SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number
0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
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(Registrant's Telephone Number,
Including Area Code)
301 South State Street, Newtown, PA 18940
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of June 30, 1999:
Class Number of Shares
--------------------------- ---------------------------
Common Stock $.01 par value 8,589,704
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION............................................ 1
Item 1. Financial Statements....................................... 1
Condensed Consolidated Balance Sheets as of December
31, 1998 and June 30, 1999 (unaudited)................. 2
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 1998 and 1999
(unaudited)............................................ 3
Condensed Consolidated Statements of Operations for
the Six Months Ended June 30, 1998 and 1999
(unaudited)............................................ 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1998 and 1999
(unaudited)............................................ 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Results of Operations...................................... 10
Liquidity and Capital Resources............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 15
PART II. OTHER INFORMATION................................................ 16
Item 2. Changes in Securities...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........ 16
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 18
SIGNATURES................................................................ 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- 1 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1998 and June 30, 1999
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
------------ ---------
(unaudited)
(dollars in thousands,
except per share data)
Current assets:
Cash and cash equivalents .......................... $ 3,286 $ 21,640
Short term investments ............................. 6,964 --
Accounts receivable, net of allowance of $293
and $337 in 1998 and 1999, respectively ........... 3,045 1,036
Inventories ........................................ 342 634
Prepaid expenses and other current assets .......... 823 736
-------- --------
Total current assets ........................... 14,460 24,046
Equipment, net ....................................... 267 613
Other assets ......................................... 13 39
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Total assets ................................... $ 14,740 $ 24,698
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable .................... $ -- $ 65
Accounts payable ................................... 2,914 2,870
Accrued expenses ................................... 2,545 3,008
-------- --------
Total current liabilities ...................... 5,459 5,943
-------- --------
Note payable, less current portion.................... -- 143
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized; no shares and
200,000 shares of Series D Cumulative
Convertible Preferred Stock, $0.01 par value,
issued and outstanding in 1998 and 1999,
respectively ...................................... -- 2
Common stock, $0.01 par value, 25,000,000 shares
authorized; 8,587,204 and 8,589,704 shares
issued and outstanding in 1998 and 1999,
respectively (liquidation value of $20,235,000
at June 30, 1999).................................. 86 86
Additional paid in capital ......................... 47,317 65,840
Deferred compensation .............................. (194) (135)
Accumulated deficit ................................ (37,928) (47,181)
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Stockholders' equity ........................... 9,281 18,612
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Commitments
Total liabilities and stockholders' equity ..... $ 14,740 $ 24,698
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 1998 and 1999
(unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1999
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(dollars in thousands,
except per share data)
Revenues:
Product sales................................. $ -- $ 3,210
Contract revenues............................. 4 128
License revenues.............................. -- 100
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Total revenues............................ 4 3,438
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Operating expenses:
Cost of product sales......................... -- 710
Research and development...................... 1,320 1,291
Selling, general and administrative........... 1,474 5,677
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Total operating expenses.................. 2,794 7,678
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Operating loss............................ 2,790 4,240
Other income (expense):
Interest income................................. 270 245
Interest expense................................ -- (145)
Other income (expense).......................... 1 (2)
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Net loss.................................. $ (2,519) $ (4,142)
========== =========
Preferred stock dividend........................ -- 235
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Net loss allocable to common stockholders....... (2,519) (4,377)
========= =========
Net loss per share allocable to common
stockholders:
Basic and Diluted............................. $ (0.29) $ (0.51)
========= =========
Shares used in computing net loss per share
allocable to common stockholders:
Basic and Diluted............................. 8,574,115 8,589,704
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 1998 and 1999
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
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(dollars in thousands,
except per share data)
Revenues:
Product sales................................. $ -- $ 5,620
Contract revenues............................. 7 136
License revenues.............................. -- 100
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Total revenues............................ 7 5,856
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Operating expenses:
Cost of product sales......................... -- 1,253
Research and development...................... 2,271 2,229
Selling, general and administrative........... 2,936 11,772
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Total operating expenses.................. 5,207 15,254
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Operating loss............................ 5,200 9,398
Other income (expense):
Interest income................................. 573 359
Interest expense................................ -- (189)
Other income (expense).......................... 1 (2)
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Net loss.................................. $ (4,626) $ (9,230)
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Preferred stock dividend........................ -- 235
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Net loss allocable to common stockholders....... (4,626) (9,465)
========= =========
Net loss per share allocable to common
stockholders:
Basic and Diluted............................. $ (0.54) $ (1.10)
========= =========
Shares used in computing net loss per share
allocable to common stockholders:
Basic and Diluted............................. 8,571,139 8,589,371
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
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(dollars in thousands)
Cash flows from operating activities:
Net loss ............................................. $ (4,626) $ (9,230)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash compensation expense ...................... 61 58
Depreciation and amortization expense ............. 18 66
Change in assets and liabilities:
Decrease in accounts receivable .................. -- 2,009
Increase in inventories .......................... -- (292)
(Increase) decrease in prepaid expenses and
other assets ................................... (241) 61
Increase (decrease) in accounts payable .......... 242 (44)
Increase (decrease) in accrued expenses .......... (112) 463
-------- --------
Net cash used in operating activities ...... (4,658) (6,909)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (13) (412)
Proceeds from the sale of short term investments ..... 5,389 7,464
Purchase of short term investments ................... (2,493) (500)
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Net cash provided by investing activities... 2,883 6,552
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Cash flows from financing activities:
Proceeds from the issuance of convertible note
payable............................................. -- 10,000
Repayment of convertible note payable................. -- (10,000)
Proceeds from the issuance of preferred stock ........ -- 18,500
Proceeds from the issuance of common stock ........... 16 3
Proceeds from the issuance of note payable ........... -- 219
Payments on note payable ............................. -- (11)
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Net cash provided by financing activities... 16 18,711
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Net increase (decrease) in cash and cash equivalents ... (1,759) 18,354
Cash and cash equivalents at beginning of period ....... 16,379 3,286
-------- --------
Cash and cash equivalents at end of period ............. $ 14,620 $ 21,640
======== ========
Supplemental schedule of non-cash financing
activities:
Common stock dividend declared on Series D
Cumulative Convertible Preferred Stock .............. -- 235
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's 1998 audited consolidated financial
statements and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly its financial position as of June 30, 1999, its results of
operations for the three and six months ended June 30, 1998 and 1999, and its
cash flows for the six months ended June 30, 1998 and 1999. Interim results are
not necessarily indicative of results anticipated for the full fiscal year.
Certain amounts in the 1998 unaudited condensed consolidated financial
statements have been reclassified to conform to the current year presentation.
NOTE 2 -- EQUITY FINANCING AND SENIOR SECURED CONVERTIBLE NOTE:
On May 12, 1999, the Company consummated a $20.0 million financing (the
"Financing") through the issuance of its Series D Cumulative Convertible
Preferred Stock (the "Preferred Stock"), which generated net proceeds to the
Company of $18.5 million. OCM Principal Opportunities Fund, L.P. ("OCM") led the
investor group, which also included certain current stockholders of the Company.
The issuance of the Preferred Stock was approved by a majority of the
Company's stockholders at the Company's Annual Meeting of Stockholders on May
11, 1999. A portion of the proceeds of the Financing were used for the repayment
of a $10.0 million Senior Secured Convertible Note provided by OCM on March 19,
1999 in connection with the Financing. The remaining proceeds will be used for
general working capital purposes.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(UNAUDITED)
(CONTINUED)
The Preferred Stock is convertible at any time into shares of Common Stock
of the Company at an initial conversion price of $11.00 per common share. The
conversion price of the Preferred Stock is subject to adjustment in certain
circumstances including, but not limited to, the failure of the Company to
declare and pay dividends when due or the issuance of new equity securities or
convertible securities by the Company at a price per share or having a
conversion price per share lower than the then applicable conversion price of
the Preferred Stock.
During the first three years following issuance, holders of the Preferred
Stock will be entitled to receive dividends payable in shares of fully
registered Common Stock at a rate of 8.4% per annum. Thereafter, dividends will
be payable in cash at a rate of 8.0% per annum.
The holders of the Preferred Stock are entitled to vote with the holders
of the Company's Common Stock on all matters to be voted on by the Company's
stockholders on an as-converted to Common Stock basis, subject to adjustment.
Without written approval of a majority of the holders of record of the
Preferred Stock, the Company, among other things, shall not: (i) declare or pay
any dividend or distribution on any shares of capital stock of the Company other
than dividends on the Preferred Stock; (ii) make any loans, incur any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments in any person, issue or sell any securities or warrants or other
rights to acquire debt securities of the Company, except that the Company may
incur such indebtedness in any amount not to exceed $10.0 million in the
aggregate outstanding at any time for working capital requirements in the
ordinary course of business; or (iii) make research and development expenditures
in excess of $7.0 million in any continuous twelve month period, unless the
Company has reported positive net income for four consecutive quarters
immediately prior to such twelve month period.
In connection with the issuance of the Preferred Stock, the rights of the
holders of the Company's Common Stock may be limited to certain instances with
respect to dividend rights, rights on liquidation, winding up and dissolution of
the Company, and the right to vote in connection with certain matters submitted
to the Company's stockholders.
NOTE 3 -- NOTE PAYABLE:
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
offices in Newtown, Pennsylvania. The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(UNAUDITED)
(CONTINUED)
interest. The note is secured by a third party irrevocable standby letter of
credit for an amount not less than 90% of the financed property.
NOTE 4 -- STOCK OPTION PLAN:
The stockholders of the Company approved a proposal to amend the Company's
1996 Stock Option Plan to increase the maximum aggregate number of shares of
Common Stock available for issuance thereunder from 750,000 to 1,500,000 shares
and to reserve an additional 750,000 shares of Common Stock of the Company for
issuance in connection with awards granted under the 1996 Stock Option Plan.
- 8 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. (the "Company") is a specialty
pharmaceutical company focused on providing innovative medical therapies to the
dental market. The Company's first product, Periostat, is a prescription
pharmaceutical capsule that was approved by the United States Food and Drug
Administration (the "FDA") in September 1998 as an adjunct to scaling and root
planing, the most prevalent therapy for periodontitis, to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis. The
Company is marketing Periostat to the dental community through its own
professional dental pharmaceutical sales force of approximately 130 sales
representatives and managers. This sales force also co-promotes Denavir(R), a
prescription cold sore medication developed by SmithKline Beecham, and the
Company is actively pursuing other prescription products to market to the dental
community.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to contract
its research and development activities as well as manufacturing and
distribution.
The Company has incurred losses each year since inception and had an
accumulated deficit of $47.2 million at June 30, 1999. The Company expects to
continue to incur losses in the near future from expenditures on sales,
marketing, manufacturing, drug development and administrative activities.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's business of selling, marketing
and developing pharmaceutical products is subject to a number of significant
risks, including risks relating to the implementation of the Company's sales and
marketing plans for Periostat, risks inherent in research and development
activities, risks associated with conducting business in a highly regulated
environment, risks relating to the Company's Year 2000 compliance and the Year
2000 compliance of the Company's vendors, suppliers, manufacturers,
distributors, marketing partners and certain other parties and uncertainty
relating to clinical trials of products under development. The success of the
Company depends to a large degree upon the market acceptance of Periostat
- 9 -
by periodontists, dental practitioners, other health care providers, patients
and insurance companies. In addition, there can be no assurance that any of the
Company's product candidates (other than the FDA's approval of Periostat in the
United States, as set forth above) will be approved by any regulatory authority
for marketing in any jurisdiction or, if approved, that any such products will
be successfully commercialized by the Company. The Company's actual results may
differ materially from the results discussed in the forward-looking statements
contained herein.
RESULTS OF OPERATIONS
From its founding through the quarter ended September 30, 1998, the
Company had no revenues from sales of its own products. During the fourth
quarter of 1998, the Company achieved net product sales of $3.1 million
following the commercial launch of Periostat in November 1998. Most of these
sales represented wholesale and retail stocking under introductory market launch
terms. During the three months ended March 31, 1999 and the three months ended
June 30, 1999, the Company achieved net product sales of $2.4 million and $3.2
million, respectively, from the marketing of Periostat. The Company realized a
net loss during the first six months of 1999, resulting primarily from sales and
marketing expenses incurred during such period. Total operating expenses consist
of the cost of product sales, research and development expenses and selling,
general and administrative expenses. Cost of product sales consists primarily of
direct manufacturing expenses and royalties. Research and development expenses
consist primarily of payments to third parties, including contract research
organizations, universities and clinical investigators, for services and
materials for research, drug development and clinical trials. Selling, general
and administrative expenses consist primarily of personnel salaries and
benefits, direct marketing costs, professional and consulting fees, insurance
and general office expenses.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues increased to $3.4 million in the second quarter
of 1999 from $4,000 in the second quarter of 1998. Revenues for the second
quarter of 1999 included $3.2 million in net sales of Periostat, $128,000 in
contract revenues and $100,000 in license revenues. Revenues for the three
months ended June 30, 1998 were derived solely from contract revenues. There
were no product sales or license revenues for the three months ended June 30,
1998.
COST OF PRODUCT SALES. Cost of product sales were $710,000 for the three
months ended June 30, 1999, while there were no cost of product sales for the
three months ended June 30, 1998. Such increase resulted from the Company's
sales of Periostat, which did not commence until November 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 2.0% to $1.29 million in the second quarter of 1999 from $1.32 million
in the second quarter of 1998. This decrease resulted primarily from a shift in
the Company's research and development expenditures from the FDA approval
process relating to Periostat to manufacturing and formulation development for
Periostat.
- 10 -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 285% to $5.7 million in the second quarter of
1999 from $1.5 million in the second quarter of 1998. This increase was due
primarily to the Company's post-launch marketing activities related to Periostat
and the hiring of additional sales personnel.
OTHER INCOME/EXPENSE. Interest income decreased to $245,000 during the
three months ended June 30, 1999 from $270,000 during the three months ended
June 30, 1998. This decrease was a function of the cash and short-term
investments on hand during the quarter. Interest expense was $145,000 for the
three months ended June 30, 1999 primarily due to the interest on the $10.0
million short term convertible note executed by the Company in March 1999. There
was no interest expense during the three months ended June 30, 1998, as there
was no debt then outstanding.
PREFERRED STOCK DIVIDEND. Preferred stock dividends increased $235,000
during the three months ended June 30, 1999 as a result of the Company's
obligations in connection with the issuance of its Preferred Stock (as
hereinafter defined) in May 1999. No dividends were declared during the three
months ended June 30, 1998 as no shares of Preferred Stock were outstanding
during that period.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues increased to $5.9 million for the six months
ended June 30, 1999 from $7,000 in the first six months of 1998. Revenues for
the first six months of 1999 included $5.6 million in net sales of Periostat,
$136,000 in contract revenues and $100,000 in license revenues. Revenues for the
six months ended June 30, 1998 were derived solely from contract revenues. There
were no product sales or license revenues for the six months ended June 30,
1998.
COST OF PRODUCT SALES. Cost of product sales were $1.25 million for the
six months ended June 30, 1999, while there were no cost of product sales for
the six months ended June 30, 1998. Such increase resulted from the Company's
sales of Periostat, which did not commence until November 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 2.0% to $2.2 million for the six months ended June 30, 1999 from $2.3
million in the first six months of 1998. This decrease resulted primarily from a
shift in the Company's research and development expenditures from the FDA
approval process relating to Periostat to manufacturing and formulation
development for Periostat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 301% to $11.8 million for the six months ended
June 30, 1999 from $2.9 million in the first six months of 1998. This increase
was due primarily to the Company's post-launch marketing activities related to
Periostat and the hiring of additional sales personnel.
OTHER INCOME/EXPENSE. Interest income decreased to $359,000 during the six
months ended June 30, 1999 from $573,000 during the six months ended June 30,
1998. This decrease
- 11 -
was a function of the cash and short-term investments on hand during the
quarter. Interest expense was $189,000 for the six months ended June 30, 1999
primarily due to the interest on the $10.0 million short term convertible note
executed by the Company in March 1999. There was no interest expense during the
six months ended June 30, 1998, as there was no debt then outstanding.
PREFERRED STOCK DIVIDEND. Preferred stock dividends increased $235,000
during the six months ended June 30, 1999 as a result of the Company's
obligations in connection with the issuance of its Preferred Stock (as
hereinafter defined) in May 1999. No dividends were declared during the six
months ended June 30, 1998 as no shares of Preferred Stock were outstanding
during that period.
LIQUIDITY AND CAPITAL RESOURCES
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On May 12, 1999, the
Company consummated a $20.0 million financing (the "Financing") through the
issuance of its Series D Cumulative Convertible Preferred Stock (the "Preferred
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Preferred Stock was approved by a majority of the Company's
stockholders at the Company's Annual Meeting of Stockholders on May 11, 1999. A
portion of the proceeds of such Financing were used to repay a $10.0 million
Senior Secured Convertible Note provided by one of the investors on March 19,
1999 in connection with the Financing. The remaining proceeds will be used for
general working capital purposes. The Preferred Stock is convertible at any time
into shares of Common Stock of the Company at an initial conversion price of
$11.00 per common share. The conversion price is not subject to reset except in
the event that the Company should fail to declare and pay dividends when due or
the Company should issue new equity securities or convertible securities at a
price per share or having a conversion price per share lower than the then
applicable conversion price of the Preferred Stock. During the first three years
following issuance, holders of the Preferred Stock will be entitled to receive
dividends payable in shares of fully registered Common Stock at a rate of 8.4%
per annum. Thereafter, dividends will be payable in cash at a rate of 8.0% per
annum. At June 30, 1999, the Company had cash, cash equivalents and short-term
investments of approximately $21.6 million, an increase of $11.3 million from
the $10.3 million balance at December 31, 1998.
In accordance with investment guidelines approved by the Company's Board
of Directors, cash balances in excess of those required to fund operations have
been invested in short-term United States Treasury securities and commercial
paper with a credit rating no lower than A1/P1. The Company's working capital at
June 30, 1999 was $18.1 million, an increase of $9.1 million from December 31,
1998. This increase was primarily attributable to the Financing, offset in part
by cash loss from operations incurred during the first six months of 1999.
- 12 -
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
offices in Newtown, Pennsylvania. The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest. The note is
secured by a third party irrevocable standby letter of credit for an amount not
less than 90% of the financed property. On June 26, 1997, the Company entered
into a credit arrangement consisting of a $5.0 million line of credit (the
"LOC") to support the future working capital needs of the Company. The LOC will
be unsecured as long as the Company's cash and investment balances maintained
with the lender or an affiliate of the lender equal or exceed $10.0 million. At
the Company's option, the LOC will bear interest at either the prime rate
charged by the lender or LIBOR plus 2.15%. The LOC is terminable by the lender
at any time. No balance was outstanding under the LOC at June 30, 1999.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least mid-year 2000. The
Company's future capital requirements and the adequacy of its available funds
will depend on many factors, including, the size and scope of the Company's
marketing effort and sales of Periostat, the terms of agreements entered into
with corporate partners, if any, and the results of research and development and
pre-clinical and clinical studies for other applications of the Company's core
technology. Over the long-term, the Company's liquidity is dependent on market
acceptance of its products and technology.
YEAR 2000 ISSUES
ASSESSMENT
The Company believes its exposure to Year 2000 problems lies primarily in
two areas: (i) its own internal operating systems; and (ii) Year 2000 compliance
by third parties with whom the Company has a material relationship. The Company
has completed an assessment of its principal internal systems. However, the
Company is continuing to assess its Year 2000 exposure with respect to third
parties. While the costs of these assessment efforts are not expected to be
material to the Company's financial condition or any year's results of
operations, there can be no assurance that this will be the case.
INTERNAL OPERATING SYSTEMS
The Company believes that its principal internal systems are Year 2000
compliant. The Company recently installed upgraded versions of its internal
accounting, management and financial reporting applications which the vendor has
represented are Year 2000 compliant. Some of the Company's non-critical
applications, however, may not be Year 2000 compliant. The Company is conducting
a program to identify and resolve any such exposure. Although the costs related
to these efforts are not expected to be material to the Company's business,
financial condition or results of operations, no assurance can be made that this
will be the case.
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THIRD-PARTY RELATIONSHIPS
The Company is conducting a program to identify and resolve Year 2000
exposure from third parties. The Company is presently conducting inquiries of
its outside vendors, suppliers, manufacturers, distributors and marketing
partners to assess their Year 2000 readiness. Any failure of third parties with
whom the Company has a material relationship to resolve Year 2000 problems in a
timely manner could materially adversely affect the Company's business,
financial condition or results of operations.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect the Company's business, financial condition or
results of operations. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting it have
been identified or will be corrected. Further, the Company cannot accurately
predict how many failures related to the Year 2000 problem will occur or the
severity, duration or financial consequences of such failures. As a result, the
Company expects that it could possibly suffer the following consequences:
o A significant number of operational inconveniences and
inefficiencies for the Company and the Company's customers that may
divert the Company's time and attention and financial and human
resources from the Company's ordinary business activities; and
o A lesser number of serious system failures (whether the Company's
systems or those of its vendors, suppliers, manufacturers,
distributors and marketing partners) that may require significant
efforts by the Company, its customers or third parties to prevent or
alleviate material business disruptions.
COSTS
Other than time spent by the Company's own personnel, to date the Company
has not incurred any significant costs in identifying and remediating Year 2000
problems.
THE COMPANY'S CONTINGENCY PLANS
The Company believes its plans for addressing the Year 2000 problem are
adequate. The Company does not believe it will incur a material financial impact
from system failures, or from the costs associated with assessing and addressing
the risks of failure, arising from the Year 2000 problem. Consequently, the
Company does not intend to create a detailed contingency plan. In the event that
the Company does not adequately identify and resolve its Year 2000 issues, the
absence of a detailed contingency plan may materially adversely affect its
business, financial condition and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.
-15-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On May 12, 1999, the Company consummated a $20.0 million financing (the
"Financing") through the issuance of its Series D Cumulative Convertible
Preferred Stock representing 21.2% of the issued and outstanding equity
securities of the Company (the "Preferred Stock"), which generated net proceeds
to the Company of $18.5 million. The issuance of the Preferred Stock was
approved by a majority of the Company's stockholders at the Company's Annual
Meeting of Stockholders on May 11, 1999 (the "Annual Meeting"). The Preferred
Stock is convertible at any time into shares of Common Stock of the Company at
an initial conversion price of $11.00 per common share. The conversion price is
not subject to reset except in the event that the Company should fail to declare
and pay dividends when due or the Company should issue new equity securities or
convertible securities at a price per share or having a conversion price per
share lower than the then applicable conversion price of the Preferred Stock.
During the first three years following issuance, holders of the Preferred Stock
will be entitled to receive dividends payable in shares of fully registered
Common Stock at a rate of 8.4% per annum. Thereafter, dividends will be payable
in cash at a rate of 8.0% per annum.
In connection with the issuance of the Preferred Stock, the rights of the
holders of the Company's Common Stock may be limited in certain instances with
respect to dividend rights, rights on liquidation, winding up and dissolution of
the Company, and the right to vote in connection with certain matters submitted
to the Company's stockholders.
A portion of the proceeds of such Financing were used to repay a $10.0
million Senior Secured Convertible Note provided by one of the investors on
March 19, 1999 in connection with the Financing. The remaining proceeds will be
used for general working capital purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting was held on May 11, 1999.
There were present at the Annual Meeting in person or by proxy
stockholders holding an aggregate of 7,011,234 shares of Common Stock. The
results of the vote taken at such Annual Meeting with respect to each nominee
for director were as follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Helmer P.K. Agersborg, Ph.D. 6,850,099 Shares 161,135 Shares
Brian M. Gallagher, Ph.D. 6,850,099 Shares 161,135 Shares
James E. Daverman 6,850,099 Shares 161,135 Shares
Pieter J. Schiller 6,850,099 Shares 161,135 Shares
Peter R. Barnett, D.M.D. 6,850,099 Shares 161,135 Shares
Robert J. Easton 6,850,099 Shares 161,135 Shares
Stephen W. Ritterbush, Ph.D. 6,850,099 Shares 161,135 Shares
Terence E. Winters, Ph.D. 6,850,099 Shares 161,135 Shares
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In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to amend the Company's 1996 Stock Option Plan to increase the
maximum aggregate number of shares of Common Stock available for issuance
thereunder from 750,000 to 1,500,000 shares and to reserve an additional 750,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1996 Stock Option Plan. Of the shares present at the meeting
in person or by proxy, 4,226,815 shares of Common Stock were voted in favor of
such proposal, 903,445 shares of Common Stock were voted against such proposal
and 22,372 shares of Common Stock abstained from voting.
In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to approve the consummation of the Financing. Of the shares present
at the meeting in person or by proxy, 4,921,420 shares of Common Stock were
voted in favor of such proposal, 200,615 shares of Common Stock were voted
against such proposal and 26,122 shares of Common Stock abstained from voting.
In addition, a vote of the shareholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the independent auditors
of the Company for the fiscal year ending December 31, 1999. Of the shares
present at the meeting in person or by proxy, 6,987,972 shares of Common Stock
were voted in favor of such proposal, 13,912 shares of Common Stock were voted
against such proposal and 9,350 shares of Common Stock abstained from voting.
ITEM 5. OTHER INFORMATION.
EQUITY FINANCING AND SENIOR SECURED CONVERTIBLE NOTE
On May 12, 1999, the Company consummated the Financing in which OCM
Principal Opportunities Fund, L.P. ("OCM") led an investor group including
certain current stockholders of the Company.
In connection therewith, the issuance of the Preferred Stock was approved
by a majority of the Company's stockholders at the Annual Meeting. A portion of
the proceeds of the Financing were used for the repayment of a $10.0 million
Senior Secured Convertible Note provided by OCM on March 19, 1999 in connection
with the Financing. The remaining proceeds will be used for general working
capital purposes.
The Preferred Stock is convertible at any time into shares of Common Stock
of the Company at an initial conversion price of $11.00 per common share. The
conversion price is not subject to reset except in the event that the Company
should fail to declare and pay dividends when due or the Company should issue
new equity securities or convertible securities at a price per share or having a
conversion price per share lower than the then applicable conversion price of
the Preferred Stock.
During the first three years following issuance, holders of the Preferred
Stock will be entitled to receive dividends payable in shares of fully
registered Common Stock at a rate of 8.4% per annum. Thereafter, dividends will
be payable in cash at a rate of 8.0% per annum.
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LICENSING AGREEMENT
The Company executed a licensing agreement with Pharmascience Inc.
("Pharmascience") in June 1999 pursuant to which Pharmascience will manufacture,
market and distribute Periostat in Canada. Pursuant to the agreement,
Pharmascience paid the Company a $100,000 non-refundable license fee. In
addition, Pharmascience agreed to pay additional fees and royalties upon
achievement of future milestones. Under the terms of the agreement,
Pharmascience will be responsible for the submission of an application to the
Canadian Therapeutic Products Program of Health Canada for Canadian marketing
approval of Periostat. The non-refundable license fee was recorded as contract
revenue in the second quarter of 1999.
CO-PROMOTION AGREEMENT
The Company executed a Co-Promotion Agreement with SmithKline Beecham
Consumer Healthcare, L.P. ("SmithKline") in April 1999, upon the expiration of
its prior agreement with SmithKline, pursuant to which the Company will continue
promoting SmithKline's Denavir(R) product to the United States dental community.
Denavir is an FDA approved prescription pharmaceutical for the treatment of
recurrent cold sores in healthy adults. The agreement provides for certain
payments by SmithKline to the Company upon future sales of Denavir.
RESIGNATION OF DIRECTOR
On June 15, 1999, Mr. Pieter J. Schiller resigned his position as a member
of the Company's Board of Directors to pursue other interests.
RELOCATION OF PRINCIPAL EXECUTIVE OFFICES
In May 1999, the Company moved its Principal Executive Offices from 301
South State Street, Newtown, Pennsylvania to 41 University Drive, Newtown,
Pennsylvania.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed, on May
26, 1999, a Current Report on Form 8-K with the Securities and
Exchange Commission relating to the Company's issuance of $20.0
million of Series D Cumulative Convertible Preferred Stock to
certain investors and the repayment of a $10.0 million Senior
Secured Convertible Note.
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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.
CollaGenex Pharmaceuticals, Inc.
Date: August 12, 1999 By: /s/ Brian M. Gallagher, Ph.D.
---------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 By: /s/ Nancy C. Broadbent
---------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
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