FIRST HORIZON PHARMACEUTICAL CORP - 10-Q Quarterly Report

FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)

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 ý No o

As of May 1, 2003, there were 34,927,754 shares of the Registrant's Common Stock outstanding.

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	1
	Consolidated Statements of Operations for the three months ended March 31, 2003 and March 31, 2002	2
	Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and March 31, 2002	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 2.	Changes in Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	19
	Signatures	21
	Certifications	22

First Horizon Pharmaceutical Corporation
Consolidated Balance Sheets
(unaudited, in thousands, except share data)

			March 31, 2003			December 31, 2002
ASSETS
Current Assets:
	Cash and cash equivalents		$	39,164		$	47,409
	Accounts receivable, net of allowance for doubtful accounts, discounts and contractual adjustments of $813 and $767 at March 31, 2003 and December 31, 2002, respectively			10,049			15,904
	Inventories			18,006			17,444
	Samples and other prepaid expenses			4,946			3,413
	Income taxes receivable			3,162			—
	Current deferred tax assets			9,053			6,647

		Total current assets		84,380			90,817
Property and equipment, net				1,674			1,607
Other Assets:
	Intangibles, net			256,415			260,441
	Other			213			67

		Total other assets		256,628			260,508
		Total assets	$	342,682		$	352,932

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable		$	8,629		$	9,603
	Accrued expenses			37,086			36,260

		Total current liabilities		45,715			45,863
Long-Term Liabilities:
	Deferred tax liabilities			1,580			1,221
	Other long-term liabilities			160			165

		Total liabilities		47,455			47,249
Stockholders' Equity:
	Preferred stock, 1,000,000 shares authorized and none outstanding			—			—
Common stock, $0.001 par value; 100,000,000 shares authorized; 34,696,254 and 35,436,629 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively				35			35
Additional paid-in capital				285,424			287,306
Deferred compensation				(120	)		(207	)
Retained earnings				9,820			18,499
Accumulated other comprehensive income				68			50

		Total stockholders' equity		295,227			305,683
		Total liabilities and stockholders' equity	$	342,682		$	352,932

The accompanying notes are an integral part of these consolidated financial statements.

First Horizon Pharmaceutical Corporation
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)

			For The Quarter Ended March 31,
			2003			2002
Net Revenues			$	12,494		$	27,120
Operating costs and expenses:
	Cost of revenues			4,088			4,296
	Selling, general and administrative expense			17,012			14,150
	Depreciation and amortization			4,123			2,197
	Research and development expense			888			315

		Total operating costs and expenses		26,111			20,958

Operating income (loss)				(13,617	)		6,162

Other (expense) income:
	Interest expense			(11	)		(1,414	)
	Interest income			129			190
	Other			10			—

		Total other (expense) income		128			(1,224	)

Income (loss) before provision for income taxes				(13,489	)		4,938
Benefit (provision) for income taxes				4,810			(1,901	)

Net income (loss)			$	(8,679	)	$	3,037

Other comprehensive income				18			—
Comprehensive income (loss)			$	(8,661	)	$	3,037

Net income (loss) per common share:
	Basic earnings (loss) per common share:		$	(0.25	)	$	0.11

	Diluted earnings (loss) per common share:		$	(0.25	)		0.11

Weighted average common shares outstanding:
	Basic			35,274			27,660

	Diluted			35,274			28,755

The accompanying notes are an integral part of these consolidated financial statements.

First Horizon Pharmaceutical Corporation
Consolidated Statements of Cash Flows
(unaudited, in thousands)

				For The Three Months Ended March 31,
				2003			2002
Cash flows from operating activities:
Net income (loss)				$	(8,679	)	$	3,037
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
	Depreciation and amortization				4,123			2,197
	Amortization of loan costs				—			856
	Deferred income tax benefit				(2,047	)		(434	)
	Non-cash compensation expense				87			87
	Reduction in taxes payable—stock option exercises				30			576
	Changes in assets and liabilities, net of acquired assets and liabilities:
		Accounts receivable			5,855			(2,224	)
		Inventories			(562	)		(744	)
		Samples and other prepaid expenses and other			(1,442	)		(1,274	)
		Income taxes receivable			(3,162	)		1,674
		Accrued expenses and other			821			4,436
		Accounts payable			(974	)		2,018

			Net cash (used in) provided by operating activities		(5,950	)		10,205
Cash flows from investing activities:
	Purchase of product licenses and other intangibles				—			(177,556	)
	Purchase of property and equipment				(164	)		(299	)

			Net cash used in investing activities		(164	)		(177,855	)
Cash flows from financing activities:
	Capitalized financing costs incurred				(236	)		(3,082	)
	Repurchase of common stock				(1,999	)		—
	Proceeds from long-term debt				—			137,000
	Net proceeds from issuance of common stock				86			1,340

			Net cash (used in) provided by financing activities		(2,149	)		135,258
Effect of foreign exchange rates on cash					18			—
Net change in cash and cash equivalents					(8,245	)		(32,392	)
Cash and cash equivalents, beginning of period					47,409			53,458

Cash and cash equivalents, end of period				$	39,164		$	21,066

Supplemental Cash Flow Information:
Cash paid for taxes				$	4,697		$	95

Cash paid for interest				$	—		$	559

The accompanying notes are an integral part of these consolidated financial statements.

FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited, in thousands except share and per share data)

The accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) which management considers necessary for fair presentation of the financial position, results of operations and cash flows of the Company for the interim periods. Certain footnote disclosures normally included in financial statements prepared according to generally accepted accounting principles have been condensed or omitted from these interim financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. Interim results are not necessarily indicative of results for the full year. The interim results should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-30123).

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The Company adopted SFAS No. 146 effective January 1, 2003. For the quarter ended March 31, 2003, there was no impact from adopting SFAS No. 146.

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Other." FIN 45 elaborates on disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on the Company's financial condition or results of operations. The disclosure requirements in FIN No. 45 are effective for all financial statements of periods ending after December 15, 2002 and the Company complied with the disclosure requirements. The Company adopted FIN No. 45 effective January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans and, effective December 15, 2002, adopted the disclosure provisions of SFAS No. 148.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin 51." The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which

business enterprise should consolidate the VIE. Additionally, FIN 46 requires additional disclosures for any Company with any interest in a VIE regarding the nature, purpose, size, and activities of the VIE and the Company's maximum exposure to loss as a result of its involvement with the VIE. The interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which the Company obtains an interest after that date. The adoption of this interpretation did not have a material impact on the Company's financial condition or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company's financial condition or results of operations.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for all stock options issued to employees. Accordingly, the Company records compensation expense for any stock option grants with exercise prices lower than fair value, recognized ratably over the vesting period.

Had compensation costs for the Company's options been determined using the Black Scholes option-pricing models prescribed by SFAS No. 123,"Accounting for Stock Based Compensation," the Company's pro forma net income (loss) per common share would have been reported as follows:

		Quarter ended March 31,
		2003			2002
Net income (loss) as reported		$	(8,679	)	$	3,037
Deduct: Total stock-based employee compensation expense determined under fair value based for all awards, net of related tax effects			(153	)		(48	)

Pro forma			(8,832	)		2,989

Net income (loss) per common share—basic:
	As reported		(0.25	)		0.11
	Pro—forma		(0.25	)		0.11
Net income (loss) per common share—diluted:
	As reported		(0.25	)		0.11
	Pro—forma		(0.25	)		0.10

The weighted average fair value per share of options granted during the three months ended March 31, 2003 and 2002 is estimated at $4.66 and $18.92, respectively. The value of options is estimated on the date of the grant using the following weighted average assumptions:

	2003	2002
Risk-free interest rate	2.10%	5.07%
Expected dividend yield	—	—
Expected lives	5 years	7 years
Expected volatility	165.4%	86.8%

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.

Inventories consist of purchased pharmaceutical products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method, and market is considered to be net realizable value. Inventories consist of finished product and bulk product awaiting processing and packaging into finished product. At March 31, 2003, the Company had an allowance for obsolete inventory of $3.9 million compared to $2.8 million at December 31, 2002. Inventories at March 31, 2003 and December 31, 2002 consisted of:

Samples primarily consist of product samples used in the sales and marketing efforts of the Company's products. Samples are expensed upon distribution, as a selling expense. At March 31, 2003, the Company had an allowance for obsolete sample inventory of $0.3 million compared to $0.0 million at December 31, 2002. Sample inventories at March 31, 2003 and December 31, 2002 were $1.7 million and $2.3 million, respectively.

Accrued expenses at March 31, 2003 and December 31, 2002 consist of the following:

In September 2002, the Company launched Tanafed DP and Tanafed DMX, line extensions to the Company's Tanafed Suspension and Tanafed DM products. These line extensions were launched in response to increasing competition by knock off products to Tanafed Suspension and Tanafed DM. Due to the launch of Tanafed DP and Tanafed DMX, the Company expected increased returns of Tanafed Suspension, as prescriptions were expected to be filled with the line extensions. The Company estimated returns of approximately $3.8 million and provided for this amount in September 2002. In April 2003, the Company decided to withdraw Tanafed Suspension and Tanafed DM from the market. The decision to withdraw Tanafed Suspension in April 2003 was earlier than planned. The Company also decided to withdraw Tanafed DM. As a result, the Company expects to incur an additional

$3.4 million in returns of Tanafed Suspension and Tanafed DM and has provided for this amount in the results of operations for the quarter ended March 31, 2003 as a deduction from revenue. The Company also provided for an additional $0.6 million for projected shipping cost related to the withdrawal of Tanafed Suspension and Tanafed DM recorded as selling expense.

In connection with the acquisition of rights for Robinul, Ponstel, Cognex, Prenate, Furadantin, and Sular the Company assumed certain liabilities for returns of product shipped by the seller prior to the acquisition date. At the acquisition date, the Company estimated the amount of the assumed liabilities based on actual sales return data from the seller and included that amount in the allocation of the total purchase price. The Company periodically reviews the estimated liability. Generally, no adjustment is made to the reserve until two or three years subsequent to the acquisition due to the lag time between when a product is sold and when it is returned. During the quarter ended March 31, 2003, the Company determined that the established reserves for Cognex were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.5 million for the quarter ended March 31, 2003.

	Quarter ended March 31,
	2003			2002
Net income (loss)	$	(8,679	)	$	3,037
Weighted average common shares outstanding— Basic		35,274			27,660
Dilutive effect of stock options		—			1,095

Weighted average common shares outstanding— Diluted		35,274			28,755
Basic net income (loss) per common share	$	(0.25	)	$	0.11

Diluted net income (loss) per common share	$	(0.25	)	$	0.11

For the quarter ended March 31, 2003, there were 484,309 potential common shares outstanding that were excluded from the diluted net (loss) per share calculation because their effect would have been anti-dilutive.

The following table reflects the components of intangible assets as of March 31, 2003:

	Gross Amount		Accumulated Amortization			Net Amount		Weighted Average Life
Licensing rights	$	244,415		(17,191	)	$	227,224	20 years
Trade names		11,060		(770	)		10,290	20 years
Contracts		8,300		(1,905	)		6,395	5 years
Supply/Distribution agreements		11,490		(1,775	)		9,715	1 to 10 years
Other intangibles		3,082		(291	)		2,791	20 years

Total	$	278,347	$	(21,932	)	$	256,415	19 years

For the three months ended March 31, 2003, amortization expense related to the intangible assets was $4.0 million. Amortization is calculated on a straight-line basis over the estimated useful life of the

intangible asset. Estimated annual amortization expense for each of the five succeeding fiscal years is as follows:

Fiscal year ended December 31:	Amount
2003	$	16,043
2004	$	15,870
2005	$	15,670
2006	$	15,567
2007	$	14,354

The Company operates in a single segment, the sale and marketing of prescription products.

On July 8, 2002, the Company announced a share buyback program. This program authorizes the repurchase of up to $8.0 million in common stock until July 5, 2003. For the three months ended March 31, 2003, the Company repurchased 807,000 shares of common stock at an aggregate cost of approximately $2.0 million. Through March 31, 2003, the Company had repurchased a total of 823,400 shares of common stock at an aggregate cost of approximately $2.1 million. These shares were retired.

On February 11, 2003 the Company entered into a Credit Agreement for a $20.0 million senior secured revolving credit facility with various lenders and LaSalle Bank National Association, as Administrative Agent. Borrowings may be used for working capital requirements and general corporate purposes. Borrowings are secured by substantially all of the Company's assets. Borrowings bear interest at the Company's option at the base rate in effect from time to time plus an applicable margin, or the Eurodollar rate plus an applicable margin. The applicable margin will vary dependent upon our leverage ratio in effect from time to time. The revolving facility matures on February 11, 2006. The revolving loan contains various covenants, including covenants relative to maintaining financial ratios and earnings levels, limitations on acquisitions, dispositions, mergers and capital expenditures, limitations on incurring additional indebtedness and a prohibition on payment of dividends and certain issuances of the Company's capital stock. As of March 31, 2003, the Company was not in compliance with certain financial covenants of the Credit Agreement. The Company is seeking a waiver for these covenant violations. Unless the Company obtains a waiver of these covenant violations, the Company will not have access to borrowings under this credit facility. As of March 31, 2003, there was no outstanding balance on the Credit Agreement. For the quarter ended March 31, 2003, there were no borrowings or repayments under the Credit Agreement.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read with the consolidated financial statements and related footnotes and Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-30123.) 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.

The Company is a specialty pharmaceutical company that markets and sells brand name prescription products. The Company focuses on the treatment of cardiovascular, obstetrical and gynecological, pediatric and gastroenterological conditions and disorders. The Company seeks to acquire or license pharmaceutical products that other companies do not actively market that have high sales growth potential, are promotion-sensitive and complement the Company's existing products. In addition, the Company seeks to develop new patentable formulations, use new delivery methods and seek regulatory approval for new indications for existing products. The Company may also acquire companies with complementary products or development pipelines as well as late stage development companies consistent with its therapeutic focus.

Net Revenues. Net revenues for the quarter ended March 31, 2003 were $12.5 million, as compared to $27.1 million for the quarter ended March 31, 2002. Net revenues decreased primarily as a result of the continued effort to reduce the levels of trade inventories for a majority of the Company's promoted products (including Sular, Nitrolingual Pumpspray, Tanafed DP, Prenate GT, Ponstel and Robinul) and a few of the Company's non-promoted products. Net revenues for the quarter ended March 31, 2003 includes an increase in net revenues of $0.5 million related to the reduction in the recorded liability for estimated future returns of Cognex and a decrease in net revenues of $3.4 million for an accrual for estimated future returns of the Tanafed Suspension and Tanafed DM products. Net revenues of existing products (namely all of the Company's products other than Sular, Tanafed DP and Tanafed DMX) decreased $17.4 million or 67% to $8.7 million for the quarter ended March 31, 2003, as compared to the quarter ended March 31, 2002. Net revenues for products acquired or launched after January 2002 were $6.7 million for the quarter ended March 31, 2003. The Company acquired Sular in March 2002. The Company launched the Tanafed line extensions, Tanafed DP and Tanafed DMX in September 2002.

According to IMS Health's National Prescription Audit Plus™ data, new prescriptions of Sular increased 5.1% and total prescriptions decreased 0.2%, for the quarter ended March 31, 2003, compared to the quarter ended December 31, 2002. According to IMS Health's National Prescription Audit Plus™ data, new prescriptions of Sular increased 3.4% and total prescriptions decreased 3.0%, for the quarter ended March 31, 2003, compared to the quarter ended March 31, 2002. The Company continued its effort to reduce the levels of trade inventories for Sular. Wholesalers who purchase Sular increased the levels of trade inventories significantly in October and November of 2002. Trade levels of inventory decreased by 38.1% from December 2002 to March 2003 (Source: IMS Health Pipeline report). Months on hand, defined as units on hand divided by monthly demand at the wholesalers were 3.0 months at March 31, 2003 compared to 4.1 months at December 31, 2003 (Source: IMS Health Pipeline report). The Company expects to continue to limit shipments of Sular in the second quarter of 2003 and possibly in future quarters in an effort to further reduce the levels of trade inventories. Net revenues of Sular for the quarter ending March 31, 2003 were approximately $2.1 million.

During March and April of 2003, the Company entered into agreements with two of its three largest wholesale customers which provide to the Company data about the levels of inventory on hand with the wholesalers. The Company believes that these agreements and the implementation of other measures will help the Company better manage the levels of trade inventories with wholesalers.

Net revenues from product sales of the promoted pediatric and OB/GYN franchise products (namely the Prenate line, the Tanafed line, and Ponstel), were approximately $8.4 million for the quarter ended March 31, 2003 compared to approximately $13.8 million for the quarter ended March 31, 2002. This decrease was primarily the result of lower unit sales of the Company's Prenate line.

Commencing in the second quarter of 2002, the Company began to experience significant erosion of sales of its Tanafed Suspension and Tanafed DM line of products due to increased competition from knock-off products resulting from pharmacists substituting such knock-off products for prescriptions of the Company's Tanafed Suspension and Tanafed DM line of products. In response to the knock-off products, the Company launched two line extensions, Tanafed DP and Tanafed DMX, in September 2002. In January 2003 the Company was issued a U.S. patent that contains claims which protect Tanafed DP and Tanafed DMX against knock-off products. According to IMS Health's NPA Plus7™ data, Tanafed DMX captured 87.8% of the weekly-dispensed new prescriptions for products including Tanafed DM, Tanafed DM knock-off products and Tanafed DMX for the week ending April 4, 2003. Over the same period, Tanafed DP captured 58.3% of the weekly-dispensed new prescriptions for products including Tanafed Suspension, Tanafed Suspension knock-off products and Tanafed DP according to IMS Health's NPA Plus7™ data. Total dispensed prescriptions of the Tanafed line increased 15.6% for the quarter ended March 31, 2003, compared to the quarter ended March 31, 2002 according to IMS Health's National Prescription Audit Plus™ data.

As a result of the launch of Tanafed DP and Tanafed DMX, the Company anticipated higher than normal returns of Tanafed Suspension. The Company estimated that additional returns would total approximately $3.8 million and recorded this amount as a deduction of revenue for the quarter ended September 30, 2002. In April 2003, the Company decided to withdraw Tanafed Suspension and Tanafed DM from the market. The decision to withdraw Tanafed Suspension in April 2003 was earlier than previously planned. Additionally, the Company decided to withdraw Tanafed DM as well. The Company expects that this withdrawal will result in $3.4 million of additional returns and has recorded this amount as a deduction of revenue in the first quarter of 2003. Additionally, the Company recorded $0.6 million in related shipping costs for those returns that has been recorded in selling, general and administrative expenses.

Total dispensed prescriptions of Prenate GT and Prenate Advance increased 4.2% for the quarter ended March 31, 2003 as compared to the quarter ended December 31, 2002. Total dispensed prescriptions of Prenate GT and Prenate Advance increased 33.4% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002. The substitution rates of Prenate GT, as measured by new dispensed prescriptions captured by Prenate GT and knock-off products, were 35.4% for the quarter ended December 31, 2002 and 37.8% for the quarter ended March 31, 2003 (Source: IMS Health's National Prescription Audit Plus™ data).

Primarily as a result of efforts to reduce the amount of trade inventories of the Prenate line, unit sales of the Prenate line were lower for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002. Also, due to an interruption in the supply of Prenate GT to the Company in the first quarter of 2003, the Prenate GT inventory on hand for most of the first quarter had an expiration date of six months or less. This adversely affected the Company's sales during the quarter. In May 2003, the Company received what it believes to be adequate supplies of Prenate GT to fill current and future demand, pending its next supply from its manufacturers There may, however, be a continuing impact on prescription patterns in future quarters.

According to IMS Health's National Prescription Audit Plus™ data, total prescriptions of the Company's Ponstel and Robinul products each decreased 2% and 4%, respectively, for the quarter ended March 31, 2003 as compared to the quarter ended December 31, 2002. Total prescriptions increased 2.3% for Ponstel and increased 11.0% for Robinul for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002.

The Company does not report independent market data on prescriptions of Nitrolingual Pumpspray because it believes such data does not capture prescriptions from some of the non-retail channels. Sales of Nitrolingual Pumpspray decreased 56% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, as a result of lower unit sales.

The Company is in discussion with its licensor and supplier of Nitrolingual Pumpspray concerning the licensor's dissatisfaction with the Company's performance in marketing and selling the product. While the Company believes it will be able to satisfactorily resolve concerns expressed by the licensor of this product line, the licensor could seek to negotiate changes to its business arrangements with the Company absent a satisfactory resolution of the licensor's ongoing concerns.

Subsequent to the first quarter of 2003, the Company launched the 60-dose version of Nitrolingual Pumpspray and will market the 60-dose bottle as a companion product to the currently marketed 200-dose bottle. While the Company will seek to use the launch of the 60-dose bottle to increase overall sales of Nitrolingual Pumpspray, the effect of this product launch may result in lower unit sales of the 200-dose bottle.

Net revenues of the Company's non-promoted products decreased 82% for the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002. The decline was primarily the result of lower unit sales for these brands and higher allowances for returns. The Company expects sales of these brands to continue to decline. For the year ended December 31, 2002, sales of non-promoted products represented less than 8% of the Company's total sales.

In connection with the acquisition of rights for Robinul, Ponstel, Cognex, Prenate, Furadantin and Sular the Company assumed certain liabilities for returns of product shipped by the seller prior to the acquisition date. At the respective acquisition dates, the Company estimated the amount of the assumed liabilities based on actual sales return data from the seller and included that amount in the allocation of the total purchase price. The Company periodically reviews the estimated liability. Generally, no adjustment is made to the reserve until two to three years subsequent to the acquisition due to the lag time between when a product is sold and when it is returned. During the first quarter of 2003 the Company determined that the established reserves for Cognex were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.5 million.

On February 27, 2003, the Company announced it would be implementing a reorganization plan that invests in sales growth while managing operating expenses. As a result of this reorganization, the Company may realign its sales force to expand its reach to physicians in an effort to increase prescriptions of its promoted products. In the past, sales force realignment has resulted in a temporary slowing of growth of the Company's promoted products. The Company has not completed its reorganization plan and cannot now determine the effect of such plan on its net revenues or operating expenses. However, such plan could have an adverse impact on the Company's financial condition, results of operations or cash flows.

Cost of Revenues. Cost of revenues for the quarter ended March 31, 2003 were $4.1 million compared to $4.3 million for the quarter ended March 31, 2002. Cost of revenues for the quarter ended March 31, 2003 includes an increased allowance for obsolete inventory of $1.3 million. This charge was primarily for the Company's non-promoted products and short dated Prenate GT

product. Costs of revenues for the quarter ended March 31, 2002 do not include a comparable allowance for obsolete inventory.

[MARK ONE]
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware (State of incorporation)		58-2004779 (I.R.S. Employer Identification Number)
6195 Shiloh Road, Alpharetta, Georgia (Address of principal executive offices)		30005 (Zip code)

	March 31, 2003		December 31, 2002
Bulk product	$	5,416	$	7,543
Finished product		12,590		9,901

	$	18,006	$	17,444

	March 31, 2003		December 31, 2002
Employee compensation and benefits	$	1,469	$	2,125
Product returns		8,497		7,560
Sales deductions		10,570		10,671
Tanafed accrual		8,668		4,656
Assumed liabilities—product acquisitions		2,566		3,665
Income taxes payable		—		4,266
Other		5,316		3,317

	$	37,086	$	36,260