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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
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
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(Title of Class)
Series A Preferred Stock Purchase Rights
----------------------------------------
(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
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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 March 6, 2000 was $160,718,964.
The number of shares outstanding of the registrant's common stock as of
March 6, 2000 was 11,479,926.
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 May 8, 2000.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, we acquired ViroTex Corporation through the
merger of our wholly owned subsidiary, Atrix Acquisition Corporation, with and
into ViroTex. In June 1999, our wholly owned registered subsidiary, Atrix
Laboratories Limited, was organized to conduct our international operations.
We are engaged primarily in the research, development and commercialization
of a broad range of medical, dental, and veterinary products based on our
proprietary drug delivery systems. With the acquisition of ViroTex, we have a
broad-based platform of drug delivery technologies that provides for parenteral,
transmucosal and topical delivery. These patented technologies have capabilities
of delivering small organic molecules, peptides, proteins, vaccines and natural
products. Our business strategy is to:
o focus on the commercialization of dental products that are on the
market in the U.S. and approved in Europe,
o develop partnerships with pharmaceutical and biotechnology companies
for delivery of new chemical entities and life cycle management
products,
o expand our internal product portfolio through the acquisition of
complementary technologies and/or products, and
o retain manufacturing control of our marketed products.
Drug Delivery Systems
The following chart provides a brief description of our drug delivery
systems.
Technology Description Application
- ---------- ----------- -----------
ATRIGEL(R) Biodegradable sustained release in Delivery of drugs from weeks to months
situ implant for local or systemic
delivery
Bioerodible Muco-Adhesive Film
("BEMA(TM)") Pre-formed bioerodible film for Transmucosal delivery of drugs from
fast-acting local or systemic minutes to hours
delivery
Solvent Microparticle System Topical gel providing 2-stage dermal Dermal delivery of water insoluble drugs
("SMP(TM)") delivery
Mucocutaneous Absorption System Water resistant topical gel providing Tenacious film for either wet or dry
("MCA(TM)") sustained delivery surfaces
Biocompatible Polymer System Non-cytotoxic gel/liquid for topical Protective film for wound healing
("BCP(TM)") delivery
Marketed Products
In December 1996, we entered into a commercialization agreement with Block
Drug Corporation, a leading marketer of oral healthcare products. Under the
current terms of the agreement, Block has acquired the exclusive North American
rights to market the ATRIDOX(R) product, the ATRISORB(R) GTR Barrier products
and the ATRISORB(R)-DOXY products.
We currently market two drug products, two medical device products and two
over-the-counter drug products. Our flagship drug product, ATRIDOX(R) is a
minimally invasive pharmaceutical treatment for periodontitis that employs the
ATRIGEL(R) system containing the antibiotic doxycycline. ATRIDOX(R) received
approval from the United States Food and Drug Administration, or FDA, in
September 1998 and Block commenced marketing of ATRIDOX(R) at this time. Our
subsidiary, Atrix Laboratories Limited, currently markets the ATRIDOX(R) product
within the United Kingdom. In the veterinary field, we developed a drug product
utilizing the ATRIGEL(R) system to treat periodontal disease in companion
animals, which is being marketed by Heska Corporation.
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The ATRISORB(R) GTR Barrier, a biodegradable film utilizing the ATRIGEL(R)
system, is a medical device used to aid in the guided tissue regeneration, or
GTR, of a tooth's support following periodontal surgery. An improved version of
the GTR barrier, the ATRISORB(R) FreeFlow GTR Barrier, was introduced in 1998.
Over-the-counter products currently marketed include Viractin(R) Cold Sore
& Fever Blister Medicine and Eucalyptamint(R) 2000, a topical arthritis pain
relieving gel that utilizes our proprietary formula based upon the MCA(TM) drug
delivery system. Both products were acquired through the ViroTex acquisition.
Viractin(R) is marketed by J.B. Williams Company and we receive royalties on net
sales of Viractin(R) through July 2002. In April 1999, our marketing partner,
Heritage Consumer Products, LLC, commenced sales of Eucalyptamint(R) 2000. Under
the terms of the Heritage agreement, Heritage funds commercialization of the
product and we receive royalty payments and manufacturing margins.
Research and Development
We are currently developing the ATRISORB(R)-DOXY and the ATRISORB(R)-DOXY
FreeFlow GTR Barrier products. These are second-generation GTR barrier products
that combine the benefits of the ATRISORB(R) GTR Barrier products with the
antibiotic doxycycline, for improved clinical outcomes following periodontal
surgery. We commenced pivotal trials for the ATRISORB(R)-DOXY product in July
1998, completed the human clinical studies in November 1999 and filed for
regulatory clearance with the FDA in February 2000.
In June 1999, we successfully completed Phase I/II human clinical studies
for delivery of leuprolide acetate in prostate cancer patients using our
proprietary 30-day sustained released ATRIGEL(R) formulation. In January 2000,
we announced successful interim results in the ongoing Phase III human clinical
trials pertaining to the 30-day prostate cancer therapy study. In January 2000,
we filed an investigational new drug application with the FDA for our 90-day
prostate cancer product.
We are currently developing an acne treatment utilizing the SMP(TM) topical
drug delivery system combined with topical dapsone. Phase I/II human clinical
trials commenced in May 1998.
Development costs associated with the ATRIDOX(R) product and research costs
for various drug evaluations utilizing our five proprietary drug delivery
systems continued throughout 1999.
RECENT DEVELOPMENTS
In April 1999, we received European approval in the United Kingdom for the
ATRIDOX(R) product. In January 2000, we received approval in 11 additional
European countries to market ATRIDOX(R). In 1999, ATRIDOX(R) was awarded the ADA
Seal of Acceptance from the American Dental Association's Council on Scientific
Affairs, which is an important symbol to dentists and consumers that signifies a
dental product's safety, effectiveness and the scientific validity of its health
benefits.
OUR DRUG DELIVERY SYSTEMS
ATRIGEL(R) System
We believe that 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:
o difficulty in maintaining uniform drug levels over time,
o problems with toxicity and side effects,
o high costs due to frequent administration, and
o 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, we have 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 future products using the ATRIGEL(R) system will be successfully
developed and FDA approved or cleared for commercial use.
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We believe 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. We have 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. In
preclinical models, we have 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-lives.
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 to minimize systemic side
effects. For example, the ATRIDOX(R) product delivers high
concentrations of the antibiotic doxycycline to periodontal pockets
with minimal systemic concentrations of the drug. In preclinical
models, we have delivered Lidocaine directly to a surgical site to
reduce the pain associated with post-operative surgery.
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 the entire body requires
treatment, and the drug may not be active when given orally. For
example, we are developing an ATRIGEL(R) formulation containing the
peptide hormone leuprolide acetate as a systemic therapy for prostate
cancer. In preclinical models, we have demonstrated the systemic
delivery of leuprolide 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.
Bioerodible Mucoadhesive ("BEMA(TM)") System
This unique polymer-based system is designed to deliver systemic levels of
drugs rapidly across oral or vaginal mucosal tissues. The BEMA(TM) delivery
system consists of bioerodible bi-layer or multi-layer thin films that can be
developed to deliver at different time intervals. The semi-soft BEMA(TM) film
adheres readily to the mucosa, where it softens further on contact with
moisture, rapidly becoming unnoticeable as it delivers the drug and erodes away.
The BEMA(TM) system is versatile and can incorporate a wide variety of drugs,
including proteins and peptides, which can be loaded into the mucoadhesive layer
for delivery into the mucosal tissue, while minimizing drug release into
surrounding tissues or cavities. It is also possible to load the drug into the
backing layer to provide more controlled release into the oral or vaginal
cavity.
Various properties of the BEMA(TM) products, such as residence time,
bioerosion kinetics, taste, shape and thickness can be modified to the desired
level in order to customize drug delivery to the medical need. The BEMA(TM)
system can be formulated for either local or systemic drug delivery, and is
suitable for both over-the-counter, or OTC, and prescription products. A
BEMA(TM) product containing dyclonine as a local anesthetic prior to dental
procedures and for the treatment of canker sores has been consumer tested. A
proprietary BEMA(TM) prescription product is currently in pivotal clinical
trials for faster healing of canker sores. The BEMA(TM) technology has
applications in hormone replacement therapy, pain management, anti-emetics,
anti-psychotics, mucosal vaccines, all of which require rapid onset of action
and avoidance of first-pass metabolism if necessary. We have evaluated several
compounds for these applications. For a typical oral application, the upper
limit of drug loading for a single immediate-release dose is about 20 mg.
Mucocutaneous Absorption ("MCA(TM)") System
The MCA(TM) delivery system can be formulated as either alcohol-based gels
or as aerosols for the localized delivery of drugs to the skin or mucosal
tissues. The MCA(TM) formulations can be applied to dry, damp or even wet skin
or mucosal surfaces. Because of the novel blend of cellulose polymers dissolved
in alcohol, they quickly dry to form tenacious, moisture-resistant films that
can deliver drugs and/or promote healing. Depending on the desired application,
the MCA(TM) products can be formulated to give opaque films in order to
highlight the area of treatment, or to transparent films that are more
cosmetically acceptable. The MCA(TM) formulations can be easily flavored to mask
the taste of active ingredients for oral products and are compatible with liquid
spray applicators.
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Solvent/Microparticle ("SMP(TM)") System
We are currently developing the SMP(TM) delivery system. This system
provides controlled delivery of a pharmaceutical compound to the skin, even
where the skin barrier is compromised or completely absent, such as in the case
of a wound or lesion.
The SMP(TM) technology consists of a two-stage system designed to provide
topical delivery of highly water-insoluble drugs to the skin. The unique
combination of dissolved drug with a microparticle suspension of the drug in a
single formulation allows a controlled amount of the dissolved drug to permeate
into the epidermal layer of the skin, while a high level of the microparticle
drug is maintained just above the outermost layer of the skin for later
delivery. The consistent microparticle size and distribution maximize drug
delivery while minimizing crystal growth over the shelf life of the product. The
dissolved and microparticulate drug may be the same pharmaceutical active or
they may be different actives that require local delivery over different time
frames.
Biocompatible Polymer ("BCP(TM)") System
The BCP(TM) delivery system, composed of polymers, solvents and actives
carefully selected for their low toxicity to skin cells, can be formulated as
either film-forming gels or liquids for topical applications. The BCP(TM) gels
are non-greasy, non-staining formulations that can be applied to wounded or
denuded skin to deliver a drug, such as an antibiotic, and then dry to form a
non-constricting, protective film over the wound. The gels have the unique
property of maintaining an ideal wound-healing environment by removing excess
moisture from exudative wounds and transferring moisture from the gel into
wounds that are too dry. The liquid BCP(TM) formulations are designed to provide
effective cleansing of topical wounds or denuded skin without causing further
trauma to the skin, thereby promoting faster healing with minimal scarring.
Topical Anesthetic Depot ("TAD(TM)") System
The TAD(TM) delivery system enhances antiviral efficacy and creates a
prolonged anesthetic effect, i.e., numbing, pain and itching relief, through
sustained delivery of a local anesthetic to the skin. The TAD(TM) delivery
system creates a depot of drug at the basal cell layer of the skin, the site at
which the nerve endings interact with the epidermis and the primary site of
viral replication. A double-blinded, placebo-controlled clinical study for the
treatment of recurrent cold sores and fever blisters exhibited a 30% reduction
in healing time with an active formulation that incorporated the TAD(TM)
delivery system versus a placebo. The Viractin(R) product was developed using
this delivery system. In connection with the sale of Viractin(R) to CEP
Holdings, Inc., ViroTex transferred all rights, title and interest to the
TAD(TM) delivery system and received an exclusive license to use the technology
in the topical treatment of diseases other than oral herpes lesions.
MARKETED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table sets forth certain information about our products and
products under development based on the Atrigel(R) system.
PRODUCT INDICATION STATUS(1)
Periodontal Applications:
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRIDOX(R) Antibiotic therapy for chronic Marketed
periodontitis Launched November 1998
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRISORB(R)GTR Barrier Tissue regeneration following periodontal Marketed
surgery Launched 1996
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRISORB(R)Free Flow Tissue regeneration following periodontal Marketed
GTR Barrier surgery Launched November 1998
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRISORB(R)GTR Barrier with Tissue regeneration and infection Phase III clinical trials completed Nov.
doxycycline reduction following periodontal surgery 1999 Currently under review by the FDA
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRISORB(R)FreeFlow GTR Barrier with Tissue regeneration and infection Phase III clinical trials completed Nov.
doxycycline reduction following periodontal surgery 1999 Currently under review by the FDA
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Oncology Applications:
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRIGEL(R) system with leuprolide Prostate cancer Phase I/II clinical trials completed
acetate June 1999 Phase III clinical trials
began September 1999
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Post-Operative Pain
- --------------------------------------------- ------------------------------------------- ------------------------------------------
ATRIGEL(R)system with lidocaine Pain associated with surgical procedures Phase I clinical trials projected to
start April 2000
- --------------------------------------------- ------------------------------------------- ------------------------------------------
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Veterinary Applications:
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Heska Periodontal Therapeutic Periodontitis in companion animals Marketed
Launched December 1997
- --------------------------------------------- ------------------------------------------- ------------------------------------------
- --------------
(1) See "Government Regulation."
The following table provides a summary of our products and products under
development that are not based on the ATRIGEL(R) system, including drug class
and corresponding drug delivery systems.
PRODUCT INDICATION STATUS(1)
Dermatological Application
- -------------------------------------------- ------------------------------------------- ------------------------------------------
SMP(TM)topical gel Treatment of acne Phase I clinical trials
Commenced May 1998
- -------------------------------------------- ------------------------------------------- ------------------------------------------
BCP(TM)topical antibiotic Infection protection Future OTC product
- -------------------------------------------- ------------------------------------------- ------------------------------------------
BCP(TM)wound wash Minor cuts and abrasions Future OTC product
- -------------------------------------------- ------------------------------------------- ------------------------------------------
Viractin(R)cream and gel Cold sores and fever blisters OTC, sold to CEP Holdings July 1997,
royalty through July 2002
- -------------------------------------------- ------------------------------------------- ------------------------------------------
Mucosal Applications
- -------------------------------------------- ------------------------------------------- ------------------------------------------
BEMA(TM)Dyclonine Canker sores and dental pain Future OTC product
- -------------------------------------------- ------------------------------------------- ------------------------------------------
MCA(TM)Benzocaine Canker sores Future OTC product
- -------------------------------------------- ------------------------------------------- ------------------------------------------
General Applications
- -------------------------------------------- ------------------------------------------- ------------------------------------------
BEMA(TM)systemic delivery Several drugs under evaluation Preclinical
- -------------------------------------------- ------------------------------------------- ------------------------------------------
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(1) See "Government Regulation."
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, we believe 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 United States population. We believe
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 is a painful procedure known as scaling and root planing that 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. We believe 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. Based on published industry reports, we
believe that over $6.5 billion is spent annually on the treatment of periodontal
disease.
The ATRIDOX(R) Product
The ATRIDOX(R) 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(R) product is intended to add a new painless,
minimally invasive pharmaceutical procedure to current periodontal treatment.
The ATRIDOX(R) product is administered by a periodontist or a general dentist by
inserting the liquid ATRIDOX(R) product into the periodontal pocket through a
cannula. The liquid ATRIDOX(R) product solidifies in the periodontal pocket and
then biodegrades as it releases doxycycline over a period of seven to ten days.
On September 4, 1998 we received notice that the FDA had approved the new drug
application for the ATRIDOX(R) product.
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Block has the exclusive rights to market the ATRIDOX(R) product in North
America. Block began introducing ATRIDOX(R) at dental professional meetings in
October 1998, and began detailing ATRIDOX(R) to the United States dental
profession in November 1998. In April 1999, we received European approval in the
United Kingdom for the ATRIDOX(R) product. Atrix Laboratories Limited sells and
markets ATRIDOX(R) in the United Kingdom. We received approval in 11 additional
European countries to market ATRIDOX(R) in January 2000. In 1999, ATRIDOX(R) was
awarded the ADA Seal of Acceptance which is an important symbol to dentists and
consumers that signifies a dental product's safety, effectiveness and the
scientific validity of its health benefits.
ATRISORB(R) GTR Barrier Products
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 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. We estimate 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
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 and costs. Since the ATRISORB(R) GTR
Barrier is biodegradable, a second surgery to remove the barrier is unnecessary.
On March 22, 1996, we received a 510(k) premarket notification clearance
from the FDA to market the ATRISORB(R) GTR Barrier in the United States. We
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. On September 9, 1998
we received a 510(k) premarket notification clearance from the FDA to market
this improved version of the ATRISORB(R) GTR Barrier in the United States, where
it is being sold by Block as the ATRISORB(R) FreeFlow GTR Barrier. As of
December 31, 1999, we had received clearance to market the ATRISORB(R) GTR
Barrier in 21 foreign countries, with 1 application pending. We expect to market
the product in additional foreign countries; however, there can be no assurance
that additional regulatory approvals or clearances will be obtained.
We commenced commercial sales of the Atrisorb(R) GTR Barrier in the United
States in the third quarter of 1996. Block has the exclusive rights to market
the ATRISORB(R) GTR Barrier and the ATRISORB(R) FreeFlow GTR Barrier products in
North America. We currently market the ATRISORB(R) GTR Barrier and the
ATRISORB(R) FreeFlow GTR Barrier products in Europe through independent
distributors and are considering various marketing arrangements at this time.
See "Collaborations."
The ATRISORB(R)-DOXY Products
We are currently developing the ATRISORB(R)-DOXY products to address
infections following periodontal surgery. It has been shown clinically that
post-operative infections often lead to less than optimum healing. We believe
the incorporation of medicinal agents such as doxycycline into the ATRISORB(R)
GTR Barrier and the ATRISORB(R) FreeFlow GTR Barrier products could provide a
drug delivery capability not feasible with other GTR barrier products currently
on the market. As a result, we believe the ATRISORB(R)-DOXY products will
contribute to better healing of the surgical site. We completed Phase III
clinical trials of the ATRISORB(R)-DOXY products in November 1999 and filed for
FDA regulatory clearance of the ATRISORB(R)-DOXY products in February 2000.
ONCOLOGY APPLICATIONS
We believe that there are a number of potential systemic cancer therapies
that are compatible with the ATRIGEL(R) technology. Our first such systemic
application for the ATRIGEL(R) system in oncology is for prostate cancer. This
product uses the ATRIGEL(R) technology and delivers leuprolide acetate to the
systemic circulation for 30 days in order to reduce testosterone levels to
castrated levels. Prostate cancer products that release leuprolide acetate over
a 90-day period and a 120-day period are also under development.
POST-OPERATIVE PAIN APPLICATIONS
We are pursuing the use of our ATRIGEL(R) system to deliver lidocaine for
orthopedic post-operative pain. This product is designed to deliver lidocaine
for 3-5 days post surgery.
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VETERINARY APPLICATIONS
In 1995, we 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, we developed a subgingival therapy for periodontal
disease in dogs and cats, comprised of the antibiotic doxycycline and the
ATRIGEL(R) system. A new animal drug application 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 we manufacture exclusively.
DERMATOLOGY
We are currently developing a proprietary prescription acne product that
incorporates the novel anti-inflammatory and antimicrobial drug dapsone into the
SMP(TM) drug delivery system. We have completed product formulation and
stability studies, good manufacturing practices, preclinical irritation and
toxicity studies, and in vitro skin permeation studies for such product. Phase I
clinical trials of this product commenced in the second quarter of 1998. Phase
II clinical trials are expected to begin in the second quarter, 2000.
COLLABORATIONS
Block Drug Agreement
On December 17, 1996, we entered into the Block agreement pursuant to which
Block acquired exclusive rights to market the ATRISORB(R) GTR Barrier products
and the ATRISORB(R)-DOXY products, when and if approved, in North America. Block
also acquired the rights to market the ATRIDOX(R) product in the United States,
with an option to acquire the rights to market the ATRIDOX(R) product in Canada
and certain European countries. On September 12, 1997, Block exercised its
option to market the ATRIDOX(R) 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 our dental research and development program. We also have 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 us. 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:
o at any time without cause,
o upon 12-months prior written notice,
o if we commit a willful and material breach of the Block agreement, or
o if we cease to manufacture or supply the product to Block pursuant to
the Block agreement.
We may terminate the Block agreement
o if Block fails to make any required payment,
o if Block commits a willful and material breach of the Block agreement,
o if Block ceases to offer the product for distribution, or
o if Block markets, distributes or sells a competitive product.
PATENTS AND TRADEMARKS
We consider patent protection and proprietary position to be materially
significant to our business. As of December 31, 1999, we maintained 37 United
States patents and 27 foreign patents, and have 22 United States and 47 foreign
patent applications pending. Claims contained in these patents and pending
patent applications protect our drug delivery technology and products based upon
these technologies. These include the ATRIGEL(R) system, the BEMA(TM), MCA(TM),
BCP(TM), and SMP(TM) technologies and the ATRISORB(R) GTR Barrier, ATRISORB(R)
FreeFlow, and the ATRIDOX(R) products.
Notwithstanding our pursuit of patent protection, there is no assurance
that others will not develop delivery systems, compositions and/or methods that
infringe our patent rights resulting from outright ownership or non-revocable
exclusive licensure of patents which relate to our delivery systems, composition
and/or methods. In that event, such delivery systems, compositions and methods
may compete with our systems, compositions and methods and may adversely affect
our operations. Furthermore, 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 our
business. We also rely on our 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 our knowledge, or that our
rights under any patents will afford sufficient protection.
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In addition to patents, we also maintain several United States and numerous
foreign trademark and service mark applications for registrations of our name,
logo, drug delivery systems and products. These include 7 United States and 23
foreign issued trademarks, with 3 United States and 14 foreign applications
pending.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than ours. 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 our products. 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, we are aware that other
companies are developing products that may compete with our products. There can
be no assurance that product introductions or developments by others will not
render our products or technologies obsolete or place them at a competitive
disadvantage.
Products utilizing our 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 our drug delivery systems. We expect 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 our 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 our 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 and the regulations promulgated thereunder govern, among other things, the
testing, manufacturing, safety, efficacy, labeling, storage, record keeping,
approval, clearance, advertising and promotion of our 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 our products. Delays or rejections in
obtaining regulatory approvals or clearances would adversely affect our ability
to commercialize any product we develop and our 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
Our ATRIDOX(R) 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:
o preclinical and clinical studies,
o the submission to the FDA of an investigational new drug application,
or IND, which must become effective before human clinical trials may
commence,
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug,
o the submission to the FDA of a new drug application, or NDA, and
o 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.
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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:
o assess the efficacy of the drug in specific, targeted indications,
o assess dosage tolerance and optional dosage, and
o 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
our 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 Food, Drug and Cosmetic Act, and User Fee
legislation, the FDA has 6-12 months in which to review the NDA and respond to
the applicant. 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. The approvable letter 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 non-approvable letter which often requires 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.
Failure to comply with the 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, or PMA or PMA supplements and the FDA's refusal to clear 510(k)s.
FDA REGULATION -- APPROVAL OF MEDICAL DEVICES
Our ATRISORB(R) GTR Barrier products are regulated in the United States as
medical devices. New medical devices are generally introduced to the market
based on a premarket notification or 510(k) submission to the FDA. Under a
510(k) submission, 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. We
have received 510(k) clearances from the FDA for the ATRISORB(R) GTR Barrier and
the ATRISORB(R) FreeFlow GTR Barrier products. The 510(k) for our
ATRISORB(R)-DOXY GTR Barrier products are currently undergoing FDA review.
FDA REGULATION -- POST-APPROVAL REQUIREMENTS
Even if regulatory clearances or approvals for our products are obtained,
our products and the facilities manufacturing our products are subject to
continued review and periodic inspection by the FDA. Each United States 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, or cGMP, if the
facility manufactures drugs, and quality system regulations if the facility
manufactures devices. In complying with cGMP and quality system regulations,
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. We must also
report certain adverse events involving our drugs and devices to the FDA under
regulations issued by the FDA.
EUROPEAN REGULATION -- APPROVAL OF MEDICINAL PRODUCTS
Our ATRIDOX(R) product is regulated in Europe as a medicinal product. In
1993, legislation was adopted which established a new and amended system for the
registration of medicinal products in the European Union, or EU. The significant
purpose of this system is to prevent the existence of separate national approval
systems which have been a major obstacle to harmonization. One of the most
significant features
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of this new system is the establishment of a new European Agency for the
Evaluation of Medicinal Products, or EMEA. Under this new system, marketing
authorization may be submitted at either a centralized, or decentralized 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 European Union for the granting of a single marketing
authorization that is valid in all European Union member states.
A mutual recognition procedure is available at the request of the applicant
for all medicinal products that are not subject to the centralized procedure,
under the so-called "decentralized procedure." The decentralized procedure
creates a new system for mutual recognition of national approvals and
establishes procedures for coordinated European Union 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 at the request of the applicant. Alternatively, the
application may be withdrawn.
We have submitted an application for ATRIDOX(R) to each European Union
member late in September 1999 for review under the decentralized procedure.
Approval was obtained January 2000 in eleven member states. The application was
withdrawn from three member states. The second round of mutual recognition is
expected to begin in the third quarter of 2000.
EUROPEAN REGULATION -- APPROVAL OF MEDICAL DEVICES
Our ATRISORB(R) GTR Barrier products are regulated in Europe as medical
devices. The European Union has promulgated rules that require medical devices
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 prohibits a company from
selling products in member states of the European Union. We have been certified
as being in compliance with the ISO 9001 standards, one of the CE Mark
certification prerequisites, and received the CE Mark for the ATRISORB(R) GTR
Barrier in January 1998. The CE Mark for the ATRISORB(R) FreeFlow GTR Barrier
product was received in January 1999.
REGULATORY CONSIDERATIONS FOR OTC DRUG PRODUCTS
An over-the-counter drug may be lawfully marketed in one of three ways:
o the drug is generally recognized as safe and effective, or GRAS/E,
o the drug is the subject of an approved NDA, or
o the drug complies with a tentative final or final monograph published
by the FDA as part of the OTC review.
Prior FDA approval is required only if an NDA is submitted. A company makes
the determination as to which route to market is the most appropriate. If a
company determines that the drug product is GRAS/E or is covered in a monograph,
it is the company's responsibility to substantiate the safety and efficacy of
the formulation and that the dosage form and claims are applicable under GRAS/E
or monograph status. Most OTC drug products are marketed pursuant to a FDA
monograph. We manufacture Eucalyptamint(R) 2000 external analgesic which is
covered under an OTC monograph.
There are several other regulatory requirements applicable to all OTC drug
products. These requirements pertain to labeling, drug registration and listing,
and manufacturing. With regard to labeling, the regulations require certain
language for statement of identity, net contents, adequate directions for use,
and name and address of the manufacturer, and their placement on the finished
package, as well as additional warning statements when relevant to the product.
All OTC manufacturers must register their establishments with the FDA and submit
to the FDA a list of products made within 5 days after beginning operations, as
well as a list of products in commercial distribution. All registered
establishments must be inspected by the FDA at least every 2 years. Lastly, OTC
drug products must be manufactured in accordance with cGMP regulations. If the
FDA finds a violation of cGMPs, it may enjoin a company's operations, seize
product, or criminally prosecute the manufacturer.
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 the 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
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provide their own safety and effectiveness data. There can be no assurance that
we 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 our ability to obtain research
grants. Various aspects of our 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 seriously harm our business.
EMPLOYEES
As of December 31, 1999, we employed 95 employees on a full-time basis and
1 person on a part-time basis. Of the 95 full-time employees, 80 are engaged in
production, research and clinical testing and the remaining 15 are in
administrative capacities and 21 employees have earned doctorate or advanced
degrees. None of our 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 to have, any adverse effect upon
our capital expenditures, earnings or the competitive position. We are not
presently a party to any litigation or administrative proceeding with respect to
our compliance with such environmental standards. In addition, we do not
anticipate being required to expend any funds in the near future for
environmental protection in connection with our operations.
We do not believe that any aspect of our business is significantly seasonal
in nature.
No significant portion of our business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
United States Government.
We currently obtain supplies of the polymer used in the polymer delivery
systems from three separate sources. Supplies of doxycycline are obtained from
both domestic and foreign sources. We believe that, in the event that we should
lose any of our suppliers of raw materials, we could locate and obtain such raw
materials from other available sources without substantial adverse delay or
increased expense.
ITEM 2. PROPERTIES.
We lease approximately 24,580 square feet of office and research laboratory
space located in Fort Collins, Colorado, pursuant to a lease that expires on
June 1, 2003. We leased an additional 4,000 square feet of space at another site
in Fort Collins and subsequently collected rental income under a sublet
agreement executed in April 1999 and completed in December 1999. Pursuant to the
lease agreement, we elected to allow the lease on the additional 4,000 square
feet to expire on December 1, 1999.
We own a 24,100 square foot manufacturing facility in Fort Collins that we
acquired in July 1996. As part of the building acquisition, we acquired two
acres of vacant land, directly adjacent to the building. In August 1997, we
acquired an additional 2.7 acres for possible future development or expansion.
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We own substantially all of our laboratory and manufacturing equipment,
which we consider to be adequate for our research, development and testing
requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders through the
solicitation of proxies during the fourth quarter of our 1999 fiscal year.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on The Nasdaq National 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 National Market:
High Low
---- ---
1999:
First Quarter $ 16 $ 8 1/2
Second Quarter 12 1/8 7 15/16
Third Quarter 9 15/16 6 1/4
Fourth Quarter 7 11/16 3 5/16
1998:
First Quarter $ 19 7/8 $ 12 1/4
Second Quarter 21 1/4 13 1/8
Third Quarter 16 1/2 11
Fourth Quarter 13 1/2 7 5/8
As of March 6 , 2000, there were approximately 2,596 holders on record of
our common stock.
We have never paid cash dividends. We currently anticipate that we will
retain all available funds for use in the operation of our business and do not
anticipate paying any cash dividends in the foreseeable future.
RECENT STOCK SALES
In May 1999, we issued 18,850 shares of common stock for the earn-out
distribution, as set forth in the ViroTex merger agreement for the market launch
of Eucalyptamint(R) 2000. These transactions were made in reliance on the
exemption from the registration requirements of the Securities Act of 1933
provided by Section 4(2).
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The consolidated financial data presented below is derived from our
consolidated financial statements, which have been audited and reported upon by
Deloitte & Touche LLP, independent auditors. The selected consolidated financial
information set forth in the table below is not necessarily indicative of our
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Consolidated Operations" and the consolidated financial statements,
related notes and independent auditors' report, included herein.
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
Summary of Operations:
Total revenues $ 5,635 $ 21,073 $ 9,849 $ 1,640 $ 580
Total expenses (21,830) (19,996) (15,105) (14,328) (14,212)
Other income (expense) (350) 404 1,389 1,256 974
Income tax expense --- (48) --- ---
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
gain on extinguishment of debt (16,545) 1,433 (3,867) (11,432) (12,658)
Extraordinary gain on
extinguishment of debt 3,275 257 --- --- ---
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (13,270) $ 1,690 $ (3,867) $ (11,432) $ (12,658)
========== ========== ========== ========== ==========
Basic and diluted per common share:
Income (loss) before extraordinary item $ (1.46) $ .13 $ (.35) $ (1.13) $ (1.58)
Extraordinary item .29 .02 --- --- ---
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (1.17) $ .15 $ (.35) $ (1.13) $ (1.58)
========== ========== ========== ========== ==========
Basic and diluted weighted average
shares outstanding 11,327 11,270 11,134 10,147 8,002
========== ========== ========== ========== ==========
Balance Sheet Data:
Working capital $ 38,646 $ 63,121 $ 67,229 $ 24,669 $ 10,913
Total assets 54,659 79,480 78,294 38,463 14,894
Long-term obligations 36,690 48,500 50,000 --- ---
Shareholders' equity 14,670 28,422 26,703 30,284 12,807
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS.
The following Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operation, as well as
information contained elsewhere in this Report, contains statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements include statements regarding the
intent, belief or current expectations of us, our directors or our officers with
respect to, among other things: (i) whether we will receive, and the timing of,
regulatory approvals or clearances to market potential products, (ii) the
results of current and future clinical trials, and (iii) the time and expenses
associated with the regulatory approval process for products. The success of our
business operations is, in turn, dependent on factors such as the receipt and
timing of regulatory approvals or clearances for potential products, the
effectiveness of our marketing strategies to market our current and any future
products, our ability to manufacture products on a commercial scale, the appeal
of our mix of products, our success at entering into and collaborating with
others to conduct effective strategic alliances and joint ventures, general
competitive conditions within the biotechnology and drug delivery industry and
general economic conditions as set forth under "Risk Factors" below.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties and actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
OVERVIEW
The year 1998 marked a turning point for us with the market launch of our
flagship product ATRIDOX(R) in September 1998 and the acquisition of ViroTex in
November 1998. Prior to 1998, we devoted our efforts and resources primarily
towards research and development of dental products without a significant
product on the market to generate material revenues. Consequently, we sustained
losses in each year of our operations prior to 1998. We realized a net profit in
1998 primarily as a result of earning $17 million in milestone revenue from
Block for the FDA approval and the subsequent market launch of ATRIDOX(R). The
Block agreement provides for potential milestone payments totaling up to $50
million to us over a three-to-five year period, as well as manufacturing margins
and royalties on sales. Prior to 1999, we had recognized $24.1 million in
milestone revenue from Block. No additional Block milestone revenue was
recognized in 1999.
The year 1999 marked the first full year of ATRIDOX(R) product sales. Sales
of ATRIDOX(R) in 1999 were relatively modest as domestic and foreign market
penetration continues, marketing strategies evolve and product acceptance with a
new innovative technology within the dental community is established. We
anticipate increased sales revenues in 2000 as progress occurs on domestic and
foreign market development. In April 1999, we received European approval in the
United Kingdom for the ATRIDOX(R) product and established Atrix Laboratories
Limited in June 1999, a wholly owned subsidiary, to sell and market ATRIDOX(R)
in the United Kingdom. We received approval in January 2000 to market ATRIDOX(R)
in 11 additional European countries. In 1999, ATRIDOX(R) was awarded the ADA
Seal of Acceptance which is an important symbol to dentists and consumers that
signifies a dental product's safety, effectiveness and the scientific validity
of its health benefits.
We shifted our research and development focus from dental to medical
products in 1999. Significant resources were devoted to the research and
development of prostate cancer therapy incorporating the ATRIGEL(R) drug
delivery system with leuprolide acetate, acne treatment using the SMP(TM) drug
delivery system with topical dapsone and various medical products utilizing the
BEMA(TM) drug delivery system acquired through the ViroTex acquisition. Research
and development expenditures continued for existing and future dental products
as well, including the ATRISORB(R)-DOXY products. We are developing the
ATRISORB(R)-DOXY products, second-generation GTR barrier products that combine
the benefits of the ATRISORB(R) GTR Barrier products with the antibiotic
doxycycline, for improved clinical outcomes following periodontal surgery. We
completed the ATRISORB(R)-DOXY products Phase III human clinical trials in
November 1999. In February 2000, we announced the filing for regulatory
clearance of the ATRISORB(R)-DOXY products.
In June 1999, phase I/II human clinical studies for delivery of leuprolide
acetate in prostate cancer patients using our proprietary 30-day sustained
released ATRIGEL(R) formulation were successfully completed. In January 2000, we
announced successful interim results in the ongoing Phase III human clinical
trials pertaining to the 30-day prostate cancer therapy study. We also filed an
investigational new drug application with the FDA in January 2000 for the 90-day
prostate cancer product.
In April 1999, our marketing partner, Heritage commenced sales of
Eucalyptamint(R) 2000 into North American wholesale and retail distribution
channels. Eucalyptamint(R) 2000 is an over-the-counter pain relieving gel that
was acquired through the purchase of ViroTex. Under the terms of the Heritage
agreement, Heritage funds commercialization of the product and we receive
royalty payments and manufacturing margins.
At December 31, 1999, we had available for Federal income tax purposes, net
operating loss carryforwards of approximately $61 million and approximately $2
million in research and development tax credits. These carryforwards will expire
through 2019. Our ability to utilize our purchased net operating loss acquired
with the acquisition of ViroTex, alternative minimum tax, 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.
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We operate in a single reportable segment and all revenues from customers
are from a similar group of periodontal products. Product net sales, royalty
revenues and milestone revenues from one customer, Block, amounted to
$3,176,000, $19,028,000 and $8,213,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Accounts receivable balances for this customer were
approximately $502,000 and $5,616,000 for the years ended 1999 and 1998,
respectively. Revenues from export sales to customers outside of North America
amounted to approximately $758,000, $557,000 and $100,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
Total revenues for the year ended December 31, 1999 were approximately
$5,635,000 compared to approximately $21,073,000 for the year ended December 31,
1998, representing a 73% decrease. The decrease was primarily related to the $17
million in milestone payments earned from Block during 1998 for the FDA approval
and product launch of ATRIDOX(R) and ATRISORB(R) GTR Barrier products. We did
not earn any milestone payments in 1999. Increased net sales and contract
revenue in 1999 partially offset this decrease in total revenue.
Our total revenue included product net sales and royalty revenue of
approximately $4,542,000 for the year ended December 31, 1999 compared to
approximately $3,451,000 for the year ended December 31, 1998, representing a
32% increase. ATRIDOX(R) product sales increased 176% and ATRISORB(R) FreeFlow
GTR Barrier product sales increased 217% as a result of a full year of sales in
1999 compared to four months of sales of these products at the end of 1998. Both
the ATRIDOX(R) and ATRISORB(R) FreeFlow GTR Barrier products were launched in
September 1998.
During the fourth quarter of 1999, the Company incurred a charge of
$733,000 for a change in estimate for revenues from sales of ATRIDOX(R),
ATRISORB(R) FreeFlow GTR Barrier and ATRISORB(R) GTR Barrier. This change
resulted when Block provided updated information indicating the actual net
selling price of these products was less than the estimated net selling price.
Revenue to us is based on a set percent of actual net sales by Block. We
recorded this adjustment in the fourth quarter as a change in estimate at the
time it became known. Further, we have reduced the rate at which we will
recognize revenue under the Block agreement during 2000 to reflect these lower
selling prices.
Third-party contract manufacturing arrangements and royalty revenue
relating to sales of the Eucalyptamint(R) 2000 product, both of which commenced
in 1999, also contributed to the increase in sales for 1999. The acquisition of
ViroTex in November 1998 included royalty revenue on future net sales of
Viractin(R) from J.B. Williams Company through July 2002. The increase in
royalty revenue of 748% in 1999 was primarily due to the royalty revenue earned
on a full year of Viractin(R) sales in 1999. Partially offsetting the increase
in sales revenue for 1999 was an 80% decrease in sales of the ATRISORB(R) GTR
Barrier product and a 76% decrease in sales of the Heska Periodontal Therapeutic
product for companion animals.
Contract revenue represents revenue we earned from grants and from
unaffiliated third parties for performing contract research and development
activities utilizing our proprietary drug delivery systems. Contract revenue was
approximately $1,093,000 for the year ended December 31, 1999 compared to
approximately $622,000 for the year ended December 31, 1998, representing a 76%
increase. The increase was primarily due to the acceleration of revenue
recognition on the ATRISORB(R)-DOXY federal research grant as a result of the
corresponding acceleration of research and development efforts on these
products.
Sale of marketing rights of $17 million represents milestone revenue we
received pursuant to the Block agreement during the year ended December 31,
1998. We expect to receive additional revenue in the future upon the achievement
of other milestones under the Block agreement. The Block agreement provides for
potential milestone payments totaling up to $50 million to us over a
three-to-five year period, as well as manufacturing margins and royalties on
sales. Prior to 1999, we had recognized $24.1 million in milestone revenue from
Block. No additional Block milestone revenue was recognized in 1999.
Cost of goods sold was approximately $1,974,000 for the year ended December
31, 1999 compared to approximately $2,250,000 for the period ended December 31,
1998, representing a 12% decrease. Although there was an increase in sales
revenue for 1999, the decrease in cost of goods sold was primarily due to lower
costs to manufacture the ATRIDOX(R) and ATRISORB(R) Freeflow GTR Barrier
products as compared to the ATRISORB(R) GTR Barrier product in 1998.
Research and development expenses were approximately $15,555,000 for the
year ended December 31, 1999 compared to approximately $12,189,000 for the year
ended December 31, 1998 representing a 28% increase. This increase represented a
shift in our research and development focus from dental to medical products in
1999. Our strategic goal is to devote substantial resources to our research and
development efforts in these areas with the expectation of quickly moving
products from the development stage through to commercialization.
In 1998, we expensed $3,050,000 of the ViroTex purchase price, which was
allocated to purchased in-process research and development projects, as of the
date of acquisition. This charge to income was based upon an independent third
party valuation.
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Administrative and marketing expenses were approximately $4,300,000 for the
year ended December 31, 1999 compared to approximately $2,507,000 for the year
ended December 31, 1998, representing a 72% increase. The increase was primarily
the result of recognition of amortization expense on intangible assets
associated with the ViroTex acquisition in November 1998. Additionally,
contributing to the increase were expenditures associated with establishing our
foreign subsidiary, which commenced operations in June 1999.
Investment income for the year ended December 31, 1999 was approximately
$2,720,000 compared to approximately $3,966,000 for the year ended December 31,
1998, representing a 31% decrease. The decrease was primarily the result of a
reduction in cash and cash equivalents, and investments from 1998 to 1999. A
loss of approximately $141,000 on the sale of investments recorded in 1999 also
contributed to the decrease in investment income.
Interest expense for the year ended December 31, 1999 was approximately
$3,062,000 compared to approximately $3,575,000 for the year ended December 31,
1998 representing a 14% decrease. The reduction in interest expense was
primarily the result of our repurchase and subsequent retirement of $11,810,000,
or approximately 24% of our 7% convertible subordinated notes in 1999. We
repurchased the notes for approximately $8,173,000. As a result, we recognized
an extraordinary gain of approximately $3,275,000, or $0.29 per share, net of
deferred finance charges and accumulated amortization of approximately $362,000.
As of December 31, 1999, $36,690,000 of these notes are outstanding.
For the reasons described above, we recorded a consolidated net loss of
approximately $13,270,000, or $1.17 per share, for the year ended December 31,
1999 compared to a net income of approximately $1,690,000 or $0.15 per share for
the year ended December 31, 1998. The $17 million Block milestone payments
earned in 1998 was the primary factor causing the decrease in net income between
periods.
Years Ended December 31, 1998 and 1997
Total revenue for the year ended December 31, 1998 was approximately
$21,073,000 compared to approximately $9,849,000 for the year ended December 31,
1997, representing a 114% increase. The increase was primarily due to
$17,000,000 earned milestone revenue under the Block agreement in 1998.
ATRIDOX(R) product sales and ATRISORB(R) FreeFlow GTR Barrier product sales,
both commencing September 1998, also contributed to the increase in total
revenues.
We recognized revenue from product sales of approximately $3,451,000 for
the year ended December 31, 1998 compared to approximately $1,895,000 for the
year ended December 31, 1997, representing an 82% increase. The increase in
sales was primarily the result of the market launch in September 1998 of the
ATRIDOX(R) product and the ATRISORB(R) FreeFlow GTR Barrier product.
Contract revenue was approximately $622,000 for the year ended December 31,
1998, compared to approximately $854,000 for the year ended December 31, 1997,
representing a 27% decrease. Contract revenue represents revenue we received
from grants and from unaffiliated third parties for performing contract research
and development activities utilizing the ATRIGEL(R) system. The decrease was
primarily due to the completion of several research contracts during 1997.
Sale of marketing rights represents milestone revenue we received pursuant
to the Block agreement during the year ended December 31, 1998. We earned
$17,000,000 for the year ended December 31, 1998 compared to $7,100,000 in
milestone revenue for the year ended December 31, 1997, an increase of 139%. We
expect to receive additional revenue in the future upon the achievement of other
milestones under the Block agreement.
Cost of goods sold was approximately $2,250,000 for the year ended December
31, 1998 compared to approximately $1,533,000 for the year ended December 31,
1997, representing a 47% increase. The increase was primarily related to sales
commencing in September 1998 for both the ATRIDOX(R) product and the ATRISORB(R)
FreeFlow GTR Barrier product.
Research and development expenses, which included activities for the
ATRIDOX(R) product and other research activities, were approximately $12,189,000
for the year ended December 31, 1998 compared to approximately $11,545,000 for
the year ended December 31, 1997, representing a 6% increase. The increase was
primarily a result of additional expenditures in new areas of research using our
existing technology.
We expensed $3,050,000 of the ViroTex purchase price, which was allocated
to purchased in-process research and development projects, as of the date of
acquisition. This charge to income was based upon an independent third party
valuation.
Administrative and marketing expenses were approximately $2,507,000 for the
year ended December 31, 1998 compared to approximately $2,027,000 for the year
ended December 31, 1997, representing a 24% increase. The primary reason for
this increase was administrative costs associated with the preparation for the
ATRIDOX(R) market launch.
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Investment income for the year ended December 31, 1998 was approximately
$3,966,000 compared to approximately $1,726,000 for the year ended December 31,
1997, representing a 130% increase. Investment income increased due to additions
in principal investments as a result of the proceeds from the notes, which was
completed in the fourth quarter of 1997, and milestone payments received under
the Block agreement during 1998. 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 our short-term operations.
Interest expense for the year ended December 31, 1998 was approximately
$3,575,000 compared to $307,000 for the year ended December 31, 1997
representing a 1,064% increase. The increase was due to the interest expense on
the notes.
In December 1998, we repurchased $1,500,000, or 3%, of our notes on the
open market for $1,192,500. As a result, we reduced deferred finance charges by
approximately $51,000 on a pro-rated basis and recognized an extraordinary gain
of approximately $257,000. As of December 31, 1998 and December 31, 1997,
$48,500,000 and $50,000,000 of these notes were outstanding, respectively.
We recorded a net income of approximately $1,690,000 for the year ended
December 31, 1998 compared to a net loss of approximately $3,867,000 for the
year ended December 31, 1997. The increase in net income was primarily the
result of the increase of the milestone payments from $7,100,000 to $17,000,000
from Block.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of approximately
$3,022,000, marketable securities (at fair market value) of approximately
$34,857,000, net accounts receivable of approximately $1,223,000, inventory of
approximately $1,863,000, and other current assets of approximately $981,000,
for total current assets of approximately $41,945,000. Current liabilities
totaled approximately $3,299,000, which resulted in working capital of
approximately $38,646,000.
In September 1998, we renewed a $1,000,000 bank line of credit that expires
August 2000. Borrowings under the line bear interest at the prime rate. As of
December 31, 1999, there was no obligation outstanding under this credit
agreement.
In November 1997, we issued $50,000,000 in principal amount of the notes.
Interest is payable semi-annually and the notes mature on December 1, 2004. The
notes are convertible, at the option of the holder, into common stock at a
conversion price of $19.00 a share, subject to adjustment in certain events. The
notes are redeemable, in whole or in part, at our option at any time on or after
December 5, 2000. As of December 31, 1999, $36,690,000 of these notes are
outstanding.
During the year ended December 31, 1999, net cash used in operating
activities was approximately $7,011,000. This was primarily a result of the net
loss for the period of approximately $13,270,000 which is offset by certain
non-cash expenses, and changes in other operating assets and liabilities as set
forth in the statements of cash flows. 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 year ended December 31, 1999.
Net cash used in investing activities was approximately $964,000 during the year
ended December 31, 1999, primarily as a result of the investment in various
marketable securities during the period. Significant uses of cash for investing
activities during the year ended December 31, 1999 included approximately
$1,190,000 for the acquisition of property, plant and equipment. Net cash used
in financing activities was approximately $7,560,000 during the year ended
December 31, 1999, primarily as a result of the retirement of notes.
FUTURE CAPITAL REQUIREMENTS
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development programs,
o the time required to file and process regulatory approval and
clearance applications,
o the development of our commercial manufacturing facilities, including
the expansion or possible construction of an administrative and
laboratory facility on land adjacent to our manufacturing facility,
o our ability to obtain additional licensing arrangements, and
o the demand for our products.
We expended approximately $1,190,000 for property, plant and equipment and
approximately $268,000 for patent development during the year ended December 31,
1999.
We expect to continue to incur substantial expenditures for research and
development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and
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may, therefore, require additional funds earlier than previously anticipated.
Management believes that the existing cash and cash equivalent assets in
addition to marketable security resources will be sufficient to fund our
operations through 2000. However, there can be no assurance that underlying
assumed levels of revenue and expense will prove accurate.
We believe that it is advisable to augment our cash in order to fund all of
our activities, including potential product acquisitions. Therefore, we will
consider raising cash whenever market conditions are favorable. Such capital may
be raised through additional public or private financing, as well as
collaborative relationships, borrowings and other available sources. In
addition, in the course of our business, we evaluate products and technologies
held by third parties which, if acquired, could result in our development of
product candidates or which complement technologies that we are currently
developing. We expect, from time to time, to be involved in discussions with
other entities concerning our potential acquisition of rights to additional
pharmaceutical products. In the event that we acquire such products or third
party technologies, we may find it necessary or advisable to obtain additional
funding.
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our products, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when marketed.
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 compliant. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in our critical information technology
and non-information technology systems, and believe those systems successfully
responded to the Year 2000 date change. We replaced some of our existing
computer and software systems with Year 2000 compliant systems. We expended a
total of approximately $1.39 million related to our Year 2000 remediation
program of which approximately $28,000 was charged to expense and approximately
$1.36 million was capitalized in 1998 and 1999. These costs were funded through
operating cash flows. Several computer systems were due to be replaced, but were
accelerated because of the Year 2000 issue.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133,
which will be effective for the year 2001, requires derivative instruments to be
recorded in the balance sheet at their fair value with changes in fair value
being recognized in earnings unless specific hedge accounting criteria are met.
We do not utilize hedges or derivative instruments and will not be impacted by
this statement.
RISK FACTORS
In addition to the other information contained in this Report, we caution
stockholders and potential investors that the following important factors, among
others, in some cases have affected, and in the future could affect, our actual
results of operations and could cause our actual results to differ materially
from those expressed in any forward-looking statements made by, on, or on behalf
of us. The following information is not intended to limit in any way the
characterization of other statements or information under other captions as
cautionary statements for such purpose. These factors include:
o Delay, difficulty, or failure in obtaining regulatory approval or
clearance to market additional products; including delays or
difficulties in development because of insufficient proof of safety or
efficacy.
o Substantial manufacturing and marketing expenses to be incurred in the
commercial launch of the ATRIDOX(R) product and commercializing future
products.
o Failure of corporate partners to develop or commercialize successfully
our products or to retain and expand markets served by the commercial
collaborations; conflicts of interest, priorities, and commercial
strategies that may arise between us and such corporate partners.
o Our limited experience in the sale and marketing of our products;
dependence on Block to establish effective marketing, sales and
distribution capabilities for the ATRIDOX(R) product, the ATRISORB(R)
GTR Barrier products and the ATRISORB(R)-DOXY products in North
America. Failure to internally develop marketing channels for the
ATRISORB(R) GTR Barrier products, the ATRISORB(R)-DOXY products and
the ATRIDOX(R) product in Europe.
o The ability to obtain, maintain and prosecute intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration or
purchase of another entity.
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o Limited experience in manufacturing products on a commercial scale;
failure to manufacture present and future products in compliance with
applicable regulations and at an acceptable cost.
o Cancellation or termination of material collaborative agreements
(including the Block agreement) and the resulting loss of research or
other funding, or marketing, sales and distribution capabilities.
o Access to the pharmaceutical compounds necessary to successfully
commercialize the ATRIGEL(R) system or other delivery systems
currently in development.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o The ability to attract and retain highly qualified management and
scientific personnel.
o Difficulties or high costs of obtaining adequate financing to fund
future research, development and commercialization of products.
o The slow rate of acceptance of new products in the dental market.
o The continued growth and market acceptance of our products and our
ability to develop and commercialize new products in a timely and
cost-effective manner.
o Exchange rate fluctuations that may adversely impact net income
(loss).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We own financial instruments that are sensitive to market risks as part of
our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. Due to the
nature of our investment portfolio, the portfolio contains instruments that are
primarily subject to interest rate risk.
Interest Rate Risk
Our investment portfolio includes fixed rate debt instruments that are
primarily United States government and agency bonds of durations ranging from
one to nine years. The market value of these bonds is subject to interest rate
risk, and could decline in value if interest rates increase. To mitigate the
impact of fluctuations in cash flow, we maintain substantially all of our debt
instruments as fixed rate. The portion maintained as fixed rate is dependent on
many factors including judgments as to future trends in interest rates.
Our investment portfolio also includes investments in United States
government and agency bond funds. The value of these investments is subject to
interest rate risk.
We regularly assess the above-described market risks and have established
policies and business practices to protect against the adverse effects of these
and other potential exposures. Our investment policy restricts investments to
United States government or government backed securities, or the highest rated
commercial paper (A1P1) only. As a result, we do not anticipate any material
losses in these areas.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and short-term and
long-term debt instruments.
To perform sensitivity analysis, we assess the risk of loss in fair values
from the impact of hypothetical changes in interest rates on market sensitive
instruments. The fair values are computed based on the present value of future
cash flows as impacted by the changes in the interest 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 December
31, 1999. The fair values that result from these computations are compared with
the fair values of these financial instruments at December 31, 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 December 31,
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 our financial instruments by approximately $231,000 per
year. A 10% increase in the levels of interest rates with all other
variables held constant would result in an increase in the fair value of
our financial instruments by
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approximately $231,000 per year. We maintain a portion of our financial
instruments, including long-term debt instruments of approximately $7.28
million at December 31, 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 our assets may rise or fall by a greater amount
depending on actual general market performances and the value of the individual
securities we own.
The market price of the notes generally changes in parallel with the market
price of our common stock. When our stock price increases, the price of the
notes generally increases proportionally. Fair market price of our notes can be
determined from quoted market prices, where available. The fair value of our
long-term debt was estimated to be $21,463,650 at December 31, 1999 and is lower
than the carrying value by $15,226,350. Market risk was estimated as the
potential decrease in fair value resulting from a hypothetical 1% increase in
our weighted average long-term borrowing rate and a 1% decrease in quoted market
prices, or approximately $734,000.
Exchange Rate Risk
We face foreign exchange rate fluctuations, primarily with respect to the
British Pound, as the financial results of our foreign subsidiary are translated
into United States dollars for consolidation. As exchange rates vary, these
results, when translated may vary from expectations and adversely impact net
income (loss) and overall profitability. The effect of foreign exchange rate
fluctuation for the year ended December 31, 1999 was not material. Based on our
overall foreign currency rate exposure at December 31, 1999, we do not believe
that a hypothetical 10% change in foreign currency rates would materially affect
our financial position.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements required by Regulation S-X are
attached to this Report. Reference is made to Item 14 below for an index to the
consolidated 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 our definitive proxy statement for our annual
meeting of shareholders scheduled to be held on May 8, 2000 regarding our
directors and officers 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 our definitive proxy statement for our annual
meeting of shareholders scheduled to be held on May 8, 2000 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 our definitive proxy statement for our annual meeting of
shareholders scheduled to be held on May 8, 2000 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 our definitive proxy statement for our annual meeting of
shareholders scheduled to be held on May 8, 2000 regarding certain relationships
and related transactions is hereby incorporated herein by reference in response
to this item.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) Our following documents are filed as part of this Report:
1. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997
Notes to the Consolidated Financial Statements
2. Consolidated 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
The exhibits are set forth in the Exhibit Index.
4. Reports on Form 8-K:
1. No reports on Form 8-K were filed during the three-month
period ended December 31, 1999.
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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
our behalf by the undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
(Registrant)
Date: March 13, 2000 By: /s/ David R. Bethune
------------------------------------------------
David R. Bethune
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 Chairman of the Board of Directors March 13, 2000
-------------------------------- and Interim Chief Executive Officer
David R. Bethune (Principal Executive Officer)
/s/ H. Stuart Campbell Director March 13, 2000
--------------------------------
H. Stuart Campbell
Director March , 2000
--------------------------------
Dr. D. Walter Cohen
/s/ Dr. Charles P. Cox Vice President of New Business March 13, 2000
-------------------------------- Development
Dr. Charles P. Cox
/s/ Michael R. Duncan Vice President of Manufacturing March 13, 2000
--------------------------------
Michael R. Duncan
/s/ Dr. Richard Dunn Senior Vice President of Drug March 13, 2000
-------------------------------- Delivery
Dr. Richard Dunn
Director March , 2000
--------------------------------
Sander A. Flaum
/s/ Dr. J. Steven Garrett Vice President of Clinical Research March 13, 2000
--------------------------------
Dr. J. Steven Garrett
/s/ Elaine M. Gazdeck Vice President of Regulatory March 13, 2000
-------------------------------- Affairs & Quality Assurance
Elaine M. Gazdeck
/s/ Dr. Jere E. Goyan Director March 13, 2000
--------------------------------
Dr. Jere E. Goyan
/s/ Dr. Richard L. Jackson Director and Senior Vice President March 13, 2000
-------------------------------- of Research and Development
Dr. Richard L. Jackson
/s/ C. Rodney O'Connor Director March 13, 2000
--------------------------------
C. Rodney O'Connor
/s/ William C. O'Neil, Jr. Director March 13, 2000
--------------------------------
William C. O'Neil, Jr.
/s/ Dr. David Osborne Vice President of Pharmaceutical March 13, 2000
-------------------------------- Development
Dr. David Osborne
/s/ Brian G. Richmond Vice President of Finance and March 13, 2000
-------------------------------- Assistant Secretary (Principal
Brian G. Richmond Financial and Accounting Officer)
/s/ Dr. G. Lee. Southard Director March 13, 2000
--------------------------------
Dr. G. Lee Southard
/s/ John E. Urheim Director March 13, 2000
--------------------------------
John E. Urheim
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CONSOLIDATED FINANCIAL STATEMENT INDEX
Page
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1999 and 1998 F-3
Consolidated Statements of Operations - Years Ended December 31, 1999,
1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1999,
1998 and 1997 F-6
Notes to the consolidated financial statements F-7- F-18
F-1
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Atrix Laboratories, Inc. and Subsidiaries
Fort Collins, Colorado
We have audited the accompanying consolidated balance sheets of Atrix
Laboratories, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 29, 2000
F-2
27
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1999 December 31, 1998
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,021,869 $ 18,556,641
Marketable securities available for sale, at fair market value 34,856,697 37,102,867
Accounts receivable, net of allowance for doubtful accounts
of $18,355 and $49,165 1,222,850 5,937,446
Interest receivable 562,318 664,374
Inventories 1,862,522 2,563,536
Prepaid expenses and deposits 418,812 853,266
---------------- ----------------
Total current assets 41,945,068 65,678,130
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET: 7,114,761 7,131,567
---------------- ----------------
OTHER ASSETS:
Intangible assets, net 4,580,325 5,049,493
Deferred finance costs, net of accumulated amortization of $430,007
and $252,131 1,018,650 1,620,412
---------------- ----------------
Other assets, net 5,598,975 6,669,905
---------------- ----------------
TOTAL ASSETS $ 54,658,804 $ 79,479,602
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,455,605 $ 1,650,490
Interest payable 211,094 279,039
Accrued salaries and payroll taxes 321,548 259,986
Other accrued liabilities 150,396 214,087
Deferred revenue 160,000 153,602
---------------- ----------------
Total current liabilities 3,298,643 2,557,204
---------------- ----------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 36,690,000 48,500,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES 4, 6, 7 AND 11)
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;
11,435,244 and 11,360,672 shares issued; 11,427,554 and 11,203,672 shares
outstanding 11,435 11,361
Additional paid-in capital 74,495,672 74,822,942
Treasury stock, 7,690 and 157,000 shares, at cost (80,846) (1,650,564)
Accumulated other comprehensive loss (1,696,010) (96,553)
Accumulated deficit (58,060,090) (44,664,788)
---------------- ----------------
Total shareholders' equity 14,670,161 28,422,398
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,658,804 $ 79,479,602
================ ================
See notes to the consolidated financial statements.
F-3
28
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ ------------------
REVENUE:
Net sales and royalties $ 4,541,703 $ 3,451,148 $ 1,895,179
Contract revenue 1,093,358 621,771 854,081
Sale of marketing rights and milestone revenue --- 17,000,000 7,100,000
------------------ ------------------ ------------------
Total revenue 5,635,061 21,072,919 9,849,260
------------------ ------------------ ------------------
OPERATING EXPENSES:
Cost of goods sold 1,974,009 2,249,776 1,533,441
Research and development 15,555,333 12,189,212 11,544,593
Purchased in-process research and development --- 3,050,000 ---
Administrative and marketing 4,300,480 2,506,879 2,027,034
------------------ ------------------ ------------------
Total operating expenses 21,829,822 19,995,867 15,105,068
------------------ ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (16,194,761) 1,077,052 (5,255,808)
OTHER INCOME (EXPENSE):
Investment income 2,719,830 3,965,966 1,725,838
Interest expense (3,062,239) (3,574,906) (306,950)
Other (7,651) 13,439 (29,797)
------------------ ------------------ ------------------
Net other income (expense) (350,060) 404,499 1,389,091
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
(16,544,821) 1,481,551 (3,866,717)
Income tax - current expense --- (48,183) ---
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (16,544,821) 1,433,368 (3,866,717)
Extraordinary gain on extinguished debt 3,274,595 256,678 ---
------------------ ------------------ ------------------
NET INCOME (LOSS) $ (13,270,226) $ 1,690,046 $ (3,866,717)
================== ================== ==================
Basic and diluted earnings per common share:
Income (loss) before extraordinary item $ (1.46) $ .13 $ (.35)
Extraordinary item .29 .02 ---
------------------ ------------------ ------------------
Net income (loss) $ (1.17) $ .15 $ (.35)
================== ================== ==================
Basic and diluted weighted average common shares
outstanding 11,327,213 11,269,981 11,133,669
================== ================== ==================
See notes to the consolidated financial statements.
F-4
29
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-in
Shares Amount Capital
------------ ------------ ------------
BALANCE,
DECEMBER 31, 1996 11,113,624 $ 11,114 $ 72,913,274
Comprehensive loss:
Net loss -- -- --
Other comprehensive loss:
- Unrealized loss on
investments -- -- --
Net comprehensive loss
Exercise of stock options 63,637 63 311,168
------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 11,177,261 11,177 73,224,442
Comprehensive income:
Net income -- -- --
Other comprehensive
income:
- Unrealized gain on
investments -- -- --
Net comprehensive income
Exercise of stock options 145,212 146 228,686
Issuance for employee stock
purchase plan 339 -- 4,557
Issuance for acquisition:
Common stock 37,860 38 389,920
Stock options -- -- 921,370
Warrants -- -- 30,555
Compensation - stock options -- -- 23,412
Purchase of treasury stock (157,000) -- --
------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 11,203,672 11,361 74,822,942
Comprehensive loss:
Net loss -- -- --
Other comprehensive loss:
Cumulative foreign
currency translation
adjustments -- -- --
Unrealized loss on
investments -- -- --
Net comprehensive loss
Exercise of stock options 120,650 15 (763,781)
Exercise of non-qualified stock
options 1,000 -- --
Issuance for employee stock
purchase plan 3,382 -- 4,781
Issuance for restricted stock 80,000 40 236,840
Issuance for earn-out
distribution 18,850 19 194,890
------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 11,427,554 $ 11,435 $ 74,495,672
============ ============ ============
Accumulated
Other Total
Treasury Comprehensive Accumulated Shareholders'
Stock Loss Deficit Equity
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1996 $ -- $ (152,641) $(42,488,117) $ 30,283,630
Comprehensive loss:
Net loss -- -- (3,866,717) (3,866,717)
Other comprehensive loss:
- Unrealized loss on
investments -- (25,226) -- (25,226)
------------
Net comprehensive loss (3,891,943)
Exercise of stock options -- -- -- 311,231
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 -- (177,867) (46,354,834) 26,702,918
Comprehensive income:
Net income -- -- 1,690,046 1,690,046
Other comprehensive income:
- Unrealized gain on
investments -- 81,314 -- 81,314
------------
Net comprehensive income 1,771,360
Exercise of stock options -- -- -- 228,832
Issuance for employee stock
purchase plan -- -- -- 4,557
Issuance for acquisition:
Common stock -- -- -- 389,958
Stock options -- -- -- 921,370
Warrants -- -- -- 30,555
Compensation - stock options -- -- -- 23,412
Purchase of treasury stock (1,650,564) -- -- (1,650,564)
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 (1,650,564) (96,553) (44,664,788) 28,422,398
Comprehensive loss:
Net loss -- -- (13,270,226) (13,270,226)
Other comprehensive loss:
Cumulative foreign
currency translation
adjustments -- (931) -- (931)
Unrealized loss on
investments -- (1,598,526) -- (1,598,526)
------------
Net comprehensive loss (14,869,683)
Exercise of stock options 1,107,550 -- (32,567) 311,217
Exercise of non-qualified stock
options 10,513 -- (3,513) 7,000
Issuance for employee stock
purchase plan 31,129 -- 1,530 37,440
Issuance for restricted stock 420,526 -- (90,526) 566,880
Issuance for earn-out
distribution -- -- -- 194,909
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 $ (80,846) $ (1,696,010) $(58,060,090) $ 14,670,161
============ ============ ============ ============
See notes to the consolidated financial statements.
F-5
30
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (13,270,226) $ 1,690,046 $ (3,866,717)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 1,067,878 927,619 765,735
Amortization 708,817 390,252 58,464
Loss on sale of property, plant and equipment 113,772 45,031 76,889
Loss (gain) on sale of marketable securities 140,350 (28,186) ---
Write-off of patents 25,835 32,226 ---
Purchased in-process research and development --- 3,050,000 ---
Compensation - stock options --- 23,412 ---
Compensation - restricted stock 309,380 --- ---
Extraordinary gain on extinguishment of debt (3,274,595) (256,678) ---
Net changes in operating assets and liabilities, net of effects
of ViroTex acquisition in 1998:
Restricted cash equivalents --- --- 7,000,000
Accounts receivable 4,714,596 (4,334,019) (872,137)
Interest receivable 102,056 (324,028) (186,218)
Inventories 701,014 (1,254,017) (1,006,014)
Prepaid expenses and deposits 434,454 (649,997) 104,747
Other assets 474,708 --- ---
Accounts payable - trade 804,184 (466,755) 119,215
Interest payable (67,945) (8,632) 287,671
Accrued salaries and payroll taxes 61,562 (16,746) 63,326
Other accrued liabilities (63,691) (149,210) (57,143)
Deferred revenue 6,398 153,602 (7,002,192)
---------------- ---------------- ----------------
Net cash used in operating activities (7,011,453) (1,176,080) (4,514,374)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,190,338) (1,004,291) (2,623,291)
Acquisition of leasehold improvements (3,743) --- (39,499)
Investment in intangible assets (268,184) (213,189) (203,854)
Proceeds from sale of property, plant and equipment 29,235 2,725 30,855
Proceeds from sale of marketable securities 10,710,352 20,130,000 2,025,000
Proceeds from maturity of marketable securities 9,352,656 48,043,018 ---
Investment in marketable securities (19,570,429) (54,968,515) (46,252,309)
Acquisition of ViroTex - net of cash acquired (23,124) (4,833,192) ---
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities (963,575) 7,156,556 (47,063,098)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 613,156 233,388 311,231
Proceeds from issuance of convertible subordinated notes --- --- 50,000,000
Payment for purchase of convertible subordinated notes (8,172,900) (1,192,500) ---
Payment of finance costs --- --- (1,916,390)
Acquisition of treasury stock --- (1,650,564) ---
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities (7,559,744) (2,609,676) 48,394,841
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,534,772) 3,370,800 (3,182,631)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,556,641 15,185,841 18,368,472
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,021,869 $ 18,556,641 $ 15,185,841
================ ================ ================
Supplemental cash flow information:
- Cash paid for interest: $ 3,110,116 $ 3,569,421 $ 19,279
================ ================ ================
Non-cash activities - In 1998, the Company issued common stock, warrants,
and stock options valued at $1,341,883 in connection with the acquisition of
ViroTex.
- In 1999, the Company issued common stock valued at
$194,909 in connection with the May 1999 Earn-Out payments relating to the
ViroTex acquisition.
- In 1999, the Company recognized compensation expense
of $309,380 for issuance of restricted stock as an addition to additional
paid-in capital.
See notes to the consolidated financial statements.
F-6
31
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 five of its
proprietary drug delivery systems. ATRIGEL(R) is the Company's original
proprietary sustained release biodegradable polymer drug delivery system. The
Company commenced sales of its first product, the ATRISORB(R) GTR Barrier in
both the United States and Europe during 1996. In 1997, the Company commenced
sales of a product to treat periodontal disease in companion animals. In 1998,
the Company launched the ATRIDOX(R) and the ATRISORB(R) FreeFlow GTR Barrier
products. The majority of Atrix's other products are in either the research,
development, or clinical stage. The Company acquired ViroTex Corporation
("ViroTex") in November 1998. The acquisition of ViroTex provided four
additional drug delivery systems: BEMATM, MCATM, BCPTM and SMPTM. ViroTex
engaged in the development of over-the-counter and prescription products based
on its proprietary polymer and solvent based drug delivery systems. In April
1999, the Company received European approval in the United Kingdom for the
ATRIDOX(R) product and established Atrix Laboratories Limited in June 1999, a
wholly owned subsidiary of the Company, to sell and market ATRIDOX(R) in the
United Kingdom. In 1999, ATRIDOX(R) was awarded the American Dental
Association's Seal of Acceptance.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Atrix Laboratories, Inc., and our wholly-owned subsidiary, Atrix Laboratories,
Limited. All significant intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
CASH AND CASH EQUIVALENTS
Cash equivalents include 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 market value with the unrealized holding gain or loss included in
shareholders' equity as a component of other comprehensive income (loss).
Premiums and discounts associated with bonds are amortized using the effective
interest rate method.
F-7
32
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market. The components of inventories are as follows as of
December 31:
1999 1998
----------- -----------
Raw materials $ 1,486,289 $ 1,659,097
Work in progress 300,571 393,068
Finished goods 75,662 511,371
----------- -----------
Total $ 1,862,522 $ 2,563,536
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful life of the assets, which range between three
and forty years. Leasehold improvements are amortized over the remaining term of
the related lease. The components of net property, plant and equipment are as
follows as of December 31:
-------------- --------------
1999 1998
-------------- --------------
Land $ 1,071,018 $ 1,071,018
Building 3,573,695 3,416,853
Leasehold improvements 470,002 605,107
Furniture & fixtures 387,549 414,019
Machinery 4,517,952 3,929,712
Office equipment 686,958 672,979
-------------- --------------
Total property, plant and
equipment 10,707,174 10,109,688
Accumulated depreciation and
amortization (3,592,413) (2,978,121)
-------------- --------------
Property, plant and equipment,
net $ 7,114,761 $ 7,131,567
============== ==============
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 $239,482 and $203,377 and $198,856 for the years ended
December 31, 1999, 1998 and 1997, respectively.
INTANGIBLE ASSETS
Intangible assets consist of patents, purchased technology, purchased
royalty rights, and goodwill. Patents are stated at the legal cost incurred to
obtain the patents. Upon approval, patent costs are amortized, using the
straight-line method, over their estimated useful life. The values assigned to
the purchased technology, purchased royalty rights, and goodwill arising from
the ViroTex acquisition are amortized using the straight-line method over the
period of expected benefit of four to five years.
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. If this review indicates
that these assets will not be recoverable, based on the forecasted
non-discounted future operating cash flows expected to result from the use of
these assets and their eventual disposition, the Company's carrying value of
these assets is reduced to fair value. Management does not believe current
events or circumstances indicate that the Company's long-lived assets including
goodwill, are impaired as of December 31, 1999.
DEFERRED FINANCE COSTS
Costs associated with the issuance of the 7% Convertible Subordinated
Notes were deferred and are being amortized on a straight-line basis over the
seven-year term of the Notes.
F-8
33
REVENUE RECOGNITION
The Company recognizes revenue on sales at the time of shipment. Royalty
revenue is recognized at the time of shipment by licensee and is reported with
sales revenue. 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.
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. A portion of overhead costs
is allocated to research and development costs on a weighted-average percentage
basis among all projects under development.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted-average number of common shares
outstanding during the years presented. Diluted net income (loss) per common
share reflects the dilution of the Notes if dilutive, and the issuance of common
stock for other potential dilutive equivalent shares outstanding. For the years
presented, the effect of dilutive stock options is not significant and the
effect of the assumed conversion of the Convertible Subordinated Notes would be
antidilutive. Therefore, diluted net income (loss) per share is not materially
different from basic net income (loss) per common share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133,
which will be effective for the year 2001, requires derivative instruments to be
recorded in the balance sheet at their fair value with changes in fair value
being recognized in earnings unless specific hedge accounting criteria are met.
The Company does not utilize hedges or derivative instruments and will not be
impacted by this statement.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 requires that changes in equity during a reporting period, except
transactions with owners in their capacity as owners (for example, the issuance
of common stock and payments of dividends on common stock) and transactions
reported as direct adjustments to retained earnings, be reported as a component
of comprehensive income. Comprehensive income is required to be displayed with
the same prominence as other financial statements. Disclosure of comprehensive
income for the years ended December 31, 1999, 1998 and 1997 is included in the
accompanying financial statements as part of the consolidated statements of
shareholders' equity.
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
F-9
34
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 established when necessary to reduce deferred income tax assets to
the amounts expected to be realized.
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 year-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates in effect during the period.
Adjustments resulting from these transactions are reflected in stockholders'
equity as cumulative foreign currency translation adjustments included in other
comprehensive income or loss.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current presentation.
2. MARKETABLE SECURITIES
As of December 31, 1999 marketable securities consist of the following:
Number of Shares or Estimated
Principal Amount Cost Fair Market Value
----------------- ----------------- -----------------
U.S. Government and Agency Bond Funds:
Thornburg Fund 45,496 $ 572,871 $ 540,494
Pimco Fund 622,446 6,707,337 6,162,219
----------------- -----------------
Total 7,280,208 6,702,713
U.S. Government and Agency Bonds 29,265,000 29,271,567 28,153,984
----------------- -----------------
Total $ 36,551,775 $ 34,856,697
================= =================
As of December 31, 1998 marketable securities consist of the following:
Number of Shares or Estimated
Principal Amount Cost Fair Market Value
----------------- ----------------- -----------------
U.S. Government and Agency Bond Funds:
Thornburg Fund 43,108 $ 543,888 $ 539,283
Pimco Fund 400,009 4,375,982 4,216,096
----------------- -----------------
Total 4,919,870 4,755,379
U.S. Government and Agency Bonds 40,519,885 32,279,550 32,347,488
----------------- -----------------
Total $ 37,199,420 $ 37,102,867
================= =================
As of December 31, 1999 gross unrealized gains and losses pertaining to
marketable securities were $-0- and $1,695,079, respectively. As of December 31,
1998 gross unrealized gains and losses pertaining to marketable securities were
$96,069 and $192,622, respectively. Realized investment gains and losses
included in investment income included gains of $608, $28,186 and -0- in 1999,
1998 and 1997, respectively, and losses of $140,958, -0-, and -0- in 1999, 1998
and 1997, respectively.
F-10
35
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
----------------- -----------------
1999 1998
----------------- -----------------
Patents $ 1,864,185 $ 1,596,002
Purchased technology 2,800,000 2,800,000
Purchased royalty rights 600,000 600,000
Goodwill 793,838 575,805
----------------- -----------------
Sub-total 6,058,023 5,571,807
----------------- -----------------
Less: Accumulated amortization (1,477,698) (522,314)
----------------- -----------------
Total $ 4,580,325 $ 5,049,493
================= =================
4. LINE OF CREDIT
The Company has a revolving line of credit with a bank that expires in
August 2000. 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, 1999, the Company had no
outstanding balance under this line.
5. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, the company issued $50,000,000 of Convertible Subordinated
Notes (the "Notes"). The Notes bear interest at the rate of 7% and are due in
2004. The Notes are convertible, at the option of the holder, into the Company's
common stock, $.001 par value, at any time prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $19.00 per share, subject to
adjustments in certain events. The Notes are redeemable, in whole or in part, at
the Company's option on or after December 5, 2000.
In December 1998, the Company repurchased $1,500,000, or 3%, of the Notes
for $1,192,500. As a result, the Company recognized an extraordinary gain of
approximately $257,000, net of unamortized deferred finance charges of $51,000.
As of December 31, 1998, $48,500,000 of these notes were outstanding.
Throughout 1999, the Company repurchased a total of $11,810,000, or
approximately 24%, of the Notes on the open market for approximately $8,173,000.
As a result, the Company recognized an extraordinary gain of approximately
$3,275,000 net of unamortized deferred finance charges and accumulated
amortization of approximately $362,000. As of December 31, 1999, $36,690,000 of
the Notes were outstanding.
6. 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 products and
ATRISORB(R)-DOXY products, and the rights to market the ATRIDOX(R) product in
the United States, with an option to acquire the rights to market the ATRIDOX(R)
product in Canada and certain European countries. On September 12, 1997, Block
exercised its option to market the ATRIDOX(R) product in Canada, but let its
option lapse with respect to Europe.
Under the Block agreement ("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 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 agreement,
or if the Company ceases to manufacture or supply the product to Block pursuant
to the agreement. The Company may terminate the agreement if Block fails to
F-11
36
make any required payment, if Block commits a willful and material breach of the
agreement, if Block ceases to offer the product for distribution, or if Block
markets, distributes or sells a competitive product.
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. Prior to 1999, the Company had
recognized $24.1 million in milestone revenue from Block. No additional Block
milestone revenue was recognized in 1999.
In 1997, the Company recognized revenue of $7,000,000 for the sale of
marketing rights of the ATRISORB(R) GTR Barrier product. The Company received an
additional $100,000 payment from Block in September 1997 when Block exercised
its option to acquire rights to market ATRIDOX(R) and ATRISORB(R) GTR Barrier
products in Canada.
In 1998, the Company received milestone payments of $12,000,000 pursuant to
the Block agreements as a result of the FDA approval of the Company's new drug
application for the ATRIDOX(R) product. The Company also earned an additional
milestone of $5,000,000 as a result of Block's first commercial sale of
ATRIDOX(R). Total milestone payments earned in 1998 were $17,000,000.
7. ACQUISITION OF VIROTEX
In November 1998, the Company acquired the common stock of ViroTex. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of ViroTex were recorded at their fair
value at the date of acquisition. The results of operations of ViroTex have been
included in the financial statements of the Company since the date of
acquisition. Total consideration paid was $7,693,749 as follows: cash of
$6,201,556, issuance of 37,860 shares of common stock valued at $389,958, stock
options to purchase 113,229 shares of common stock valued at $921,370, a warrant
to purchase 6,750 shares of common stock valued at $30,556, and transaction
expenses of $150,309. Additional consideration of up to $3,000,000 is payable,
in shares of common stock or cash, over the next three years upon the
satisfaction of certain defined earn-out events related to the performance of
certain ViroTex products. The total purchase price of $7,693,749 was allocated
to the fair value of the assets, based primarily on an independent third party
valuation, as follows:
Net tangible assets $ 667,944
------------
Intangible assets:
Purchased in process research and
development 3,050,000
Purchased technology 2,800,000
Purchased royalty rights 600,000
Goodwill 575,805
------------
Total $ 7,025,805
------------
Net assets purchased $ 7,693,749
============
The Company expensed $3,050,000 of the purchase price, which was allocated
to in-process research and development projects, as of the date of acquisition.
The projects were valued using the discounted cash flow method in an independent
third-party valuation.
The following unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997 assumes the purchase of ViroTex had occurred as of
January 1, 1997:
1998 1997
--------------- ---------------
Total revenues $ 25,260,962 $ 16,509,489
Net income (loss) $ (142,921) $ (2,736,752)
Basic net income (loss) per
common share $ (0.01) $ (0.25)
F-12
37
The pro forma results of operations include adjustments to give effect to
amortization of goodwill and other intangible assets, the write-off of purchased
in-process research and development and certain other adjustments. The unaudited
pro forma financial information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made as of January 1,
1997, or the future results of combined operations.
In 1999 the Company made payments totaling $218,000 under the earn-out
provisions of the merger agreement. Specifically, ViroTex shareholders earned
18,850 shares of our common stock valued at approximately $195,000 and a cash
distribution of approximately $23,000 in April 1999 for the introduction and
sale of Eucalyptamint(R) 2000. Included in the purchase price of ViroTex in
November 1998 was approximately $32,000 relating to an advance payment of the
Eucalyptamint(R) 2000 earn-out paid to ViroTex employees who subsequently were
employed by our company or performed consulting duties on our company's behalf.
An additional $1,750,000 in cash and common stock is available to be
earned by previous ViroTex shareholders under the provisions of the merger
agreement for additional licensing agreements and product introductions if
executed prior to December 31, 2000.
8. STOCK OPTION PLANS
As of December 31, 1999, the Company has three 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 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 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 options is the closing bid price of the
stock on the date of grant. There are 219,433 shares that remain available under
the plan for future employee stock option grants.
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 income (loss) and basic and diluted income (loss) per common share
would have been changed to the pro forma amounts indicated below:
1999 1998 1997
-------------- -------------- --------------
Net income (loss) :
-- as reported $ (13,270,226) $ 1,690,046 $ (3,866,717)
-------------- -------------- --------------
-- pro forma $ (14,911,956) $ 76,088 $ (5,067,819)
-------------- -------------- --------------
Basic and diluted net income (loss) per common
-- as reported $ (1.17) $ .15 $ (.35)
-------------- -------------- --------------
-- pro forma $ (1.32) $ .01 $ (.46)
-------------- -------------- --------------
The weighted-average Black-Scholes fair value per option granted in 1999,
1998 and 1997 was $5.63, $5.29 and $4.58, 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 1999, 1998 and 1997: no dividend yield, expected
volatility of 52.5% for 1999, 47.7% for 1998 and 41.7% for 1997, risk free
interest rate of 7.0%, and expected life of 5 years.
F-13
38
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, 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 10.97
Options exercised (20,137) .50 - 11.75 7.16
---------------- ---------------- ----------------
Options outstanding, December 31, 1997 1,023,397 .50 - 21.75 8.45
Options granted 409,169 1.18 - 19.00 9.60
Options canceled or expired (12,190) .50 - 12.50 8.22
Options exercised (145,222) 10.50 - 20.00 1.58
---------------- ---------------- ----------------
Options outstanding, December 31, 1998 1,275,154 .50 - 21.75 9.60
Options granted 342,390 5.38 -12.875 13.98
Options canceled or expired (68,942) .50 -21.750 12.30
Options exercised (120,650) 8.75 - 15.00 11.15
---------------- ---------------- ----------------
Options outstanding, December 31, 1999 1,427,952 $ 5.38 - 20.75 $ 9.54
---------------- ---------------- ----------------
Options outstanding are available for exercise as follows:
Currently exercisable 884,743 $ 9.57
2000 246,029 10.57
2001 192,280 9.37
2002 104,900 7.17
--------------- ---------------
Total 1,427,952 $ 9.54
--------------- ---------------
The following table summarizes information about stock options outstanding
under the Plan as of December 31, 1999:
NUMBER WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE WEIGHTED- EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISABLE
- ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
$ 5.88 - 17.25 28,887 1 year $ 10.94 28,887 $ 10.94
6.50 - 14.00 625 2 years 11.00 625 11.00
6.75 - 9.88 279,715 3 years 8.48 279,715 8.48
5.88 - 8.00 55,247 4 years 6.57 55,247 6.57
6.75 - 6.88 73,000 5 years 6.80 73,000 6.80
6.63 - 11.94 139,558 6 years 8.29 139,558 8.29
9.00 - 12.75 159,260 7 years 10.16 143,823 10.08
11.38 - 20.75 171,590 8 years 16.71 95,373 16.59
8.75 - 14.44 319,490 9 years 10.34 68,515 10.56
5.38 - 9.25 200,580 10 years 5.60 -- --
-------------- ----------------- ------------------ ----------- ---------------- -----------
$ 5.38 - 20.75 1,427,952 6.77 years $ 9.54 884,743 $ 9.57
-------------- ----------------- ------------------ ----------- ---------------- -----------
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
During the year ended December 31, 1999 the company adopted a "Non-Employee
Director Stock Incentive Plan ("DSI Plan"). The purposes of the DSI Plan are to
attract and retain the best available Non-Employee Directors, to provide them
additional incentives, and to promote the success of the Company's business.
This DSI Plan is comprised of two components: an "Automatic Option Grant
Program" and a "Stock Fee Program."
Automatic Option Grant Program
Immediately following each annual meeting of the Company's stockholders,
commencing with the 1999 Annual Stockholders' Meeting, each Non-Employee
Director who continues as a Non-Employee Director following such annual meeting
shall be granted automatically a Non-Qualified Stock Option to purchase 4,000
(5,000 in the case of the Chairman) shares of the Company's common stock. Under
the terms of the plan, these options vest in three equal annual installments
from the date of the grant. The exercise price of each option, which has a
maximum ten- year life, is equal to the market price of the Company's common
stock on the date of the grant. All options awarded under this portion of the
plan shall be made under the "Performance Stock Option Plan" and are included
above. For
F-14
39
the year ended December 31, 1999, 33,000 stock options were issued and none were
exercised under this program. The exercise price of these options is $9.94.
Stock Fee Program
Commencing with the 1999 Annual Stockholders' Meeting, each Non-Employee
Director will receive an annual retainer fee. Each Non-Employee Director shall
be eligible to elect to apply all or any portion of the retainer fee to the
acquisition of shares of Restricted Common Stock or the receipt of stock
options.
The portion of the fee subject to election of Restricted Common Stock shall
be determined by dividing the elected dollar amount by the fair market value per
share on the date the fee is due to be paid. Under the terms of the plan, the
Restricted Common Stock vest in three equal installments upon completion of one
full calendar month of Board service and become fully vested and exercisable at
the end of the quarterly period from the date of grant.
The portion of the fee subject to the election of options shall be equal to
the option fee amount divided by the value of an option to purchase one share as
determined on the grant date using the Black-Scholes option pricing model. Under
the terms of the plan, the options vest in three equal installments upon
completion of one full calendar month of Board service and become fully vested
and exercisable at the end of the quarterly period from the date of grant. The
exercise price of each stock option, which has a maximum ten-year life, is equal
to the market price of the Company's common stock on the date of the grant.
The maximum aggregate number of shares which may be issued under the Stock
Fee Program portion of the plan is 25,000 shares. During the year ended December
31, 1999 the Non-Employee Directors elected to have 2,474 shares of Restricted
Common Stock issued and no stock options were elected to be issued. There are
22,526 shares that remain available under this Program.
NON-QUALIFIED STOCK OPTION PLAN
The Company has reserved 150,000 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"). In 1998, the Company amended the
Non-Qualified Plan to increase 50,000 shares to provide for a total of 150,000
shares. 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 72,020 shares, which remain
available under the Non-Qualified Plan for future stock option grants.
The Company accounts for grants under the Non-Qualified Plan using SFAS 123.
The weighted-average Black-Scholes fair value per option granted under the
Non-Qualified Plan in 1998 and 1997 was $7.80 and $3.98, 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 1998 and 1997: no dividend yield, expected
volatility of 47.7% for 1998 and 41.7% for 1997, risk free interest rate of
7.0%, and expected lives of 5 years.
F-15
40
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, 1996 56,980 $ 3.75 - 9.50 $ 5.07
Options granted 18,000 .50 - 16.50 8.59
Options canceled or expired (43,500) .50 - 6.88 3.84
---------------- ------------------ ------------
Options outstanding, December 31, 1997 31,480 5.13 - 16.50 8.92
Options granted 3,000 15.38 15.38
Options exercised -- -- --
---------------- ------------------ ------------
Options outstanding, December 31, 1998 34,480 5.13 - 16.50 8.67
Options granted -- -- --
Options exercised (1,000) 7.00 7.00
---------------- ------------------ ------------
Options outstanding, December 31, 1999 33,480 $ 5.13 - 16.50 $ 9.30
---------------- ------------
Options outstanding are available for exercise as follows:
---------------- ------------
Currently exercisable 27,480 $ 8.68
2000 5,000 13.18
2001 1,000 15.38
TOTAL 33,480 $ 9.55
---------------- ------------
The following table summarizes information about stock options outstanding
under the Non-Qualified Plan as of December 31, 1999:
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-
EXERCISE PRICES OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
1999 EXERCISABLE
- --------------------- -------------------- -------------------- ------------------- ----------------- ------------------
$ 5.13 7,000 5 years $ 5.13 7,000 $ 5.13
6.63 - 7.00 8,480 6 years 6.80 8,480 6.80
9.50 - 10.88 9,000 7 years 10.42 7,000 10.29
12.28 - 16.50 9,000 8 years 14.72 5,000 14.59
---------------- ----------------- ----------------- ------------- -------------- ------------
$ 5.13 - 16.50 33,480 6.60 years $ 9.55 27,480 $ 8.68
---------------- ----------------- ----------------- ------------- -------------- ------------
9. INCOME TAXES
Net deferred tax assets at December 31, consist of:
1999 1998
----------------------- --------------------
Deferred tax assets:
Net operating loss carry forwards $ 22,793,308 $ 15,129,836
Research and development tax credit carryforwards 1,967,066 1,608,039
Amortization of intangibles 2,124,879 2,311,644
Purchased in-process research and development -- 1,131,330
Depreciation 104,449 164,874
Other items 296,266 229,831
-------------- --------------
Net deferred tax assets 27,285,968 20,575,554
-------------- --------------
Less valuation allowance 27,285,968 20,575,554
-------------- --------------
Total $ -0- $ -0-
============== ==============
At December 31, 1999, the Company has $60,798,685 of federal income tax net
operating loss carryforwards and $1,967,066 of research and development credits,
which expire through 2019. Included in the deferred tax asset for net operating
loss carryforwards are benefits from the exercise of employee stock options of
$2,691,332, which when subsequently recognized will be allocated to additional
paid in capital.
F-16
41
A reconciliation of the differences in income tax expense from income (loss)
computed at the federal statutory rate and income tax expense as recorded for
the year ended December 31 are as follows:
1999 1998 1997
---------------- ------------------ ---------------
Income tax computed at federal statutory rate: $ (4,511,877) $ 590,998 $ (1,314,684)
State income taxes - net of federal benefit (437,917) 57,362 (127,602)
Meals and entertainment 9,569 8,457 10,685
Exercise of employee stock options (351,991) (593,368) (324,545)
Research and Development (359,027) (1,110,854) (145,739)
Other (1,059,171) 15,316 (38,671)
Change in valuation allowance 6,710,414 1,080,272 1,940,556
------------ ------------ ------------
Income tax expense $ -- $ 48,183 $ --
============ ============ ============
10. SEGMENT AND CUSTOMER INFORMATION
The Company operates in a single reportable segment and all revenues from
customers are primarily from a similar group of periodontal products. Product
net sales, royalty revenues and milestone revenues from one customer amounted to
$3,176,000, $19,028,000 and $8,213,000 for the years ended December 31, 1999,
1998 and 1997 respectively. Accounts receivable balances for this customer were
approximately $502,000 and $5,616,000 for the years ended 1999 and 1998
respectively. Revenues from export sales to customers outside of North America
amounted to approximately $758,000, $557,000 and $100,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
11. COMMITMENTS
As of December 31, 1999, minimum rental commitments under non-cancelable
operating leases of one year or more are as follows:
Year Ending Minimum Rental
December 31, Commitment
------------ ------------------
2000 $ 274,261
2001 281,918
2002 273,993
2003 114,232
----------
Total $ 944,404
==========
Rent expense was $330,346, $275,917 and $212,982 for the years ended
December 31, 1999, 1998 and 1997, respectively.
A five-year purchase agreement with a supplier to provide doxycycline
hyclate was executed in March 1998 and expires in March 2003. The agreement
required a $300,000 initial annual fee payment and $100,000 in annual fees for
each of the remaining contract years. The priced charged for the doxycyline
product is based on accumulated commercial sales of our products containing
doxycycline sold for each year under the agreement and varies from 1/2% to 2% of
such sales depending on the level of accumulated sales. In the event the fee for
doxycyline consumption exceeds $100,000 in any one year, then the annual fee
shall be waived.
12. 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 that are immediately vested. The
Company's matching contributions to the Savings Plan were $119,120, $91,889 and
$64,770 for 1999, 1998 and 1997, respectively.
F-17
42
On April 27, 1997, the stockholders of the Company approved the Atrix
Laboratories, Inc. 1997 Employee Stock Purchase Plan (the "ESPP"). The ESPP
provides eligible employees with the opportunity to purchase shares through
authorized payroll deductions at 85% of the average market price on the last day
of each quarter. The ESPP qualifies as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. The Company has reserved 300,000
shares of its authorized but unissued common stock for issuance under the ESPP
of which 283,871 shares remain available at December 31, 1999.
13. COMMON STOCK
In February 1998, the Company's Board of Directors authorized the Company to
repurchase up to $10,000,000 of the Company's common stock. The repurchase
program was amended by the Board of Directors to authorize the Company to
purchase up to $10 million of the 7% Convertible Subordinated Notes or shares of
Common Stock. The initial repurchase program completed in November 1999 and a
new repurchase program to acquire an additional $10 million in the Company's
Common Stock or Notes was approved by the Board of Directors in November 1999.
As of December 31, 1999, the Company has repurchased 157,000 shares of its
common stock for approximately $1,651,000. In 1999, 149,310 shares of the
Company's treasury stock were reissued for the Company's common stock shares
under the ESPP, the Performance Stock Option Plan and the Non-Qualified Plan. As
of December 31, 1999, 7,690 treasury stock shares remain available. The treasury
shares reissued increased the Accumulated Deficit by approximately $125,000 in
1999.
During 1999, the Company granted an officer the right to purchase up to
50,000 shares of common stock at the market price on date of purchase. Upon
purchase, the Company will match the number of shares acquired for no additional
consideration. This arrangement extends for the term of employment. During 1999,
40,000 shares were acquired under this arrangement and an additional 40,000
shares were issued to match the stock purchases made. As a result, the Company
recognized $309,380 of compensation expense during 1999 related to this
arrangement.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31 are as follows:
1999 1999 1998 1998
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------- ------------------- -------------------- ------------------
Cash and cash equivalents $ 3,021,869 $ 3,021,869 $ 18,556,641 $ 18,556,641
Marketable securities 34,856,697 34,856,697 37,102,867 37,102,867
Convertible subordinated notes 36,690,000 21,463,650 48,500,000 36,375,000
------------ --------------- ---------------- ---------------
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.
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-18
43
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization dated November
24, 1998 by and among Atrix Laboratories, Inc., Atrix
Acquisition Corporation and ViroTex Corporation(6)
2.2 Certificate of Merger of Atrix Acquisition
Corporation into ViroTex Corporation dated November
24, 1998(6)
3.1 Amended and Restated Certificate of Incorporation(7)
3.2 Eighth Amended and Restated Bylaws(*)
4.1 Form of Common Stock Certificate(2)
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, and 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(7)
10.1 Employment Agreement between Registrant and John E.
Urheim dated June 4, 1993(2)
10.2 Lease Agreement dated May 11, 1991 between the
Registrant and GB Ventures(2)
10.3 Agreement dated December 16, 1996 between the
Registrant and Block Drug Corporation ("Block
Agreement")(3)
10.3A First Amendment to Block Agreement dated June 10,
1997.(7) **
10.3B Second Amendment to Block Agreement dated July 31,
1997.(7) **
10.3C Third Amendment to Block Agreement dated February 4,
1998.(7) **
10.3D Fourth Amendment to Block Agreement dated January 12,
1999.(7) **
10.3E Fifth Amendment to Block Agreement dated January 27,
1999.(7) **
10.3F Sixth Amendment to Block Agreement dated September
24, 1999.(8) **
10.4 Registration Rights Agreement, dated as of November
15, 1997, by and among Registrant and NationsBanc
Montgomery Securities, Inc. and SBC Warburg Dillon
Read, Inc.(4)
10.5 Amended and Restated Performance Stock Option Plan,
as amended.(7)
10.6 Non-Qualified Stock Option Plan, as amended.(7)
1
44
10.7 Non-Employee Director Stock Incentive Plan.*
10.8 Employment Agreement between Registrant and Dr. J.
Steven Garrett dated April 17, 1995(7)
10.10 Employment Agreement between Registrant and Dr. David
W. Osborne dated November 24, 1998(7)
10.11 Employment Agreement between Registrant and Dr.
Richard L. Jackson dated November 1, 1998(7)
10.12 Personal Services Agreement between Registrant and
David R. Bethune dated August 10, 1999.*
10.13 Agreement between Registrant and John E. Urheim dated
August 2, 1999.*
21 Subsidiaries of the Registrant*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
* Filed herewith.
** Confidential treatment requested.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(2) 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.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1996, as amended on May 20, 1998, 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 Current Report on Form 8-K dated
November 24, 1998, as filed with the Securities and Exchange Commission.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as filed with the Securities and
Exchange Commission.
(8) 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..
2