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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of the registrant's common stock as of July 25,
2000 was 11,521,783.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 666,307 $ 3,021,869
Marketable securities available for sale, at fair market value 27,564,061 34,856,697
Accounts receivable, net of allowance for doubtful accounts
of $50,305 and $18,355 2,744,159 1,222,850
Interest receivable 429,571 562,318
Inventories 2,359,167 1,862,522
Prepaid expenses and deposits 1,055,791 418,812
------------ ------------
Total current assets 34,819,056 41,945,068
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 6,853,148 7,114,761
------------ ------------
OTHER ASSETS:
Intangible assets, net 4,217,066 4,580,325
Deferred finance costs, net of accumulated amortization of $533,599 and $430,007 915,058 1,018,650
Other assets, net 5,132,124 5,598,975
------------ ------------
TOTAL ASSETS $ 46,804,328 $ 54,658,804
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,385,133 $ 2,455,605
Interest payable 207,577 211,094
Accrued salaries and payroll taxes 337,787 321,548
Other accrued liabilities 99,636 150,396
Deferred revenue 165,000 160,000
------------ ------------
Total current liabilities 2,195,133 3,298,643
------------ ------------
CONVERTIBLE SUBORDINATED NOTES PAYABLE 36,690,000 36,690,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 11,483,226 and 11,435,244 shares
issued; 11,483,160 and 11,427,554 shares outstanding 11,483 11,435
Additional paid-in capital 74,918,832 74,495,672
Treasury stock, 66 and 7,690 shares, at cost (694) (80,846)
Accumulated other comprehensive loss (1,615,290) (1,696,010)
Accumulated deficit (65,395,136) (58,060,090)
------------ ------------
Total shareholders' equity 7,919,195 14,670,161
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 46,804,328 $ 54,658,804
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
REVENUE:
Net sales and royalties $ 1,663,336 $ 1,322,384
Contract research and development revenue 222,278 186,099
Sale of marketing rights and milestone revenue 40,000 25,000
------------ ------------
Total revenue 1,925,614 1,533,483
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 663,860 245,736
Research and development 3,609,631 4,751,374
Administrative and marketing 1,187,401 949,586
------------ ------------
Total operating expenses 5,460,892 5,946,696
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LOSS FROM OPERATIONS (3,535,278) (4,413,213)
------------ ------------
OTHER (EXPENSE) INCOME:
Investment income 373,752 746,456
Interest expense (646,603) (776,490)
Other 39,400 16,200
------------ ------------
Net other (expense) income (233,451) (13,834)
LOSS BEFORE EXTRAORDINARY ITEM (3,768,729) (4,427,047)
Extraordinary gain on extinguished debt -- 267,590
------------ ------------
NET LOSS $ (3,768,729) $ (4,159,457)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (.33) $ (.39)
Extraordinary item -- .02
------------ ------------
Net loss $ (.33) $ (.37)
============ ============
Basic and diluted weighted average common shares
outstanding 11,463,355 11,315,520
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
REVENUE:
Net sales and royalties $ 2,820,652 $ 2,551,103
Contract research and development revenue 760,150 468,664
Sale of marketing rights and milestone revenue 105,000 25,000
------------ ------------
Total revenue 3,685,802 3,044,767
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 1,123,084 947,951
Research and development 7,330,384 8,310,626
Administrative and marketing 2,211,568 1,731,834
------------ ------------
Total operating expenses 10,665,036 10,990,411
------------ ------------
LOSS FROM OPERATIONS (6,979,234) (7,945,644)
------------ ------------
OTHER (EXPENSE) INCOME:
Investment income 888,038 1,510,122
Interest expense (1,296,460) (1,569,975)
Other 78,122 64,240
------------ ------------
Net other (expense) income (330,300) 4,387
LOSS BEFORE EXTRAORDINARY ITEM (7,309,534) (7,941,257)
Extraordinary gain on extinguished debt -- 1,034,889
------------ ------------
NET LOSS $ (7,309,534) $ (6,906,368)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (.64) $ (.70)
Extraordinary item -- .09
------------ ------------
Net loss $ (.64) $ (.61)
============ ============
Basic and diluted weighted average common shares 11,457,533 11,271,180
outstanding
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid-in Treasury Comprehensive Accumulated Shareholders'
Shares Amount Capital Stock Loss Deficit Equity
----------- -------- ------------ --------- ------------- ------------- -------------
Balance, December 31, 1999 11,427,554 $ 11,435 $ 74,495,672 $ (80,846) $ (1,696,010) $ (58,060,090) $ 14,670,161
Comprehensive loss:
Net loss -- -- -- -- -- (7,309,534) (7,309,534)
Other comprehensive loss:
- Foreign currency translation
Adjustments - cumulative -- -- -- -- (3,089) -- (3,089)
- Unrealized gain on
Investments -- -- -- -- 83,809 -- 83,809
--------------
Net comprehensive loss (7,228,814)
Exercise of stock options 29,185 23 177,178 68,335 -- (23,615) 221,921
Issuance of employee stock
purchase plan 2,617 1 13,386 11,817 -- (1,897) 23,307
Issuance of restricted stock 23,804 24 232,596 -- -- -- 232,620
----------- -------- ------------ --------- ------------- ------------ -------------
Balance, June 30, 2000 11,483,160 $ 11,483 $ 74,918,832 $ (694) $ (1,615,290) $(65,395,136) $ 7,919,195
=========== ======== ============ ========= ============= ============ =============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,309,534) $ (6,906,368)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation 534,735 514,570
Amortization 585,082 364,877
Loss on sale of property, plant and equipment 5,447 23,643
Compensation - restricted stock 75,620 --
Loss on sale of marketable securities 171,583 11,750
Extraordinary gain on extinguishment of debt -- (1,034,889)
Write-off of obsolete patents -- 2,345
Net changes in operating assets and liabilities:
Accounts receivable (1,521,309) 4,877,574
Interest receivable 132,747 (73,832)
Inventories (496,645) 340,161
Prepaid expenses and deposits (636,979) (49,341)
Accounts payable - trade (1,070,472) (464,124)
Interest payable (3,517) (44,012)
Accrued salaries and payroll taxes 16,239 56,282
Other accrued liabilities (50,760) (123,860)
Deferred revenue 5,000 (127,085)
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Net cash provided by (used in) operating activities (9,562,763) (2,632,309)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (278,593) (739,249)
Investments in intangible assets (112,867) (54,324)
Proceeds from sale of property, plant and equipment 25 25,125
Proceeds from sale of marketable securities 7,402,545 2,488,250
Proceeds from maturity of marketable securities -- 8,617,826
Investment in marketable securities (203,049) (19,375,807)
------------ ------------
Net cash provided by (used in) investing activities 6,808,061 (9,038,179)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 402,229 509,929
Extinguished convertible long-term debt -- (4,285,000)
------------ ------------
Net cash provided by (used in) financing activities 402,229 (3,775,071)
------------ ------------
------------ ------------
NET EFFECT OF EXCHANGE RATE ON CASH (3,089) --
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,355,562) (15,445,559)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,021,869 18,556,641
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 666,307 $ 3,111,082
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries, referred to herein as we, us or our, have
been prepared in accordance with generally accepted accounting principles for
interim consolidated financial statements and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
considered necessary (which consist of normal recurring accruals and
intercompany elimination entries) for a fair presentation have been included.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1999, filed with the Securities and Exchange Commission in our
Annual Report on Form 10-K.
On February 17, 2000, our wholly owned registered subsidiary, Atrix
Laboratories GmbH, based in Frankfurt, Germany, commenced operations. Atrix
Laboratories GmbH was organized to conduct our European operations. Currently,
the subsidiary has three employees whose objective is to establish business
relations with international distributors for the sale of ATRIDOX(R) upon mutual
recognition of the product in key countries. Currently, the Germany subsidiary
has received mutual recognition to distribute ATRIDOX(R) in 11 countries. The
corresponding activity will be maintained in a subsidiary ledger using the Euro
as its functional currency. The Company's wholly owned registered subsidiary,
Atrix Laboratories Limited, based in London, England, and established in June
1999, will continue to sell the ATRIDOX(R) product in the United Kingdom. The
corresponding activity is maintained in a subsidiary ledger using the British
pound as its functional currency. The subsidiary financials were converted from
Euro and British pounds to United States dollars prior to consolidation and all
significant intercompany balances and transactions have been eliminated.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The inventory components at June
30, 2000 and December 31, 1999, are as follows:
June 30, 2000 December 31, 1999
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Raw Materials $ 1,959,996 $ 1,486,289
Work in Process 178,764 300,571
Finished Goods 220,407 75,662
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$ 2,359,167 $ 1,862,522
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NOTE 3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful life of the assets, which range between three
and forty years. Leasehold improvements are amortized over the remaining term of
the related lease. The components of net property, plant and equipment are as
follows:
JUNE 30, DECEMBER 31,
2000 1999
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Land $ 1,071,018 $ 1,071,018
Building 3,576,884 3,573,695
Leasehold improvements 470,002 470,002
Furniture & fixtures 388,437 387,549
Machinery 4,749,829 4,517,952
Office equipment 717,860 686,958
------------ ------------
Total property, plant and equipment 10,974,030 10,707,174
Accumulated depreciation and (4,120,882) (3,592,413)
amortization
------------ ------------
Property, plant and equipment, net $ 6,853,148 $ 7,114,761
============ ============
Betterments, renewals and extraordinary repairs that extend the life of
an asset are capitalized; other repairs and maintenance are expensed. Repairs
and maintenance expense was approximately $134,000 and $122,000 for the six
months ended June 30, 2000 and 1999, respectively.
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NOTE 4. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the periods presented. Diluted net income (loss) per
common share reflects the potential dilution of securities that could
participate in the earnings. For the periods presented, the effect of dilutive
stock options and the effect of assuming a conversion of convertible
subordinated notes would be antidilutive. Therefore, diluted net income (loss)
per share is not different from basic net income (loss) per common share.
NOTE 5. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1997, we issued $50,000,000 of convertible subordinated
notes. These notes bear interest at the rate of 7% annually and are due in 2004.
The notes are convertible, at the option of the holder, into our common stock,
$0.001 par value, at any time prior to maturity, unless previously redeemed or
repurchased at a conversion price of $19.00 per share, subject to adjustments in
certain events. The notes are redeemable, in whole or in part, at our option on
or after December 5, 2000. As of June 30, 2000 and December 31, 1999,
$36,690,000 of these notes were outstanding.
NOTE 6. TRANSLATION OF FOREIGN CURRENCIES
Our primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at period-end exchange rates, while income and expense accounts are
translated at average exchange rates in effect during the period. Adjustments
resulting from these translations are reflected in stockholders' equity as
cumulative foreign currency translation adjustments. Some of our transactions
and transactions of our subsidiaries are made in currencies different from their
functional currency. Gains and losses from these transactions are included in
income as they occur. To date, the effect on income of such amounts has been
immaterial. Sales by our foreign subsidiaries during the period ended June 30,
2000 were not material.
NOTE 7. SUBSEQUENT EVENT
In July 2000, Elan purchased shares of our common stock and a new
series of our preferred stock, or Series A Stock, for aggregate proceeds of $5.0
million and $12.0 million, respectively. The Series A Stock is entitled to 7%
annual dividends payable in shares of Series A Stock, is convertible into our
common stock and has a liquidation preference over our common stock. We invested
all of the proceeds of the Series A Stock issuance into our joint venture with
Elan, for an 80.1% interest in the joint venture. Elan has the option to
exchange the Series A Stock for 30.1% of our interest in the joint venture,
which would result in each of us owning 50% of the joint venture. We also issued
Elan a five-year warrant to acquire one million shares of our common stock for
$18 per share and a six-year promissory note pursuant to which Elan may provide
development funding to the joint venture. Any amounts drawn under the note will
bear interest at 7% annually, can be converted into shares of our common stock
at Elan's option and can be repaid at maturity, at our option, in cash or
through the issuance of shares of our common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations as well as information contained elsewhere
in this Report, contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
include statements regarding the intent, belief or current expectations of us,
our directors or our officers with respect to, among other things: (i) whether
we will receive, and the timing of, regulatory approvals or clearances to market
potential products; (ii) the results of current and future clinical trials; and
(iii) the time and expenses associated with the regulatory approval process for
products. The success of our business operations is in turn dependent on factors
such as the receipt and timing of regulatory approvals or clearances for
potential products, the effectiveness of our marketing strategies to market, our
current and any future products, our ability to manufacture products on a
commercial scale, the appeal of our mix of products, our success at entering
into and collaborating with others to conduct effective strategic alliances and
joint ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Actual results may differ materially from those projected in the forward-looking
statements as a result of various factors, including those described below under
the heading "Risk 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 Drug Company for the FDA approval and the subsequent market launch of
ATRIDOX(R). The Block agreement provides for potential milestone payments
totaling up to $50 million to us over a three-to-five year period, as well as
manufacturing margins and royalties on sales. Prior to the year 2000, we had
recognized approximately $24.1 million in milestone revenue from Block. No Block
milestone revenue has been recognized during the six months ended June 30, 2000.
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We are committed to expanding the sales of ATRIDOX(R) internationally,
and in April 1999 we received our first European approval of ATRIDOX(R) from the
Medicines Control Agency of the United Kingdom. We are pursuing the mutual
recognition of ATRIDOX(R) in the European Union and in January 2000 received
approval to market ATRIDOX(R) in 11 additional European countries. We recently
received individual marketing authorizations in Italy, the Netherlands, Belgium,
Finland and Ireland. Marketing authorizations in the six other countries are
pending. We anticipate European sales of the product to commence in the third
quarter of 2000. Additionally, we received marketing approval in Canada for
ATRIDOX(R) in July 2000. Block's Canadian subsidiary will market ATRIDOX(R) and
we will be entitled to receive royalties on sales and manufacturing margins.
We shifted our research and development focus from dental to medical
products in 1999. Significant resources were devoted to the research and
development of Leuprogel(TM) our prostate cancer therapy incorporating the
ATRIGEL(R) drug delivery system with leuprolide acetate, Atrisone(TM), our 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. Our strategic goal is to devote substantial
resources to our research and development efforts in the medical areas with the
expectation of quickly moving products from the development stage through to
commercialization. Research and development expenditures continued for existing
and future dental products as well, including the ATRISORB(R)-DOXY GTR Barrier
and ATRISORB(R)-DOXY Free Flow GTR Barrier products. We are developing the
ATRISORB(R)-DOXY products, second-generation GTR barriers 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.
Third-party agreements for contract manufacturing utilizing our
state-of-the-art manufacturing facility and contract research and development
activities utilizing our various patented drug delivery technologies provide
additional sources of revenue. We have increased our efforts to engage in these
third-party arrangements in the year 2000.
In January 2000, we announced successful interim results in the ongoing
Phase III human clinical trials pertaining to a 30-day prostate cancer therapy
using our product Leuprogel(TM). Leuprogel(TM) combines our 30-day sustained
release ATRIGEL(R) formulation with leuprolide acetate. In May 2000, we
completed patient enrollment in the Leuprogel(TM) 30-day therapy Phase III
clinical trial and anticipate completion of Phase III by the end of the year
2000. Depending upon the results of the Phase III clinical trials, we plan to
submit a New Drug Application for the 30-day Leuprogel(TM) product to the FDA in
the year 2001. We filed an Investigational New Drug application with the FDA in
January 2000 for the 90-day sustained release Leuprogel(TM) prostate cancer
product and in June 2000 we initiated patient enrollment.
In April 2000, Pharmacia and Upjohn Company replaced Heska Corporation
as our marketing partner for our PERIOceutic(R) product to treat periodontal
disease in companion animals. Pharmacia and Upjohn Animal Health have assumed
our existing license agreement with Heska. We will continue to manufacture the
product.
In April 2000, we submitted an Investigational New Drug application to
the FDA for the use of our dapsone topical gel for the treatment of chronic itch
associated with healed and healing burn wounds. Additionally, we initiated Phase
II clinical trials on Atrisone(TM), our dapsone topical gel product for the
treatment of moderate to severe acne. We announced in June 2000 that patient
enrollment was completed sooner than anticipated for Atrisone(TM) Phase II
clinical trials.
We formed a joint venture with Elan Corporation, plc in July 2000 to
develop and commercialize oncology and pain management products. As part of our
agreements, Elan may provide funding to develop these compounds. Initially we
are the majority owner of this joint venture. Additionally, Elan made equity
investments in our company. This joint venture will use our patented BEMA and
ATRIGEL(R) systems and Elan's nanoparticulate drug delivery technology to
deliver compounds targeted for major unmet medical needs in oncology and pain
management.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999
Total revenues for the three months ended June 30, 2000 were
approximately $1,926,000 compared to approximately $1,533,000 for the three
months ended June 30, 1999. The 26% increase was primarily due to an increase in
contract manufacturing revenue as a result of additional agreements entered into
with unaffiliated third parties.
We had net sales of approximately $1,663,000 during the three months
ended June 30, 2000 compared to approximately $1,322,000 for the three months
ended June 30, 1999. The 26% increase in sales was primarily the result of
continued sales growth of our dental products line and the addition of the
contract manufacturing business.
Contract research and development revenue represents revenue we
received from grants and from unaffiliated third parties for performing contract
research and development activities using our various patented drug delivery
technologies and was approximately $222,000 for the three months ended June 30,
2000 compared to approximately $186,000 for the three months
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ended June 30, 1999, representing a 19% increase. This increase was primarily
related to work on two research projects with two separate unaffiliated third
parties.
Cost of goods sold recorded for the three months ended June 30, 2000
was approximately $664,000 compared to approximately $246,000 for the three
months ended June 30, 1999, representing a 170% increase. This increase in cost
of sales is primarily related to contract manufacturing sales that currently
carry a low margin as we start up this portion of our business.
Research and development expenses for the three months ended June 30,
2000 were approximately $3,610,000 compared to approximately $4,751,000 for the
three months ended June 30, 1999, representing a 24% decrease. This decrease was
primarily the result of expenditures relating to our ATRIDOX(R) and
ATRISORB(R)-DOXY GTR Barrier products in addition to the initial study costs for
Atrisone(TM) and Leuprogel(TM) studies during the second quarter of 1999.
Administrative and marketing expenses for the three months ended June
30, 2000 were approximately $1,187,000 compared to approximately $950,000 for
the three months ended June 30, 1999, representing a 25% increase. The increase
was primarily the result of increased expenditures associated with our foreign
subsidiary, Atrix Laboratories GmbH, which commenced operations in February
2000.
Investment income for the three months ended June 30, 2000 was
approximately $374,000 compared to approximately $746,000 for the three months
ended June 30, 1999, representing a 50% decrease. The decrease was primarily the
result of a reduction in principal investments and a loss on sale of investments
for the three months ended June 30, 2000.
Interest expense for the three months ended June 30, 2000 was
approximately $647,000 compared to approximately $776,000 for the three months
ended June 30, 1999, representing a 17% decrease. The reduction in interest
expense was primarily the result of our repurchase and retirement of $6,310,000
of our 7% convertible subordinated notes since the period ended June 30, 1999.
In the three months ended June 30, 1999, we repurchased a total of
$1,500,000, or 3%, of our outstanding 7% convertible subordinated notes for
$1,233,000, which includes approximately $48,000 accrued interest paid. As a
result, we recognized an extraordinary gain of approximately $268,000, net of
deferred finance charges and accumulated amortization of approximately $47,000,
for the three months ended June 30, 1999. As of June 30, 2000, $36,690,000
aggregate principal amount of these notes were outstanding.
For the reasons described above, we recorded a net loss of
approximately $3,769,000, or $0.33 per share, for the three months ended June
30, 2000 compared to a net loss of approximately $4,159,000, or $0.37 per share,
for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
Total revenues for the six months ended June 30, 2000 were
approximately $3,686,000 compared to approximately $3,045,000 for the six months
ended June 30, 1999. The 21% increase was primarily due to an increase in
contract manufacturing revenue as a result of additional agreements entered into
with unaffiliated third parties.
We had net sales of approximately $2,821,000 during the six months
ended June 30, 2000 compared to approximately $2,551,000 for the six months
ended June 30, 1999. The 11% increase in sales was primarily the result of
continued sales growth of our dental products line and the addition of contract
manufacturing business.
Contract research and development revenue represents revenue we
received from grants and from unaffiliated third parties for performing contract
research and development activities using our various patented drug delivery
technologies and was approximately $760,000 for the six months ended June 30,
2000 compared to approximately $469,000 for the six months ended June 30, 1999,
representing a 62% increase. This increase was primarily related to work on two
research projects with two separate unaffiliated third parties.
Cost of goods sold recorded for the six months ended June 30, 2000 was
approximately $1,123,000 compared to approximately $948,000 for the six months
ended June 30, 1999, representing an 18% increase. This increase in cost of
sales is primarily related to an increase in sales.
Research and development expenses for the six months ended June 30,
2000 were approximately $7,330,000 compared to approximately $8,311,000 for the
six months ended June 30, 1999, representing a 12% decrease. This decrease was
primarily the result of expenditures relating to our ATRIDOX(R) and
ATRISORB(R)-DOXY GTR Barrier products as well as the initial study costs for
Atrisone(TM) and Leuprogel(TM) studies in the first half of 1999.
Administrative and marketing expenses for the six months ended June 30,
2000 were approximately $2,212,000 compared to approximately $1,732,000 for the
six months ended June 30, 1999, representing a 28% increase. This increase was
primarily the result of increased expenditures associated with our foreign
subsidiary, Atrix Laboratories GmbH, which commenced operations in February
2000.
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Investment income for the six months ended June 30, 2000 was
approximately $888,000 compared to approximately $1,510,000 for the six months
ended June 30, 1999, representing a 41% decrease. The decrease was primarily the
result of a reduction in principal investments and a loss on sale of investments
for the six months ended June 30, 2000.
Interest expense for the six months ended June 30, 2000 was
approximately $1,296,000 compared to approximately $1,570,000 for the six months
ended June 30, 1999, representing a 17% decrease. The reduction in interest
expense was primarily the result of our repurchase and retirement of $6,310,000
of our 7% convertible subordinated notes since the period ended June 30, 1999.
In the six months ended June 30, 1999, we repurchased a total of
$5,500,000, or 11%, of our outstanding 7% convertible subordinated notes for
approximately $4,380,000, which includes approximately $95,000 accrued interest
paid. As a result, we recognized an extraordinary gain of approximately
$1,035,000, net of deferred finance charges and accumulated amortization of
approximately $180,000. As of June 30, 2000, $36,690,000 aggregate principal
amount of these notes were outstanding.
For the reasons described above, we recorded a net loss of
approximately $7,310,000, or $0.64 per share, for the six months ended June 30,
2000 compared to a net loss of approximately $6,906,000, or $0.61 per share, for
the six months ended June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash and cash equivalents of approximately
$666,000, marketable securities (at fair market value) of approximately
$27,564,000 and other current assets of approximately $6,589,000 for total
current assets of approximately $34,819,000. Current liabilities totaled
approximately $2,195,000, which resulted in working capital of approximately
$32,624,000.
We have a revolving line of credit with a bank that expires in August
2000. Under the terms of the line of credit, we may borrow up to $1,000,000.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring us to maintain certain levels of net worth and
liquidity. As of June 30, 2000, we had no outstanding balance under this line of
credit.
During the six months ended June 30, 2000, net cash used in operating
activities was approximately $9,563,000. This was primarily the result of the
net loss for the period of approximately $7,310,000, adjusted for certain
non-cash expenses, and changes in operating assets and liabilities as set forth
in the consolidated statement of cash flows.
Net cash provided by investing activities was approximately $6,808,000
during the six months ended June 30, 2000, primarily as a result of the proceeds
from the sale of marketable securities of approximately $7,403,000 for the
purpose of funding operations.
Net cash provided by financing activities was approximately $402,000
during the six months ended June 30, 2000, primarily as a result of the proceeds
from issuance of common stock.
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development programs,
o the time required to file and process regulatory approval
applications,
o the development of our commercial manufacturing facilities,
o our ability to obtain additional licensing arrangements, and
o the demand for our products.
We expended approximately $279,000 for property, plant and equipment
and approximately $113,000 for patent development in the six-month period ended
June 30, 2000. We expect our capital expenditures to approximate $1,250,000 for
the year ending December 31, 2000, which will be used primarily to complete the
automation of our manufacturing facility and to upgrade laboratory equipment.
In July 2000, Elan purchased shares of our common stock and a new
series of our preferred stock, or Series A Stock, for aggregate proceeds of $5.0
million and $12.0 million, respectively. The Series A Stock is entitled to 7%
annual dividends payable in shares of Series A Stock, is convertible into our
common stock and has a liquidation preference over our common stock. We invested
all of the proceeds of the Series A Stock issuance into our joint venture with
Elan, for an 80.1% interest in the joint venture. Elan has the option to
exchange the Series A Stock for 30.1% of our interest in the joint venture,
which would result in each of us owning 50% of the joint venture. With the
proceeds from its stock issuances to us and Elan, the joint venture licensed
from Elan its nanoparticulate drug delivery technology. We also issued Elan a
five-year warrant to acquire one million shares of our common stock for $18 per
share and a six-year promissory note pursuant to which Elan may provide
development funding to the joint venture. Any amounts drawn under the note will
bear interest at 7% annually, can be converted into shares of our common stock
at Elan's option and can be repaid at maturity, at our option, in cash or
through the issuance of shares of our common stock.
We expect to continue to incur substantial expenditures for research
and development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. Management believes that the existing cash and cash
equivalent assets in addition to marketable security resources will be
sufficient to fund our operations through 2000. However, there can be no
assurance that underlying assumed levels of revenue and expense will prove
accurate.
RISK FACTORS
In addition to the other information contained in this Report, we
caution stockholders and potential investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results of operations and could cause our actual results to
differ materially from those expressed in any forward-looking statements made by
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.
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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 protect intellectual
property rights, and the cost of acquiring in-process
technology and other intellectual property rights, either by
license, collaboration or purchase of another entity.
o Limited experience in manufacturing products on a commercial
scale; failure to manufacture present and future products in
compliance with applicable regulations and at an acceptable
cost.
o Cancellation or termination of material collaborative
agreements (including the Block agreement) and the resulting
loss of research or other funding, or marketing, sales and
distribution capabilities.
o Access to the pharmaceutical compounds necessary to
successfully commercialize the ATRIGEL(R) system or other
delivery systems currently in development.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o The ability to attract and retain highly qualified management
and scientific personnel.
o Difficulties or high costs of obtaining adequate financing to
fund future research, development and commercialization of
products.
o The slow rate of acceptance of new products in the dental
market.
o The continued growth and market acceptance of our products and
our ability to develop and commercialize new products in a
timely and cost-effective manner.
o Exchange rate fluctuations that may adversely impact net
income (loss).
o Our ability to enter into strategic alliances or collaborative
arrangements with third parties to market and commercialize
our products on favorable terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
We own financial instruments that are sensitive to market risks as part
of our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. Due to the
nature of our investment portfolio, the investment portfolio contains
instruments that are primarily subject to interest rate risk.
Interest Rate Risk. Our investment portfolio includes fixed rate debt
instruments that are primarily United States government and agency bonds of
durations ranging from one to four years. The market value of these bonds is
subject to interest rate risk and could decline in value if interest rates
decrease. To mitigate the impact of fluctuations in cash flow, we maintain
substantially all of our debt instruments as fixed rate. The portion maintained
as fixed rate is dependent on many factors including judgments as to future
trends in interest rates.
Our investment portfolio also includes equity interests in United
States government and agency bond funds. The value of these equity interests is
also subject to interest rate risk.
We regularly assess the above-described market risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. Our investment policy restricts
investments to U.S. Government or government backed securities, or the highest
rated commercial paper (A1P1) only. As a result, we do not anticipate any
material losses in these areas.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and long-term and
short-term debt instruments.
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To perform a sensitivity analysis, we assess the risk of loss in fair
values from the impact of hypothetical changes in interest rates on market
sensitive instruments. The fair values are computed based on the present value
of future cash flows as impacted by the changes in the rates attributable to the
market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at June 30,
2000. The fair values that result from these computations are compared with the
fair values of these financial instruments at June 30, 2000. The differences in
this comparison are the hypothetical gains or losses associated with each type
of risk. The results of the sensitivity analysis at June 30, 2000 are as
follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in a decrease
in the fair value of our financial instruments by approximately
$181,000 per year. A 10% increase in the levels of interest rates with
all other variables held constant would result in an increase in the
fair value of our financial instruments by approximately $181,000 per
year. We maintain a portion of our financial instruments, including
long-term debt instruments of approximately $7,483,000 at June 30,
2000, at variable interest rates. If interest rates were to increase or
decrease 10%, the impact of such instruments on cash flows or earnings
would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities we own.
The market price of the 7% convertible subordinated notes generally
changes in parallel with the market price of our common stock. When our stock
price increases, the price of these notes generally increases proportionally.
Fair market price of the notes can be determined from quoted market prices,
where available. The fair value of our long-term debt was estimated to be
approximately $29,216,000 at June 30, 2000 and is lower than the carrying value
by approximately $7,474,000. Market risk was estimated as the potential decrease
in fair value resulting from a hypothetical 1% increase in our weighted average
long-term borrowing rate and a 1% decrease in quoted market prices, or
approximately $734,000.
Exchange Rate Risk. We face foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the financial
results of our foreign subsidiaries are translated into United States dollars
for consolidation. As exchange rates vary, these results, when translated may
vary from expectations and adversely impact net income (loss) and overall
profitability. The effect of foreign exchange rate fluctuation for the period
ended June 30, 2000 was not material. Based on our overall foreign currency rate
exposure at June 30, 2000, we do not believe that a hypothetical 10% change in
foreign currency rates would materially affect our financial position.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the stockholders of the Company was held on May 8,
2000, in Fort Collins, Colorado, for the purpose of re-electing John E. Urheim,
Sander A. Flaum and Dr. D. Walter Cohen to the Board of Directors as Class A
directors, approving the adoption of the 2000 Incentive Stock Option Plan and
ratifying the appointment of the Company's independent auditors.
The following votes were cast by the stockholders with respect to the
election of directors:
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
----------- ------- -------- --------- ---------
John E. Urheim 10,106,175 0 620,717 0 0
Sander A. Flaum 10,446,556 0 280,336 0 0
Dr. D. Walter Cohen 10,118,837 0 608,055 0 0
The other directors whose term continues after the meeting are David R.
Bethune, Dr. Richard Jackson, Dr. G. Lee Southard, C. Rodney O'Connor and H.
Stuart Campbell.
The following votes were cast by the stockholders with respect to the
adoption of the 2000 Incentive Stock Option Plan.
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
----------- ---------- -------- --------- ---------
4,353,879 1,163,912 0 84,295 0
The following votes were cast by the stockholders with respect to the
resolution to ratify the Board of Directors' selection of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending December 31,
2000:
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
----------- -------- -------- --------- ---------
10,564,658 103,108 0 59,126 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Seventh Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee thereunder(4)
4.3 Form of Note (included in Indenture, see Exhibit 4.2)
4.4 Rights Agreement (including form of Right Certificate, as
Exhibit A, the form of Summary of Rights, as Exhibit B)(5)
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4.5 Warrant to purchase 6,750 shares of Atrix Common Stock issued
to Gulfstar Investments, Limited(1)
27. Financial Data Schedule.*
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period ended June 30,
2000.
- ----------
* Filed herewith.
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(3) Incorporated by reference to Registrant's Annual Report on Form 10K for
the 4 fiscal year ended September 30, 1993 as filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K
dated November 6, 1997, as filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, file number 000-18231.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
July 27, 2000 By: /s/ David R. Bethune
--------------------------------------------
David R. Bethune
Chairman of the Board of Directors and Chief
Executive Officer
July 27, 2000 By: /s/ Brian G. Richmond
--------------------------------------------
Brian G. Richmond
Vice President--Finance, and Assistant
Secretary
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Seventh Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
4.2 Indenture, dated November 15, 1997, by and among the
Registrant and State Street Bank and Trust Company of
California, N.A., as trustee thereunder(4)
4.3 Form of Note (included in Indenture, see Exhibit 4.2)
4.4 Rights Agreement (including form of Right Certificate, as
Exhibit A, the form of Summary of Rights, as Exhibit B)(5)
4.5 Warrant to purchase 6,750 shares of Atrix Common Stock issued
to Gulfstar Investments, Limited(1)
27. Financial Data Schedule.*
- ----------
* Filed herewith
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, file number 333-43191.
(3) Incorporated by reference to Registrant's Annual Report on Form 10K for
the 4 fiscal year ended September 30, 1993 as filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K
dated November 6, 1997, as filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, file number 000-18231.