1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
-----------------
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 23, 1998 was $176,678,703.
The number of shares outstanding of the registrant's common stock as
of February 23, 1998 was 11,307,437.
Documents incorporated by reference:
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders
scheduled to be held on April 26, 1998.
===============================================================================
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Atrix Laboratories, Inc. (the "Company"), originally named Vipont Research
Laboratories, Inc. was formed in August 1986 as a Delaware corporation. The
Company is engaged in the research, development and commercialization of a
broad range of dental, medical and veterinary products based on its proprietary
sustained release biodegradable polymer drug delivery system, trade-named
ATRIGEL(R).
The Company's patented ATRIGEL(R) system is comprised of biodegradable
polymer formulations that are administered as flowable compositions (e.g.,
solutions, gels, pastes, and putties), which solidify in situ upon contact with
body fluids to form biodegradable implants. The ATRIGEL(R) system is designed
to provide extended localized or systemic drug delivery in a single
application, without the need for surgical implantation or removal. Depending
on the intended use or the specific drug to be delivered via the ATRIGEL(R)
system, the release and degradation rates of the system can be customized. The
Company's business strategy is to develop and commercialize its proprietary
ATRIGEL(R) system in dental, medical and veterinary applications. Key elements
of the Company's business strategy are (i) to focus on the development and
commercialization of periodontal products, (ii) to leverage its proprietary
technology, (iii) to enhance development and commercialization efforts through
third party collaborations, (iv) to expand its product portfolio through the
acquisition of complementary technologies and/or products and (v) to retain
manufacturing control of the Company's proprietary ATRIGEL(R) system.
The Company currently markets the ATRISORB(R) GTR Barrier, a biodegradable
film utilizing the ATRIGEL(R) system to aid in the guided tissue regeneration
of a tooth's support following periodontal surgery. The Company is also
developing the ATRISORB(R)-DOXY product, a second-generation guided tissue
regeneration ("GTR") barrier which combines the benefits of the ATRISORB(R) GTR
Barrier with the antibiotic doxycycline for improved clinical outcomes
following periodontal surgery. The Company expects to initiate pivotal trials
for the ATRISORB(R)-DOXY product in the first half of 1998. In the veterinary
field, the Company has developed a product utilizing the ATRIGEL(R) system to
treat periodontal disease in companion animals, which is being marketed by
Heska Corporation ("Heska"). See "Recent Developments."
RECENT DEVELOPMENTS
Note Offering. On November 6, 1997 the Company completed the sale of
$50,000,000 aggregate principal amount of its 7% Convertible Subordinated Notes
due 2004 (the "Notes"), all of which were sold in reliance upon Rule 144A under
the Securities Act of 1933, as amended (the "Note Offering"). The Placement
Agents for the Note Offering were NationsBanc Montgomery Securities, Inc. and
SBC Warburg Dillon Read, Inc.
1
3
The Notes were issued pursuant to the provisions of the Indenture, dated as of
November 15, 1997 (the "Indenture"), by and among the Company and State Street
Bank and Trust Company of California, N.A., as trustee thereunder. The Notes
bear interest at the rate of 7% per annum until December 1, 2004. The Notes are
convertible into common stock, $.001 par value, of the Company at any time
prior to the close of business on the maturity date, unless previously redeemed
or repurchased, at a conversion price of $19.00 per share subject to adjustment
in certain circumstances. The payment of principal, premium, if any, interest,
any Additional Amounts (as defined in the Indenture), and any other amounts
payable on or in respect of the Notes by the Company are on a subordinated
basis in accordance with the terms of the Indenture.
New Drug Application. In March 1997, the Company submitted a New Drug
Application ("NDA") with the United States Food and Drug Administration ("FDA")
for its lead product ATRIDOX(TM), a minimally invasive subgingival antibiotic
therapy for periodontal disease employing the ATRIGEL(R) system with the
antibiotic doxycycline. The Company filed the NDA based on the results of
pivotal Phase III trials involving the ATRIDOX(TM) product, which included data
from 822 patients at 20 study sites across the United States. The trials
demonstrated that treatment with the ATRIDOX(TM) product was superior to
placebo and oral hygiene, and equivalent to scaling and root planing, a painful
mechanical procedure that is the current standard treatment for periodontal
disease.
Block Drug Agreement. On December 17, 1996, the Company entered into an
agreement (the "Block Agreement") with Block Drug Corporation ("Block")
pursuant to which Block acquired exclusive rights to market the ATRISORB(R) GTR
Barrier and the ATRISORB(R)-DOXY product, when and if approved, in North
America, and the rights to market the ATRIDOX(TM) product in the United States,
with an option to acquire the rights to market the ATRIDOX(TM) product in
Canada and certain European countries. On September 12, 1997, Block exercised
its option to market the ATRIDOX(TM) product in Canada but let its option lapse
with respect to Europe. Under the Block Agreement, Block is responsible for
sales and marketing for the products and will advise, consult and may
financially support various aspects of the Company's dental research and
development program. The Company also has the right to co-market the products
if certain annual sales levels are not met. The Block Agreement provides for
both milestone and royalty payments to the Company. The Block Agreement expires
on a product-by-product and a country-by-country basis upon the expiration of
the last applicable patent or loss of patent protection for a product in a
given country. The first patent will expire in 2012. In addition,
Block may terminate the Block Agreement at any time without cause upon
12-months written notice to the Company, if the Company commits a willful and
material breach of the Block Agreement or if the Company ceases to manufacture
or supply the product to Block pursuant to the Block Agreement. The Company may
terminate the Block Agreement if Block fails to make any required payment, if
Block commits a willful and material breach of the Block Agreement, if Block
ceases to offer the product for distribution, or if Block markets, distributes
or sells a competitive product.
Heska Agreement. In 1995, the Company signed a supply and license agreement
with Heska (the "Heska Agreement"). In connection with this agreement, the
Company supplies the ATRIGEL(R) system for the treatment of periodontal disease
in companion animals under an exclusive worldwide license to Heska for the
right to use and sell the product for such
2
4
treatments. Under the terms of the Heska Agreement, the Company will receive a
fixed payment for the costs of reformulating the product for use in the
treatment of companion animals, revising the Company's manufacturing processes
to meet Heska's requirements and performing all testing necessary for
submission to the FDA for approval. Heska also paid a one-time license fee.
Heska filed a New Animal Drug Application ("NADA") with the FDA, which was
approved on November 19, 1997 and commercial sales by Heska commenced in
December 1997.
ATRIX TECHNOLOGY
The Company believes the ATRIGEL(R) system addresses many of the limitations
associated with traditional drug delivery technologies. Most drugs are
administered orally or by injection at intermittent and frequent doses. These
routes of administration are not optimal for several reasons, including
difficulty in maintaining uniform drug levels over time, problems with toxicity
and side effects, high costs due to frequent administration and poor patient
compliance. Furthermore, innovations in biotechnology have led to an increase
in the number of protein and peptide drugs under development. These
therapeutics, because of their larger molecular size and susceptibility to
degradation in the gastrointestinal tract, often are required to be
administered by multiple injections, usually in a hospital or other clinical
setting. The ATRIGEL(R) system is compatible with a broad range of
pharmaceutical compounds, including water soluble and insoluble compounds and
high and low molecular weight compounds. In preclinical trials, the Company has
demonstrated the ability of the ATRIGEL(R) system to deliver, both systemically
and locally, various proteins and peptides, including hormones and growth
factors. There can be no assurance, however, that products using the ATRIGEL(R)
system will be successfully developed and approved or cleared for commercial
use.
The Company believes that the ATRIGEL(R) system may provide benefits over
traditional methods of drug administration such as tablets or capsules,
injections and continuous infusion as a result of the following properties:
o Safety. All current components of the ATRIGEL(R) system are biocompatible
and have independently established safety and toxicity profiles. The polymers
used in the system are members of a class of polymers some of which have
previously been approved by the FDA for human use in other applications. The
Company has also conducted toxicological studies on the ATRIGEL(R) system to
develop a safety and toxicological profile.
o Broadly Applicable. The ATRIGEL(R) system is compatible with a broad range
of pharmaceutical compounds, including water soluble and insoluble compounds
and high and low molecular weight compounds. The Company has demonstrated the
ATRIGEL(R) system can be used to deliver proteins, peptides and other
compounds that have formulation stability issues or short in-vivo half lifes.
o Site Specific Drug Delivery. The ATRIGEL(R) system can be delivered directly
to a target area, thus potentially achieving higher drug concentrations at
the desired site of action and potentially minimizing systemic side effects.
For example, the ATRIDOX(TM) product delivers high concentrations of the
antibiotic doxycycline to periodontal pockets with minimal systemic
concentrations of the drug. In preclinical models, the Company has
3
5
delivered several cancer drugs directly to tumors, achieving high local
concentrations of the drugs with minimal systemic toxic side-effects.
o Systemic Drug Delivery. The ATRIGEL(R) system also can be used to provide
sustained drug release into the systemic circulation for certain drugs. In
these applications, for example, the entire body requires treatment, and the
drug may not be active when given orally. In preclinical models, the Company
has demonstrated the systemic delivery of peptides at therapeutic levels for
up to 120 days from a single depot injection.
o Customized Continuous Release and Degradation Rates. The ATRIGEL(R) system
can be designed to provide continuous release of incorporated
pharmaceuticals over a targeted time period so as to reduce the frequency of
drug administration. In addition, the ATRIGEL(R) system can be designed to
degrade over weeks, months, or even one year.
o Biodegradability. The ATRIGEL(R) system will biodegrade and is not expected
to require removal when the drug is depleted.
o Ease of Application. The ATRIGEL(R) system can be injected or inserted as
flowable compositions (e.g., solutions, gels, pastes, and putties) by means
of ordinary needles and syringes, or can be sprayed or painted onto tissues.
In addition to the delivery of drugs, the ATRIGEL(R) system without a drug
has potential uses as a biomaterial for use in medical devices, in which case
the ATRIGEL(R) system has all of the properties described above except those
dependent on the release of a drug.
PRODUCT AND PRODUCTS UNDER DEVELOPMENT
The following table sets forth certain information about the Company's
product and products under development.
PRODUCT INDICATION STATUS(1)
------- ---------- ---------
Periodontal Applications:
ATRIDOX(TM) Antibiotic therapy for NDA submitted March 1997.
chronic periodontitis Accepted for filing by FDA
in June 1997.
ATRISORB(R) GTR Barrier Tissue regeneration Marketed
following periodontal
surgery
ATRISORB(R)-DOXY Tissue regeneration and Clinical device trial
infection reduction expected to begin first
following periodontal half of 1998.
surgery
ATRIGEL(R) system with growth Periodontal regeneration Preclinical
factors
Oncology Applications:
ATRIGEL(R) system with Prostate cancer Phase I/II trials
leuprolide acetate expected to begin second
half of 1998.
Orthopedic Applications:
ATRIGEL(R) system with Tissue and bone Preclinical
growth factors Regeneration
Veterinary Applications:
Heska Periodontal Periodontitis in Marketed
Therapeutic companion animals Launched December 1997.
- ----------
(1) See "Government Regulation."
4
6
PERIODONTAL APPLICATIONS
Periodontal disease is an infection caused by plaque build up on the teeth
and gums. The severity of the disease varies from the mildest cases, clinically
termed gingivitis (bleeding gums) to more severe cases, clinically termed
periodontitis. When gingivitis is not controlled, the disease progresses into
periodontitis, a condition characterized by the progressive, chronic infection
and inflammation of the gums and surrounding tissue. This chronic infection and
inflammation causes destruction of a tooth's supporting structure (bone and
periodontal ligament) and results in the formation of periodontal pockets
(spaces between the gum and tooth). If left untreated, periodontitis will
continue to progress and eventually lead to tooth loss.
Based on published industry reports, the Company believes there are in excess
of 50 million Americans with periodontal disease, and this number is increasing
as a result of the increasing average age of the U.S. population. The Company
believes that only a small percentage of Americans are now being treated for
periodontal disease. In its early stages, progression of the disease is usually
painless, allowing the condition to become advanced before treatment is sought
by the patient. Periodontal disease has no known cure, and effective treatment
is possible only through periodic professional intervention. The most common
treatment, scaling and root planing, requires the dental professional to
anesthetize the gums and then scrape away accumulated plaque and calculus above
and below the gumline. For more serious cases, various forms of gum surgery are
the primary treatment. The Company believes that many individuals do not seek
treatment due to a number of factors including cost, pain, potential medical
complications associated with current therapies, and because the disease is
asymptomatic in its early stages. The Company believes, based on published
industry reports, that over $6.5 billion is spent annually on the treatment of
periodontal disease.
The ATRIDOX(TM) Product. The ATRIDOX(TM) product employs the ATRIGEL(R)
system and the antibiotic doxycycline to form a product designed to control the
bacteria that cause periodontal disease. The ATRIDOX(TM) product is intended to
add a new, minimally invasive pharmaceutical maintenance procedure to current
periodontal treatment. The ATRIDOX(TM) product is administered by a
periodontist or a general dentist by inserting the liquid ATRIDOX(TM) product
into the periodontal pocket through a cannula. The liquid ATRIDOX(TM) product
solidifies in the periodontal pocket and then biodegrades to release
doxycycline over a period of seven to ten days.
In connection with the Block Agreement, Block has the exclusive rights to
market the ATRIDOX(TM) product in North America. The Company is currently
considering various arrangements with respect to the marketing of the
ATRIDOX(TM) product in Europe. See "-- Marketing and Sales."
ATRISORB(R) GTR Barrier. The ATRISORB(R) GTR Barrier is a biodegradable,
liquid polymer product that utilizes the ATRIGEL(R) system to aid in the
regeneration of a tooth's
5
7
support following osseous flap surgery or other periodontal procedures. Osseous
flap surgery, a common treatment for severe cases of periodontal disease,
involves cutting a flap of gum tissue to expose and debride areas not reachable
by conventional scaling and root planing procedures. The Company estimates that
there are currently over 2 million flap surgeries performed each year in the
United States. Published research has shown that to obtain optimal healing
following flap surgery, it is necessary to isolate the wound healing site from
the adjacent gum tissue. The placement of a barrier that isolates the surgical
site from the gum tissue has been shown to selectively facilitate growth of the
periodontal ligament cells, leading to connective tissue and bone regeneration
at the base of the periodontal defects.
The ATRISORB(R) GTR Barrier is formed outside of the mouth using a sterile,
single-use barrier forming kit. Once placed in the mouth over the periodontal
defect, the semi-solid ATRISORB(R) GTR Barrier further solidifies upon contact
with oral fluids to form a solid barrier that isolates the healing site in
order to promote guided tissue regeneration. Sutures are not required to hold
the barrier in place, which allows the ATRISORB(R) GTR Barrier to be placed in
a shorter time relative to existing guided tissue regeneration barrier
products. In addition, periodontists have the potential for treatment of
multiple diseased sites in one surgical session and can form multiple barriers
from a single kit, thereby reducing the inventory requirements. Since the
ATRISORB(R) GTR Barrier is biodegradable, a second surgery to remove the
barrier is unnecessary.
On March 22, 1996 the Company received 510(k) premarket notification
clearance from the FDA to market the ATRISORB(R) GTR Barrier in the United
States. The Company received the CE Mark for the ATRISORB(R) product in
December 1997, increasing from eight to seventeen countries in Europe where the
product is cleared for sale. The CE Mark approval included a new in situ
application technique allowing the direct placement of the liquid on bone graft
material. Upon FDA approval, this technique will become available in the United
States. As of December 31, 1997 the Company had received clearance to market
the ATRISORB(R) GTR Barrier in 24 foreign countries, with 3 applications
pending. The Company expects to market the product in additional foreign
countries; however, there can be no assurance that additional regulatory
approvals or clearances will be obtained.
The Company commenced commercial sales of the ATRISORB(R) GTR Barrier in the
United States in the third quarter of 1996. Under the Block Agreement, Block
has the exclusive rights to market the ATRISORB(R) GTR Barrier in North
America. The Company currently markets the ATRISORB(R) GTR Barrier in Europe
through independent distributors and is considering various marketing
arrangements at this time. See "-- Marketing and Sales" and "-- Recent
Developments."
The ATRISORB(R)-DOXY Product. The ATRISORB(R)-DOXY product is under
development by the Company to address infections following periodontal surgery.
It has been shown clinically that post operative infections often lead to less
than optimum healing. Medicinal agents such as doxycycline can be incorporated
into the ATRISORB(R) GTR Barrier, which the Company believes could provide a
drug delivery capability not feasible with other barriers currently on the
market. As a result, the Company believes the ATRISORB(R)-DOXY product will
contribute to better healing of the surgical site. The Company expects to
commence a pivotal trial of the ATRISORB(R)-DOXY product in the first half of
1998.
6
8
If clinical trials are successful and if the ATRISORB(R)-DOXY product is
approved for sale Block has the exclusive rights to market this product in
North America.
ATRIGEL(R) System with Growth Factors. The Company is currently investigating
the use of the ATRIGEL(R) system with a variety of growth factors to treat
periodontal defects where there exists no current effective therapy. In
preclinical studies, the ATRIGEL(R) system demonstrated that certain growth
factors could be delivered during periodontal osseous flap surgery to
regenerate periodontal attachment in a manner superior to controls.
ONCOLOGY APPLICATIONS
The Company believes the ATRIGEL(R) system is well suited for the local
delivery of certain anti-cancer agents and has the potential to capitalize on
the potency of these drugs while diminishing the systemic side effects
associated with them. The Company believes that the ATRIGEL(R) system can
release active drug agents into solid tumors at higher concentrations and for
extended periods of time while maintaining lower systemic levels of drug than
generally can be achieved with injection or intravenous delivery.
The Company also believes that there are a number of potential systemic
cancer therapies that are compatible with the ATRIGEL(R) technology. The
Company's first such systemic application for the ATRIGEL(R) system in oncology
is prostate cancer.
In 1995, the Company signed an exclusive worldwide collaboration agreement
with Gensia Sicor, Inc. ("Gensia") to develop a 30-day sustained release
ATRIGEL(R) formulation of leuprolide acetate, an anti-cancer agent used in the
treatment of prostate cancer. Leuprolide acetate, a luteinizing hormone
releasing hormone peptide, is currently marketed under the brand name Lupron(R)
and worldwide sales of this product were in excess of $800 million in 1996.
In November 1997, the Company and Gensia jointly agreed to terminate their
agreement for reasons unrelated to the progress of the collaboration. As a
result, the rights to develop, manufacture and market the potential product
reverted back to the Company. The Company believes that the market for a
reformulated product using the ATRIGEL(R) system could be substantial.
Consequently, the Company is continuing its development efforts and recently
completed feasibility studies to characterize the release rates of leuprolide
acetate incorporated in the ATRIGEL(R) system. Based on the encouraging results
of these studies, the Company expects to initiate Phase I/II trials in the
second half of 1998.
ORTHOPEDIC APPLICATIONS
The Company is pursuing the use of its ATRIGEL(R) system to deliver tissue
growth factors for a variety of product applications including the healing of
bone fractures and defects, and the treatment of dermal ulcers and other soft
tissue wounds. In the area of orthopedics, the Company is initially focusing on
the development of the ATRIGEL(R) system for bone regeneration, and orthopedic
post-operative pain.
7
9
In 1996, the Company conducted preclinical trials which showed that a
combination of tissue growth factors could be incorporated into the ATRIGEL(R)
system and released at controlled rates for extended periods of time. For
example, when the ATRIGEL(R) formulation containing bone growth factors was
applied to a bone defect in preclinical studies, the amount of new bone formed
was increased significantly over that obtained in control groups. The Company
continues to evaluate a number of different growth factors. The Company expects
to continue these preclinical trials to select the best factors for healing
bone fractures as well as periodontal tissue regeneration.
VETERINARY APPLICATIONS
In 1995, the Company signed an exclusive worldwide license agreement with
Heska, to develop a product to treat periodontal disease in companion animals.
Under the terms of the agreement, the Company developed a subgingival therapy
for periodontal disease in dogs and cats, comprised of the antibiotic
doxycycline and the ATRIGEL(R) system. An NADA was approved for this product on
November 19, 1997 and the product was launched in December 1997. Heska has the
worldwide rights to market this product, which is manufactured exclusively by
the Company.
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development activities
through its own staff and facilities. The Company's research and development
program encompasses the early stage of product development through the receipt
of FDA clearance or approval, and the expansion of new product uses and
applications. The Company has assembled a team of scientists, clinical,
regulatory and quality assurance personnel with a variety of complementary
skills and experiences, and conducts a broad-based research program in its
facilities. The Company also employs contract research organizations, academic
laboratories, independent consultants and clinical research professionals to
aid in the product development process.
The Company anticipates incurring significant research and development
expenses in the coming years as the Company continues its efforts to develop
its present technologies and begins to move other products to the clinical
testing stage and identifies future products for development. The Company's
aggregate research and development expenses totaled approximately $9.6 million,
$10.1 million and $11.5 million for calendar years 1995, 1996 and 1997,
respectively. The Company expects to continue to incur substantial research and
development expenses in future periods.
In connection with its research and development activities, the Company
may seek to enter into collaborative arrangements with pharmaceutical or
biotechnology companies to assist in funding development costs. It is
anticipated that some of these collaborators are capable of and may also be
responsible for commercial scale manufacturing of certain potential products.
In addition, these arrangements may involve the grant by the Company of the
exclusive or semi-exclusive right to sell specific products to specified market
segments in particular geographic territories in exchange for up-front
payments, royalties, milestone payments or other financial arrangements. The
Company believes that these arrangements could be more effective in promoting
and distributing certain therapeutic products, due to the extensive marketing
8
10
networks and large advertising budgets of large pharmaceutical and
biotechnology companies. There can be no assurance that the Company will be
able to enter into any such arrangements with a collaborative partner or
independent third parties on favorable terms, or at all.
MARKETING AND SALES
In 1996, the Company launched its first commercial product, the ATRISORB(R)
GTR Barrier, in certain European countries and the United States and began to
develop a marketing and sales organization to market the ATRISORB(R) GTR
Barrier in the United States. On December 17, 1996, the Company entered into
the Block Agreement. As a result of the Block Agreement the Company eliminated
its United States marketing and sales force. On September 12, 1997, Block
elected not to exercise its option to market the ATRIDOX(TM) product in Europe.
Currently, the Company is evaluating various marketing alternatives, including
establishing its own European sales force, entering into a marketing alliance
with a major European company, establishing a series of independent dental
distributors, or a combination of these approaches.
In order to market the ATRISORB(R) GTR Barrier and future products
successfully, in Europe, as well as North America for products in which Block
does not have marketing rights, the Company will have to develop a sales force
with significant technical expertise or enter into agreements with existing
distributors or other corporate partners. There can be no assurance that the
Company will be able to establish or maintain a successful direct sales
organization in Europe or enter into marketing agreements with other corporate
partners. In addition, there can be no assurance that there will be sufficient
sales of the ATRISORB(R) GTR Barrier or future products to fund related sales
and marketing expenses, many of which must be incurred before sales commence.
MANUFACTURING
The Company has limited experience in manufacturing its products on a
commercial scale. The Company recently expanded and upgraded its pilot
manufacturing facility. In addition to producing supplies at pilot scale for
clinical trials, this facility has been manufacturing the ATRISORB(R) GTR
Barrier on commercial scale since March 1996. In July 1996, the Company
purchased a 26,000 square foot commercial production facility. The Company has
completed validation of the facility and relocated all manufacturing of the
ATRISORB(R) GTR Barrier to that facility. The Company is currently in the
process of validating the production process in its new facility for the Heska
veterinary product and clinical study supplies for additional products in
development. In October 1997, the FDA completed a pre-approval inspection of
the new manufacturing facility and the pilot facility, solely with respect to
the Heska product, and noted no major concerns. The Company is currently
producing the Heska veterinary at its pilot facility pending validation. The
Company is also in the process of completing such validation for the
ATRIDOX(TM) product. In addition, all inspections necessary to obtain a CE
Mark, including the receipt of ISO 9000 Certification, have been completed and
the Company is now ISO 9001 registered and is entitled to place the CE Mark on
the ATRISORB(R) product.
9
11
PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The Company considers patent protection and proprietary position to be
materially significant to its business. As of December 31, 1997, the Company
maintained 16 United States patents and 13 foreign patents, and has 17 United
States and 36 foreign patent applications pending. The Company's ATRIGEL(R)
system, upon which the ATRISORB(R) GTR Barrier, the ATRIDOX(TM) product and all
of the Company's presently anticipated future products are based, is protected
by claims contained in these patents and in pending patent applications.
Notwithstanding the Company's pursuit of patent protection, there is no
assurance that others will not develop delivery systems, compositions and/or
methods that infringe the Company's patent rights resulting from outright
ownership or non-revocable exclusive licensure of patents which relate to the
Company's delivery systems, composition and/or methods. In that event, such
delivery systems, compositions and methods may compete with the Company's
systems, compositions and methods and may adversely affect the operations of
the Company. Further, there is no assurance that patent protection will afford
adequate protection against competitors with similar systems, composition or
methods, nor is there any assurance that the patents will not be infringed or
circumvented by others. Moreover, it may be costly to pursue and to prosecute
patent infringement actions against others, and such actions could hamper the
business of the Company. The Company also relies on its unpatented proprietary
knowledge. No assurance can be given that others will not be able to develop
substantially equivalent proprietary knowledge or otherwise obtain access to
the Company's knowledge, or that the Company's rights under any patents will
afford sufficient protection.
In 1995, the Company registered two U.S. trademarks for use in designating
its products and compositions, the ATRIGEL(R) system and ATRISORB(R) GTR
Barrier. As part of the Block Agreement, the Company transferred ownership of
the ATRISORB(R) and ATRIDOX(TM) trademarks in the United States and Canada to
Block.
The Company has also submitted and maintains several U.S. and numerous
foreign trademark and service mark applications for registrations of its name,
logo, products and compositions. The Company expects that the Trademark Office
examinations of these applications will be successful and registrations
granted.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than those of the Company. In addition, many specialized biotechnology
companies have formed collaborations with large, established pharmaceutical
companies to support research, development and commercialization of products
that may be competitive with those of the Company. Moreover, from time to time,
there have been research reports from various sources describing other
sustained release drug delivery systems for use in treating periodontal
disease. Further, the Company is aware that other companies are developing
products that may compete with the Company's products. There can be no
assurance that product introductions or developments by others will not
10
12
render the Company's products or technologies obsolete or place them at a
competitive disadvantage.
Products utilizing the Company's proprietary drug delivery systems are
expected to compete with other products for specified indications, including
drugs marketed in conventional and alternative dosage forms. New drugs or
further developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost, than those offered by the Company's drug delivery
systems. The Company expects proprietary products approved for sale to compete
primarily on the basis of product safety, efficacy, patient convenience,
reliability, availability and price. There can be no assurance that product
introductions or developments by others will not render the Company's expected
products or technologies noncompetitive or obsolete.
GOVERNMENT REGULATION
The research and development, preclinical studies and clinical trials, and
ultimately the manufacturing, marketing and labeling of its products, are
subject to extensive regulation by the FDA and other regulatory authorities in
the United States and other countries. The United States Food, Drug and
Cosmetic Act ("FD&C Act") and the regulations promulgated thereunder govern,
among other things, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, clearance, advertising and promotion of the
Company's products. Preclinical study and clinical trial requirements and the
regulatory approval process typically take years and require the expenditure of
substantial resources. Additional government regulation may be established that
could prevent or delay regulatory approval or clearance of the Company's
products. Delays or rejections in obtaining regulatory approvals or clearances
would adversely affect the Company's ability to commercialize any product the
Company develops and the Company's ability to receive product revenues. If
regulatory approval or clearance of a product is granted, the approval or
clearance may include significant limitations on the indicated uses for which
the product may be marketed.
FDA REGULATION -- APPROVAL OF THERAPEUTIC PRODUCTS
The Company's ATRIDOX(TM) product is regulated in the United States as a
drug. The steps ordinarily required before a drug may be marketed in the United
States include (a) preclinical and clinical studies, (b) the submission to the
FDA of an Investigational New Drug Application ("IND"), which must become
effective before human clinical trials may commence, (c) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (d) the submission to the FDA of an NDA, and (e) FDA approval of the
application, including approval of all labeling. Preclinical tests include
laboratory evaluation of product chemistry and formulation, as well as animal
studies to assess the potential safety and efficacy of the product. Preclinical
tests must be conducted in compliance with Good Laboratory Practice
regulations. The results of preclinical testing are submitted to the FDA as
part of an IND. A 30-day waiting period after the filing of each IND is
required prior to the commencement of clinical testing in humans. In addition,
the FDA may, at any time during this 30-day period, or anytime
thereafter, impose a clinical hold on proposed or ongoing clinical trials. If
the FDA imposes a clinical hold, clinical trials cannot commence or recommence
without FDA authorization.
11
13
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacology and safety, including side
effects associated with increasing doses. Phase II usually involves studies in
a limited patient population to (i) assess the efficacy of the drug in
specific, targeted indications, (ii) assess dosage tolerance and optional
dosage and (iii) identify possible adverse effects and safety risks. If a
compound is found to be potentially effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
demonstrate clinical efficacy and to further test for safety within an expanded
patient population at several study sites. There can be no assurance that Phase
I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's products
subject to such testing.
After successful completion of the required clinical testing, generally an
NDA is submitted. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the FD&C Act, the FDA has 180 days in which
to review the NDA and respond to the applicant. The review is often
significantly extended by FDA requests for additional information or
clarification regarding information already provided in the submission. The FDA
may refer the application to an appropriate advisory committee, typically a
panel of clinicians, for review, evaluation and a recommendation as to whether
the application should be approved. The FDA is not bound by the recommendation
of an advisory committee. If the FDA evaluations of the NDA and the
manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the NDA. When and if
those conditions have been met to the FDA's satisfaction, the FDA will issue an
approval letter. If the FDA's evaluation of the NDA or manufacturing facility
is not favorable, the FDA may refuse to approve the NDA or issue a not
approvable letter, and often requiring additional testing or information. Even
if regulatory approval is obtained, a marketed product and its manufacturing
facilities are subject to continual review and periodic inspections. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of manufacturing problems could cause subsequent withdrawal
of approval, reformulation of the drug, additional preclinical testing or
clinical trials and changes in labeling.
In March 1997, the Company submitted an NDA with the FDA for the ATRIDOX(TM)
product. The Company's NDA was accepted
for filing
by the FDA in June 1997. The Company filed the NDA based on the results of
pivotal Phase III trials, which were completed in May 1996 and included data
from 822 patients at 20 study sites. There can be no assurance that the results
of the Company's preclinical or clinical studies will demonstrate, to the FDA's
satisfaction, substantial evidence that the drug is safe and effective.
Additionally, because the protocol of the Phase III clinical trials required
the removal of the ATRIDOX(TM) product following treatment, an additional Phase
III study was conducted and the results were submitted in an amendment to the
original NDA filing, which may allow the Company to seek approval of the
product for use without removal. There can be no assurance that the Company
will obtain approval for any use of the product. If regulatory approval of the
ATRIDOX(TM) product or any other drug product is granted, such approval will be
limited to those disease states and conditions for which the product has been
shown to be safe and effective, as demonstrated to the FDA's satisfaction
through well controlled clinical studies. Furthermore,
12
14
approval may entail ongoing requirements for post-marketing studies. Even if
such regulatory approval is obtained, a marketed product, promotional
activities for the product, its manufacturer and its manufacturing facilities
are subject to continual review and periodic inspections by the FDA. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of marketing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical or clinical testing
and changes in labeling.
Failure to comply with FDA or other applicable regulatory requirements may
subject a company to administrative sanctions or judicially imposed sanctions
such as civil penalties, criminal prosecution, injunctions, product seizure or
detention, product recalls, or total or partial suspension of production. In
addition, noncompliance may result in the FDA's refusal to approve pending NDAs
or supplements to approved NDAs, premarket approval application ("PMA") or PMA
supplements and the FDA's refusal to clear 510(k)s.
FDA REGULATION -- APPROVAL OF MEDICAL DEVICES
The Company's ATRISORB(R) GTR Barrier product is regulated in the United
States as a medical device. New medical devices are generally introduced to the
market based on a premarket notification or 510(k) submission to the FDA in
which the sponsor establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III device for which the FDA has not required premarket approval. If the
sponsor cannot demonstrate substantial equivalence, the sponsor will be
required to submit a PMA, which generally requires preclinical and clinical
trial data, to prove the safety and effectiveness of the device. The Company
has received FDA clearance of a 510(k) for the ATRISORB(R) GTR Barrier, and is
currently marketing the device in the United States.
FDA REGULATION -- POST-APPROVAL REQUIREMENTS
Even if regulatory clearances or approvals for the Company's products are
obtained, its products and the facilities manufacturing the Company's products
are subject to continued review and periodic inspection by the FDA. Each U.S.
drug and device manufacturing establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial inspections by
the FDA and must comply with the FDA's current Good Manufacturing Practices
("cGMP") regulations if the facility manufactures drugs, and Quality System
Regulations ("QSR") regulations if the facility manufactures devices. In
complying with cGMP and QSR, manufacturers must expend funds, time and effort
in the area of production and quality control to ensure full technical
compliance. The FDA stringently applies regulatory standards for manufacturing.
Labeling and promotional activities are regulated by the FDA. The Company
must also report certain adverse events involving its drugs and devices to the
FDA under regulations issued by the FDA.
13
15
EUROPEAN REGULATION -- APPROVAL OF MEDICINAL PRODUCTS
In 1993, legislation was adopted which established a very new and amended
system for the registration of medicinal products in the European Union ("EU").
A significant purpose of this system is to prevent the existence of essentially
separate national approval systems which have been a major obstacle to
harmonization. One of the most significant features of this new system is the
establishment of a new European Agency for the Evaluation of Medicinal Products
("EMEA"). Under this new system, marketing authorization, broadly speaking, may
be submitted at either a centralized, a decentralized or a national level.
The centralized procedure is administered by the EMEA; this procedure is
mandatory for the approval of biotechnology products and available at the
applicant's option for other products. The centralized procedure provides for
the first time in the EU for the grant of a single marketing authorization
which is valid in all EU Member States.
As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products which are not subject to
the centralized procedure, under the so-called "decentralized procedure." The
decentralized procedure will be mandatory beginning in January 1, 1998. The
decentralized procedure creates a new system for mutual recognition of national
approvals and establishes procedures for coordinated EU action on product
suspensions and withdrawals. Under this procedure, the holder of a national
marketing authorization for which mutual recognition is sought may submit an
application to one or more Member States, certifying that identical dossiers
are being submitted to all Member States for which recognition is sought.
Within 90 days of receiving the application and assessment report, each Member
State must decide whether to recognize the approval. The procedure encourages
Member States to work with applicants and other regulatory authorities to
resolve disputes concerning mutual recognition. If such disputes cannot be
resolved within the 90-day period provided for review, the application will be
subject to a binding arbitration procedure.
The Company has chosen a decentralized procedure which utilizes a mutual
recognition process for European regulatory filings and submitted the
regulatory dossier to the Medicines Control Agency in the United Kingdom in
October 1997. However, there can be no assurance that the chosen regulatory
strategy will secure regulatory approvals or approvals of the applications
submitted by the Company.
EUROPEAN REGULATION -- APPROVAL OF MEDICAL DEVICES
The Company's ATRISORB(R) GTR Barrier is regulated in Europe as a medical
device. The EU has promulgated rules that require medical devices received by
mid-June 1998 the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards and compliance with applicable
European medical device directives. Failure to receive the right to affix the
CE Mark will prohibit a company from selling products in Member States of the
EU. The Company has been certified as being in compliance with the ISO 9000
standards, one of the CE Mark certification prerequisites, and received the CE
Mark for the ATRISORB(R) GTR Barrier in the December 1997.
14
16
ADDITIONAL REGULATORY ISSUES
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
patent which claims a product, use or method of manufacture covering drugs and
certain other products may be extended for up to five years to compensate the
patent holder for a portion of the time required for research and FDA review of
the product. This law also establishes a period of time following approval of a
drug during which the FDA may not accept or approve applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. There can be no assurance that the
Company will be able to take advantage of either the patent term extension or
marketing exclusivity provisions of this law.
The National Institutes of Health has been requested by the Department of
Health and Human Services to submit proposals for addressing potential
conflicts of interest in the biomedical research sector. Although the proposal
request is aimed at establishing rules to treat potential abuses in the system
without imposing unnecessary burdens and disincentives, there can be no
assurance that any rules adopted will not adversely affect the Company's
ability to obtain research grants. Various aspects of the Company's business
and operations are regulated by a number of other governmental agencies
including the Occupational Safety and Health Administration and the Securities
and Exchange Commission.
THIRD PARTY REIMBURSEMENT
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare,
Medicaid, health maintenance organizations and private insurers, including Blue
Cross/Blue Shield plans. Governmental imposed limits on reimbursement of
hospitals and other health care providers (including dental practitioners) have
significantly impacted their spending budgets. Under certain government
insurance programs, a health care provider is reimbursed a fixed sum for
services rendered in treating a patient, regardless of the actual charge for
such treatment. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling health care costs through
redesign of benefits and exploration of more cost-effective methods of
delivering health care. In general, these government and private measures have
caused health care providers to be more selective in the purchase of medical
products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain third-party payers to
fully or substantially reimburse health care providers for the use of the
products could have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 116 employees on a full-time
basis and one person on a part-time basis. Of the 116 full-time employees, 102
are engaged in production, research and clinical testing and the remaining 14
are in administrative capacities. Thirteen employees have earned doctorate or
advanced degrees. None of the Company's
15
17
employees are represented by a union or collective bargaining unit and
management considers relations with employees to be good.
ADDITIONAL INFORMATION
Compliance with federal, state and local law regarding the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any
adverse effect upon capital expenditures, earnings or the competitive position
of the Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such
environmental standards. In addition, the Company does not anticipate being
required to expend any funds in the near future for environmental protection in
connection with its operations.
The Company does not believe that any aspect of its business is
significantly seasonal in nature.
No significant portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States Government.
The Company currently obtains supplies of the polymer used in the polymer
delivery system from three separate sources. Supplies of doxycycline are
obtained from both domestic and foreign sources. The Company believes that, in
the event that it should lose any of its suppliers of raw materials, it could
locate and obtain such raw materials from other available sources without
substantial adverse delay or increased expense.
ITEM 2. PROPERTIES.
The Company leases approximately 25,200 square feet of office and
research laboratory space located in Fort Collins, Colorado, pursuant to a
lease that expires on June 1, 2003. The Company has a one time right to
terminate this lease on June 1, 2000. In addition, the Company leases an
additional 4,000 square feet of space at the same location for pre-clinical and
initial manufacturing activities, pursuant to a lease which expires on December
1, 1999.
The Company owns a 25,000 square foot manufacturing facility in Fort
Collins which it acquired in July 1996. As part of the building acquisition,
the Company acquired two acres of vacant land, directly adjacent to the
building. In August 1997, the Company acquired an additional 2.7 acres for
possible future development or expansion of the Company.
The Company owns substantially all of its laboratory and manufacturing
equipment, which it considers to be adequate for its research, development and
testing requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
16
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
through the solicitation of proxies during the fourth quarter of the Company's
most recent year.
17
19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on The Nasdaq Stock Market under
the symbol "ATRX." The following table sets forth, for the fiscal periods
indicated, the range of high and low sales price per share of the common stock,
as reported on The Nasdaq Stock Market:
High Low
---- ---
1997:
First Quarter $14 1/2 $ 10 1/8
Second Quarter 12 1/4 9
Third Quarter 22 1/4 11
Fourth Quarter 23 7/8 12 3/8
1996:
First Quarter $15 1/2 $ 6 1/4
Second Quarter 15 1/2 8 1/4
Third Quarter 12 5/8 6 7/8
Fourth Quarter 12 3/4 8 3/4
As of February 23, 1998, there were approximately 3,237 holders of record of
the Company's common stock.
The Company has never paid cash dividends. The Company currently
anticipates that it will retain all available funds for use in the operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future.
18
20
ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented below is derived from the financial
statements of the Company, which has been audited and reported upon by Deloitte
& Touche LLP, independent auditors. The selected financial information set
forth in the table below is not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, related notes and independent auditors' report,
included herein.
Three
Year Ended Year Ended Year Ended Year Ended Months Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Ended Dec. Sept. 30,
1997 1996 1995 1994 31, 1993 1993
-----------------------------------------------------------------------------------------------
(In thousands, except share data)
SUMMARY OF OPERATIONS:
Total revenue $ 11,545 $ 2,896 $ 1,562 $ 1,815 $ 539 $ 3,092
Total expenses 15,412 14,328 14,220 7,355 1,546 6,791
Net loss (3,867) (11,432) (12,658) (5,540) (1,007) (3,698)
Basic loss per common share (.35) (1.13) (1.58) (0.72) (0.13) (0.48)
Weighted average shares 11,134 10,147 8,002 7,741 7,721 7,695
outstanding
BALANCE SHEET DATA:
Working capital $ 67,229 $ 24,669 $ 10,913 $ 12,616 $ 13,478 $ 9,372
Total assets 78,294 38,463 14,894 22,006 27,912 29,074
Long-term obligations 50,000 -- -- -- -- --
Shareholders' equity 26,703 30,284 12,807 21,191 26,978 28,118
ITEM 7. 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 contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors.
OVERVIEW
Since its inception, the Company has devoted its efforts and resources
primarily to research and development of dental products. The Company has
sustained losses in each year of its operations and expects to continue to
incur losses due to expenses for research, development, manufacturing, sales,
marketing and interest on the Notes in excess of anticipated revenues. Prior to
1996, the Company received no revenue from product sales. The Block Agreement
provides for potential milestone payments totaling up to $50 million to the
Company over three to five years, as well as manufacturing margins and
royalties on sales. As of
19
21
December 31, 1997, the Company had received approximately $7.1 million in
milestone payments from Block.
The Company anticipates that expenses for the year ending December 31, 1998
will increase as a result of increasing costs for product development,
preclinical and clinical testing, regulatory affairs, manufacturing, commercial
distribution activities, and general and administrative activities associated
with the ATRIDOX(TM) product and the ATRISORB(R) GTR Barrier.
At December 31, 1997 the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $43 million. These
carryforwards will expire through 2011. The Company's ability to utilize its
net operating loss and research and development credit carryforwards is subject
to an annual limitation in future periods pursuant to the "change in ownership"
rules under Section 382 of the Internal Revenue Code of 1986, as amended.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
The Company had revenue from product sales of approximately $1,895,000 for
the year ended December 31, 1997 compared to approximately $636,000 for the
year ended December 31, 1996, representing a 198% increase. The increase is
primarily due to the increased sales of the ATRISORB(R) GTR Barrier in the
United States as a result of the Block Agreement and a new product released in
the fourth quarter of 1997 and marketed by Heska.
Contract revenue represents revenue the Company received from grants and from
unaffiliated third parties for performing contract research and development
activities utilizing the ATRIGEL(R) system, and was approximately $854,000 for
the year ended December 31, 1997, compared to approximately $1,004,000 for the
year ended December 31, 1996, representing a 15% decrease. The decrease is
primarily due to the completion of several research contracts during 1996.
Sale of marketing rights represents milestone revenue the Company received
pursuant to the Block Agreement during the year ended December 31, 1997. There
was no revenue from sale of marketing rights payments in 1996. The Company
expects to receive additional future revenue upon the achievement of other
milestones under the Block Agreement, which could result in substantial
payments.
Interest income for the year ended December 31, 1997 was approximately
$1,726,000 compared to approximately $1,204,000 for the year ended December 31,
1996, representing a 43% increase. Interest income increased due to additions
in principal investments as a result of the proceeds from the Note Offering
completed in the fourth quarter of 1997 and the $7,000,000 payment received
under the Block Agreement. The majority of the funds were invested in U.S.
government bond funds, long-term U.S. government and government agency
investments. The remaining cash and cash equivalents were invested in interest
bearing accounts and commercial paper to fund the Company's short-term
operations.
20
22
Cost of goods sold was approximately $1,533,000 for the year ended December
31, 1997 compared to approximately $364,000 for the period ended December 31,
1996, representing a 321% increase. The increase is primarily due to the
increased sales of the ATRISORB(R) GTR Barrier in the United States as a result
of the Block Agreement and sales of a new product released in the fourth
quarter of 1997 and marketed by Heska.
Other research and development expenses, which included activities for the
ATRISORB(R) GTR Barrier and other research activities, were approximately
$6,089,000 for the year ended December 31, 1997 compared to approximately
$4,824,000 for the year ended December 31, 1996, representing a 26% increase.
The increase was primarily a result of additional expenditures in new areas of
research using the Company's existing technology.
Administrative and marketing expenses were approximately $2,334,000 for the
year ended December 31, 1997 compared to approximately $3,872,000 for the year
ended December 31, 1996, representing a 40% decrease. The primary reason for
this decrease was the termination of the Company's sales and marketing expenses
related to the ATRISORB(R) GTR Barrier, since Block markets the product.
The Company recorded a net loss of approximately $3,867,000 for the year
ended December 31, 1997 compared to a net loss of approximately $11,432,000 for
the year ended December 31, 1996, representing a 66% decrease. The reduction in
net loss was primarily the result of the receipt of the payment of $7,000,000
from Block.
Years Ended December 31, 1996 and 1995
Total revenue for the year ended December 31, 1996 was approximately
$2,896,000 compared to approximately $1,562,000 for the year ended December 31,
1995, representing an 85% increase. The increase in total revenue was primarily
due to increases in sales, contract revenue and interest income.
The Company had sales of approximately $636,000 during the year ended
December 31, 1996, primarily representing sales of the ATRISORB(R) GTR Barrier
during 1996. The Company had no product sales during 1995.
Contract revenue was approximately $1,004,000 for the year ended December 31,
1996 compared to approximately $580,000 for the year ended December 31, 1995,
representing a 73% increase. Contract revenue represents revenue the Company
received from grants and from unaffiliated third parties for performing
contract research and development activities utilizing the ATRIGEL(R) system.
The increased revenues are primarily due to the Company being awarded two
federal research grants during 1996.
Interest income for the year ended December 31, 1996 was approximately
$1,204,000 compared to approximately $987,000 for the year ended December 31,
1995, representing a 22% increase. The increase in interest income was due to
an increase in principal investments during 1996 as a result of the receipt of
approximately $27,844,000 in proceeds from the Company's common stock offering
completed in May 1996.
21
23
Cost of goods sold of $364,000 for the year ended December 31, 1996 was
primarily associated with the launch of the Company's first dental product, the
ATRISORB(R) GTR Barrier, in the United States and certain European countries.
The Company did not record cost of goods sold for the year ended December 31,
1995.
Research and development -- ATRIDOX(TM) product expenses for the year ended
December 31, 1996 were approximately $5,268,000 compared to approximately
$5,684,000 for the year ended December 31, 1995, representing a 7% decrease due
to the completion of Phase III clinical trials on the ATRIDOX(TM) product in
May 1996.
Other research and development expenses, which included activities for the
ATRISORB(R) GTR Barrier and other research activities, for the year ended
December 31, 1996 were approximately $4,824,000 for the year ended December 31,
1996 compared to approximately $3,905,000 for the year ended December 31, 1995,
representing a 24% increase. The increase was primarily a result of hiring
additional personnel in the Manufacturing and Quality Assurance/Quality Control
departments and expenses related to federal grants received in 1996.
Administrative and marketing expenses were approximately $3,872,000 for the
year ended December 31, 1996 compared to $830,000 for the year ended December
31, 1995, representing a 367% increase. The primary reasons for this increase
were expenses related to the initiation of marketing and sales efforts related
to the ATRISORB(R) GTR Barrier. This expense is expected to decrease in future
years as a result of the signing of the Block Agreement.
During 1996, the Company recorded a one-time non-cash charge of approximately
$585,000 for compensation expense associated with the cancellation of certain
employee incentive stock options with a five year term and the issuance of new
non-qualified stock options which extended the term to ten years.
The Company recorded a net loss of approximately $11,432,000 for the year
ended December 31, 1996 compared to a net loss of $12,658,000 for the year
ended December 31, 1995, representing a 10% decrease. However, exclusive of a
one-time charge of approximately $3,802,000 associated with the acquisition of
Vipont Royalty Income Fund, Ltd. (the "Acquisition"), the prior year loss would
be approximately $8,856,000. Therefore, the loss for the year ended December
31, 1996 actually represents a 29% increase over the year ended December 31,
1995. The increased loss was primarily due to expenses associated with the
commencement of marketing and manufacturing activities related to the
ATRISORB(R) GTR Barrier.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
approximately $15,186,000, marketable securities of approximately $50,234,000
and other current assets of approximately $3,400,000, for total current assets
of approximately $68,819,000. Current liabilities totaled approximately
$1,591,000, which resulted in working capital of approximately $67,229,000.
22
24
In August 1997, the Company established a $1,000,000 line of credit with a
bank. Borrowings under the line bear interest at the prime rate. As of December
31, 1997, there were no borrowings outstanding under this agreement.
In November 1997, the Company issued $50,000,000 of convertible subordinated
notes. These notes carry an interest rate of 7% and are due in 2004. The notes
are convertible, at the option of the holder, into common stock, at any time
prior to maturity, unless previously redeemed or repurchased. The notes are
convertible, at the option of the Company, after three years from the date of
issue. The conversion price is set at $19.00 per share.
During the year ended December 31, 1997, net cash used in operating
activities was approximately $4,514,000. This was primarily a result of the net
loss for the period of approximately $3,867,000, adjusted for certain non-cash
expenses, and changes in other operating assets and liabilities as set forth in
the statements of cash flows.
Net cash used in investing activities was approximately $47,063,000 during
the year ended December 31, 1997, primarily as a result of the net investment
in marketable securities during the period and the acquisition of property,
plant and equipment for the manufacturing facility.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
and clearance applications, the development of the Company's commercial
manufacturing facilities, including the expansion or possible construction of an
administrative and laboratory facility on land adjacent to its manufacturing
facility, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products, if and when approved or
cleared. The Company expended approximately $2,663,000 for property, plant and
equipment and leasehold improvements, and approximately $204,000 for patent
development in the year ended December 31, 1997.
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company and third parties with which the Company does
business rely on numerous computer programs in their day to day operations. The
Company is evaluating the Year 2000 issue as it relates to the Company's
internal computer systems and third party computer systems with which the
Company interacts. The Company expects to incur internal staff costs as well as
consulting and other expenses related to these issues; these costs will be
expensed as incurred. In addition, the appropriate course of action may include
replacement or an upgrade of certain systems or equipment at a substantial cost
to the Company. There can be no assurance that the Year 2000 issues will be
resolved in 1998 or 1999. The Company may incur significant costs in resolving
its Year 2000 issues, however, the Company believes this issue will not have a
significant adverse impact on the Company's operations.
23
25
The Company expects to continue to incur substantial expenditures for
research and development, testing, regulatory compliance and to hire additional
management, scientific, manufacturing and administrative personnel. The Company
will also continue to expend a significant amount of funds in its ongoing
clinical studies. These expenses will be partially offset by a decrease in
sales and marketing expenses as a result of the Block Agreement and potential
fees and royalties. Further, the Company expects to continue to incur operating
losses for the foreseeable future. Depending on the results of the Company's
research and development activities, the Company may determine to accelerate or
expand its efforts in one or more of its proposed areas and may therefore
require additional funds earlier than presently anticipated. Management
believes that the proceeds of the Note Offering, together with existing cash
resources, will be sufficient to fund its operations through 1999.
24
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company required by Regulation S-X are
attached to this Report. Reference is made to Item 14 below for an index to the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
26, 1998 regarding directors and officers of the Company and compliance with
Section 16(a) of the Exchange Act is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
26, 1998 regarding executive compensation is incorporated herein by reference
in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 26, 1998
regarding security ownership of certain beneficial owners and management is
hereby incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 26, 1998
regarding certain relationships and related transactions is hereby incorporated
herein by reference in response to this item.
25
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents of the Company are filed as part of
this Report:
1. Financial Statements
Independent Auditors' Report
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - Years Ended December 31,
1997, 1996 and 1995
Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995
Notes to the Financial Statements
2. Financial Statement Schedules
Schedules for which provision is made in the
applicable regulations of the Securities and Exchange
Commission have been omitted because they are not required
under the related instructions or the information related is
contained elsewhere in the financial statements.
3. Exhibits
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E.
Urheim dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology
Transfer Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
10.4 Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.5 Termination Agreement dated September 27, 1995
between Registrant and Atrix, L.P.(4)
26
28
10.6 Lease Agreement dated May 11, 1991 between the
Registrant and GB Ventures(3)
10.7 Agreement dated December 16, 1996 between the
Registrant and Block Drug Corporation(5)
10.8 Indenture, dated November 15, 1997, by and among
the Registrant and State Street Bank and Trust
company of California, N.A., as trustee
thereunder(6)
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and Exchange
Commission.
(4)Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to Registrant's Current Report on
Form 8-K dated December 16, 1996, as filed with the Securities and Exchange
Commission.
(6) Incorporated by reference to Registrant's Current Report on
Form 8-K dated November 6, 1997, as filed with the Securities and Exchange
Commission.
* Filed herewith.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K, dated September 22,
1997, was filed with the Securities and Exchange
Commission under Item 5 regarding the decision of
Block Drug Corporation to market Atridox(TM) in
Canada and Atrix' pursuit of marketing opportunities
for Atridox(TM) in Europe.
2. Current Report on Form 8-K dated November 24, 1997,
was filed with the Securities and Exchange
Commission under Item 5 regarding the issuance of
$50,000,000 of 7% convertible subordinated notes.
No other reports on Form 8-K were filed during the three
month period ended December 31, 1997.
27
29
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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)
By: /s/ John E. Urheim
------------------------------
John E. Urheim
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David R. Bethune Director
- ---------------------------------------
David R. Bethune
/s/ H. Stuart Campbell Director
- ---------------------------------------
H. Stuart Campbell
/s/ Dr. D. Walter Cohen Director
- ---------------------------------------
Dr. D. Walter Cohen
/s/ Dr. Charles P. Cox Vice President of New Business
- ---------------------------------------
Dr. Charles P. Cox Development
/s/ Michael R. Duncan Vice President of Manufacturing
- ---------------------------------------
Michael R. Duncan
/s/ Dr. Richard L. Dunn Vice President of Drug Delivery
- ---------------------------------------
Dr. Richard L. Dunn Research
/s/ Dr. J. Steven Garrett Vice President of Dental Clinical
- ---------------------------------------
Dr. J. Steven Garrett Research
/s/ Elaine M. Gazdeck Vice President of Regulatory
- ---------------------------------------
Elaine M. Gazdeck Affairs & Quality Assurance
/s/ Dr. Jere E. Goyan Director
- ---------------------------------------
Dr. Jere E. Goyan
30
/s/ Dr. R. Bruce Merrifield Director
- ---------------------------------------
Dr. R. Bruce Merrifield
/s/ C. Rodney O'Connor Director
- ---------------------------------------
C. Rodney O'Connor
/s/ William C. O'Neil, Jr. Chairman of the Board of
- ---------------------------------------
William C. O'Neil, Jr. Directors
/s/ Rees M. Orland Vice President of Marketing and
- ---------------------------------------
Rees M. Orland Sales
/s/ Brian G. Richmond Vice President of Finance and
- ---------------------------------------
Brian G. Richmond Assistant Secretary
/s/ Dr. G. Lee Southard President, Chief Scientific
- ---------------------------------------
Dr. G. Lee Southard Officer and Director
/s/ John E. Urheim Vice Chairman of the Board of
- ---------------------------------------
John E. Urheim Directors and Chief Executive
Officer
31
FINANCIAL STATEMENT INDEX
Page
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1997 and 1996 F-3
Statements of Operations - Years Ended December 31, 1997,
1996 and 1995 F-4
Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995 F-6
NOTES TO THE FINANCIAL STATEMENTS F-7- F-17
F-1
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Atrix Laboratories, Inc.
Fort Collins, Colorado
We have audited the accompanying balance sheets of Atrix Laboratories,
Inc. (the "Company") as of December 31, 1997 and 1996, and the related
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 6, 1998
F-2
33
ATRIX LABORATORIES, INC.
BALANCE SHEETS
ASSETS
December 31, December 31,
1997 1996
-----------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,185,841 $ 18,368,472
Restricted cash equivalents -- 7,000,000
Marketable securities, at fair value 50,233,553 6,040,389
Accounts receivable, net of allowance for doubtful accounts
of $111,479 and $10,000 1,553,427 681,290
Interest receivable 340,346 154,128
Inventories 1,309,519 303,505
Prepaid expenses and deposits 196,574 301,321
------------ ------------
Total current assets 68,819,260 32,849,105
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 8,332,671 5,888,007
Leasehold improvements 605,107 565,608
------------ ------------
Total 8,937,778 6,453,615
Accumulated depreciation and amortization (2,381,908) (1,687,056)
------------ ------------
Property, plant and equipment, net 6,555,870 4,766,559
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $96,355 and $69,624 1,024,953 847,830
Deferred finance costs, net of accumulated
amortization of $22,814 and $0 1,893,576 --
------------ ------------
Total other assets 2,918,529 847,830
------------ ------------
TOTAL $ 78,293,659 $ 38,463,494
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,052,362 $ 933,147
Interest payable 287,671 --
Accrued salaries and payroll taxes 155,200 88,868
Other accrued liabilities 95,508 155,657
Deferred revenue -- 7,002,192
------------ ------------
Total current liabilities 1,590,741 8,179,864
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 --
------------ ------------
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; 11,177,261 and 11,113,624 shares
issued and outstanding 11,177 11,114
Additional paid-in capital 73,224,442 72,913,274
Unrealized holding loss on marketable securities (177,867) (152,641)
Accumulated deficit (46,354,834) (42,488,117)
------------ ------------
Total shareholders' equity 26,702,918 30,283,630
------------ ------------
TOTAL $ 78,293,659 $ 38,463,494
============ ============
See notes to the financial statements
F-3
34
ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
-------------------------------------------------
REVENUE:
Sales $ 1,895,179 $ 635,517 $ --
Contract revenue 854,081 1,004,201 580,164
Sale of marketing rights 7,100,000 -- --
Interest income 1,725,838 1,204,352 986,995
Gains (losses) & other income, net (29,797) 51,455 (4,895)
-------------------------------------------------
Total revenue 11,545,301 2,895,525 1,562,264
-------------------------------------------------
EXPENSES:
Cost of goods sold 1,533,441 363,517 --
Research and development
- ATRIDOX(TM) product 5,455,693 5,268,070 5,683,805
- Other 6,088,900 4,823,666 3,904,730
Administrative and marketing 2,333,984 3,872,425 829,509
Acquisition of rights -- -- 3,802,491
-------------------------------------------------
Total expenses 15,412,018 14,327,678 14,220,535
-------------------------------------------------
NET LOSS $ (3,866,717) $(11,432,153) $(12,658,271)
=================================================
BASIC LOSS PER COMMON SHARE $ (.35) $ (1.13) $ (1.58)
=================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
11,133,669 10,146,703 8,001,985
=================================================
See notes to the financial statements.
F-4
35
ATRIX LABORATORIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Unrealized Total
Paid-in Holding Gain Accumulated Shareholders'
Capital (Loss) Deficit Equity
Shares Amount
--------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1994 7,743,078 $ 7,743 $ 39,977,455 $ (396,965) $(18,397,693) $ 21,190,540
Exercise of stock options 139,350 139 391,611 -- -- 391,750
Acquisition of rights 550,868 551 3,520,407 -- -- 3,520,958
Unrealized holding gain -- -- -- 361,789 -- 361,789
Net loss -- -- -- -- (12,658,271) (12,658,271)
--------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 8,433,296 8,433 43,889,473 (35,176) (31,055,964) 12,806,766
Exercise of stock options 92,828 93 597,824 -- -- 597,917
Issuance of common stock for cash 2,587,500 2,588 27,841,389 -- -- 27,843,977
Unrealized holding loss -- -- -- (117,465) -- (117,465)
Compensation-stock options -- -- 584,588 -- -- 584,588
Net loss -- -- -- -- (11,432,153) (11,432,153)
--------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 11,113,624 11,114 72,913,274 (152,641) (42,488,117) 30,283,630
Exercise of stock options 63,637 63 311,168 -- -- 311,231
Unrealized holding loss -- -- -- (25,226) -- (25,226)
Net loss -- -- -- -- (3,866,717) (3,866,717)
--------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 11,177,261 $ 11,177 $ 73,224,442 $ (177,867) $(46,354,834) $ 26,702,918
--------------------------------------------------------------------------------------------
See notes to the financial statements.
F-5
36
ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
-------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,866,717) $(11,432,153) $(12,658,271)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 765,735 554,595 369,663
Loss (gain) on sale of equipment 76,889 (3,017) --
Amortization of intangible assets 26,731 17,384 15,175
Amortization of bond premiums 8,919 39,239 241,623
Amortization of deferred finance costs 22,814 -- --
Loss (gain) on sale of marketable securities -- (36,419) 4,895
Write-off of patents -- 29,579 5,506
Acquisition of rights through issuance of common stock -- -- 3,520,958
Compensation - stock options -- 584,588 --
Changes in operating assets and liabilities:
Restricted cash equivalents 7,000,000 (7,000,000) --
Accounts receivable (872,137) (490,625) (97,196)
Interest receivable (186,218) (41,825) 28,545
Inventories (1,006,014) (101,241) (202,264)
Prepaid expenses and deposits 104,747 271,430 (453,649)
Accounts payable - trade 119,215 (929,703) 1,381,583
Interest payable 287,671 0 0
Accrued salaries and payroll taxes 66,332 16,669 9,199
Other accrued liabilities (60,149) 3,549 (43,707)
Deferred revenue (7,002,192) 7,002,192 (75,000)
------------ ------------ ------------
Net cash used in operating activities (4,514,374) (11,515,758) (7,952,940)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (2,623,291) (4,293,064) (577,342)
Acquisition of leasehold improvements (39,499) (59,418) (137,339)
Investment in intangible assets (203,854) (220,677) (167,157)
Proceeds from sale of property, plant and equipment 30,855 253,835 --
Proceeds from maturity of marketable securities 2,025,000 1,000,000 5,185,800
Proceeds from sale of marketable securities -- 4,070,501 2,533,283
Investment in marketable securities (46,252,309) (234,328) (230,843)
------------ ------------ ------------
Net cash (used in) provided by investing activities (47,063,098) 516,849 6,606,402
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of 311,231 28,441,894 391,750
stock options
Proceeds from issuance of convertible subordinated notes 50,000,000 -- --
Payment of finance costs (1,916,390)
------------ ------------ ------------
Net cash provided by financing activities 48,394,841 28,441,894 391,750
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,182,631) 17,442,985 (954,788)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,368,472 925,487 1,880,275
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,185,841 $ 18,368,472 $ 925,487
============ ============ ============
See notes to the financial statements.
F-6
37
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. The
Company is engaged in research, development and commercialization of a broad
range of dental, medical and veterinary products based on its proprietary
sustained release biodegradable polymer drug delivery system, trade-named
ATRIGEL(R). The Company commenced sales of its first product, the ATRISORB(R)
GTR Barrier in both the United States and Europe during 1996. The majority of
its other products are in either the research, development, or clinical stage.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original maturity
of three months or less.
RESTRICTED CASH EQUIVALENTS
Restricted cash equivalents consists of highly liquid investments with an
original maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and carried at
fair value with the unrealized holding gain or loss included in shareholders'
equity. Premiums and discounts associated with bonds are amortized using the
effective interest rate method.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first out method, or market. The components of inventories as of December 31,
1997 and 1996, are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
Raw Materials.......................................... $ 563,503 $ 228,533
Work In Progress....................................... 500,198 13,435
Finished Goods......................................... 245,818 61,537
--------- ---------
$1,309,519 $ 303,505
========== =========
F-7
38
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. Leasehold improvements are
amortized over the term of the related lease.
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 $198,856, $93,072 and $83,106 for the years ended
December 31, 1997, 1996 and 1995 respectively.
INTANGIBLE ASSETS
Certain technology rights acquired from the Company's former parent, Vipont
Pharmaceutical, Inc., a wholly owned subsidiary of Colgate-Palmolive Company,
were transferred at cost less accumulated amortization and are being amortized
on a straight-line basis over their estimated useful life. Also included in
intangible assets are the legal costs incurred to obtain patents. Upon
receiving a determination that the Company's claims have been approved, these
costs are amortized over the patent's estimated useful life commencing with the
approval of the patent. Costs associated with patents are expensed upon the
determination that such costs are not recoverable.
VALUATION OF LONG-LIVED ASSETS
The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and establishes guidelines
for determining fair value based on future net cash flows for the use of the
asset and for the measurement of the impairment loss. Any impairment loss is
recorded in the period in which the recognition criteria are first applied and
met.
DEFERRED FINANCE COSTS
Costs associated with the issuance of the 7% convertible subordinated
notes are deferred and are being amortized on a straight-line basis over the
seven-year term of the notes.
REVENUE RECOGNITION
The Company recognizes revenue on sales at the time of shipment. Revenue is
recognized on research contracts as research work is performed and costs are
incurred. Deferred revenue is recorded with respect to payments received that
relate to research activities to be performed in subsequent periods.
F-8
39
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
LOSS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", in the current year. SFAS No. 128 requires dual
presentation of basic, which excludes dilution, and diluted earnings per share
for all entities with complex capital structures. Adoption of the new standard
had no effect on the financial statements.
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the periods presented. The
computation of diluted loss per share was antidilutive in each of the periods
presented; therefore, the amount reported for basic and diluted loss per share
are the same.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK OPTION PLANS
The Company accounts for stock-based compensation to employees and directors
using the intrinsic value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
accounts for stock-based compensation to non-employees using a fair value based
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation."
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach
to financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement basis and the income tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future. Such deferred
income tax liability computations are based on enacted tax laws and rates
applicable to the years in which the differences are expected to affect taxable
income. A valuation allowance is
F-9
40
established when necessary to reduce deferred income tax assets to the amounts
expected to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company is required to adopt SFAS No. 130 in fiscal year 1999.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not yet determined the impact
of adopting SFAS No. 130 on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective for the Company
beginning July 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has not
determined whether the adoption of SFAS No. 131 will have a material impact on
current financial statement disclosures.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current
presentation.
2. MARKETABLE SECURITIES
As of December 31, 1997 marketable securities consist of the following:
NUMBER OF SHARES/ ESTIMATED
PRINCIPAL AMOUNT COST FAIR VALUE
---------------- ---- ----------
U.S. Government and Agency Bond Funds
Thornburg Fund ............................................................. 40,815 $ 515,338 $ 504,059
Pimco Fund ................................................................. 364,087 3,992,860 3,859,326
----------- ----------- -----------
Total .............................................................. 404,902 4,508,198 4,363,385
U.S. Government and Agency Bonds ............................................. 42,000,000 42,014,235 41,981,180
Commercial Paper-6 month maturity ............................................ 4,000,000 3,888,988 3,888,988
----------- ----------- -----------
Total .............................................................. 46,404,902 $50,411,421 $50,233,553
=========== =========== ===========
As of December 31, 1996 marketable securities consist of the following:
NUMBER OF SHARES/ ESTIMATED
PRINCIPAL AMOUNT COST FAIR VALUE
----------------- ---- ----------
U.S. Government and Agency Bond Funds
Thornburg Fund ............................................................. 38,450 $ 486,327 $ 472,933
Pimco Fund ................................................................. 386,542 3,676,706 3,544,584
----------- ----------- -----------
Total .............................................................. 424,992 4,163,033 4,017,517
U.S. Government and Agency Bonds ............................................. 2,025,000 2,030,000 2,022,872
----------- ----------- -----------
Total .............................................................. 2,449,992 $ 6,193,033 $ 6,040,389
=========== =========== ===========
F-10
41
As of December 31, 1997 gross unrealized gains and losses pertaining to
marketable securities are $9,997 and $187,864, respectively. As of December 31,
1996 gross unrealized gains and losses pertaining to marketable securities are
$0 and $152,641, respectively.
3. LINE OF CREDIT
In August 1997, the Company obtained a revolving line of credit with a bank.
Under the terms of the line of credit, the Company may borrow up to $1,000,000.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring the Company to maintain certain levels of net
worth and liquidity. As of December 31, 1997, the Company had no outstanding
balance under this line.
4. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, the company issued $50,000,000 of convertible subordinated
notes. These notes bear interest at the rate of 7% and are due in 2004. The
notes are convertible, at the option of the holder, into common stock, at any
time prior to maturity, unless previously redeemed or repurchased. The notes
are convertible, at the option of the Company, after three years from the date
of issue. The conversion price is set at $19.00 per share.
5. BLOCK DRUG CORPORATION AGREEMENT
On December 17, 1996, the Company entered into an agreement with Block Drug
Corporation ("Block"). Under the terms of the agreement, Block acquired the
North American marketing rights to the ATRISORB(R) GTR Barrier and
ATRISORB(R)-DOXY product, and the rights to market the ATRIDOX(TM) product in
the United States, with an option to acquire the rights to market the
ATRIDOX(TM) product in Canada and certain European countries. The Company
received an advance payment of $7,000,000 for the sale of the marketing rights
to the ATRISORB(R) GTR Barrier. The funds were deposited in an escrow account
until February 1, 1997, at which time substantially all of the initial services
required by the agreement were performed. Accordingly, the Company deferred
recognition of the initial payment as revenue until 1997. The $7,000,000
initial payment is included in restricted cash equivalents as of December 31,
1996. The Company received an additional $100,000 payment from Block in
September 1997 when Block exercised its option to acquire rights to market the
ATRIDOX(TM) and ATRISORB(R) GTR Barrier products in Canada.
6. ACQUISITION OF RIGHTS
The Company was the sole general partner of Vipont Royalty Income Fund, Ltd.,
a Colorado limited partnership (the "Partnership"). The primary asset of the
Partnership was its right to receive payments from the Company based on
royalties and/or proceeds from the sale of rights relating to the ATRIDOX(TM)
product, if any, pursuant to certain agreements (the "Agreements") between the
Company and the Partnership. On September 27, 1995, the limited partners (the
"Limited Partners") of the Partnership approved the merger (the "Merger"), of
F-11
42
the Partnership with and into Atrix, L.P., a Colorado limited partnership
("Atrix, L.P."). The Company was the sole limited partner of Atrix, L.P.
AtrixSub, a Colorado corporation and a wholly-owned subsidiary of the Company,
was the sole general partner of Atrix, L.P. The Company determined the value of
the Partnership using an income valuation approach based on projected royalty
payments from projected sales of the ATRIDOX(TM) product. The Company issued
550,868 shares of common stock, valued at $6.40 per share for purposes of the
Merger, for a total consideration of $3,524,000. Additional expenses related to
the Merger of approximately $278,000 were paid by the Company. The total cost
of acquiring the Partnership rights of approximately $3,802,000 was considered
a research and development cost and accordingly, was expensed in 1995.
Immediately following the Merger, the Agreements were terminated pursuant to a
Termination Agreement dated September 27, 1995 entered into between the Company
and Atrix, L.P. Subsequent to the Merger, Atrix, L.P. and AtrixSub were
dissolved.
7. STOCK OPTION PLANS
As of December 31, 1997, the Company has two stock-based compensation plans,
which are discussed below.
PERFORMANCE STOCK OPTION PLAN
The 1987 Performance Stock Option Plan, as amended and restated in 1992 (The
"Plan") permits the granting of both incentive stock options, as defined under
Section 422 of the Internal Revenue Code, and non-qualified stock options to
employees, officers and directors. The exercise price of each option, which
have a maximum ten year life, is equal to the market price of the Company's
common stock on the date of grant.
The Company accounts for the Plan using the intrinsic value method in
accordance with APB No. 25 and has adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, no compensation expense has been recognized for the
Plan. Had compensation cost for the Plan been determined based on the fair
value at the grant dates of awards under the Plan consistent with SFAS No. 123,
the Company's net loss and basic loss per share would have been reduced to the
pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net loss -- as reported ........... $ (3,866,717) $ (11,432,153) $ (12,658,271)
============ ============= ==============
-- pro forma ......... $ (5,067,819) $ (12,188,993) $ (12,858,329)
============ ============= ==============
Basic loss per share -- as reported $ (.35) $ (1.13) $ (1.58)
============ ============= ==============
-- pro forma ......... $ (.46) $ (1.20) $ (1.61)
============ ============= ==============
The Company has reserved 1,500,000 of its authorized but unissued common
stock for stock options to be granted under the Plan. On April 27, 1997, the
stockholders of the Company approved an amendment to the Plan that increased
the maximum aggregate number of shares issuable upon the exercise of options
granted under the Stock Option Plan from 1,500,000 shares to 2,500,000 shares.
Under the terms of the Plan, options are not exercisable for a period of one to
three years from the date of grant. The exercise price of all
F-12
43
options is the closing bid price of the stock on the date of grant. There are
1,051,836 shares which remain available under the plan for future employee
stock option grants.
The weighted average Black-Scholes fair value per option granted in 1997, 1996
and 1995 was $4.58, $2.33 and $1.38, respectively. The fair value of options
granted under the Plan was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: no dividend yield, expected
volatility of 41.7% for 1997, 37.8% for 1996 and 66.1% for 1995, risk free
interest rate of 7.0%, and expected life of 5 years.
The following table summarizes information on stock option activity for the
Plan:
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------ ----------- --------------
Options outstanding, December 31, 1994......................... 791,862 .50 -- 20.75 $ 6.15
Options granted................................................ 153,088 6.63 -- 6.88 5.05
Options canceled or expired.................................... (45,345) 5.88 -- 15.88 7.95
Options exercised.............................................. (139,350) .50 -- 5.88 2.81
------------
Options outstanding, December 31, 1995......................... 760,255 .50 -- 20.75 6.64
Options granted................................................ 602,574 .50 -- 14.00 8.64
Options canceled or expired.................................... (408,580) 5.88 -- 20.75 8.58
Options exercised.............................................. (92,828) .50 -- 9.88 6.44
------------
Options outstanding, December 31, 1996......................... 861,421 .50 -- 14.00 7.14
Options granted................................................ 189,090 10.75 -- 21.75 14.41
Options canceled or expired.................................... (6,977) 6.13 -- 11.63 10.91
Options exercised.............................................. (20,137) .50 -- 11.75 7.16
------------
Options outstanding, December 31, 1997......................... 1,023,397 .50 -- 21.75 8.45
=============
Options outstanding are available for exercise as follows:
Currently Exercisable........................................ 651,279 $ 6.60
1998......................................................... 179,175 10.55
1999......................................................... 131,030 11.96
2000......................................................... 61,913 14.47
------------
Total................................................ 1,023,397 8.45
=============
On November 18, 1996, the Company canceled certain incentive and nonqualified
stock options with a five year term and issued new nonqualified stock options
which extended the original term to ten years. The effect of this cancellation
and reissuance was a $584,588 charge to compensation expense during 1996.
The following table summarizes information about stock options outstanding
under the Plan as of December 31, 1997:
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE AT EXERCISE PRICE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, EXERCISABLE
--------------- -------------- ---------------- -------------- ------------ --------------
1997
$ 0.50 127,900 1 years $ 0.50 127,900 $ 0.50
6.50 - 14.00 74,100 4 years 8.32 74,100 8.32
5.88 - 9.63 274,179 5 years 8.12 274,179 8.12
6.88 - 9.13 17,500 6 years 7.20 17,500 7.20
6.625 - 6.88 137,613 7 years 6.74 89,439 6.74
6.88 - 12.38 206,445 8 years 9.71 68,161 9.72
10.71 - 21.75 185,660 9 years 14.47 --- ---
$ .50 - 21.75 1,023,397 6.04 years $ 8.45 651,279 $ 6.60
F-13
44
NON-QUALIFIED STOCK OPTION PLAN
The Company has reserved 100,000 of its authorized but unissued common stock
for stock options to be granted to outside consultants under its Non-qualified
Stock Option Plan (the "Non-qualified Plan"). The option price and
exercisability of options granted under the Non-qualified Plan are set by the
Compensation Committee. The exercise price of all options granted under the
Non-qualified Plan currently outstanding is the closing market price at the date
of grant. There are 43,020 shares which remain available under the Non-qualified
Plan for future stock option grants.
The weighted average Black-Scholes fair value per option granted in 1997, 1996
and 1995 was $3.98, $2.00 and $1.21, respectively. The fair value of options
granted under the Non-qualified Plan was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used in 1997, 1996 and 1995: no dividend yield, expected volatility
of 41.7% for 1997, 37.8% for 1996 and 66.1% for 1995, risk free interest rate of
7.0%, and expected lives of 5 years.
The following table summarizes information on stock option activity for the
Non-qualified Plan.
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- -------------- --------------
Options outstanding, December 31, 1994.................. 37,500 3.75 -- 6.50 $ 4.30
Options granted......................................... 10,360 5.13 -- 6.63 5.45
Options canceled or expired............................. 0
---------
Options outstanding, December 31, 1995.................. 47,860 3.75 -- 6.63 4.55
Options granted......................................... 9,120 6.63 -- 9.50 7.78
Options canceled or expired............................. 0
---------
Options outstanding, December 31, 1996.................. 56,980 3.75 -- 9.50 5.07
Options granted......................................... 18,000 .50 -- 16.50 8.59
Options exercised....................................... (43,500) .50 -- 6.88 3.84
---------
Options outstanding, December 31, 1997.................. 31,480 5.13 -- 16.50 8.92
=========
Options outstanding are available for exercise as follows:
Currently Exercisable........................................ 16,733
$ 6.28
1998......................................................... 5,373
11.63
1999......................................................... 5,374
4,000 11.63
2000......................................................... ---------
12.63
Total................................................ 31,480
========= 8.92
F-14
45
The following table summarizes information about stock options outstanding
under the Nonqualified Plan as of December 31, 1997:
NUMBER NUMBER
OUTSTANDING AT WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
RANGE OF DECEMBER 31, REMAINING WEIGHTED AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISABLE
-------------- --------------- ------------------ -------------------- -------------- --------------
$5.13 -- 6.63 10,360 7 years $ 5.62 10,360 $ 5.62
7.00 5,000 8 years 7.00 5,000 7.00
6.63 -- 16.50 16,120 9 years 11.63 1,373 8.54
-------------- -------------- -------------- -------------- -------------- --------------
$5.13 -- 16.50 31,480 8.18 years 8.92 16,733 $ 6.28
============== ============== ============== ============== ============== ==============
8. INCOME TAXES
Net deferred tax assets and the valuation allowance at December 31, 1997 and
1996, consist of:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carry forwards.................................. $16,102,000 $11,065,000
Amortization of intangibles........................................ 2,488,000 2,685,000
Depreciation....................................................... 140,000 90,000
Other items........................................................ 269,000 295,000
----------- -----------
Net deferred tax assets.................................... 18,999,000 14,135,000
----------- -----------
Less valuation allowance........................................... 18,999,000 14,135,000
----------- -----------
Total...................................................... $ 0 $ 0
=========== ===========
At December 31, 1997 and 1996, the Company has approximately $43,169,000 and
$37,894,000 of federal income tax net operating loss carry forwards which
expire through 2011.
9. MAJOR CUSTOMERS
Contract revenue for three major unrelated customers for the year ended
December 31, 1997 was $99,781, $150,000 and $339,000. Contract revenue for
three major unrelated customers during 1996 was $198,000, $235,000 and
$270,000. Contract revenue for two unrelated customers for 1995 was $225,000
and $227,000.
F-15
46
10. LEASE COMMITMENTS
As of December 31, 1997, minimum rental commitments under non-cancelable
operating leases of one year or more are as follows:
YEAR ENDING
DECEMBER 31,
1998.................................................................................. $ 288,677
1999.................................................................................. 290,358
2000.................................................................................. 261,872
2001.................................................................................. 262,944
2002.................................................................................. 270,830
2003.................................................................................. 114,232
-----------
Total................................................................................. $ 1,488,913
===========
Other accrued liabilities include deferred rent of $29,895 as of December 31,
1997 and $96,802 as of December 31,1996. Rent expense was $212,982, $205,583
and $202,503 for the years ended December 31, 1997, 1996 and 1995,
respectively.
11. BENEFIT PLANS
The Company has an employee savings plan (the "Savings Plan") which qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. This Savings Plan allows eligible employees to contribute from 1% to 17%
of their income to this Savings Plan. The Company matches 50% of the first 6%
of the employee's contributions which are immediately vested. The Company's
matching contributions to the Savings Plan were approximately $64,770, $48,461
and $43,597 for 1997, 1996 and 1995, respectively.
On April 27, 1997, the stockholders of the Company approved the Atrix
Laboratories, Inc. 1997 Employee Stock Purchase Plan (the "ESPP"). The ESPP
will provide eligible employees the opportunity to purchase shares through
authorized payroll deductions at 85% of the average market price on the last
day of each quarter. This plan qualifies as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. Total shares available under
the ESPP is 300,000.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1997 and December 31, 1996 are as follows:
1997 1997 1996 1996
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ------------ ------------
Cash and cash equivalents....... $15,185,841 $ 15,185,841 $ 18,368,472 $ 18,368,472
Restricted cash equivalents.. -- -- 7,000,000 7,000,000
Marketable securities... 50,233,553 50,233,553 6,040,389 6,040,389
Convertible subordinated notes 50,000,000 47,812,500 -- --
F-16
47
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents -- The carrying amount approximates fair value
because of the short maturity of these instruments.
Restricted cash equivalents -- The carrying amount approximates fair
value because of the short maturity of these instruments.
Marketable securities ---- The fair value is based on quoted market
prices or dealer quotes.
Convertible subordinated notes -- The fair value is based on quoted
marked prices or dealer quotes.
F-17
48
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E.
Urheim dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology
Transfer Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
10.4 Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.5 Termination Agreement dated September 27, 1995
between Registrant and Atrix, L.P.(4)
10.6 Lease Agreement dated May 11, 1991 between the
Registrant and GB Ventures(3)
10.7 Agreement dated December 16, 1996 between the
Registrant and Block Drug Corporation(5)
10.8 Indenture, dated November 15, 1997, by and among
the Registrant and State Street Bank and Trust
company of California, N.A., as trustee
thereunder(6)
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's
Registration Statement on Form S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and Exchange
Commission.
(4)Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to Registrant's Current Report on
Form 8-K dated December 16, 1996, as filed with the Securities and Exchange
Commission.
(6) Incorporated by reference to Registrant's Current Report on
Form 8-K dated November 6, 1997, as filed with the Securities and Exchange
Commission.
* Filed herewith.