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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
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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The number of shares outstanding of the registrant's common stock as of April
24, 2000 was 11,501,630.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,021,327 $ 3,021,869
Marketable securities, at fair market value 30,116,312 34,856,697
Accounts receivable, net of allowance for doubtful accounts
of $50,305 and $18,355 1,733,485 1,222,850
Interest receivable 309,728 562,318
Inventories 2,180,775 1,862,522
Prepaid expenses and deposits 492,366 418,812
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Total current assets 38,853,993 41,945,068
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PROPERTY, PLANT AND EQUIPMENT, NET: 6,990,841 7,114,761
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OTHER ASSETS:
Intangible assets, net 4,424,210 4,580,325
Deferred finance costs, net of accumulated amortization of $481,803 and $430,007 966,854 1,018,650
------------ ------------
Other assets, net 5,391,064 5,598,975
------------ ------------
TOTAL ASSETS $ 51,235,898 $ 54,658,804
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,753,705 $ 2,455,605
Interest payable 851,411 211,094
Accrued salaries and payroll taxes 314,896 321,548
Other accrued liabilities 145,046 150,396
Deferred revenue 47,500 160,000
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Total current liabilities 3,112,558 3,298,643
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CONVERTIBLE SUBORDINATED NOTES PAYABLE 36,690,000 36,690,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 11,463,696 and 11,435,244 shares
issued; 11,463,630 and 11,427,554 shares outstanding 11,464 11,435
Additional paid-in capital 74,779,566 74,495,672
Treasury stock, 66 and 7,690 shares, at cost (694) (80,846)
Accumulated other comprehensive loss (1,728,148) (1,696,010)
Accumulated deficit (61,628,848) (58,060,090)
------------ ------------
Total shareholders' equity 11,433,340 14,670,161
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,235,898 $ 54,658,804
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
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REVENUE:
Net sales and royalties $ 1,157,401 $ 1,228,719
Contract revenue 537,872 257,565
Sale of marketing rights and milestone revenue 65,000 25,000
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Total revenue 1,760,273 1,511,284
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OPERATING EXPENSES:
Cost of goods sold 459,261 702,216
Research and development 3,726,514 3,559,252
Administrative and marketing 1,020,896 782,247
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Total operating expenses 5,206,671 5,043,715
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LOSS FROM OPERATIONS (3,446,398) (3,532,431)
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OTHER (EXPENSE) INCOME:
Investment income 514,287 763,665
Interest expense (649,857) (793,485)
Other 38,722 48,042
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Net other (expense) income (96,848) 18,222
LOSS BEFORE EXTRAORDINARY ITEM (3,543,246) (3,514,209)
Extraordinary gain on extinguished debt -- 767,299
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NET LOSS $ (3,543,246) $ (2,746,910)
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Basic and diluted earnings per common share:
Loss before extraordinary item $ (.31) $ (.31)
Extraordinary item -- .07
------------ ------------
Net loss $ (.31) $ (.24)
============ ============
Basic and diluted weighted average common shares outstanding 11,439,792 11,226,347
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
Common Stock Additional
Paid-in Treasury
Shares Amount Capital Stock
------------ ------------ ------------ ------------
Balance, December 31, 1999 11,427,554 $ 11,435 $ 74,495,672 $ (80,846)
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive loss:
- Foreign currency translation
Adjustments - cumulative -- -- -- --
- Unrealized loss on
Investments -- -- -- --
Net comprehensive loss
Exercise of stock options 14,185 8 73,993 68,335
Issuance of employee stock
purchase plan 1,687 1 4,801 11,817
Issuance of restricted stock 20,204 20 205,100 --
------------ ------------ ------------ ------------
Balance, March 31, 2000 11,463,630 $ 11,464 $ 74,779,566 $ (694)
============ ============ ============ ============
Accumulated
Other Total
Comprehensive Accumulated Shareholders'
Loss Deficit Equity
------------ ------------ ------------
Balance, December 31, 1999 $ (1,696,010) $(58,060,090) $ 14,670,161
Comprehensive loss:
Net loss -- (3,543,246) (3,543,246)
Other comprehensive loss:
- Foreign currency translation
Adjustments - cumulative (2,818) -- (2,818)
- Unrealized loss on
Investments (29,320) -- (29,320)
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Net comprehensive loss (3,575,384)
Exercise of stock options -- (23,615) 118,721
Issuance of employee stock
purchase plan -- (1,897) 14,722
Issuance of restricted stock -- -- 205,120
------------ ------------ ------------
Balance, March 31, 2000 $ (1,728,148) $(61,628,848) $ 11,433,340
============ ============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,543,246) $ (2,746,910)
Adjustments to reconcile net (loss) to net cash (used in) provided by
operating activities:
Depreciation 266,418 252,180
Amortization 294,600 122,926
Loss on sale of property, plant and equipment 4,667 19,426
Compensation - restricted stock 75,620 --
Loss (gain) on sale of marketable securities 39,288 --
Extraordinary gain on extinguishment of debt -- (767,299)
Net changes in operating assets and liabilities:
Accounts receivable (510,635) 4,827,966
Interest receivable 252,589 138,687
Inventories (318,253) (116,820)
Prepaid expenses and deposits (73,554) (287,086)
Accounts payable - trade (701,900) 735,116
Interest payable 640,317 745,070
Accrued salaries and payroll taxes (6,652) 15,163
Other accrued liabilities (5,350) (134,753)
Deferred revenue (112,500) (30,050)
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Net cash (used in) provided by operating activities (3,698,591) 2,773,616
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (147,188) (146,377)
Investments in intangible assets (81,381) 147,633
Proceeds from sale of property, plant and equipment 25 555
Proceeds from sale of marketable securities 4,764,840 --
Proceeds from maturity of marketable securities -- 6,230,430
Investment in marketable securities (98,372) (18,894,184)
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Net cash provided by (used in) investing activities 4,437,924 (12,661,943)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 262,943 169,144
Extinguished convertible long-term debt -- (3,100,000)
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Net cash provided by (used in) financing activities 262,943 (2,930,856)
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NET EFFECT OF EXCHANGE RATE ON CASH - CURRENT YEAR (2,818) --
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 999,458 (12,819,183)
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,021,869 18,556,641
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,021,327 $ 5,737,458
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See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries, referred to herein as we, us or our, have
been prepared in accordance with generally accepted accounting principles for
interim consolidated financial statements and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
considered necessary (which consist of normal recurring accruals and
intercompany elimination entries) for a fair presentation have been included.
These consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1999, filed with the Securities and Exchange Commission in our Annual Report
Form on 10-K.
On February 17, 2000, our wholly owned registered subsidiary, Atrix
Laboratories GmbH, based in Frankfurt, Germany, commenced operations. Atrix
Laboratories GmbH was organized to conduct our European operations. Currently,
the subsidiary has one employee who's objective is to establish business
relations with international distributors for the sale of ATRIDOX(R) upon mutual
recognition of the product in key countries. The corresponding activity will be
maintained in a subsidiary ledger using the European Euro as its functional
currency. The Company's wholly owned registered subsidiary, Atrix Laboratories
Limited, based in London, England, and established in June 1999, will continue
to sell the ATRIDOX(R) product in the United Kingdom. The corresponding activity
is maintained in a subsidiary ledger using the British pound as its functional
currency. The subsidiary financials were converted from European Euro and
British pounds to United States dollars prior to consolidation and all
significant intercompany balances and transactions have been eliminated.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The inventory components at March
31, 2000 and December 31, 1999, are as follows:
March 31, 2000 December 31, 1999
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Raw Materials $ 1,856,703 $ 1,486,289
Work in Process 214,714 300,571
Finished Goods 109,358 75,662
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$ 2,180,775 $ 1,862,522
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NOTE 3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful life of the assets, which range between three
and forty years. Leasehold improvements are amortized over the remaining term of
the related lease. The components of net property, plant and equipment are as
follows:
MARCH 31, 2000 DECEMBER 31, 1999
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Land $ 1,071,018 $ 1,071,018
Building 3,575,052 3,573,695
Leasehold improvements 470,002 470,002
Furniture & fixtures 387,549 387,549
Machinery 4,656,498 4,517,952
Office equipment 684,735 686,958
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Total property, plant and equipment 10,844,854 10,707,174
Accumulated depreciation and
amortization (3,854,013) (3,592,413)
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Property, plant and equipment, net $ 6,990,841 $ 7,114,761
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Betterments, renewals and extraordinary repairs that extend the life of
an asset are capitalized; other repairs and maintenance are expensed. Repairs
and maintenance expense was approximately $62,000 and $45,000 for the quarters
ended March 31, 2000 and 1999, respectively.
NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the periods presented. Diluted net income (loss) per
common share reflects the potential dilution of securities that could
participate in the earnings. For the periods presented, the effect of dilutive
stock options and the effect of assuming a conversion of convertible
subordinated notes would be antidilutive. Therefore, diluted net income (loss)
per share is not different from basic net income (loss) per common share.
NOTE 5. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, we issued $50,000,000 of convertible subordinated
notes. These notes bear interest at the rate of 7% annually and are due in 2004.
The notes are convertible, at the option of the holder, into our common stock,
$0.001 par value, at any time prior to maturity, unless previously redeemed or
repurchased at a conversion price of $19.00 per share, subject to adjustments in
certain events. The notes are redeemable, in whole or in part, at our option on
or after December 5, 2000. As of March 31, 2000 and December 31, 1999,
$36,690,000 of these notes are outstanding.
NOTE 6. TRANSLATION OF FOREIGN CURRENCIES
Our primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at period-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates in effect during the period.
Adjustments resulting from these translations are reflected in stockholders'
equity as cumulative foreign currency translation adjustments. Some of our
transactions and transactions of our subsidiaries are made in currencies
different from their functional currency. Gains and losses from these
transactions are included in income as they occur. To date, the effect on income
of such amounts has been immaterial. Sales by our foreign subsidiaries during
the period ending March 31, 2000 were not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations as well as information contained elsewhere
in this Report, contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
include statements regarding the intent, belief or current expectations of us,
our directors or our officers with respect to, among other things: (i) whether
we will receive, and the timing of, regulatory approvals or clearances to market
potential products; (ii) the results of current and future clinical trials; and
(iii) the time and expenses associated with the regulatory approval process for
products. The success of our business operations is in turn dependent on factors
such as the receipt and timing of regulatory approvals or clearances for
potential products, the effectiveness of our marketing strategies to market, our
current and any future products, our ability to manufacture products on a
commercial scale, the appeal of our mix of products, our success at entering
into and collaborating with others to conduct effective strategic alliances and
joint ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors.
OVERVIEW
The year 1998 marked a turning point for us with the market launch of
our flagship product ATRIDOX(R) in September 1998 and the acquisition of ViroTex
in November 1998. Prior to 1998, we devoted our efforts and resources primarily
towards research and development of dental products without a significant
product on the market to generate material revenues. Consequently, we sustained
losses in each year of our operations prior to 1998. We realized a net profit in
1998 primarily as a result of earning $17 million in milestone revenue from
Block for the FDA approval and the subsequent market launch of ATRIDOX(R). The
Block agreement provides for potential milestone payments totaling up to $50
million to us over a three-to-five year period, as well as manufacturing margins
and royalties on sales. Prior to the year 2000, we had recognized approximately
$24.1 million in milestone revenue from Block.
We are also committed to expanding the sales of ATRIDOX(R)
internationally. In April 1999, we received our first European approval of
ATRIDOX(R) from the Medicines Control Agency of the United Kingdom. We are
pursuing the mutual recognition of ATRIDOX(R) in the European Union and in
January 2000 we received approval to market ATRIDOX(R) in 11 additional
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European countries. We are currently awaiting a country-by-country shipping
authorization and anticipate sales of the product to commence in the second
quarter of 2000.
We shifted our research and development focus from dental to medical
products in 1999. Significant resources were devoted to the research and
development of prostate cancer therapy incorporating the ATRIGEL(R) drug
delivery system with leuprolide acetate, acne treatment using the SMP(TM) drug
delivery system with topical dapsone and various medical products utilizing the
BEMA(TM) drug delivery system acquired through the ViroTex acquisition. Research
and development expenditures continued for existing and future dental products
as well, including the ATRISORB(R)-DOXY products. We are developing the
ATRISORB(R)-DOXY products, second-generation GTR barrier products that combine
the benefits of the ATRISORB(R) GTR Barrier products with the antibiotic
doxycycline, for improved clinical outcomes following periodontal surgery. We
completed the ATRISORB(R)-DOXY products Phase III human clinical trials in
November 1999. In February 2000, we announced the filing for regulatory
clearance of the ATRISORB(R)-DOXY products.
In January 2000, we announced successful interim results in the ongoing
Phase III human clinical trials pertaining to the 30-day prostate cancer therapy
study using our 30-day sustained release ATRIGEL(R) formulation with leuprolide
acetate. We also filed an investigational new drug application with the FDA in
January 2000 for the 90-day prostate cancer product.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1999
Total revenues for the three months ended March 31, 2000 were
approximately $1,760,000 compared to approximately $1,500,000 for the three
months ended March 31, 1999. The 17% increase was primarily due to research and
development contract revenue with an unaffiliated third party.
We had net sales of approximately $1,157,000 during the three months
ended March 31, 2000 compared to approximately $1,229,000 for the three months
ended March 31, 1999. The 6% decrease in sales was primarily the result of a
lower average net selling price of ATRIDOX(R) and ATRISORB(R) FreeFlow GTR
Barrier products recognized by Block.
Contract revenue represents revenue we received from grants and from
unaffiliated third parties for performing contract research and development
activities using our technology and was approximately $538,000 for the three
months ended March 31, 2000 compared to approximately $258,000 for the three
months ended March 31, 1999, representing a 109% increase. The increase was
primarily related to work on a single research project with an unaffiliated
third party.
Cost of goods sold recorded for the three months ended March 31, 2000
was approximately $459,000 compared to approximately $702,000 for the three
months ended March 31, 1999, representing a 35% decrease. This decrease in cost
of sales is primarily related to manufacturing efficiencies gained through the
installation of automated equipment.
Research and development expenses for the three months ended March 31,
2000 were approximately $3,727,000 compared to approximately $3,559,000 for the
three months ended March 31, 1999, representing a 5% increase. The increase was
primarily the result of additional expenditures in new areas of research
including leuprolide acetate for the treatment of prostate cancer and topical
dapsone for the treatment of acne.
Administrative and marketing expenses for the three months ended March
31, 2000 were approximately $1,021,000 compared to approximately $782,000 for
the three months ended March 31, 1999, representing a 31% increase. The increase
was primarily the result of increased expenditures associated with our foreign
subsidiary, Atrix Laboratories GmbH, which commenced operations in February
2000.
Investment income for the three months ended March 31, 2000 was
approximately $514,000 compared to approximately $764,000 for the three months
ended March 31, 1999, representing a 33% decrease. The decrease was primarily
the result of a reduction in principal investments and a loss on sale of
investments for the three months ended March 31, 2000.
Interest expense for the three months ended March 31, 2000 was
approximately $650,000 compared to approximately $793,000 for the three months
ended March 31, 1999, representing an 18% decrease. The reduction in interest
expense was primarily the result of our repurchase and retirement of $7,810,000
of our 7% convertible subordinated notes since the period ending March 31, 1999.
For the reasons described above, we recorded a net loss of
approximately $3,543,000, or $0.31 per share, for the three months ended March
31, 2000 compared to a net loss of approximately $2,747,000, or $0.24 per share,
for the three months ended March 31, 1999. The extraordinary gain recognized
from the repurchase of convertible notes during the first quarter of 1999 was
the primary factor for the increase in net loss between periods.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had cash and cash equivalents of approximately
$4,021,000, marketable securities (at fair market value) of approximately
$30,116,000 and other current assets of approximately $4,717,000 for total
current assets of approximately $38,854,000. Current liabilities totaled
approximately $3,113,000, which resulted in working capital of approximately
$35,741,000.
We have a revolving line of credit with a bank that expires in August
2000. Under the terms of the line of credit, we may borrow up to $1,000,000.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring us to maintain certain levels of net worth and
liquidity. As of March 31, 2000, we had no outstanding balance under this line
of credit.
During the three months ended March 31, 2000, net cash used in
operating activities was approximately $3,699,000. This was primarily the result
of the net loss for the period of approximately $3,543,000, adjusted for certain
non-cash expenses, and changes in operating assets and liabilities as set forth
in the consolidated statement of cash flows. Approximately $4,765,000 from the
sale of marketable securities was used to fund operations for the period ending
March 31, 2000.
Net cash provided by investing activities was approximately $4,438,000
during the three months ended March 31, 2000, primarily as a result of the
proceeds from the sale of marketable securities of approximately $4,765,000. Net
cash provided by financing activities was approximately $275,000 during the
three months ended March 31, 2000, primarily as a result of the proceeds from
issuance of common stock.
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development
programs,
o the time required to file and process regulatory
approval applications,
o the development of our commercial manufacturing
facilities,
o our ability to obtain additional licensing
arrangements, and
o the demand for our products.
We expended approximately $147,000 for property, plant and equipment
and approximately $81,000 for patent development in the three-month period
ending March 31, 2000. We expect our capital expenditures to approximate
$1,250,000 for the year ending December 31, 2000, which will be used primarily
to complete the automation of its manufacturing facility and to upgrade
laboratory equipment.
We expect to continue to incur substantial expenditures for research
and development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. Management believes that the existing cash and cash
equivalent assets in addition to marketable security resources will be
sufficient to fund our operations through 2000. However, there can be no
assurance that underlying assumed levels of revenue and expense will prove
accurate.
RISK FACTORS
In addition to the other information contained in this Report, we
caution stockholders and potential investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results of operations and could cause our actual results to
differ materially from those expressed in any forward-looking statements made
by, on, or on behalf of us. The following information is not intended to limit
in any way the characterization of other statements or information under other
captions as cautionary statements for such purpose. These factors include:
o Delay, difficulty, or failure in obtaining regulatory approval
or clearance to market additional products; including delays
or difficulties in development because of insufficient proof
of safety or efficacy.
o Substantial manufacturing and marketing expenses to be
incurred in the commercial launch of the ATRIDOX(R) product
and commercializing future products.
o Failure of corporate partners to develop or commercialize
successfully our products or to retain and expand markets
served by the commercial collaborations; conflicts of
interest, priorities, and commercial strategies that may arise
between us and such corporate partners.
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o Our limited experience in the sale and marketing of our
products; dependence on Block to establish effective
marketing, sales and distribution capabilities for the
ATRIDOX(R) product, the ATRISORB(R) GTR Barrier products and
the ATRISORB(R)-DOXY products in North America. Failure to
internally develop marketing channels for the ATRISORB(R) GTR
Barrier products, the ATRISORB(R)-DOXY products and the
ATRIDOX(R) product in Europe.
o The ability to obtain, maintain and prosecute intellectual
property rights, and the cost of acquiring in-process
technology and other intellectual property rights, either by
license, collaboration or purchase of another entity.
o Limited experience in manufacturing products on a commercial
scale; failure to manufacture present and future products in
compliance with applicable regulations and at an acceptable
cost.
o Cancellation or termination of material collaborative
agreements (including the Block agreement) and the resulting
loss of research or other funding, or marketing, sales and
distribution capabilities.
o Access to the pharmaceutical compounds necessary to
successfully commercialize the ATRIGEL(R) system or other
delivery systems currently in development.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o The ability to attract and retain highly qualified management
and scientific personnel.
o Difficulties or high costs of obtaining adequate financing to
fund future research, development and commercialization of
products.
o The slow rate of acceptance of new products in the dental
market.
o The continued growth and market acceptance of our products and
our ability to develop and commercialize new products in a
timely and cost-effective manner.
o Exchange rate fluctuations that may adversely impact net
income (loss).
o Our ability to enter into strategic alliances or collaborative
arrangements with third parties to market and commercialize
our products on favorable terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
We own financial instruments that are sensitive to market risks as part
of our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. Due to the
nature of our investment portfolio, the investment portfolio contains
instruments that are primarily subject to interest rate risk.
Interest Rate Risk. Our investment portfolio includes fixed rate debt
instruments that are primarily United States government and agency bonds of
durations ranging from one to four years. The market value of these bonds is
subject to interest rate risk and could decline in value if interest rates
decrease. To mitigate the impact of fluctuations in cash flow, we maintain
substantially all of our debt instruments as fixed rate. The portion maintained
as fixed rate is dependent on many factors including judgments as to future
trends in interest rates.
Our investment portfolio also includes equity interests in United
States government and agency bond funds. The value of these equity interests is
also subject to interest rate risk.
We regularly assess the above-described market risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. Our investment policy restricts
investments to U.S. Government or government backed securities, or the highest
rated commercial paper (A1P1) only. As a result, we do not anticipate any
material losses in these areas.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and long-term and
short-term debt instruments.
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To perform a sensitivity analysis, we assess the risk of loss in fair
values from the impact of hypothetical changes in interest rates on market
sensitive instruments. The fair values are computed based on the present value
of future cash flows as impacted by the changes in the rates attributable to the
market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at March 31,
2000. The fair values that result from these computations are compared with the
fair values of these financial instruments at March 31, 2000. The differences in
this comparison are the hypothetical gains or losses associated with each type
of risk. The results of the sensitivity analysis at March 31, 2000 are as
follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in a decrease
in the fair value of our financial instruments by approximately
$210,000 per year. A 10% increase in the levels of interest rates with
all other variables held constant would result in an increase in the
fair value of our financial instruments by approximately $210,000 per
year. We maintain a portion of our financial instruments, including
long-term debt instruments of approximately $7,380,000 at March 31,
2000, at variable interest rates. If interest rates were to increase or
decrease 10%, the impact of such instruments on cash flows or earnings
would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities we own.
The market price of the 7% convertible subordinated notes generally
changes in parallel with the market price of our common stock. When our stock
price increases, the price of these notes generally increases proportionally.
Fair market price of the notes can be determined from quoted market prices,
where available. The fair value of our long-term debt was estimated to be
approximately $28,068,000 at March 31, 2000 and is lower than the carrying value
by approximately $8,622,000. Market risk was estimated as the potential decrease
in fair value resulting from a hypothetical 1% increase in our weighted average
long-term borrowing rate and a 1% decrease in quoted market prices, or
approximately $734,000.
Exchange Rate Risk. We face foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the financial
results of our foreign subsidiaries are translated into United States dollars
for consolidation. As exchange rates vary, these results, when translated may
vary from expectations and adversely impact net income (loss) and overall
profitability. The effect of foreign exchange rate fluctuation for the period
ended March 31, 2000 was not material. Based on our overall foreign currency
rate exposure at March 31, 2000, we do not believe that a hypothetical 10%
change in foreign currency rates would materially affect our financial position.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.*
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period ended
March 31, 2000.
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* Filed herewith.
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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.
ATRIX LABORATORIES, INC.
(Registrant)
April 25, 2000 By: /s/ David R. Bethune
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David R. Bethune
Vice Chairman of the Board of Directors and
Interim Chief Executive Officer
April 25, 2000 By: /s/ Brian G. Richmond
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Brian G. Richmond
Vice President--Finance, Assistant Secretary,
and Assistant Treasurer
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EXHIBIT INDEX
Exhibit No. Description
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27 Financial Data Schedule*
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* Filed herewith