection with the development of FHPC
01. The Company expects to incur approximately $500,000 of research and
development expense through the last three months of 2000 and approximately
$3,000,000 through 2002.
Net cash used in investing activities for the nine months ended September
30, 2000 was $16,844,263. The Company purchased Ponstel on April 14, 2000 for
$9,500,000 in cash and an additional $3,500,000 financed by the seller. In
addition, the Company assumed liabilities for returned products shipped by the
seller prior to the acquisition. The Company purchased Cognex on June 22, 2000
for $3,500,000 in cash and assumed liabilities for returned products shipped by
the seller prior to the acquisition. Purchases of property and equipment were
$335,273 for the nine months ended September 30, 2000 primarily for computer
equipment and leasehold improvements at the Company's corporate headquarters.
Net cash provided by financing activities was $27,906,645 for the nine
months ended September 30, 2000. This source of cash was the result of the
Company's initial public offering and the exercise of stock options by former
employees that provided net proceeds of $31,168,345 offset by payment on the
revolving loan agreement of $800,000 and payment of long-term debt of
$2,461,700.
In May 1998, the Company entered into a credit facility with LaSalle Bank
National Association, which was subsequently amended to include a revolving
credit facility, a term loan and a bridge loan. The revolving loan is subject to
borrowing base limitations. The revolving credit facility provides for
borrowings up to $2,500,000 and bears interest at the bank's prime rate, and is
due May 2, 2001. At September 30, 2000, the Company had no outstanding balance
under the revolving credit facility.
In January 1999, the Company borrowed $2,400,000 under a term loan with
LaSalle Bank. The term loan bore an interest rate at the Company's choice of
either the bank's prime rate or LIBOR plus 2%. The term loan was payable in
monthly installments of $40,000 plus accrued interest and was due to mature on
May 2, 2001. On June 5, 2000, the outstanding balance of $1,640,000 payable
under the term loan was paid with proceeds from the Company's initial public
offering. On April 14, 2000, the credit facility was further amended to include
bridge financing of up to $13,000,000 to finance product acquisitions. On April
9
<PAGE>
14, 2000, the Company borrowed $9,500,000 under this bridge loan for its
purchase of Ponstel. Borrowings under the bridge loan bore interest at the
Company's choice of the bank's prime rate or LIBOR plus 1.5%. On June 5, 2000
the outstanding balance of $9,500,000 payable under the bridge loan was paid
with proceeds from the Company's initial public offering.
The Company's credit facility with LaSalle Bank is secured by the Company's
accounts receivable, inventories, equipment and intangible assets including the
Company's intellectual properties. Under the terms of the credit facility, the
Company must maintain a minimum net worth plus subordinated debt of $3,300,000
plus 75% of net income, a ratio of liabilities to net worth plus subordinated
debt of 2.25 to 1.00, a minimum specified EBITDA, and a fixed charge coverage
ratio ranging from .75 to 1.00 to 1.25 to 1.00. The credit facility also limits
the Company's ability to incur additional indebtedness, and prohibits
substantial asset sales and cash dividends. As of September 30, 2000, the
Company was in compliance with these covenants.
On April 14, 2000, the Company issued a promissory note to Warner-Lambert
evidencing $3,500,000 of the purchase price of Ponstel. This promissory note was
interest free. The Company paid this promissory note in full with proceeds from
the initial public offering.
The Company believes that its cash and cash equivalents, cash generated
from operations plus borrowings available under its credit facility with LaSalle
Bank will be adequate to fund its current working capital requirements for at
least the next 12 months. However, in the event that the Company makes
significant acquisitions in the future, it may be required to raise additional
funds through additional borrowings or the issuance of debt or equity
securities.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations discussion as well as information contained elsewhere in this
Report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements include
statements about the following:
o developing new formulations, new delivery methods and seeking new
indications for existing products;
o increases in selling expenses for Nitrolingual Pumpspray and Ponstel;
o concluding further product acquisitions;
o the Company's product development efforts for FHPC 01 and the Robinul
line extension;
o obtaining regulatory clearance for FHPC 01;
o future development expenses;
o capital expenditures;
o future inventory levels and purchases; and
o adequacy of capital resources.
When used in this Report, the Company intends the words "may", "believe,"
"anticipate," "planned," "expect," "require," "intend," and "depend" to identify
"forward-looking statements." The Company's forward-looking statements involve
uncertainties and other factors, including those described in the "Risk Factors"
section of the Company's Registration Statement on Form S-1 (File No. 333-30764)
under the headings "Our growth will suffer if we do not acquire rights to
additional products", "We may encounter problems in the manufacture of our
products that could limit our ability to sell our products", "The availability
of a previous version of our Nitrolingual product could reduce its sales", "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 have expended significant resources for no
return", "Our level of debt could reduce our growth", "We expect to require
additional funding and if we cannot obtain it, our sales, profits, acquisitions
and development projects could suffer" and " Pohl-Boskamp can terminate our
rights to Nitrolingual." These risk factors along with the others may cause
actual results, performance or achievements, to be different from that suggested
by the Company's forward-looking statements. You should not place undue reliance
on forward-looking statements. The Company does not intend to update any of
these factors or to publicly announce the results of any revisions to any of
these forward-looking statements.
10
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to fluctuations
from changes in foreign currency exchange rates and interest rates. The
Company's purchases of Nitrolingual Pumpspray under its agreement with
Pohl-Boskamp are made in German Deutsche marks. The Company expects to make
purchases several times per year under this agreement.
In addition, sales of Cognex are recognized in the foreign currencies of
the respective European countries in which it is sold. While the effect of
foreign currency translations has not been material to the Company's results of
operations to date, currency translations on export sales or import purchases
could be adversely affected in the future by the relationship of the U.S. dollar
with foreign currencies. To the extent that the Company borrows under its credit
facility with LaSalle Bank, it will experience market risk with respect to
changes in the general level of the interest rates and its effect upon the
Company's interest expense. Borrowings under the Company's credit facility with
LaSalle Bank bear interest at variable rates. Because such rates are variable,
an increase in interest rates will result in additional interest expense and a
reduction in interest rates will result in reduced interest expense.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement on form S-1 (File No. 333-30764)
relating to its initial public offering was declared effective on May 31, 2000.
The offering of 3,800,000 shares of common stock, $.001 par value, commenced on
May 31, 2000 and closed on June 5, 2000. All 3,800,000 of the shares registered
were sold at $8.00 per share for an aggregate price of $30,400,000 before
deducting underwriting discounts commissions and underwriting expenses. The
managing underwriters of the initial public offering were Chase Securities,
Inc., Banc of America Securities LLC, and Thomas Weisel Partners LLC (the
"Underwriters"). The Company deducted $2,128,000 in underwriting discounts and
commissions and $1,357,578 in offering expenses incurred through September 30,
2000. The Company received net proceeds of $26,914,422. On June 30, 2000, the
Underwriters exercised their over-allotment option, pursuant to which the
Company sold an additional 570,000 shares of common stock at $8.00 per share for
an aggregate price of $4,560,000 before deducting underwriting discounts and
commissions of $319,200. The Company received net proceeds of $4,240,800 from
the exercise of the over-allotment option. The total net proceeds to the Company
from its initial public offering including the exercise of the over-allotment
option was $31,155,222.
Through September 30, 2000, the Company used the proceeds from the initial
public offering to repay $9,500,000 due under the bridge loan with LaSalle Bank
which it borrowed to purchase Ponstel, $1,640,000 due under the term loan
facility with LaSalle Bank and $2,000,000 under the revolving loan facility with
LaSalle Bank. The Company also repaid $3,500,000 due under the promissory note
issued to Warner-Lambert for the purchase of Ponstel and $3,500,000 to
Warner-Lambert Company for the purchase of Cognex. The Company also paid a
$200,000 fee to Inpharmakon Corporation under the terms of the Amendment to the
Collaboration Agreement with Inpharmakon Corporation dated May 3, 2000.
The Company currently expects that the remaining proceeds will be used
primarily for working capital and general corporate purposes, including the
development of new products and for new product acquisitions.
None of the Company's offering expenses or net proceeds from the initial
public offering were paid directly or indirectly to any director, officer or
their associates, persons owning 10% or more of any class of the Company's
equity securities or to any affiliates of the Company except for the $200,000
fee paid under the Amendment to the Collaboration Agreement to Inpharmakon
Corporation and the $16,848 fee paid to the Kapoor Children's 1992 Trust in
consideration of its pledge of securities and investments in the amount of
$10,000,000 under the bridge loan with LaSalle Bank.
The John N. Kapoor Trust, dated September 30, 1989 (the "Trust") owns 50%
of the common stock of Inpharmakon Corporation. The Trust is a partner of
Kapoor-Pharma Investments, L.P., the Company's majority stockholder and John
Kapoor, Ph.D., the Trustee of the Trust is one of the Company's Directors and is
the President and sole stockholder of the managing general partner of
Kapoor-Pharma Investments, L.P. In addition, Mahendra Shah, Ph.D., the Company's
Chairman and Chief Executive Officer is a director of Inpharmakon Corporation
and owns options to purchase 25,000 shares of its common stock.
Dr. Kapoor is the husband of Edith Kapoor, the Trustee of the Kapoor
Children's 1992 Trust and their children are the beneficiaries.
12
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held September 8, 2000, John N.
Kapoor, Ph.D. was re-elected to the Company's Board of Directors as a Class A
Director. There were 10,506,329 votes for and 457,643 votes withheld, for Dr.
Kapoor. The Company's Class B Directors, Mahendra Shah Ph.D. and Jon S. Saxe and
the Class C Directors, R. Brent Dixon and Pierre Lapalme continue to serve on
the Board. The terms of the Class A, B and C Directors expire at the Annual
Meeting of Stockholders in fiscal year 2003, 2001 and 2002, respectively.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* - Restated Certificate of Incorporation
3.2* - Amended and Restated By-Laws
4.1* - Form of Stock Certificate
27 - Financial Data Schedule - September 30, 2000
(for SEC use only)
---------------------
* Incorporated by Reference from the Company's Registration
Statement on Form S-1 (File. No. 333-30764)
(b) The Registrant has not filed any reports on Form 8-K for the
quarter ended September 30, 2000.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 10, 2000.
FIRST HORIZON PHARMACEUTICAL CORPORATION
By:/s/ Mahendra G. Shah
-----------------------------------------
Mahendra G. Shah, Ph.D.
Chairman and Chief Executive Officer
By:/s/ Balaji Venkataraman
-----------------------------------------
Balaji Venkataraman
Vice President of Corporate Development
and Chief Financial Officer
(Principal Accounting and Financial Officer)
14