Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[MARK ONE]

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

6195 Shiloh Road, Alpharetta, Georgia 30005
(Address of principal executive offices) (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 ý    No o

        Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý    No o

        As of October 21, 2004, there were 35,390,029 shares of the registrant's common stock outstanding.

FIRST HORIZON PHARMACEUTICAL CORPORATION
FORM 10-Q
INDEX

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

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

1

FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)

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

2

FIRST HORIZON PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

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

3

FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.

Basis of Presentation

        The accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting 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 accounting principles generally accepted in the United States of America 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, 2003 (File No. 000-30123).

2.

New Accounting Pronouncements

        In October 2004, the Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share" ("EITF 04-8"), which requires all shares that are contingently issuable under the Company's outstanding convertible notes to be considered outstanding for its diluted earnings per share computations, if dilutive, using the "if converted" method of accounting from the date of issuance. Currently these shares are only included in the diluted earnings per share computation if the Company's common stock price has reached certain conversion trigger prices. EITF 04-8 also requires the Company to retroactively restate its prior periods diluted earnings per share. EITF 04-8 is expected to be effective for periods ending after December 15, 2004. When adopted, EITF 04-8 will have no impact on the Company's diluted earnings per share for the three and nine months ended September 30, 2003 but it will reduce the Company's diluted earnings per share by $0.02 for the three months ended September 30, 2004 and by $0.04 for the nine months ended September 30, 2004.

        In March 2004, the EITF reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost method or the equity method. The application of this guidance should be used to determine when an investment is considered impaired, whether an impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance for evaluating whether an investment is other-than-temporarily impaired is effective for evaluations made in reporting periods beginning after June 15, 2004. The application of this consensus did not have a material impact on the Company's results of operations or financial position.

        In March 2004, the FASB issued a proposed standard entitled "Share-Based Payment—An Amendment of FAS Nos. 123 and 95." The proposed rules will eliminate the disclosure-only election under FAS 123 and require the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant. The FASB currently expects to issue a final standard in late 2004, which is slated to be effective for the third quarter 2005 for the Company. See Note 3 for the quarterly disclosures of the pro forma dilutive

4

impact on net income and earnings per share of expensing stock options based on the Black-Scholes model.

        The FASB's proposal advocates using a binomial (lattice-based) option pricing model rather than the Black-Scholes model the Company currently uses to determine grant date fair value. The Company has not yet determined what, if any, impact using the recommended binomial model will have on the Company's estimated net income and earnings per share dilution compared to the Black-Scholes model.

        During December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB No. 104"), which supercedes SAB No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). While the wording of SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by SAB No. 104. The issuance of SAB No. 104 did not impact the Company's accounting policy for revenue recognition.

        During December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106" ("SFAS No. 132"). SFAS No. 132 revises disclosure requirements about pension plans and other postretirement benefit plans. SFAS No. 132 does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. In addition, the various elements of pension and other postretirement benefit costs must be disclosed on a quarterly basis. The annual disclosure provisions of SFAS No. 132 generally are effective for fiscal years ending after December 15, 2003, while the interim disclosure provisions are effective for interim periods beginning after December 15, 2003. The adoption of SFAS No. 132 did not have a material impact on the Company's financial condition or results of operations.

3.

Stock Options

        The Company applies Accounting Principal 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 stock options been determined using the Black Scholes option-pricing models prescribed by SFAS No. 123, "Accounting for Stock Based Compensation," the

5

Company's pro forma net income (loss) per common share would have been reported as follows (in thousands, except per share data):

        The weighted average fair value per share of stock options granted during the nine months ended September 30, 2004 and 2003 is estimated at $14.72 and $4.88, respectively. The value of the stock options is estimated on the date of the grant using the following weighted average assumptions:

        The Black-Scholes option valuation model was not developed for use in valuing employee stock options. Instead, this model was developed for use in estimating the fair value of traded options, which have no vesting restrictions, and are fully transferable, which differ significantly from the Company's stock option awards. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected survival rates of the options.

4.

Reclassifications

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

5.

Marketable Securities

        The Company classifies its existing marketable securities as available-for-sale. All available-for-sale securities are considered current, as the Company has the ability to use them for current operating and investing purposes. There were no realized gains or losses in the three or nine months ended September 30, 2004. At September 30, 2004, the Company had total net unrealized losses from marketable securities of $1.0 million.

6

        The carrying amount of available-for-sale securities and their approximate fair values at September 30, 2004 were as follows (in thousands):

6.

Inventories

        Inventories consist of purchased pharmaceutical products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method, and market is considered to be net realizable value. Inventories consist of finished product and bulk product awaiting processing and packaging into finished product. At September 30, 2004, the Company had an allowance for excess and obsolete inventory of $1.7 million compared to $2.4 million at December 31, 2003. Inventories at September 30, 2004 and December 31, 2003 consisted of (in thousands):

7.

Samples

        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. Sample inventories at September 30, 2004 and December 31, 2003 were $1.3 million and $0.8 million, respectively, and are included in other current assets.

8.

Other Assets

        Other assets at September 30, 2004 and December 31, 2004 consist of the following (in thousands):

        During the second quarter of 2004, the Company announced an agreement with SkyePharma PLC granting the Company the exclusive license to market and distribute a cardiovascular product in the United States. The agreement requires the Company to pay $5.0 million to SkyePharma PLC upon signing the agreement and up to an additional $15.0 million is payable thereafter—all of which are contingent upon milestones related to the U.S. Food and Drug Administration ("FDA") approval. The product has been submitted to the FDA for approval, which the Company expects to receive by the end of 2004. The Company intends to begin marketing and distribution shortly after receipt of the FDA approval.

7

9.

Accrued Expenses

        Accrued expenses at September 30, 2004 and December 31, 2003 consist of the following (in thousands):

10.

Earnings Per Share

        Below is the calculation of basic and diluted net income (loss) per share (in thousands except per share data):