1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q/A-1
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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
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
--- ---
The number of shares outstanding of the registrant's common stock as of October
13, 1999 was 11,385,980.
================================================================================
2
PART I. FINANCIAL INFORMATION
EXPLANATORY NOTE: Pursuant to this form 10-Q/A, Atrix Laboratories, Inc. amends
"Item 1. FINANCIAL STATEMENTS", and ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of part I of its Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999.
The financial statements for the quarter and nine-month period ended September
30, 1999 have been restated from amounts previously reported to report
additional expenses related to issuance of restricted stock to an executive and
to reflect these expenses as period costs when incurred.
2
3
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1999 1998
------------ ------------
(As Restated
See Note 6)
CURRENT ASSETS:
Cash and cash equivalents $ 3,099,022 $ 18,556,641
Marketable securities, at fair market value 42,706,613 37,102,867
Accounts receivable, net of allowance for doubtful accounts
of $124,408 and $49,165 1,445,366 5,937,446
Interest receivable 511,005 664,374
Inventories 2,028,374 2,563,536
Prepaid expenses and deposits 996,845 853,266
------------ ------------
Total current assets 50,787,225 65,678,130
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 10,476,693 9,504,581
Leasehold improvements 608,850 605,107
------------ ------------
Total property, plant and equipment 11,085,543 10,109,688
Accumulated depreciation and amortization (3,721,641) (2,978,121)
------------ ------------
Property, plant and equipment, net 7,363,902 7,131,567
------------ ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $1,216,082 and $522,314 4,746,905 5,049,493
Deferred finance costs, net of accumulated amortization of $175,274 and $252,131 1,254,543 1,620,412
------------ ------------
Total other assets 6,001,448 6,669,905
------------ ------------
TOTAL ASSETS $ 64,152,575 $ 79,479,602
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,418,165 $ 1,650,490
Short-term debt 1,000,000 ---
Interest payable 993,713 279,039
Accrued salaries and payroll taxes 321,609 263,204
Other accrued liabilities 58,260 210,869
Deferred revenue 3,390 153,602
------------ ------------
Total current liabilities 3,795,137 2,557,204
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 43,000,000 48,500,000
------------ ------------
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; 11,395,244 and 11,360,672 shares
issued; 11,385,980 and 11,203,672 shares outstanding 11,395 11,361
Additional paid-in capital 74,630,082 74,822,942
Treasury stock, 9,264 and 157,000 shares, at cost (97,394) (1,650,564)
Accumulated other comprehensive loss (1,414,520) (96,553)
Accumulated deficit (55,772,125) (44,664,788)
------------ ------------
Total shareholders' equity 17,357,438 28,422,398
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 64,152,575 $ 79,479,602
============ ============
See notes to the consolidated financial statements.
3
4
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
----------- ----------
REVENUE: (As Restated
See Note 6)
Sales $ 1,250,017 $571,783
Contract revenue 311,727 231,656
Licensing --- 5,000,000
----------- ----------
Total revenue 1,561,744 5,803,439
----------- ----------
OPERATING EXPENSES:
Cost of goods sold 591,563 353,885
Research and development 3,237,183 2,564,817
Administrative and marketing 1,569,688 545,148
----------- ----------
Total operating expenses 5,398,434 3,463,850
----------- ----------
(LOSS) INCOME FROM OPERATIONS (3,836,690) 2,339,589
----------- ----------
OTHER (EXPENSE) INCOME:
Investment income 698,385 931,305
Interest expense (780,147) (882,192)
Other 9,173 (2,366)
----------- ----------
Total other (expense) income (72,589) 46,747
=========== ==========
NET (LOSS) INCOME $(3,909,279) $2,386,336
=========== ==========
Basic income (loss) per common share: $ (.34) $.21
=========== ==========
Basic weighted average common shares outstanding 11,359,748 11,280,246
=========== ==========
See notes to the consolidated financial statements.
4
5
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ -----------
REVENUE: (As Restated
See Note 6)
Sales 3,801,117 $ 2,281,124
Contract revenue 805,391 423,521
Licensing --- 12,000,000
------------ -----------
Total revenue 4,606,508 14,704,645
------------ -----------
OPERATING EXPENSES:
Cost of goods sold 1,539,510 1,466,822
Research and development 11,548,189 8,421,303
Administrative and marketing 3,301,234 1,869,095
------------ -----------
Total operating expenses 16,388,933 11,757,220
------------ -----------
(LOSS) INCOME FROM OPERATIONS (11,782,425) 2,947,425
------------ -----------
OTHER INCOME (EXPENSE):
Investment income 2,220,257 2,838,843
Interest expense (2,350,121) (2,669,720)
Other 61,664 57,317
------------ -----------
Total other (expense) income (68,200) 226,440
------------ -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM
(11,850,625) 3,173,865
------------ -----------
Extraordinary gain on extinguishment of debt 1,034,889 ---
------------ -----------
NET (LOSS) INCOME $(10,815,736) $ 3,173,865
============ ===========
Basic earnings per common share:
(Loss) Income before extraordinary item $(1.05) $.28
Extraordinary item .09 ---
------------ -----------
Net (loss) income $(.96) $.28
============ ===========
Basic weighted average common shares outstanding 11,301,027 11,293,149
============ ===========
See notes to the consolidated financial statements.
5
6
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
Common Stock Additional Other Total
-------------------- Paid-in Treasury Comprehensive Accumulated Shareholders'
(As Restated - See Note 6) Shares Amount Capital Stock Loss Deficit Equity
---------- ------- ----------- ----------- ----------- ------------ ------------
Balance, December 31, 1998 11,203,672 $11,361 $74,822,942 $(1,650,564) $ (96,553) $(44,664,788) $ 28,422,398
Comprehensive loss:
Net loss --- --- --- --- --- (10,815,736) (10,815,736)
Other comprehensive
loss:
- Cumulative foreign
currency Translation
adjustments --- --- --- --- (3,920) --- (3,920)
- Unrealized loss on
Investments --- --- --- --- (1,314,047) --- (1,314,047)
------------
Total comprehensive loss (12,133,703)
Exercise of stock options 120,655 15 (763,782) 1,107,549 --- (32,568) 311,214
Exercise of non-qualified
stock options 1,000 --- --- 10,513 --- (3,513) 7,000
Exercise for earn-out
distribution 18,845 19 194,890 --- --- --- 194,909
Issuance to executive 40,000 371,250 420,526 (255,520) 536,256
Issuance for employee stock
purchase plan 1,808 --- 4,782 14,582 --- 19,364
---------- ------- ----------- ----------- ----------- ------------ ------------
Balance, September 30, 1999 11,385,980 $11,395 $74,630,082 $ (97,394) $(1,414,520) $(55,772,125) $ 17,357,438
========== ======= =========== =========== =========== ============ ============
See notes to the consolidated financial statements.
6
7
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (As Restated
See Note 6)
Net (loss) income $(10,815,736) $ 3,173,865
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation 793,721 696,604
Amortization 666,398 312,863
Loss on sale of property, plant and equipment 26,365 26,812
Loss (gain) on sale of marketable securities 11,750 (28,186)
Extraordinary gain on extinguishment of debt (1,034,889) ---
Write-off of obsolete patents 2,345 14,828
Stock Compensation 371,250 ---
Net changes in operating assets and liabilities:
Accounts receivable 4,492,080 700,973
Interest receivable 153,369 (456,906)
Inventories 535,162 (1,517,984)
Prepaid expenses and deposits (143,579) (634,169)
Accounts payable - trade (236,245) (10,027)
Short-term debt 1,000,000 ---
Interest payable 714,674 867,808
Accrued salaries and payroll taxes 58,405 75,575
Other accrued liabilities (152,609) (39,385)
Deferred revenue (150,212) ---
------------ ------------
Net cash (used in) provided by operating activities (3,707,751) 3,182,671
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,077,303) (790,187)
Acquisition of leasehold improvements (3,743) ---
Investments in intangible assets (165,615) (211,263)
Proceeds from sale of property, plant and equipment 28,625 2,713
Proceeds from sale of marketable securities 3,488,250 20,158,186
Proceeds from maturity of marketable securities 9,035,713 28,618,987
Investment in marketable securities (19,468,288) (48,659,233)
------------ ------------
Net cash used in investing activities (8,162,361) (880,797)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 697,493 232,562
Extinguished convertible long-term debt (4,285,000) ---
Treasury stock acquired --- (435,001)
------------ ------------
Net cash used in financing activities (3,587,507) (202,439)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,457,619) 2,099,435
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,556,641 15,185,841
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,099,022 $ 17,285,276
============ ============
See notes to the consolidated financial statements.
7
8
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
consolidated financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
considered necessary (which consist of normal recurring accruals and
intercompany elimination entries) for a fair presentation have been included.
These consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1998, filed with the Securities and Exchange Commission in the Company's Annual
Report Form on 10-K.
On June 16, 1999, the Company's wholly owned registered subsidiary,
Atrix Laboratories Limited, based in London, England, commenced operations.
Atrix Laboratories Limited was organized to conduct international operations of
the Company. Currently, the subsidiary handles the sale of Atridox(R) in the
United Kingdom. As mutual recognition for the product is established and
distributor partnerships are consummated, Atrix Laboratories Limited will
coordinate such operations and the corresponding activity will be maintained in
a subsidiary ledger using the British pound as its base currency. The subsidiary
financials were converted from British pounds to United States dollars prior to
consolidation and all significant intercompany balances and transactions have
been eliminated.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The inventory components at
September 30, 1999 and December 31, 1998, are as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials $1,663,421 $1,659,097
Work in Process 216,520 393,068
Finished Goods 148,433 511,371
---------- ----------
$2,028,374 $2,563,536
========== ==========
NOTE 3. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during the periods presented. Diluted income (loss) per common share
reflects the potential dilution of securities that could participate in the
earnings. For the periods presented, the effect of dilutive stock options is not
significant and the effect of assuming a conversion of convertible subordinated
notes would be antidilutive. Therefore, diluted income (loss) per share is not
materially different from basic income (loss) per common share.
NOTE 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% annually 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 nine-month period ended September 30, 1999, the Company
repurchased a total of $5,500,000, or 11%, of its outstanding 7% convertible
subordinated notes for approximately $4,380,000, which includes approximately
$95,000 accrued interest paid. As a result, the Company recognized an
extraordinary gain of approximately $1,035,000, net of deferred finance charges
and accumulated amortization of approximately $180,000. As of September 30,
1999, $43,000,000 of these notes are outstanding.
8
9
NOTE 5. TRANSLATION OF FOREIGN CURRENCIES
The Company's primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at period-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates. Adjustments resulting from these
translations are reflected in stockholders' equity as cumulative foreign
currency translation adjustments. Some transactions of the Company and its
subsidiary are made in currencies different from their functional currency.
Gains and losses from these transactions are included in income as they occur.
To date, the effect on income of such amounts has been immaterial. Sales by the
Company's foreign subsidiary during the period ending September 30, 1999 were
not material.
NOTE 6. RESTATEMENT
Prior to the issuance of the Company's financial statement for the year
ended December 31, 1999 management determined that certain compensation costs
that should have been recorded in the third quarter were not. These costs were
associated with a charge of $371,250 for the issuance of restricted stock to an
executive of the Company. As a result, the financial statements for the quarter
and nine-month periods ended September 30, 1999 have been restated to reflect
these costs. An adjustment for this amount between additional paid in capital
and accumulated deficit was made and is the only change in the September 30,
1999 balance sheet. A summary of the effects of the restatement on the
statements of operation is as follows:
For the Quarter Ended For the Nine Month Ended
September 30, 1999 September 30, 1999
---------------------------- -----------------------------
As Previously As Previously
As Restated Reported As Restated Reported
----------- ------------ ----------- -------------
Administrative and marketing 1,569,688 1,198,438 3,301,234 2,929,984
Total operating expense 5,398,434 5,027,184 16,388,933 16,017,683
(Loss) income from operations (3,836,690) (3,465,440) (11,782,425) (11,411,175)
(Loss) income before extraordinary item --- --- (11,850,625) (11,479,375)
Net (loss) income (3,909, 279) (3,538,029) (10,815,736) (10,444,486)
(Loss) Income before extraordinary item --- --- (1.05) (1.01)
Basic income (loss) per common share (.34) (.31) (.96) (.92)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as information contained elsewhere in this Report,
contains statements that constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. These statements include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) whether
the Company will receive, and the timing of, regulatory approvals or clearances
to market potential products; (ii) the results of current and future clinical
trials; and (iii) the time and expenses associated with the regulatory approval
process for products. The success of the Company's business operations is in
turn dependent on factors such as the receipt and timing of regulatory approvals
or clearances for potential products, the effectiveness of the Company's
marketing strategies to market its current and any future products, the
Company's ability to manufacture products on a commercial scale, the appeal of
the Company's mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors.
OVERVIEW
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 prior to 1998 and realized its
first net profit in 1998 primarily as a result of earning $17 million in
milestone revenue from Block Drug Company ("Block"). The Block Agreement
provides for potential milestone payments totaling up to $50 million to the
Company over a three-to-five year period, as well as manufacturing margins and
royalties on sales. As of December 31, 1998, the Company had recognized
approximately $24.1 million in milestone revenue from Block.
On September 24, 1999, the Company and Block entered into a Sixth
Amendment to the Block Agreement, whereby the Company will provide Block with
professional samples of ATRIDOX(R) during Block's fiscal year 2000. The Company
believes that it can help promote the sales of ATRIDOX(R) by Block through these
samples and is committed to investing in the future marketing and sales of
ATRIDOX(R).
9
10
The Company is also committed to expanding the sales of ATRIDOX(R)
internationally. In July 1999, the Company received its first European approval
of ATRIDOX(R) from the Medicines Control Agency of the United Kingdom. As a
result, the Company launched the sales of ATRIDOX(R) in the United Kingdom
during the second quarter.
In addition, the Company recently has taken various actions to help
assess strategic alternatives and reduce overall expenses. In early September,
the Company retained Lehman Brothers Inc. as its financial advisor to assist the
Company's board of directors in evaluating various strategic options and
pursuing such options that are in the best interests of the Company and its
shareholders. In addition, during October 1999, the Company implemented a cost
reduction and restructuring plan. As a result, the Company will be reducing its
work force by an estimated 12% with the goal of reducing operating costs by
approximately $1.5 million for the year 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Total revenues for the three months ended September 30, 1999 were
approximately $1,562,000 compared to approximately $5,803,000 for the three
months ended September 30, 1998. The 73% decrease was primarily due to the $5
million Block milestone earned during the third quarter 1998.
The Company had sales of approximately $1,250,000 during the three
months ended September 30, 1999 compared to approximately $572,000 for the three
months ended September 30, 1998. The 119% increase in sales was primarily the
result of the addition of sales for the ATRIDOX(R) product and the ATRISORB(R)
FreeFlow GTR Barrier product both launched in September 1998.
Contract revenue represents revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities using the Company's technology and was approximately
$312,000 for the three months ended September 30, 1999 compared to approximately
$232,000 for the three months ended September 30, 1998, representing a 34%
increase. The increase was primarily related to additional research contracts
entered into after the third quarter of 1998.
Cost of goods sold recorded for the three months ended September 30,
1999 was approximately $592,000 compared to approximately $354,000 for the three
months ended September 30, 1998, representing a 67% increase. This increase in
cost of sales is primarily related to the increase in sales as a result of
ATRIDOX(R) and ATRISORB(R) FreeFlow GTR Barrier products both launched in
September 1998.
Research and development expenses for the three months ended September
30, 1999 were approximately $3,237,000 compared to approximately $2,565,000 for
the three months ended September 30, 1998, representing a 26% increase. The
increase was primarily the result of additional expenditures in new areas of
research including leuprolide acetate for the treatment of prostate cancer and
topical dapsone for the treatment of acne.
Administrative and marketing expenses for the three months ended
September 30, 1999 were approximately $1,570,000 compared to approximately
$545,000 for the three months ended September 30, 1998, representing a 188%
increase. The increase was primarily the result of recognition of amortization
on assets associated with the ViroTex Corporation ("ViroTex") acquisition in
November 1998; expenditures associated with the Company's foreign subsidiary,
which commenced operations in June 1999; and compensation costs for the issuance
of restricted shares of stock to an executive of the Company.
Investment income for the three months ended September 30, 1999 was
approximately $698,000 compared to approximately $931,000 for the three months
ended September 30, 1998, representing a 25% decrease. The decrease was
primarily the result of a reduction in principal investments and a decline in
interest rates on investments for the three months ended September 30, 1999.
Interest expense for the three months ended September 30, 1999 was
approximately $780,000 compared to approximately $882,000 for the three months
ended September 30, 1998, representing a 12% decrease. The reduction in interest
expense was primarily the result of the Company's repurchase and retirement of
$7,000,000 of its 7% convertible subordinated notes since the period ending
September 30, 1998.
For the reasons described above, the Company recorded a net loss of
approximately $3,909,000, or $0.34 per share, for the three months ended
September 30, 1999 compared to net income of approximately $2,386,000 for the
three months ended September 30, 1998. The $5 million Block milestone payment
earned in the third quarter of 1998 was the primary factor for the decrease in
net income between periods.
10
11
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
Total revenues for the nine months ended September 30, 1999 were
approximately $4,607,000 compared to approximately $14,705,000 for the nine
months ended September 30, 1998. The 69% decrease was primarily due to the $12
million Block milestone payments earned during the second and third quarters of
1998.
The Company had sales of approximately $3,801,000 during the nine
months ended September 30, 1999 compared to approximately $2,281,000 for the
nine months ended September 30, 1998. The 67% increase in sales was primarily
the result of the addition of sales for the ATRIDOX(R) product and the
ATRISORB(R) FreeFlow GTR Barrier product both launched in September 1998.
Contract revenue represents revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities using the Company's technology, and was approximately
$805,000 for the nine months ended September 30, 1999 compared to approximately
$424,000 for the nine months ended September 30, 1998, representing a 90%
increase. The increase was primarily related to additional research contracts
entered into after the second quarter of 1998.
Research and development expenses for the nine months ended September
30, 1999 were approximately $11,548,000 compared to approximately $8,421,000 for
the nine months ended September 30, 1998, representing a 37% increase. The
increase was primarily the result of additional expenditures in new areas of
research including leuprolide acetate for the treatment of prostate cancer and
topical dapsone for the treatment of acne.
Administrative and marketing expenses for the nine months ended
September 30, 1999 were approximately $ 3,301,000 compared to approximately
$1,869,000 for the nine months ended September 30, 1998, representing a 77%
increase. The increase was primarily the result of recognition of amortization
on assets associated with the ViroTex acquisition in November 1998; expenditures
associated with the Company's foreign subsidiary, which commenced operations in
June 1999; and compensation costs for the issuance of restricted shares of stock
to an executive of the Company.
Investment income for the nine months ended September 30, 1999 was
approximately $2,220,000 compared to approximately $2,839,000 for the nine
months ended September 30, 1998, representing a 22% decrease. The decrease was
primarily the result of a reduction in principal investments and a decline in
interest rates on investments for the nine months ended September 30, 1999.
Interest expense for the nine months ended September 30, 1999
approximated $2,350,000 compared to approximately $2,670,000 for the nine months
ended September 30, 1998, representing a 12% decrease. The reduction in interest
expense was primarily the result of the Company's repurchase and retirement of
$7,000,000 of its 7% convertible subordinated notes since the period ending
September 30, 1998.
During the nine-month period ended September 30, 1999, the Company
repurchased a total of $5,500,000, or 11%, of its outstanding 7% convertible
subordinated notes for approximately $4,380,000, which includes approximately
$95,000 accrued interest paid. As a result, the Company recognized an
extraordinary gain of approximately $1,035,000 net of deferred finance charges
and accumulated amortization of approximately $180,000. As of September 30,
1999, $43,000,000 of these notes were outstanding.
For the reasons described above, the Company recorded a net loss of
approximately $10,816,000 for the nine months ended September 30, 1999 compared
to net income of approximately $3,174,000 for the nine months ended September
30, 1998. The $12 million Block milestone payments earned in the second and
third quarters of 1998 were the primary factors causing the decrease in net
income between periods.
11
12
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents of
approximately $3,099,000, marketable securities (at fair market value) of
approximately $42,707,000 and other current assets of approximately $4,981,000
for total current assets of approximately $50,787,000. Current liabilities
totaled approximately $3,795,000, which resulted in working capital of
approximately $46,992,000.
In July 1999, a $1,000,000 line of credit was extended to fund
short-term operations. As of September 30, 1999, this line of credit remained
outstanding.
During the nine months ended September 30, 1999, net cash used in
operating activities was approximately $3,708,000. This result was due to the
net loss for the period of approximately $10,816,000, adjusted for certain
non-cash expenses, and changes in other operating assets and liabilities as set
forth in the consolidated statements of cash flows. Most significantly, the $5
million Block milestone payment earned in the third quarter of 1998 and received
in the first quarter of 1999 reduced the cash impact of the net loss for the
nine months ended September 30, 1999.
Net cash used in investing activities was approximately $8,162,000
during the nine months ended September 30, 1999. This result was primarily due
to the net investment of approximately $6,944,000 in marketable securities
during the period. Additionally, approximately $1,077,000 was invested in the
acquisition of property, plant and equipment. Net cash used in financing
activities was approximately $3,588,000 during the nine months ended September
30, 1999. This result was primarily due to the repurchase of the Company's 7%
convertible subordinated notes for $4,285,000.
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
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements and the demand for the Company's products. The Company expended
approximately $1,077,000 for property, plant and equipment and approximately
$173,000 for patent development in the nine-month period ending September 30,
1999. The Company expects its capital expenditures to approximate $1,500,000 for
the year ending December 31, 1999, which will be used primarily to complete the
automation of its manufacturing facility and to upgrade laboratory equipment.
In October 1999, the Company repurchased $4,500,000, or 10%, of its
then outstanding 7% convertible subordinated notes on the open market for
approximately $2,947,000, which includes accrued interest paid of approximately
$127,000. As a result, the Company will recognize an extraordinary gain in the
fourth quarter of 1999 of approximately $1,549,000, net of deferred finance
charges and accumulated amortization of approximately $131,000. As of October
28, 1999, approximately $38,500,000 of these notes were outstanding.
YEAR 2000
The Year 2000 problem concerns the application of computer systems
written using six (e.g., 12/31/00) versus eight (e.g., 12/31/2000) digits to
define the applicable date. Any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company's Year 2000 plan includes a four-phase process to evaluate
its internal status with respect to the Year 2000 issue: inventory, system
testing, remediation and preparation of contingency plans. In the first phase,
which the Company completed in the first quarter of 1999, the Company conducted
an inventory of its systems, including both information technology ("IT")
systems and non-IT systems, such as, hardware and manufacturing equipment
containing embedded technology, for Year 2000 compliance. The Company has
identified its critical and medium priority internal systems. The remaining
systems are considered to be of low priority because they are determined to have
no direct impact on safety or the business.
The Company is currently engaged in phase two (system testing) and
phase three (remediation), simultaneously. Progress continues to be made in
phases two and three of the Company's Year 2000 plan in which systems that are
not Year 2000 compliant are either repaired, replaced or retired. All corrected
applications and data elements are implemented and tested in the production
environment. The systems that have been tested are either Year 2000 compliant or
are expected to be made compliant at an immaterial cost to the Company. Although
the Company does not expect that the impact of the Year 2000 issue will be
material in systems still under evaluation, there can be no assurance that the
Company will not discover Year 2000 issues in the course of its evaluation
process that would have a material adverse effect on the business, financial
condition or results of Company operations. Phases two and three of the Year
2000 plan are expected to be completed during the fourth quarter of 1999.
The Company is in the process of requesting and assessing compliance
information from its critical suppliers, strategic partners, financial
organizations and utility providers with which the Company depends on in its
business operations. These business entities may refuse to respond to a
readiness survey or request for information. It is possible that these business
entities may, in fact, be prepared to address Year 2000 concerns, however,
simply neglect to respond. Conversely, various business
12
13
entities may respond that they are Year 2000 ready, when in fact, they are not
prepared. If the Year 2000 problem causes these business entities to fail to
deliver essential materials and services, then disruptions in the Company's
operations, computer infrastructure or telecommunications systems could be the
result. Because of the inherent uncertainties associated with the Year 2000
problem, including understanding the Year 2000 readiness of these key third
parties, it is not possible to accurately quantify the potential impact at this
time. Failure to adequately address the Year 2000 problem in a timely manner by
key suppliers, utility providers or the Company could potentially have a
material adverse effect on the Company's financial condition, results of
operations or liquidity. Additionally, there can be no guarantee that any
contingency plans developed by the Company will prevent such failures from
having a material adverse effect on the Company. The Company, however, believes
that there is a low probability that these multiple failures could occur. The
Company expects to complete this survey in the fourth quarter of 1999. At this
time, the Company cannot estimate the effect, if any, that non-compliant systems
at these entities could have on the business, financial condition or results of
operations of the Company, and there can be no assurance that the impact, if
any, will not be material.
Phase four (contingency planning) of the Year 2000 plan will involve
taking any necessary corrective actions to bring systems into compliance and to
develop a contingency plan in the event any non-compliant critical systems
remain by January 1, 2000. The Company expects to establish its contingency plan
in the fourth quarter of 1999, after the completion of phases two and three. As
part of phase four, the Company will attempt to quantify the impact, if any, of
the failure to complete any necessary corrective actions. Although the Company
cannot currently estimate the magnitude of such impact, if systems material to
the Company's operations have not been made Year 2000 compliant upon completion
of this phase, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition or results of operations.
To date, the costs incurred by the Company with respect to this process
were approximately $99,000 in 1998 and approximately $136,000 for the nine
months ended September 30, 1999. The Company has continued to purchase and
replace non-compliant equipment and software as part of its continual IT
updating process and has virtually replaced as part of its normal business plan
the majority of all non-compliant equipment. Future costs associated with the
Year 2000 process are estimated to be approximately $27,000.
The risk to the Company resulting from the failure of third parties in
the public and private sector to attain Year 2000 readiness is the same as other
companies in general. The following are representative of the types of risks
that could result in the event of one or more of the Company's information
systems, laboratories or facilities failing to be Year 2000 ready, or similar
major failures by one or more major third party suppliers to the Company:
Information systems - could include interruptions or disruptions of
business and transactions processing, such as, customer billing,
payroll, accounts payable and other operating and information
processing, until systems can be remedied or replaced.
Laboratory facilities - could include interruptions or disruptions of
data management processes and facilities with delays in delivery of
services, until non-compliant conditions or components can be remedied
or replaced.
Major supplier to the Company - could include interruptions or
disruptions of the supply of raw materials, supplies and Year 2000
ready components, which could cause interruptions or disruptions and
delays in delivery of services, until the third party suppliers
remedied the problem or contingency measures can be implemented.
The Company believes, based on available information, that it will be
able to manage its total Year 2000 transition without material adverse effect on
its business operations, services or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio of cash equivalents and marketable
securities. The investment portfolio is used to preserve the Company's capital
until it is required to fund operations, including the Company's research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. The Company does not own derivative financial instruments
in its investment portfolio. Due to the nature of the Company's investment
portfolio, the investment portfolio contains instruments that are primarily
subject to interest rate risk.
Interest Rate Risk. The Company's investment portfolio includes fixed
rate debt instruments that are primarily United States government and agency
bonds of durations ranging from one to four years. The market value of these
bonds is subject to interest rate risk and could decline in value if interest
rates decrease. To mitigate the impact of fluctuations in cash flow, the Company
maintains substantially all of its debt instruments as fixed rate. The portion
maintained as fixed rate is dependent on many factors including judgments as to
future trends in interest rates.
The Company's investment portfolio also includes equity interests in
United States government and agency bond funds. The value of these equity
interests is also subject to interest rate risk.
13
14
The Company regularly assesses the above-described market risks and has
established policies and business practices to protect against the adverse
effects of these and other potential exposures. The Company's investment policy
restricts investments to U.S. Government or government backed securities, or the
highest rated commercial paper (A1P1) only. As a result, the Company does not
anticipate any material losses in these areas.
For disclosure purposes, the Company uses sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
the Company's debt and financial instruments. The financial instruments included
in the sensitivity analysis consist of all of the Company's cash and cash
equivalents and long-term and short-term debt instruments.
To perform a sensitivity analysis, the Company assesses the risk of
loss in fair values from the impact of hypothetical changes in interest rates on
market sensitive instruments. The fair values are computed based on the present
value of future cash flows as impacted by the changes in the rates attributable
to the market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at September
30, 1999. The fair values that result from these computations are compared with
the fair values of these financial instruments at September 30, 1999. The
differences in this comparison are the hypothetical gains or losses associated
with each type of risk. The results of the sensitivity analysis at September 30,
1999 are as follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in a decrease
in the fair value of the Company's financial instruments by
approximately $247,000 per year. A 10% increase in the levels of
interest rates with all other variables held constant would result in
an increase in the fair value of the Company's financial instruments by
approximately $247,000 per year. The Company maintains a portion of its
financial instruments, including long-term debt instruments of
approximately $7,178,000 at September 30, 1999, at variable interest
rates. If interest rates were to increase 10%, the impact of such
instruments on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of the Company's assets may rise or fall by a greater
amount depending on actual general market performances and the value of
individual securities owned by the Company.
The market price of the 7% convertible subordinated notes generally
changes in parallel with the market price of the Common Stock. When the Common
Stock price increases, the price of these notes generally increases
proportionally. Fair market price of the convertible subordinated notes can be
determined from quoted market prices, where available. The fair value of the
Company's long-term debt was estimated to be approximately $26,400,000 at
September 30, 1999 and is lower than the carrying value by approximately
$16,600,000. Market risk was estimated as the potential decrease in fair value
resulting from a hypothetical 1% increase in the Company's weighted average
long-term borrowing rate and a 1% decrease in quoted market prices, or $860,000.
14
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Seventh Amended and Restated Bylaws (2)
4.1 Form of Common Stock Certificate (3)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee thereunder (4)
4.3 Form of Note (included in Indenture, see Exhibit 4.2)
4.4 Rights Agreement (including form of Right
Certificate, as Exhibit A, the form of Summary of
Rights, as Exhibit B) (5)
4.5 Warrant to purchase 6,750 shares of Atrix Common
Stock issued to Gulfstar Investments, Limited (1)
10.3F Sixth Amendment to Block Agreement dated
September 24, 1999(6), **
27. Financial Data Schedule.*
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period ended
September 30, 1999.
- ----------------------
* Filed herewith.
** Confidential treatment requested.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 as filed with the Securities
and Exchange Commission.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(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 Current Report on Form 8-K dated
November 6, 1997, as filed with the Securities and Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, file number 000-18231.
(6) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1999, as filed with the Securities and
Exchange Commission on November 1, 1999.
15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
By: /s/ David R. Bethune
-----------------------------------------
David R. Bethune
Vice Chairman of the Board of Directors
and Interim Chief Executive Officer
By: /s/ Brian G. Richmond
-----------------------------------------
Brian G. Richmond
Vice President--Finance, Assistant
Secretary, and Assistant Treasurer
16
17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Seventh Amended and Restated Bylaws (2)
4.1 Form of Common Stock Certificate (3)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee thereunder (4)
4.3 Form of Note (included in Indenture, see Exhibit 4.2)
4.4 Rights Agreement (including form of Right
Certificate, as Exhibit A, the form of Summary of
Rights, as Exhibit B) (5)
4.5 Warrant to purchase 6,750 shares of Atrix Common
Stock issued to Gulfstar Investments, Limited (1)
10.3F Sixth Amendment to Block Agreement dated
September 24, 1999(6), **
27. Financial Data Schedule.*
- ----------------------
* Filed herewith.
** Confidential treatment requested.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 as filed with the Securities
and Exchange Commission.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(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 Current Report on Form 8-K dated
November 6, 1997, as filed with the Securities and Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, file number 000-18231.
(6) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the nine months ended September 30, 1999, as filed with the Securities and
Exchange Commission on November 1, 1999.